VAALCO Energy, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement figures are unaudited. VAALCO operates in Gabon, Egypt and Canada, with an undeveloped interest in Equatorial Guinea. 2023 comparisons include Egypt and Canada, acquired with TransGlobe in late 2022, so reported growth is not fully comparable with 2022.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $116.3m | $78.1m | $305.9m | $257.7m |
| Operating income | $35.5m | $33.9m | $77.7m | $147.1m |
| Net income | $6.1m | $6.9m | $16.4m | $34.1m |
| Diluted EPS | $0.06 | $0.11 | $0.15 | $0.57 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $171.8m | $129.7m |
| Property and equipment cash expenditures | Not stated for quarter | Not stated for quarter | $77.4m | $103.9m |
- Q3 operating margin was approximately 30.6% and net margin 5.3%; nine-month operating margin was approximately 25.4% and net margin 5.4%.
- At September 30, cash and cash equivalents were $103.4m; current assets were $218.1m and current liabilities $166.8m. The current ratio was approximately 1.31.
- VAALCO reported no outstanding debt. It had $43.8m available to draw under its reserve-based credit facility as of October 1. Finance lease liabilities totaled $85.7m, including current and long-term portions.
- Nine-month operating cash flow benefited from changes in operating assets and liabilities. Cash increased by $51.7m, including restricted cash, to $111.5m. Capital expenditures on an accrual basis were $63.3m.
Changes versus prior comparable periods
- Q3 revenue rose 49%, while net income edged down from $6.9m to $6.1m. Sales volume increased to 1.812 million Boe from 731,000 Boe, but average realized price fell to $63.41/Boe from $103.61/Boe.
- For the first nine months, revenue increased 19%, but net income fell by more than half. Sales volume rose to 4.839 million Boe from 2.305 million Boe; average realized price declined to $62.48/Boe from $109.28/Boe.
- Operating costs and expenses rose to $80.7m in Q3 and $227.9m year to date. Higher production, acquired operations, and sharply higher depreciation, depletion and amortization contributed. Year-to-date DD&A was $95.0m versus $21.8m.
- Nine-month operating income declined to $77.7m from $147.1m, notwithstanding higher revenue. 2022 included different acquisition-related and derivative items; comparisons are also affected by the TransGlobe acquisition and the 2022 field transition.
Outlook, commentary and risks
- Management said available cash and operating cash flow were expected to support current operating needs, drilling programs, lease obligations and other planned uses, while noting that cash generation and access to financing depend on market and operating conditions.
- Gabon’s next Etame drilling campaign was being planned for 2024. Management cited improved uptime and production following field reconfiguration and commissioning of gas-lift compression. Egypt completed six wells in Q3 and was drilling its final planned 2023 well in Q4; Canada’s 2023 wells were reported to be producing above expectations.
- The board’s quarterly dividend policy was $0.0625 per share; a dividend at that rate was declared after quarter-end for payment in December. The $30m buyback program repurchased about 1.40m shares in Q3; $11.5m remained available at September 30. Repurchases continued after quarter-end.
- Outstanding collars covered approximately 705,000 barrels through June 2024, with $65/bbl weighted average floors and call prices ranging from $90 to $100/bbl by settlement period. Hedging limits some downside exposure but also caps gains above collar ceilings.
- Key uncertainties include volatile commodity prices, inflation and supply-chain delays, currency movements, operational and reserve risks, and government actions or negotiations in operating jurisdictions. The filing identifies a past-due $17.9m Gabon refinery receivable, with a $3.5m credit-loss allowance, and ongoing discussions over recovery of that balance and VAT receivables. The final value of an Egyptian effective-date adjustment was still being negotiated; $50.3m remained recorded as a receivable.
- FPSO decommissioning costs included $5.6m net to VAALCO in 2023 for additional waste-related fees. The company also accrued an estimated $5.6m net share for radioactive-material tank cleaning and disposal. Abandonment estimates and future funding requirements may change.
- Disclosure controls were reported ineffective at September 30 because of previously disclosed material weaknesses. Management said remediation was underway and expected completion before year-end 2023; the weaknesses were not yet considered remediated.
- The October 3, 2023 credit-facility amendment replaced LIBOR with SOFR plus a credit adjustment spread. VAALCO reported covenant compliance and no facility borrowings at September 30.
Important facts for investors to verify
- Whether production, realized prices and operating costs support sustained cash generation, separating acquired-segment contributions from underlying trends.
- Collection timing and recoverability of the Gabon refinery and VAT receivables, and the final settlement of the Egyptian effective-date adjustment.
- Progress and cost outcomes for the 2024 Gabon campaign, Egypt’s drilling program, and remaining FPSO disposal and abandonment obligations.
- Use of cash for buybacks, dividends and Egyptian modernization payments, alongside lease liabilities and available facility capacity.
- Whether management remediated the material weaknesses and improved disclosure controls after the quarter-end.