VAALCO Energy, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unless otherwise noted, financial figures are in U.S. dollars; the September 30 results exclude TransGlobe, whose acquisition closed October 13, 2022.
Business context
VAALCO was principally an independent oil producer operating offshore Gabon, with an undeveloped interest in Equatorial Guinea and Angola reported as discontinued operations. After the quarter, VAALCO completed its TransGlobe combination, adding assets in Egypt and Canada. The filing states that combined-company results will include TransGlobe beginning in Q4 2022.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $78.1 million | $55.9 million | $257.7 million | $142.7 million |
| Operating income | $33.9 million | $20.0 million | $147.1 million | $53.2 million |
| Net income | $6.9 million | $31.7 million | $34.1 million | $47.5 million |
| Diluted earnings per share | $0.11 | $0.53 | $0.57 | $0.80 |
| Operating cash flow | Not separately presented for the quarter | $129.7 million | $46.7 million |
- Revenue rose 39.7% in Q3 and 80.6% year to date. The nine-month increase reflected higher realized prices, greater sales volumes and the full-period contribution from VAALCO’s increased Etame working interest after the 2021 Sasol acquisition.
- Q3 realized crude price was $103.61 per barrel versus $73.02; nine-month realized price was $109.28 versus $68.31. Nine-month net sales volume increased to 2.305 million barrels from 2.002 million.
- Operating margin was approximately 43% in Q3 and 57% for the nine months, versus approximately 36% and 37%, respectively, in the prior-year periods. Net income nonetheless fell, particularly in Q3, as the prior-year quarter included a substantial income tax benefit while 2022 recorded tax expense.
- Q3 operating costs included $8.9 million of FPSO demobilization expense. Nine-month derivative losses were $37.5 million versus $21.1 million in 2021; these fair-value and settlement effects contributed to the difference between operating income and pretax results.
- For the first nine months, investing cash outflow was $103.9 million, primarily reflecting drilling and Etame field reconfiguration spending. Financing cash outflow was $8.1 million, including $5.8 million of dividends. Cash, cash equivalents and restricted cash totaled $90.1 million at September 30; unrestricted cash was $69.3 million.
- Current assets were $123.3 million and current liabilities were $143.0 million. Total liabilities were $221.1 million, including $41.9 million of asset retirement obligations. VAALCO had no outstanding debt; its $50 million reserve-based credit facility was undrawn, and the company reported covenant compliance.
Changes, outlook and risks
- TransGlobe combination: VAALCO issued approximately 49.3 million shares for the acquisition. The filing says VAALCO shareholders owned approximately 54.5% and former TransGlobe shareholders approximately 45.5% of the combined company. Purchase accounting was not complete at filing.
- Operations and investment: The replacement FSO, named Teli, was accepted in October 2022. Management estimated the 2021/2022 drilling program, including four wells and two workovers, at $165–$202 million gross ($104–$128 million net to VAALCO), with $16–$19 million net expected in Q4 2022. The new North Tchibala well was undergoing cleanup; a planned workover was expected to restore 1,000–1,500 gross barrels per day to another well.
- Liquidity outlook: Management said existing cash and operating cash flow were expected to support current requirements, including drilling, FPSO demobilization, FSO and transaction costs, through December 2023. This is not a guarantee; additional financing might not be available on acceptable terms.
- Capital returns: VAALCO paid quarterly dividends of $0.0325 per share during 2022 and announced the same amount for Q4. Following the combination, management stated an annualized 2023 dividend target of $28 million, approximately $0.25 per share based on estimated combined shares. The board also approved a buyback program of up to $30 million over 20 months; execution is discretionary.
- Hedging: At September 30, collars covered 109,000 barrels per month for October–December 2022, with a $70 put and $122 call. In October, collars were added for January–March 2023 at a $65 put and $120 call. Derivatives were not designated for hedge accounting and can limit gains when prices rise.
- Key risks and contingencies: Commodity-price volatility, Gabon regulatory and currency exposure, supply-chain delays and inflation, and political, tax and integration risks following the TransGlobe acquisition. Management noted delays in obtaining an approved U.S.-dollar abandonment escrow account in Gabon; the net VAALCO abandonment funding estimate was $47.9 million undiscounted. Government audits in Gabon remained ongoing, though management did not expect the identified 2013–2014 audit to have a material financial impact. Ordinary-course litigation was not considered material by management.
- Other unusual items: Q3 and nine-month results included $6.4 million and $7.6 million, respectively, of TransGlobe transaction costs. The nine-month 2022 effective tax rate, excluding discrete items, was 90.3%; management cited nondeductible items and other tax factors. It also disclosed a $20.2 million valuation-allowance release during the period.
Important facts for investors to verify
- Whether post-merger integration delivers expected operating benefits, and the completed purchase accounting and resulting combined-company balance sheet.
- TransGlobe’s ability to meet the Egyptian concession’s modernization payments and capital commitments, and collect its reported EGPC receivable.
- Actual drilling-program and FSO conversion costs, well performance, and progress on the Teli’s operations.
- Collection of Gabon VAT and other receivables, the status of the abandonment escrow, and outcomes of government audits.
- Future borrowing-base determinations, covenant headroom, hedge volumes and realized cash effects, and whether dividends or repurchases remain affordable.