VAALCO Energy, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited. VAALCO is an independent crude-oil producer, with operated production and development activities offshore Gabon and a non-operated interest in Equatorial Guinea. Angola is reported as discontinued operations.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Oil and gas revenue | $18.2 million | $14.6 million | $59.9 million | $44.5 million |
| Operating income (loss) | $3.7 million | $3.7 million | $17.5 million | $(5.2) million |
| Income (loss) from continuing operations | $(0.1) million | $1.0 million | $6.7 million | $(14.9) million |
| Net income (loss), including discontinued operations | $(0.3) million | $(14.8) million | $6.2 million | $(22.9) million |
| Net income (loss) per share | $(0.01) | $(0.25) | $0.10 | $(0.39) |
- Revenue rose 24% in Q3 and 35% year to date. Higher realized oil prices were the principal driver; sales volumes were lower overall. Q3 realized oil price was $51.10/bbl versus $40.00/bbl; nine-month realized price was $49.86/bbl versus $36.03/bbl.
- Calculated operating margin was approximately 20.5% in Q3 2017 versus 25.2% in Q3 2016, and 29.1% for the first nine months of 2017 versus negative 11.7% in 2016. Q3 production costs increased 44%, including maintenance-turnaround, asset-integrity and regulatory costs; nine-month production costs rose 9%.
- Q3 continuing-operations results were weighed down by $2.7 million of income-tax expense and $0.9 million of derivative losses within other expense. Nine-month income-tax expense was $9.0 million.
- For the first nine months, operating cash flow was $3.2 million, including $7.4 million from continuing operations and a $4.2 million use in discontinued operations. Investing cash outflow was $1.1 million; financing cash outflow was $3.7 million. Cash declined $1.6 million to $18.9 million.
- At September 30, current assets were $36.5 million and current liabilities were $46.8 million; the calculated current ratio was approximately 0.78. Total assets were $76.5 million and shareholders’ equity was $6.7 million, compared with a deficit at year-end 2016.
- Debt carrying value was approximately $11.0 million, including $7.5 million current; principal outstanding was approximately $11.2 million. The IFC term loan bears interest at LIBOR plus 5.75% and matures in June 2019. VAALCO reported compliance with loan covenants at quarter-end.
Changes, outlook and material matters
- Year-to-date improvement from 2016 reflects higher oil prices and the absence of major 2016 charges, including rig-demobilization costs and Angola-related items. The Sojitz acquisition, completed in November 2016, increased VAALCO’s Etame Marin interest and contributed to revenue and production costs.
- Etame Marin net oil production for the first nine months was 1.154 million barrels versus 1.181 million barrels in 2016. A July maintenance shutdown reduced Q3 production. Management said a South Tchibala 2-H workover begun in November was expected to increase Q4 production, with higher related workover costs. The South Tchibala 1-HB workover was completed in November and the well returned to production.
- Management stated that, at current prices, cash on hand and cash generated from continuing operations should support operations and cash requirements through December 31, 2018. This is not a guarantee and depends on prices, production and operating results. No material 2017 or future capital-expenditure commitments were reported; year-to-date capital spending was $1.1 million on an accrual basis.
- VAALCO expected its Gabon oil sales contract, due to expire in January 2018, to be extended or replaced on comparable terms. It had oil puts covering 180,000 barrels of anticipated October–December 2017 sales at a weighted-average price of $50/bbl; these were not designated for hedge accounting.
- Angola’s potential drilling-obligation accrual was $15.0 million, included in discontinued-operation liabilities. VAALCO was negotiating with Sonangol and believed the eventual payment could be substantially lower. Angola discontinued operations incurred a $0.5 million loss for the first nine months of 2017.
- Gabon VAT and other receivables were subject to collection and foreign-exchange risk. The government had not resumed monthly payments under a 2016 VAT repayment agreement; discussions were ongoing. The company reported a $6.2 million allowance against VAT and other receivables.
- VAALCO had funded $8.5 million net toward Gabon abandonment obligations and expected a further $2.3 million net payment in December 2017. Its net share of FPSO charter payments was approximately $9.7 million annually; gross remaining minimum charter obligations were $93.1 million at quarter-end.
- The NYSE had notified VAALCO of share-price listing-standard deficiencies; a separate market-capitalization deficiency had also been notified in 2016. The filing said the share-price notice did not trigger a debt default or affect operations.
- Disclosure controls and internal control over financial reporting were deemed ineffective because of previously reported material weaknesses, including financial-report review/reconciliation controls and operational-spares counts. Management expected remediation actions to be completed in Q4 2017 but cautioned that success was not assured.
- Other uncertainties include oil-price volatility, loan covenant compliance and refinancing, the Angola withdrawal and potential liabilities, Gabon audits and abandonment costs, reserve estimates, and the ability to maintain liquidity. The filing provided no formal quantitative production or earnings guidance.
Key facts for investors to verify
- Whether Q4 workovers restore production as expected, and the resulting production and cost impact.
- Oil-price and realized-price trends, sales liftings, and the renewal or replacement of the January 2018 sales contract.
- Cash generation, scheduled debt repayments, covenant headroom, and the basis for management’s liquidity outlook through 2018.
- Resolution and collectability of Gabon VAT receivables, the Angola drilling-obligation claim, and the timing and amount of abandonment funding.
- Progress on NYSE listing compliance and remediation of the disclosed internal-control material weaknesses.