VAALCO Energy, Inc. — Q2 2012 Form 10-Q
Business and period: Houston-based oil and gas exploration and production company, with its principal production from the Etame Marin block offshore Gabon and additional exploration and production activities in the United States and Angola. This unaudited report covers the three and six months ended June 30, 2012; financial statement amounts below are in millions of dollars unless noted.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Oil and gas revenue | $58.8 | $58.5 | $104.1 | $105.3 |
| Operating income | $38.6 | $42.5 | $68.7 | $73.9 |
| Net income | $12.3 | $13.5 | $22.8 | $26.4 |
| Net income attributable to VAALCO | $10.4 | $11.8 | $19.4 | $23.0 |
| Diluted EPS | $0.18 | $0.20 | $0.33 | $0.40 |
| Operating margin | 65.7% | 72.6% | 66.0% | 70.1% |
Cash flow and balance sheet: For the first half, operating cash flow was $28.0 million versus $41.1 million a year earlier; investing cash outflow was $27.1 million versus $7.4 million, primarily reflecting higher capital spending. Cash increased $0.7 million to $137.8 million. At June 30, current assets were $171.8 million and current liabilities $20.8 million; total assets were $290.1 million and total liabilities $32.7 million. The balance sheet reports no borrowings or debt. Restricted cash totaled $12.1 million, including $10.0 million held for Angola exploration-well obligations.
Capital expenditures paid during the first half were $27.2 million; net property and equipment additions incurred were $23.5 million. Management anticipated approximately $43 million of its share of capital expenditures in the second half of 2012 for U.S. wells and Gabon wells and infrastructure. Income taxes paid in the first half were $41.7 million.
Changes versus prior comparable periods
- First-half revenue declined 1.2%, while operating income fell 6.9% and VAALCO-attributable income fell 15.6%. Gabon net oil sales volumes were about 906,000 barrels versus 938,000; average realized price increased to $113.25 per barrel from $112.18.
- Q2 revenue was nearly flat, but Gabon production averaged about 20,100 barrels per day gross (4,900 net), down from 22,200 gross (5,300 net). Q2 Gabon sales volume rose to about 538,000 net barrels from 489,000, while realized price fell to $107.51 per barrel from $119.61.
- First-half production expense rose to $12.1 million from $11.0 million, exploration expense to $4.3 million from $2.3 million, and G&A to $6.5 million from $5.5 million. The filing attributes cost increases to retroactive FPSO costs, exploration activity including a dry-hole charge, and expanded staffing and offices.
- Operating cash flow was lower mainly because two Gabon oil liftings had not yet become payable at quarter-end, contributing to a $9.9 million increase in trade receivables.
Outlook, risks and unusual items
- Operations and development: Management planned further U.S. drilling and Gabon development work in the second half. It reported a commercial Bakken/Three Forks discovery at East Poplar Dome, while $2.9 million of costs for deeper, noncommercial intervals were expensed. A second well was underway and a third was expected in Q4.
- Ebouri H2S: After detecting hydrogen sulfide on the Ebouri platform in July, VAALCO shut in two producing wells as a precaution. The company reported continued Etame-complex production of approximately 19,000 barrels per day, including one Ebouri well, but could not estimate when, or whether, the shut-in wells would return to production or whether additional costs would be required.
- Angola: Two exploration wells remain subject to the Block 5 work commitment. The government extended the deadline to November 30, 2014; penalties are $5 million per well, with $10 million recorded as restricted cash. A potential replacement partner was under discussion, and VAALCO had recorded a full $5 million allowance against partner receivables.
- Gabon commitments: One Etame Marin exploration well remains due by July 2014. The Mutamba Iroru exploration well was expected in the second half of 2012. Funding for offshore abandonment was expected to begin in Q3 after finalizing details with Gabon; the estimated discounted VAALCO share was revised down to $9.2 million from $14.6 million. The estimate change reduced Q2 operating costs by $0.7 million and increased diluted per-share results by $0.01.
- Subsequent acquisition: In July, VAALCO signed an agreement to acquire a partial working interest in a concession in a new West African country for $10 million, subject to customary conditions and government approval; closing was expected before the end of Q3.
- Market and customer exposure: The company had no active commodity hedges. It cautioned that oil and gas prices are volatile and identified operational, reserve, partner, government, customer, and capital-spending uncertainties. Management said alternative buyers could be sought if current buyers were lost.
Key facts for investors to verify
- Progress, restart timing, production impact, and potential remediation costs for the two Ebouri wells shut in after H2S detection.
- Cash collection and subsequent payment of the Gabon liftings outstanding at June 30, and the related working-capital impact.
- Angola partner discussions, the two-well commitment, and whether the restricted $10 million will remain available or be exposed to penalties.
- Execution and funding of the anticipated second-half capital program, including the stated $43 million estimate and drilling results.
- Closing conditions and government approval for the proposed $10 million West African acquisition.
- Final Gabon abandonment-funding terms and whether the revised $9.2 million estimate remains appropriate.