VAALCO Energy, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Financial statements are unaudited. VAALCO is an independent oil and gas company, with its principal production and operations in offshore Gabon and exploration activities in Gabon, Angola, and Equatorial Guinea.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share amounts and operating data.
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $24.5 | $37.7 | $104.7 | $111.0 |
| Operating income | $6.7 | $8.1 | $39.9 | $41.3 |
| Net income | $3.1 | $2.4 | $20.8 | $16.7 |
| Diluted EPS | $0.05 | $0.04 | $0.36 | $0.29 |
| Operating margin | 27.3% | 21.5% | 38.1% | 37.2% |
| Net margin | 12.7% | 6.3% | 19.9% | 15.0% |
- Cash flow: Nine-month operating cash flow was $54.8 million, versus $36.8 million. Investing cash use was $68.0 million, primarily for capital expenditures of $68.1 million; financing provided $16.3 million, including $15.0 million of borrowings. Cash increased $3.0 million to $133.5 million.
- Balance sheet: Current assets were $169.2 million and current liabilities $56.1 million. Total assets were $362.9 million, total liabilities $84.8 million, and equity $278.1 million. Restricted cash totaled $13.1 million across current and other assets.
- Debt: $15.0 million outstanding under a $65.0 million IFC revolving facility, secured by assets of the Gabon subsidiary, with maturity in January 2019. The company reported covenant compliance. The filing reports no separate interest expense in earnings because facility interest incurred through September was capitalized.
Changes versus prior comparable periods
- Q3 revenue fell 35% year over year, mainly reflecting fewer Gabon barrels lifted and a lower realized oil price. Gabon sales were approximately 255,000 net barrels at $94.57 per barrel, compared with 337,000 barrels at $110.54.
- Nine-month revenue declined 6%, while net income increased 25%. Lower production and exploration expenses and lower income taxes supported earnings; higher DD&A and general and administrative costs partly offset these benefits.
- Q3 operating expenses declined to $17.8 million from $29.6 million, primarily due to lower production costs and exploration expense. Q3 G&A increased to $4.0 million from $1.9 million. A $1.8 million allowance was recorded against overdue Gabon VAT receivables.
- Nine-month production expense fell to $21.6 million from $28.0 million; exploration expense fell to $15.2 million from $21.5 million. DD&A rose to $15.4 million from $11.0 million, and G&A rose to $10.7 million from $8.0 million.
- Net property and equipment increased to $189.6 million from $138.5 million, with work in progress rising to $127.8 million from $64.5 million, largely reflecting Gabon platform development.
Outlook, management commentary, and key risks
- Management expected approximately $25.3 million of the company’s capital expenditures in Q4 2014, principally for Etame development wells and the Angola Kindele exploration well. It stated available cash, operating cash flow, and the IFC facility should fund remaining 2014 capital spending and working-capital needs.
- Two offshore Gabon production platforms were installed in September. A development drilling program of at least six wells began in October. The company’s net share of estimated platform construction and installation costs was $102.0 million; well costs are additional.
- H2S has affected production at Ebouri and Etame; the Etame 5-H well was shut in. A possible processing facility and associated work were under evaluation, with a final investment decision expected in Q1 2015 and a goal of restoring affected-area production in the first half of 2017. In October, Ebouri 2-H, producing about 700 net barrels per day, was also shut in for diagnosis of a pressure communication issue.
- The Etame Marin exploration license expired in July 2014. VAALCO had applied for a seventh license and was negotiating with Gabon; it expensed $0.8 million of undeveloped leasehold costs because renewal was uncertain. The filing provides no assurance that the requested license will be granted.
- In October, VAALCO entered Angola’s Subsequent Exploration Phase, extending exploration through November 2017. The program requires four exploration wells in total and 3D seismic; a $5.0 million net assessment applies for each required well left undrilled. The Kindele well was expected to start in December 2014.
- Gabon’s tax authority issued a provisional audit report in October concerning Etame Marin operations. VAALCO said it could not reasonably estimate any potential loss; management considered the claims unfounded. The company also recorded a $1.8 million allowance for VAT reimbursements overdue more than 12 months.
- Other risks highlighted include volatile oil and gas prices, exploration and operating hazards, delivery and equipment constraints, partner and government actions, and political, regulatory, and currency risks. The company had no active commodity hedges.
Important facts for investors to verify
- Progress and cost outlook for the Gabon development wells and platforms, and whether H2S-related production can be safely restored on the projected timetable.
- Resolution of the Gabon tax audit and collection of overdue VAT receivables, including whether additional allowances or losses are required.
- Status of the Etame Marin license application and the onshore Gabon production-sharing agreement and development approvals.
- Angola drilling schedule, funding requirements, restricted cash, and exposure to assessments for uncompleted well commitments.
- Oil lifting volumes and realized prices, cash generation, capital spending, and compliance with IFC loan covenants as operations progress.