VAALCO Energy, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited. VAALCO is an independent oil and gas company whose principal producing operations are offshore Gabon; it also has exploration interests in Angola, Equatorial Guinea, and the United States.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data and where otherwise noted.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $37.7 | $37.6 | $111.0 | $141.7 |
| Operating income | $8.1 | $15.6 | $41.3 | $84.3 |
| Net income attributable to VAALCO | $2.4 | $0.1 | $16.7 | $19.6 |
| Attributable diluted EPS | $0.04 | $0.00 | $0.29 | $0.33 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $36.8 | $44.8 |
| Capital expenditures paid | Not stated for quarter | Not stated for quarter | $56.1 | $43.5 |
- Q3 operating margin was approximately 21.5%, compared with 41.4% a year earlier; nine-month operating margin was approximately 37.2%, compared with 59.5%. These percentages are calculated from reported revenue and operating income.
- At September 30, cash and cash equivalents were $100.5 million; restricted cash totaled $13.0 million, including $10.0 million held for Angola well commitments. Current assets were $126.9 million and current liabilities $40.4 million. Total liabilities were $51.7 million, including $11.3 million of asset retirement obligations. No borrowings are presented in the balance sheet.
- Cash declined $30.3 million during the first nine months, from $130.8 million to $100.5 million. Investing cash use was $57.0 million and financing cash use was $10.1 million, including $10.7 million of share repurchases.
Changes versus comparable periods
- Q3 revenue was nearly flat year over year, but operating income fell by $7.5 million. Production expense rose $6.6 million to $12.6 million and exploration expense rose $10.4 million to $11.1 million; the prior-year quarter included a $7.6 million impairment charge that did not recur.
- For the first nine months, revenue fell 21.7% and operating income fell 51.1%. Gabon net oil sales volume declined to approximately 1.013 million barrels from 1.248 million, while the average realized price decreased to $108.06 per barrel from $111.79.
- Nine-month production expense increased to $28.0 million from $18.0 million, and exploration expense increased to $21.5 million from $5.0 million, principally reflecting unsuccessful exploration and U.S. leasehold costs. DD&A declined to $11.0 million from $16.7 million. Net income attributable to VAALCO decreased to $16.7 million from $19.6 million.
- Cash from operations decreased $8.0 million year over year, mainly due to lower net income and less favorable working-capital movements, including higher amounts owed by joint-venture partners.
Operations, outlook, risks, and unusual items
- Gabon production averaged approximately 16,900 gross barrels per day (4,100 net) in Q3, down from 19,000 gross (4,600 net) a year earlier. Two Ebouri wells remained shut in after hydrogen sulfide was detected; production restoration is expected in the first half of 2016, subject to additional investment and future decisions.
- The Ovoka exploration well offshore Gabon was water-bearing and abandoned. The company reported $9.0 million of dry-hole costs related to two unsuccessful offshore Gabon wells in the nine-month period. It also recognized substantial U.S. exploration and leasehold write-offs.
- Two new Gabon platforms were under construction and scheduled for installation in 2014. VAALCO’s expected net share of platform construction and installation costs was approximately $91 million; $37.8 million had been incurred through September 30. The company anticipated approximately $17 million of its capital expenditures in Q4 2013, mainly for the platforms and an exploration well. Management said cash plus operating cash flow should fund remaining 2013 and 2014 capital needs; a specific 2014 budget was not provided.
- Angola’s working-interest assignment remained uncertain. The government indicated it planned to assign an available 40% interest directly to a third party; timing and completion were uncertain. VAALCO had a full $7.4 million allowance against partner receivables at September 30. Two exploration commitment wells have an extension through November 30, 2014, and the company intends to drill after the assignment is completed.
- Management cited oil-price volatility, reserve uncertainty, operating and exploration hazards, partner and government actions, and capital availability among the risks. The company had no active commodity hedges. It relied principally on Gabon oil sales, marketed under an agreement with Mercuria; management believed alternative buyers could be found, though losing Mercuria could adversely affect the near term.
- The board authorized up to $25 million of repurchases over 12 months. Through September 30, VAALCO had repurchased 1.765 million shares for $10.7 million, leaving approximately $14.3 million authorized. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Track Gabon production, the H2S remediation plan, its final cost and schedule, and the expected 2016 restart.
- Verify platform construction spending, installation timing, remaining capital needs, and funding against operating cash flow.
- Monitor Angola’s partner assignment, recoverability of the $7.4 million partner receivable allowance, and the well-commitment deadline.
- Assess the drivers of weaker year-to-date revenue and operating income, including production volumes, workover costs, and unsuccessful exploration spending.
- Confirm available liquidity after restricted cash, partner balances, repurchases, and ongoing capital spending; assess exposure to oil prices given the absence of active hedges.