VAALCO Energy, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Comparatives are for Q1 2022 unless stated otherwise. VAALCO operates in Gabon, Egypt and Canada, with development interests in Equatorial Guinea. The October 2022 TransGlobe acquisition added Egypt and Canada to the reporting base, so year-over-year comparisons are not like-for-like.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Revenue | $80.4 million | $68.7 million |
| Operating income | $21.6 million | $40.0 million |
| Operating margin | 26.9% | 58.3% |
| Net income | $3.5 million; $0.03 per diluted share | $12.2 million; $0.20 per diluted share |
| Operating cash flow | $42.0 million | $(0.8) million |
| Cash capital expenditures | $27.7 million | $23.1 million |
| Cash, cash equivalents and restricted cash | $60.2 million, including $52.1 million unrestricted cash | $46.3 million |
| Total assets | $824.0 million | $855.6 million at Dec. 31, 2022 |
| Current assets / current liabilities | $179.4 million / $148.8 million | $200.1 million / $162.1 million at Dec. 31, 2022 |
| Debt and leases | No borrowings outstanding; $50 million RBL borrowing base. Finance lease liabilities totaled $87.4 million. | No outstanding debt at Dec. 31, 2022 |
Revenue increased 17%, primarily from higher sales volumes and the acquired Egypt and Canada businesses, partly offset by lower realized prices. Net sales volume rose to 1.224 million Boe from 0.616 million Boe, while average realized price fell to $65.68/Boe from $109.65/Boe. Operating expenses rose to $58.8 million from $28.6 million, including DD&A of $24.4 million versus $4.7 million. The filing attributes much of the DD&A increase to acquired assets, the FSO and Etame field-reconfiguration costs. Production expense per barrel, excluding specified items, declined to $23.91 from $29.83.
Net income was lower despite higher revenue: operating income declined, and income tax expense was $14.8 million versus a $4.6 million tax benefit in Q1 2022. The prior-year period included a $31.8 million derivative loss; Q1 2023 derivative results were an immaterial $0.02 million gain. Results also include a $1.4 million expense from a TransGlobe purchase-accounting adjustment.
Operating cash flow of $42.0 million less cash capital spending of $27.7 million left approximately $14.3 million before financing activities. Financing used $13.5 million, including $6.7 million of dividends, $5.4 million of treasury-share purchases and $1.7 million of finance-lease principal payments. Cash, cash equivalents and restricted cash increased by $0.5 million during the quarter. Accrual-basis capital expenditures were $25.4 million.
Material changes and operating developments
- TransGlobe contributed $43.7 million of Q1 2023 sales and $9.7 million of net income, according to the filing. Its acquisition makes the year-over-year operating comparison substantially different in scope.
- Gabon production was 1.603 million gross barrels, or 0.820 million net, compared with 1.416 million gross, or 0.725 million net, a year earlier. The filing says Gabon revenue fell mainly because fewer barrels were lifted and realized prices were lower.
- Egypt reported $34.8 million of revenue and Canada $8.9 million. Egypt’s five Q1 development wells included three brought on production during the quarter; reported initial rates varied by well. Two Canadian wells drilled in Q1 were being equipped for production and expected online in May 2023.
- In Equatorial Guinea, VAALCO increased its Block P participating interest to 60% and began executing the Venus development plan. A $6.8 million payment to GEPetrol is due at first commercial production.
- The board declared a quarterly dividend of $0.0625 per share, paid March 31, and declared another $0.0625 dividend for payment June 23, 2023. The company repurchased 981,000 shares in Q1 for approximately $5.4 million; $22.5 million remained under the $30 million program at quarter-end.
Outlook, risks and contingencies
- Outlook: No formal financial guidance is provided in the supplied filing text. Management said Etame’s next drilling campaign is expected in 2024 and described plans to sustain production through optimization. Management stated it believed available cash and operating cash flow were sufficient for current requirements, while noting that future liquidity depends on operating and economic conditions.
- Commodity exposure: Brent averaged about $81/Bbl in Q1 2023, below the prior-year average. At March 31, hedges covered about 95,500 barrels per month for April–June, with $65 put and $100 call prices; additional July–September collars were entered into in April at $65/$96. These instruments limit some downside but cap gains above the call level. VAALCO had no mandate to reduce Etame production under the cited OPEC+ actions.
- Receivable collection: A $50.3 million receivable remains due under Egypt’s Merged Concession effective-date adjustment, whose final amount is still being negotiated with EGPC. Gabon refinery amounts were past due; the filing cites $20.3 million due at March 31 and ongoing discussions with government officials. The company also reported gross Gabon VAT receivables of approximately $22.9 million, net to VAALCO of $14.9 million, subject to an allowance. Recovery timing and terms remain uncertain.
- Abandonment and contractual obligations: VAALCO received $15.6 million in March from an approved Gabon abandonment-funding payment. It is working with Gabonese authorities on a schedule to resume annual funding. The company also has Egyptian modernization/equalization payments, including three annual $10 million payments beginning in 2024, and minimum work commitments under the Egyptian concession.
- Operational and market risks: Management cited inflation, higher interest rates, extended equipment lead times, supply-chain constraints, geopolitical developments, oil-price volatility, foreign-exchange exposure and possible future production restrictions. The company also faces routine Gabon government and joint-interest audits; management did not expect the disclosed audits to have a material effect.
- Controls: Disclosure controls were not effective at March 31, 2023 because of previously reported material weaknesses. Management expected remediation before year-end 2023 and was still integrating TransGlobe controls.
- RBL terms: The $50 million secured facility was undrawn and the company reported covenant compliance at quarter-end. Covenants include net debt/EBITDAX no greater than 3.0x and minimum cash of $10 million. The filing notes borrowing capacity and distributions are subject to facility conditions.
Important facts for investors to verify
- Progress, final negotiated value and collection timing for the $50.3 million Egypt receivable and overdue Gabon refinery and VAT receivables, including the related allowances.
- Post-acquisition, like-for-like production, realized pricing, costs and cash generation across Gabon, Egypt and Canada; reported comparisons include TransGlobe only in 2023.
- Actual well performance and timing of the 2023 Egypt and Canada programs, and milestones, funding and partner commitments for Block P Venus.
- Abandonment-fund replenishment, FSO-related obligations and remaining lease commitments, as well as compliance with RBL covenants and limits on capital returns.
- Remediation and testing of the material weaknesses in financial reporting controls, including integration of TransGlobe controls.