Business context and reporting period
VAALCO Energy, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. The company is an independent oil and gas producer whose principal producing asset is its 28.1% working interest in the offshore Etame Marin block in Gabon. The filing also covers exploration interests in Angola and Equatorial Guinea and small U.S. operations. This is an annual filing, with fourth-quarter results highlighted below.
Financial and operating metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $80.4 million | $127.7 million |
| Operating income (loss) | $(143.6) million | $(54.4) million |
| Net income (loss) | $(158.7) million | $(77.6) million |
| Net loss per share | $(2.72) | $(1.36) |
| Cash from operating activities | $38.9 million | $23.4 million |
| Cash used in investing activities | $(83.0) million | $(101.4) million |
| Cash and cash equivalents at year-end | $25.4 million | $69.1 million |
| Total debt at year-end | $15.0 million | $15.0 million |
| Total assets at year-end | $124.0 million | $248.8 million |
- Revenue fell 37% year over year, mainly because the average realized oil price declined to $47.85 per barrel from $93.66. Oil-equivalent sales volumes increased to 1.712 million BOE from 1.389 million BOE, partly offsetting the price decline.
- The 2015 operating and net losses included $81.3 million of proved-property impairments and substantial exploration expense. The operating loss was about 178% of revenue and the net loss about 197%; both ratios are heavily affected by impairment and other charges.
- Operating cash flow was positive, but investing outflows exceeded it: cash declined by $43.7 million during 2015. Accrual-basis capital expenditures were $87.3 million.
- Current assets were $63.7 million against current liabilities of $66.7 million, a $3.0 million working-capital deficit. The $15.0 million revolving-credit balance was secured by Gabon assets; the borrowing base was reduced from $65.0 million to $20.1 million, leaving limited borrowing capacity.
- Year-end proved reserves fell to 3.031 million BOE from 8.494 million BOE; proved undeveloped reserves fell from 5.036 million BOE to zero. The standardized measure of discounted future net cash flows declined to $27.1 million from $149.4 million.
- Fourth-quarter 2015 revenue was $17.5 million and net loss was $80.8 million, including $52.1 million of proved-property impairment.
Material changes versus the prior period
- Lower oil prices drove most of the revenue decline; the price effect reduced revenue by $62.5 million, partly offset by a $15.7 million favorable volume effect.
- Proved reserves were reduced primarily because lower prices shortened the estimated economic life of the Gabon block and sour reserves were removed. The filing cites a 3.5-year reduction in economic production and removal of 1.440 million barrels of sour reserves, partly offset by better-than-expected well performance.
- Production expense rose to $40.1 million from $31.7 million, and exploration expense rose to $46.5 million from $15.4 million. Exploration charges included the unsuccessful Angola Kindele well, the N’Gongui No. 2 suspended-cost write-off and leasehold impairments.
- Cash declined while current payables rose; accounts payable increased to $46.8 million from $11.7 million. Net property and equipment fell to $33.4 million from $108.1 million, substantially reflecting impairments.
- In 2015 the company recorded prior-period corrections: a $7.0 million increase to impairment expense for an understated 2014 charge and a $2.3 million revenue reduction related to a prepaid-royalty account error.
Outlook, commentary, risks and unusual items
- Going concern: Management and the auditor cited substantial doubt about the company’s ability to continue as a going concern, due to recurring losses, depressed commodity prices and insufficient liquidity. The financial statements were prepared on a going-concern basis and do not include adjustments that might follow if the company cannot continue operating.
- 2016 outlook: At prevailing low prices, management expected revenue and cash flow to be insufficient to cover operating expenses and expected operating losses. The 2016 capital budget was reduced to $3 million–$6 million; VAALCO released the Constellation II rig and planned no 2016 Etame Marin drilling. It expected up to $7 million of rig-related costs after release.
- Strategic review: A board committee and financial adviser were evaluating alternatives, including financing, asset sales or farm-downs, joint ventures, cost reductions, a sale or merger, and continuing the current plan. The filing gives no assurance that a transaction or financing would be completed.
- Credit and liquidity risks: The IFC could make an interim borrowing-base reduction before the scheduled June 30, 2016 redetermination. Covenant compliance was reported at year-end, but future compliance was uncertain; a default could accelerate debt and expose collateral to foreclosure.
- Operations and concentration: Gabon supplied about 98% of 2015 production and accounted for 93% of year-end proved reserves. Four wells were shut in because of hydrogen sulfide; solutions to restore production were uneconomic at then-current prices. The Gabon crude sales contract with Glencore ended in July 2016, and the company relied on a single purchaser for its Gabon production.
- Post-year-end Angola payment: Sonangol P&P paid $19.0 million on March 14, 2016 for amounts owed at year-end, including $8.1 million of 2015 partner receivables, previously reserved costs of $7.6 million and $3.2 million of default interest. The company expected the allowance reversal and interest recognition to benefit first-quarter 2016 results.
- Other contingencies: A Gabon tax audit remained unresolved, with $0.3 million accrued based on preliminary negotiations. A Delaware stockholder action had been resolved on the validity of director-removal provisions, but a request for plaintiffs’ legal fees remained pending. The filing also describes offshore abandonment obligations and other contractual commitments.
- Controls and audit: The auditor issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting, citing a material weakness related to insufficient financial-reporting resources. Management expected remediation work to continue during 2016.
Important facts for investors to verify
- Whether VAALCO secured sufficient financing or other strategic support to address the going-concern uncertainty, and the resulting terms and dilution, if any.
- The latest IFC borrowing base, available borrowing capacity, covenant compliance and any required repayment or waiver.
- Actual 2016 oil prices, production, operating costs and cash flow relative to management’s stated outlook and reduced capital budget.
- Whether the March 2016 Sonangol payment was fully collected and how the expected $7.6 million allowance reversal and $3.2 million interest were recorded.
- Progress on the Glencore sales-contract replacement, Gabon government oil-in-kind arrangements, H₂S-affected wells and the Gabon PSC/audit matters.
- Whether the material weakness in financial reporting was remediated and whether subsequent filings report any further accounting corrections.