VAALCO Energy, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. VAALCO is an independent oil and gas exploration and production company, with its principal producing operations offshore Gabon and exploration interests in West Africa and the United States.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Oil and gas revenue | $28.1 million | $44.1 million, down 36% |
| Operating income (loss) | $(0.7) million | $21.5 million |
| Operating margin | (2.3%) | 48.7% |
| Net income (loss) | $(7.0) million; $(0.12) per diluted share | $7.2 million; $0.12 per diluted share |
| Cash from operating activities | $(23.5) million | $(9.0) million |
| Capital expenditures paid | $24.8 million | $18.4 million |
| Cash and cash equivalents | $80.7 million at March 31 | $130.5 million at December 31, 2013 |
| Total assets / liabilities | $297.1 million / $51.8 million | $308.2 million / $57.3 million at December 31, 2013 |
| Debt outstanding | None | $65 million IFC revolving facility available |
Reported production expenses were $9.7 million, exploration expenses $11.3 million, depreciation, depletion and amortization $4.2 million, and general and administrative expenses $3.6 million. The filing does not provide a clear gross-margin or EBITDA value. Current assets were $146.3 million versus current liabilities of $40.2 million. Cash-flow pressure included a $42.2 million increase in accounts with partners; operating cash use should be considered alongside these working-capital movements.
Changes and operating developments
- Gabon crude sales were 257,000 net barrels from two liftings at an average $107.97 per barrel, versus 397,000 barrels from three liftings at $110.07 in Q1 2013. Net production was approximately 335,000 barrels versus 360,000. Management attributed the revenue decline primarily to fewer liftings and a lower realized price; sales timing does not necessarily match production.
- The unsuccessful offshore Gabon exploration well drove $9.7 million of exploration expense; total exploration expense rose from $6.1 million in Q1 2013. Workover expense also increased, including $3.2 million for an ESP replacement versus $1.2 million in the prior-year quarter.
- Cash declined by $49.8 million during the quarter. Investing cash use was $24.5 million; financing cash use of $1.7 million related to IFC facility issuance costs.
- The $65 million IFC revolving credit facility was entered into in January, is secured by assets of the Gabon subsidiary, and matures in January 2019. No amount had been drawn at quarter-end. It includes financial ratio requirements.
Outlook, risks and contingencies
- Management said available cash, operating cash flow and the IFC facility were expected to fund the remaining 2014 capital budget and working-capital needs. The filing gives no formal earnings or production guidance. It anticipated approximately $26 million of its share of capital expenditures in Q2 2014, mainly for Gabon platform construction and a replacement development well.
- Two offshore Gabon production platforms were under construction; estimated total construction and installation cost was $325 million, or $91 million net to VAALCO. At March 31, jackets were 95% complete and decks 70% complete; installation was scheduled for the second half of 2014.
- Hydrogen sulfide (H2S) had led to shut-ins at Ebouri, reducing gross production by approximately 2,000 barrels per day. Etame 5-H was also shut in pending confirmation of possible H2S, expected in Q3 2014. Potential remediation could require a processing facility, well recompletions and additional wells; investment decisions were expected in the second half of 2014, with production restoration targeted for the first half of 2017.
- Angola exploration commitments require two wells. A proposed extension to November 30, 2017 was pending government approval; the proposed schedule called for one well in 2014 and the second by early 2016. Each uncompleted well could trigger a $5 million penalty; $10 million was held as restricted cash.
- Gabon onshore development depended on approval of a revised production-sharing contract and subsequent government decisions; VAALCO cautioned that approval was not assured. The Etame abandonment funding arrangement was pending final approval and expected to begin in the first half of 2014. Asset retirement obligations were $11.6 million.
- The company had no active commodity hedges. It cited oil and gas price volatility, exploration and operating risks, partner and government actions, equipment availability, and market access among risks that could affect results.
Investor verification priorities
- Confirm whether the IFC facility’s covenant calculations and available borrowing capacity remain adequate, given the quarter’s cash outflows.
- Track Gabon liftings, production, inventory, H2S testing and shut-in impacts, plus actual timing and cost of platform installation and related projects.
- Verify approval and execution of the Angola contract extension and well schedule, and assess the restricted cash and potential penalties.
- Review the unsuccessful well charges, remaining exploration commitments, and approval status of the onshore Gabon production-sharing contract.
- Reconcile cash-flow trends with partner receivables and other working-capital changes; assess the effect of lifting timing on reported quarterly revenue.