VAALCO Energy, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unaudited results. VAALCO is an independent oil and gas company whose principal revenue source is production from the Etame Marin block offshore Gabon.
Financial performance and position
- Q3 revenue: $37.4 million, up 15% from $32.6 million. Oil and gas sales were approximately 324,000 net barrels of oil equivalent at an average $112.85 per barrel, versus 429,000 barrels at $76.17 in Q3 2010. Lower sales volume reflected two liftings versus three; Gabon production averaged about 21,500 BOPD.
- Q3 profit: Operating income was $19.8 million versus $21.6 million; net income was $3.5 million versus $13.9 million. Net income attributable to VAALCO was $2.4 million ($0.04 diluted EPS), versus $12.5 million ($0.22 diluted EPS).
- Nine-month revenue and profit: Revenue was $142.7 million, up 48%; operating income was $93.7 million, up 57%. Net income was $29.9 million versus $32.3 million, while net income attributable to VAALCO was $25.4 million ($0.44 diluted EPS) versus $28.5 million ($0.50 diluted EPS). Average realized oil price was $112.36 per barrel versus $75.69; Gabon production averaged 22,200 BOPD versus 20,000 BOPD.
- Margins: Operating margin was approximately 53% for Q3 (66% in Q3 2010) and 66% for the first nine months (62% in 2010). The filing does not present these margins explicitly; percentages are calculated from reported revenue and operating income.
- Cash flow: Nine-month operating cash flow was $54.3 million versus $34.9 million. Investing cash outflow was $19.0 million, including $23.0 million of property and equipment expenditures; financing cash outflow was $4.0 million. Cash increased by $31.3 million to $112.6 million.
- Liquidity and debt: Current assets were $148.9 million and current liabilities $22.4 million, approximately 6.6 times current-liability coverage. Management reported $112.6 million of unrestricted cash. The balance sheet lists no borrowings; total liabilities were $39.6 million, including $14.9 million of asset retirement obligations. Funds in escrow totaled $11.9 million across current and noncurrent assets.
Material changes and operating developments
- Higher oil prices and increased Gabon production drove year-to-date revenue growth, but substantially higher Gabon income taxes and a $4.1 million Angola partner-receivable allowance reduced earnings. Q3 income tax expense rose to $17.1 million from $7.4 million; nine-month expense rose to $65.0 million from $26.8 million.
- Q3 general and administrative expense increased to $2.6 million from $0.9 million, partly reflecting lower overhead reimbursements. Nine-month G&A rose to $8.1 million from $5.9 million. DD&A increased to $17.8 million for the nine months from $12.9 million, reflecting higher Gabon depletion rates and the Texas well entering production.
- A Texas Granite Wash well began production in August 2011. In Q3 it produced approximately 2,000 barrels of condensate and 132,000 mcf of natural gas. VAALCO also acquired a 65% interest in approximately 22,000 net acres in Montana; it is planning drilling activity there.
Outlook, risks and contingencies
- Management expected approximately $6 million of remaining 2011 capital spending on Gabon platform work and other activity, and approximately $11 million for a second Texas Granite Wash well and a Montana well. It stated cash and operating cash flow should fund remaining 2011 and 2012 capital budgets and working-capital needs.
- Angola’s government-assigned partner had not paid its share of costs. VAALCO recorded a full $4.1 million allowance against related receivables and was seeking a replacement partner and a second time extension for two exploration wells. If the extension is denied, VAALCO may forfeit $10 million in escrow and may need to impair $11 million of leasehold costs and other investments.
- Other commitments include drilling one Mutamba Iroru exploration well in Gabon, expected in the first half of 2012, and Montana drilling obligations estimated at $15 million by the end of 2012, including one well by June 1, 2012. The Etame Marin extension requires a second exploration well and seismic work; seismic operations resumed in October 2011.
- VAALCO had no active commodity hedges. Risks include oil-price volatility, exploration and operating uncertainty, partner and government actions, equipment availability, foreign exchange, and customer concentration. Management reported effective disclosure controls and no material change in internal controls; it reported no material change to previously disclosed risk factors.
Investor verification priorities
- Check subsequent developments on the Angola extension, replacement partner, recoverability of partner receivables, and potential $10 million escrow forfeiture and $11 million impairment.
- Review Gabon tax and profit-oil allocations, which materially affected the gap between revenue growth and earnings.
- Verify lifting schedules, crude inventory, production trends, and realized prices; sales volumes do not necessarily track production in each quarter.
- Track execution and funding of the stated capital program, including Texas and Montana well results and Gabon platform spending.
- Assess partner/customer concentration and commodity-price exposure; the filing provides no quantified price-sensitivity analysis.