VAALCO Energy, Inc. — 2011 Form 10-K
Business context and reporting period. This annual filing covers the year ended December 31, 2011; fourth-quarter results are unaudited. VAALCO is an independent oil and gas company whose principal producing asset is the Etame Marin block offshore Gabon. It also has exploration interests in Gabon and Angola and developing U.S. acreage in Texas and Montana.
Financial and operating performance
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $210.4 million | $134.5 million |
| Operating income | $132.6 million; 63.0% margin | $78.1 million |
| Net income | $40.6 million consolidated; $34.1 million attributable to VAALCO | $42.4 million consolidated; $37.3 million attributable to VAALCO |
| Basic / diluted EPS attributable to VAALCO | $0.60 / $0.59 | $0.66 / $0.65 |
| Cash from operating activities | $89.6 million | $45.5 million |
| Cash and cash equivalents at year-end | $137.1 million | $81.2 million |
| Total debt at year-end | None | None |
2011 consolidated net margin was 19.3%; net income attributable to VAALCO was 16.2% of revenue. Income tax expense was $93.5 million, primarily Gabon taxes, versus $35.3 million in 2010. Current assets were $162.9 million and current liabilities $25.1 million. Restricted cash totaled approximately $12.2 million, including $10.0 million pledged for Angola drilling obligations.
Net production averaged 5,235 BOE per day, compared with 4,705 BOE per day in 2010. VAALCO reported 2011 Gabon crude sales of approximately 1.864 million barrels at an average $111.98 per barrel, versus 1.714 million barrels at $78.38 in 2010. Production expense was $26.7 million, DD&A $25.6 million, exploration expense $5.7 million, and G&A $10.4 million. A $4.4 million Angola partner-receivable provision and a $5.0 million Granite Wash impairment were recorded.
Capital expenditures were approximately $32.0 million in cash-flow reporting ($33.0 million of property and equipment additions). Net cash used in investing was $28.4 million; financing activities used $5.3 million, mainly distributions to the noncontrolling interest. The standardized measure of proved reserves rose to $166.2 million from $124.8 million. Net proved oil reserves fell to 6.048 million barrels from 6.922 million; gas reserves increased to 1.925 Bcf from 23 MMcf, mainly reflecting U.S. additions. No proved undeveloped reserves were converted to developed reserves during 2011.
Material changes versus the prior period
- Revenue increased 56.5%, reflecting higher oil prices and sales volumes. Average Gabon crude price rose to about $111.98 per barrel from $78.38.
- Operating income increased to $132.6 million from $78.1 million, but consolidated net income declined to $40.6 million from $42.4 million as income taxes rose sharply and the company booked the Angola bad-debt provision and Granite Wash impairment.
- Operating cash flow nearly doubled to $89.6 million; cash and cash equivalents increased by $55.9 million during the year.
- Production averaged 5,235 BOE per day versus 4,705 BOE per day; U.S. production began at the first Granite Wash well.
- VAALCO expanded its U.S. position through acquisitions in the Granite Wash and Montana Bakken, while the 2011 reserve estimate included new U.S. gas reserves.
Outlook, management commentary, risks and contingencies
- Management expected approximately $75 million of 2012 capital spending, including a four-well Gabon development program, a Mutamba Iroru exploration well, completion of the Texas Granite Wash well, and four wells on Montana acreage.
- Gabon remains the key earnings and asset concentration: the Etame Marin fields accounted for almost 98% of 2011 production and 94% of year-end proved reserves. Sales there are concentrated with Mercuria, under a contract extended through 2012.
- Angola partner-payment and drilling delays remain material. A further extension beyond November 30, 2012 might be needed; denial could expose the company to impairment of $11.0 million of investment and a possible $10.0 million payment for missed exploration commitments. The company recorded a $4.4 million allowance against partner receivables.
- Other work commitments include one remaining Etame Marin exploration well by July 2014 and a Mutamba Iroru well, for which VAALCO expected to seek a permit extension. Montana acquisition terms require three wells at VAALCO’s cost, with two additional wells planned for 2012 after the first was spudded in December 2011.
- Operating lease commitments were $24.4 million net to VAALCO, including its share of the Gabon FPSO charter. The company also reported $14.5 million of asset retirement obligations and anticipated beginning Gabon abandonment funding after an agreement is finalized.
- Key risks include oil-price volatility, offshore operating hazards, reserve-estimate uncertainty, foreign-government and partner actions, currency exposure, reliance on Gabon and a single Gabon buyer, and potential environmental or hydraulic-fracturing regulation. The filing reports no derivatives in place during 2009–2011.
- The first Granite Wash well had mechanical problems and was impaired; the second well’s production depended on successful fracturing. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether 2012 Gabon drilling and platform projects proceed on schedule and within the stated capital budget.
- Progress securing an Angola replacement partner, meeting drilling commitments, and recovering partner receivables; confirm any extension or contingent payment outcome.
- Performance and commerciality of the Texas and Montana wells, including the impairment assumptions and future development costs.
- Gabon field production, reserve revisions, cost-recovery and tax terms, and continued crude sales arrangements with Mercuria.
- Cash availability after restricted balances, planned capital spending, lease commitments, and the expected abandonment funding arrangement.
- Reserve and standardized-measure assumptions: these are estimates using prescribed prices and a 10% discount rate, not current market value.