VAALCO Energy, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. VAALCO is an independent oil producer operating primarily offshore Gabon, with an undeveloped interest in Equatorial Guinea. Angola is reported as discontinued operations. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $55.9 | $18.3 | $142.7 | $54.6 |
| Operating income (loss) | $20.0 | $4.7 | $53.2 | $(23.0) |
| Net income (loss) | $31.7 | $7.6 | $47.5 | $(44.6) |
| Diluted EPS | $0.53 | $0.13 | $0.80 | $(0.77) |
| Operating cash flow | Not separately stated | Not separately stated | $46.7 | $19.1 |
- Q3 revenue rose 206%; nine-month revenue rose 161%. Higher realized prices and the Sasol acquisition drove the increase. Average realized oil price was $73.02/bbl in Q3 and $68.31/bbl year to date, versus $43.63 and $39.90, respectively, in 2020.
- Q3 operating margin was approximately 36%; nine-month operating margin was approximately 37%. Reported net income included a significant deferred tax benefit, so net margins are not directly indicative of operating performance.
- Nine-month net cash from operations was $46.7 million; investing used $31.0 million, including $22.5 million paid for the Sasol acquisition. Financing used $0.1 million. Cash, cash equivalents and restricted cash increased $15.6 million to $77.0 million, including $52.8 million of unrestricted cash.
- At September 30, total assets were $206.3 million and total liabilities $96.7 million. Current assets of $64.1 million slightly exceeded current liabilities of $63.3 million. No borrowing or conventional debt balance is presented; liabilities include operating lease obligations and asset retirement obligations.
Changes versus prior comparable periods
- VAALCO completed its acquisition of Sasol’s 27.8% Etame working interest on February 25, 2021, increasing its working interest from 31.1% to 58.8%. The acquisition contributed $58.0 million of nine-month revenue and $20.1 million of nine-month net income, per the filing.
- Q3 net oil production increased to 708 thousand barrels from 405 thousand; nine-month production rose to 1.904 million barrels from 1.347 million. Higher ownership following the acquisition was partly offset by natural production decline.
- Production expense increased to $25.2 million in Q3 and $57.8 million for nine months, reflecting the higher working interest, workovers and higher marine/personnel costs. Production expense per barrel, excluding workovers, rose to $28.85 in Q3 and $26.75 year to date.
- There was no proved-property impairment in 2021, compared with a $30.6 million impairment in the first nine months of 2020. The prior-year loss also included a $37.4 million charge to increase deferred-tax valuation allowances.
Outlook, commentary and risks
- Tax and unusual items: The company reversed $22.3 million of deferred-tax valuation allowance in 2021 as improved prices and operating forecasts supported expected realization of some tax assets. The Q3 income-tax benefit was $17.2 million; the nine-month benefit was $11.3 million. The Sasol transaction also generated a $7.7 million bargain-purchase gain, including $5.5 million reported in other income and a related $2.2 million tax benefit.
- Liquidity and investment: Management said existing cash and expected operating cash flow should fund requirements through December 2022. The four-well 2021/2022 drilling program was estimated at $117–$143 million gross, or $74–$91 million net to VAALCO; approximately $16–$20 million net was expected in 2021.
- FPSO replacement: A floating storage and offloading vessel (FSO) agreement was approved to replace the FPSO when its current term ends in September 2022. Estimated conversion costs are $40–$50 million gross ($26–$32 million net to VAALCO), mainly in 2022. Failure or delay in bringing the FSO into service could require production to be shut in.
- Commodity hedges: Swaps covered 1.12 million barrels at September 30, with scheduled settlements through June 2022. The company reported a $21.1 million nine-month derivative loss as oil prices rose above swap prices; hedges reduce downside exposure but also limit some benefit from higher prices.
- Commercial and operating exposure: Exxon accounted for all customer-contract revenue; its sales contract was scheduled to expire January 31, 2022. Production had not been subject to OPEC+ curtailments since April 2021, but future quotas, oil-price declines, COVID-19 effects, operational hazards and reserve uncertainty remain risks.
- Other matters: Gabon VAT receivables, local-currency exposure and government/joint-venture audits are ongoing considerations. Management did not expect the cited audits or ordinary-course litigation to have a material effect, but outcomes remain uncertain. No formal production or earnings guidance is provided in the filing.
Key facts for investors to verify
- Whether the FSO conversion, installation and September 2022 transition remain on schedule and within the disclosed cost range.
- The timing and terms of the replacement crude-oil sales contract after the Exxon agreement’s stated expiration.
- Actual drilling-program spending, well results and production trends relative to the disclosed estimates.
- The cash-flow and earnings effects of expiring swaps, including volumes hedged and realized settlements.
- Whether deferred-tax assets are ultimately realized and whether further valuation-allowance changes occur.
- Progress in collecting Gabon VAT receivables and resolving abandonment-fund access and outstanding audits.
- The board’s future dividend declarations; the announced policy contemplated $0.0325 per share quarterly beginning in Q1 2022, subject to board discretion and available funds.