VAALCO Energy, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. VAALCO is an independent oil producer operating primarily in Gabon, with an undeveloped interest in Equatorial Guinea. Angola is reported as discontinued operations.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Crude oil and natural gas sales | $39.8 million | $18.4 million |
| Operating income (loss) | $14.3 million | $(26.7) million |
| Net income (loss) | $9.9 million | $(52.8) million |
| Basic and diluted EPS | $0.17 | $(0.91) |
| Cash provided by operating activities | $1.7 million | $27.6 million |
| Cash used in investing activities | $19.1 million | $12.0 million |
| Cash, cash equivalents and restricted cash at period-end | $43.9 million | $74.1 million |
Sales volume rose to 619,000 barrels from 294,000; net production was 466,000 barrels versus 450,000. The average realized price increased to $61.31 per barrel from $59.54. Revenue growth reflected primarily higher sales volumes, with a smaller contribution from price. VAALCO completed three liftings versus two a year earlier, so sales volumes differed from production.
Operating cash flow fell despite the return to profitability, primarily because operating assets and liabilities used $11.7 million of cash, versus providing $18.7 million in Q1 2020. The filing cites increased trade receivables and other working-capital movements. Unrestricted cash was $19.3 million at March 31, 2021. Current assets of $49.3 million were below current liabilities of $65.1 million. The balance sheet lists no debt balance.
Material changes and unusual items
- On February 25, 2021, VAALCO completed its acquisition of Sasol’s 27.8% Etame Marin working interest, increasing its working interest from 31.1% to 58.8%. The acquired interest contributed $9.4 million of Q1 revenue and $1.2 million of net income; its results are included only after closing.
- The acquisition generated a $7.7 million bargain purchase gain, principally reflecting improved oil-price assumptions between signing and closing. The statements include $5.5 million in other income and a related $2.2 million income-tax benefit. The gain is nonrecurring.
- Production expense increased $6.4 million, DD&A increased $1.0 million, and G&A increased $3.8 million year over year. The G&A increase was primarily related to a $4.0 million increase in stock-appreciation-rights expense. Q1 2020 results included a $30.6 million property impairment and $33.5 million income-tax expense.
- Derivative instruments produced a $6.0 million net loss, compared with a $7.3 million gain in Q1 2020, as oil prices rose. The contracts reduce some downside exposure but also limit benefits from price increases.
- Period-end asset retirement obligations were $32.2 million, up from $17.3 million, mainly due to $14.6 million assumed in the acquisition. The acquisition also included a $5.0 million contingent-payment liability; its price condition was met and VAALCO paid Sasol on April 29, 2021.
Liquidity, outlook and risks
- Management said it expected existing cash and operating cash flow to support requirements through June 2022, based on current expectations. The company had no debt balance listed, but Q1 operating cash flow was modest and working capital was negative.
- Gabon’s production reduction request under OPEC+ arrangements was expected to remain in effect through June 30, 2021. COVID-19 effects, oil-price volatility, production quotas and operating costs remain uncertainties.
- VAALCO planned an Etame drilling campaign for late 2021 or early 2022, with two development and two appraisal wells estimated at $115–$125 million gross, or $73–$79 million net to VAALCO’s participating interest.
- The current FPSO charter runs through September 2022. An April 2021 non-binding letter of intent with Omni proposed an FSO arrangement for up to 11 years; it requires a definitive agreement and approvals and is not assured. Estimated investment is $40–$50 million gross ($25–$32 million net), with an anticipated payback of less than three years according to management. Failure to secure a timely replacement storage solution could require production to be shut in.
- VAALCO reported 709,262 barrels of swaps at a weighted-average $53.10 per barrel for February 2021–January 2022. It also disclosed additional swaps entered into after quarter-end on May 6, 2021; these are not Q1-period transactions.
- Other exposures include a $12.9 million gross Gabon VAT receivable ($8.8 million net to VAALCO), foreign-exchange risk, pending Gabon government audits and uncertainty around abandonment funding. The filing says management does not expect the cited 2013–2014 audit to materially affect the company; findings for the 2015–2016 audit had not yet been received.
Important facts for investors to verify
- How post-acquisition production, costs and cash generation compare with management’s expectations for the increased Etame interest.
- Whether working-capital demands and receivable collections improve, and whether liquidity supports planned drilling and FSO commitments.
- Final purchase-accounting values and the effect of the nonrecurring bargain purchase gain on comparisons of reported earnings.
- Progress toward a binding FPSO/FSO solution, required approvals, timing, total VAALCO-funded cost and operational readiness before September 2022.
- Developments in Gabon production restrictions, crude prices and hedging, VAT recovery, abandonment-fund access and government audits.