VAALCO Energy, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; filed November 8, 2012. Unaudited interim results. VAALCO is an independent oil and gas exploration and production company, with its principal revenue from offshore Gabon and additional operations in the United States and Angola.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $37.6 million | $37.4 million | $141.7 million | $142.7 million |
| Operating income | $15.6 million | $19.8 million | $84.3 million | $93.7 million |
| Net income | $1.4 million | $3.5 million | $24.3 million | $29.9 million |
| Net income attributable to VAALCO | $0.1 million | $2.4 million | $19.6 million | $25.4 million |
| Diluted EPS | $0.00 | $0.04 | $0.33 | $0.44 |
- Q3 operating margin was approximately 41%, compared with 53% a year earlier; nine-month operating margin was approximately 60%, versus 66%. These percentages are calculated from reported revenue and operating income.
- Q3 production expense rose to $5.9 million from $4.5 million. The company cited revised/retroactive FPSO costs and lower costs capitalized in unsold crude inventory, partly offset by lower Gabon domestic market obligation charges.
- Q3 included a $7.6 million impairment of Granite Wash proved properties, reflecting production declines and low natural gas prices. Nine-month exploration expense was $5.0 million, including a $2.9 million dry-hole charge in Montana.
- Income tax expense was $14.2 million in Q3 and $60.7 million year to date; the filing says taxes were paid in Gabon and the year-over-year decrease reflected a lower share of profit oil versus cost oil.
Cash, liquidity and balance sheet
- At September 30, 2012, cash and cash equivalents were $136.3 million; total current assets were $168.6 million and current liabilities $25.5 million. Restricted cash totaled $12.2 million, including $10.0 million held for Angola exploration commitments.
- Nine-month operating cash flow was $44.8 million, down from $54.3 million. Investing cash outflow was $43.5 million, including $43.5 million of property and equipment expenditures; financing cash outflow was $2.2 million. Cash declined by $0.9 million from year-end 2011.
- Total liabilities were $38.0 million, including $9.9 million of asset retirement obligations. The balance sheet presents no debt line; the filing does not otherwise provide a clear debt balance.
- Management said cash and operating cash flow should be sufficient to fund the remaining 2012 capital budget and potential growth investments. It anticipated approximately $32 million in remaining-2012 capital expenditures.
Changes, outlook and risks
- Nine-month revenue was nearly flat year over year, while operating income and VAALCO-attributable income declined. Gabon crude sales were 1.248 million net barrels at an average $111.79 per barrel, versus 1.260 million barrels at $112.42 a year earlier.
- In July, two of three Ebouri wells were shut in as a precaution after hydrogen sulfide was detected on the platform. The issue was isolated to those wells; investigation and remediation planning were ongoing, and required capital investment was not yet estimable.
- VAALCO was progressing plans for two new Gabon platforms, with installation expected in the first half of 2014, and expected to drill its remaining Etame exploration commitment well in 2013.
- Angola’s two-well exploration commitment remained outstanding, with a $5.0 million penalty per well if not drilled by the extended November 2014 deadline. The company recorded a full $5.4 million allowance against partner receivables amid uncertainty over government approval of a replacement partner.
- Subsequent events: VAALCO completed its $10 million purchase of a 31% interest in Equatorial Guinea’s Block P on November 1, 2012; two exploration wells were expected there in 2013. An October 2012 Mutamba Iroru well in Gabon made an oil discovery, with appraisal underway; commerciality was not yet established. A $3.6 million employee benefit settlement was expected to be paid in December 2012, including $1.0 million additional expense to be recorded in Q4.
- Key exposures include volatile oil and gas prices, reserve and production uncertainty, operational hazards, country and partner risks, and dependence on buyers. The company reported no active commodity hedges. Management reported effective disclosure controls and no material change in internal controls; no material risk-factor changes from the 2011 Form 10-K were reported.
Important facts for investors to verify
- Progress, safety implications, costs and timing for restoring the two shut-in Ebouri wells and producing affected reserves.
- Whether Angola approves a replacement partner or VAALCO’s alternative proposal, and the resulting exploration obligations, partner receivables and penalty exposure.
- Commerciality and expected production from Montana wells and the Mutamba Iroru discovery; status and economics of the planned Gabon platforms and Block P drilling.
- Execution of the remaining 2012 capital program and the impact on cash, including restricted abandonment funding and the employee settlement.
- Drivers of the Granite Wash impairment and any further impairment risk if prices, production or reserve assumptions weaken.