VAALCO Energy, Inc. — Q1 2017 Form 10-Q Summary
Reporting period: Three months ended March 31, 2017; unaudited. VAALCO is an independent oil and gas company operating offshore Gabon, with an undeveloped interest in Equatorial Guinea. Angola is reported as discontinued operations.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Oil and natural gas sales | $21.3 million | $11.0 million |
| Operating income (loss) | $8.1 million | $(13.5) million |
| Continuing operations income (loss) | $4.4 million | $(15.4) million |
| Net income (loss), including discontinued operations | $4.3 million | $(7.6) million |
| Net cash from operating activities | $4.1 million | $(0.2) million |
| Cash and cash equivalents at period end | $24.2 million | $24.2 million |
Revenue increased 94%, primarily because average realized oil prices rose to $51.99 per barrel from $27.07; net oil sales increased to 394,000 barrels from 381,000. Net production in Gabon was 416,000 barrels versus 404,000. Production expense declined to $7.9 million from $11.3 million, while general and administrative expense increased to $3.1 million from $2.2 million. Income tax expense was $3.2 million, primarily attributable to Gabon.
Operating cash flow from continuing operations was $4.7 million; total operating cash flow included a $0.6 million outflow from discontinued operations. Investing cash outflow was $0.8 million, primarily for equipment. Q1 accrual-basis capital expenditures were $0.3 million. The company reported total assets of $80.0 million, total liabilities of $75.9 million and shareholders’ equity of $4.1 million, compared with a $0.4 million deficit at year-end 2016.
At March 31, VAALCO had approximately $15.4 million of IFC term-loan principal outstanding, including $8.3 million classified as current on the balance sheet. The loan bears interest at LIBOR plus 5.75% and matures in June 2019. The company was in compliance with its financial covenants at quarter-end. Scheduled principal repayments are $6.2 million for the remainder of 2017, $6.7 million in 2018 and $2.5 million in 2019.
Material changes and unusual items
- Revenue growth and the return to operating and net income mainly reflect higher oil prices; lower production costs also helped. Q1 2016 production expense included $4.3 million of workover costs, and other operating expense included costs for rig demobilization.
- Q1 2016 discontinued-operations income included recovery of a $7.6 million partner receivable and $3.2 million of default interest. Q1 2017 discontinued-operations loss was $0.2 million, primarily ongoing Angola administrative costs.
- Operating cash flow improved year over year, but the comparison is affected by the $19.0 million Sonangol payment received in Q1 2016. In Q1 2017, working-capital movements included an $8.1 million cash source from partner accounts and a $9.1 million cash use from accounts payable.
- VAALCO borrowed $4.2 million under the additional IFC term-loan option on March 14, 2017. It also held oil puts covering 540,000 barrels of expected April–December 2017 sales, at a weighted average price of $49.63 per barrel. Their quarter-end fair value was a $1.0 million asset; the quarter recorded a $0.2 million derivative loss.
Outlook, risks and contingencies
- Management expects to focus on maintaining Gabon production and lowering operating costs. Assuming oil prices remain at current levels and other variables are unchanged, it believes cash on hand and continuing-operation cash generation can support operations and cash requirements through June 30, 2018. Financing for future capital projects is limited, and there is no assurance additional financing will be available.
- The 2017 capital budget is limited; the company reported no material capital-expenditure commitments. It said current prices and cash on hand were expected to fund 2017 spending.
- The Etame Marin production license currently runs through June 2021; VAALCO is focused on extending it. The company’s Gabon crude sales contract ends in January 2018, and it expects to extend or replace it on comparable terms.
- VAALCO accrued $15.0 million for potential Angola exploration-well obligations, which it is vigorously contesting and believes may ultimately be substantially lower. Angola discontinued-operation liabilities totaled $18.3 million at quarter-end.
- The company’s net share of the Gabon FPSO charter is approximately $9.7 million annually; gross remaining minimum charter obligations were $109 million at quarter-end. VAALCO recorded a $0.6 million liability for its guarantee. It had funded $8.5 million net toward Gabon abandonment costs, with a further estimated $2.3 million net payment expected in December 2017.
- Gabon VAT collection remains uncertain: after one installment in July 2016 under a government payment agreement, no further installments had been received. The filing reports $5.4 million of net VAT and other receivables, without isolating the VAT amount in that balance-sheet line.
- On April 6, 2017, the NYSE notified VAALCO that its 30-trading-day average share price was below the $1.00 minimum listing standard; it had six months to regain compliance. The notice did not trigger a debt default.
- Disclosure controls and internal control over financial reporting were not effective because of previously reported material weaknesses, including deficiencies in review controls and the physical count of operational spares. Management planned remediation during 2017 but gave no assurance it would succeed.
- Other risks include volatile oil prices, liquidity and covenant compliance, ability to replace the term loan or fund operations, operational and country risks, and uncertainty regarding reserves. A pending age-discrimination lawsuit sought $361,000; management said it did not expect a material financial effect.
Important facts for investors to verify
- Whether production, realized oil prices and operating costs sustain management’s cash-coverage outlook, particularly if prices weaken.
- Debt repayment capacity, covenant headroom and availability of replacement or additional financing.
- Progress and potential cost of resolving the contested Angola drilling obligation and other exit matters.
- Collection of Gabon VAT, the NYSE minimum-price compliance plan, and remediation of the reported control weaknesses.
- Etame Marin license-extension progress, renewal of the crude sales contract, and the funding and liability assumptions for abandonment and the FPSO charter.