VAALCO Energy, Inc. — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017; balance-sheet figures are compared with December 31, 2017. VAALCO is an independent oil producer operating primarily in Gabon, with an undeveloped interest in Equatorial Guinea. Angola is reported as discontinued operations.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Oil and gas revenue | $27.6 million | $21.3 million |
| Operating income | $13.0 million | $8.1 million |
| Net income | $8.7 million; $0.15 per share | $4.3 million; $0.07 per share |
| Operating / net margin (calculated) | 47.2% / 31.3% | 38.3% / 20.0% |
| Cash from continuing operations | $15.7 million | $4.7 million |
| Cash from all operating activities | $15.1 million | $4.1 million |
| Cash, cash equivalents and restricted cash | $44.8 million | $32.3 million at December 31, 2017 |
| Unrestricted cash | $32.2 million, including $4.8 million of partner advances | $19.7 million at December 31, 2017 |
| Debt | $7.1 million principal; $5.8 million current portion | $9.0 million principal at December 31, 2017 |
| Current assets / current liabilities | $49.5 million / $51.3 million | $36.5 million / $46.6 million at December 31, 2017 |
Q1 property and equipment expenditures were $0.4 million. Operating cash flow benefited from partner payments and working-capital movements; those movements contributed $5.4 million net in Q1 2018. The filing reports no material 2018 capital-expenditure commitments.
Material changes versus Q1 2017
- Revenue rose 30%, mainly because the average realized oil price increased to $68.69 per barrel from $51.99. Price contributed approximately $6.6 million to the revenue increase; volume and other effects modestly offset it.
- Net Gabon production fell to 325,000 barrels from 416,000 barrels, while net sales were nearly unchanged at 393,000 versus 394,000 barrels. The filing attributes lower production to natural declines and temporarily shut-in wells following electric-submersible-pump failures; Q1 sales also included barrels from a 2017 lifting completed in January 2018.
- Production expense increased 38% to $11.0 million, including workover costs and higher personnel, fuel, maintenance and charter costs. DD&A declined to $1.1 million from $1.9 million, while G&A fell to $2.6 million from $3.1 million.
- Operating cash flow increased substantially, partly due to partner collections and other working-capital changes. Debt principal declined through repayments; no new borrowing occurred in Q1 2018.
Outlook, risks and unusual items
- Management said current oil prices were adequate to generate cash from continuing operations and believed cash on hand plus operating cash flow could support operations and cash requirements through June 30, 2019. This depends on commodity prices and other assumptions; no formal earnings or production guidance is provided.
- VAALCO planned workovers intended to restore approximately 750 net barrels per day from the Avouma 2-H and South Tchibala 1-HB wells before the end of Q2 2018. The company said changes to ESP design, installation and operations were intended to reduce repeat failures.
- The company may drill two or three development wells in 2019, subject to partner and Gabonese government approval. Its Etame Marin license currently runs through June 2021; management is focused on extending it.
- The IFC term loan bears interest at LIBOR plus 5.75%, matures in June 2019, and requires $4.6 million of principal payments during the remainder of 2018 and $2.5 million in 2019. VAALCO was in covenant compliance at quarter-end; future compliance is exposed to oil prices, production and other factors.
- Angola discontinued operations include a $15.0 million accrued potential drilling-obligation payment. VAALCO is negotiating with Sonangol and believes the ultimate payment will be substantially less, but the outcome is unresolved.
- Other exposures include Gabon tax and customs audits (approximately $1.3 million accrued for potential audit fees and $0.4 million for estimated additional taxes and penalties), VAT collection delays, and abandonment funding. The next scheduled abandonment funding is $2.3 million net to VAALCO in December 2018.
- VAALCO guaranteed the FPSO charter; remaining gross minimum obligations were $77.5 million at March 31, 2018. The company’s net charter share is approximately $9.7 million annually, and it recorded a $0.5 million guarantee liability.
- All or substantially all revenue depends on Gabon and sales to Glencore, whose contract runs through January 2019. Oil-price sensitivity disclosure estimates that a $5-per-barrel decrease at recent sales volumes would reduce quarterly revenue and operating income by about $2.0 million.
- The company had NYSE listing deficiencies relating to minimum share price and market capitalization; it had until May 30, 2018 to regain market-capitalization compliance and was evaluating remedies or another exchange. Management reported disclosure controls were effective at March 31, 2018.
Important facts for investors to verify
- Progress and production impact of the planned well workovers, and whether ESP reliability improves.
- Realized oil prices, production and lifting timing, plus renewal or replacement of the Glencore sales contract.
- Cash availability after accounting for partner advances, scheduled debt repayments, abandonment funding and operating needs.
- Resolution and potential payment for the Angola drilling obligation, and outcomes of Gabon tax, customs and operational audits.
- Etame Marin license-extension progress, any 2019 drilling approvals and the status of NYSE listing compliance.