VAALCO Energy, Inc. reported operational and financial results for the third quarter of 2020.
Highlights and Recent Key Items:
- Achieved strong production performance of 4,405 net revenue interest (“NRI”)(1) barrels of crude oil per day (“BOPD”), or 5,064 working interest (“WI”)(2) BOPD in Q3 2020, despite planned full field maintenance shutdown in September and production curtailment due to an OPEC+ mandate for Gabon;
- Successfully resumed production following completion of the planned full field annual maintenance shutdown at Etame in September on schedule and on budget;
- Sold 412,000 barrels of oil in Q3 2020, compared to 279,000 barrels in Q3 2019, due to the continued strong production performance from the successful 2019/2020 drilling campaign;
- Decreased per-unit production expense, excluding workovers, by 35% in Q3 2020 vs Q3 2019 as a result of higher sales volumes and lower operating costs due to proactive cost reductions;
- Reported Q3 net income of $7.6 million ($0.13 per diluted share), Adjusted Net Income(3) of $2.3 million ($0.04 per diluted share) and generated Adjusted EBITDAX(3) of $7.0 million;
- Maintained strong balance sheet with no debt, a cash balance of $42.0 million, including $6.0 million in joint venture owner advances, working capital of $16.6 million and Adjusted Working Capital(3) of $29.3 million as of September 30, 2020; and
- Announced acquisition of new proprietary three-dimensional (“3-D”) seismic data over the entire Etame Marin block which will be used to optimize and de-risk future drilling locations as well as identify new potential locations.
(1) All NRI production rates and volumes are VAALCO’s 31.1% WI less 13% royalty volumes.
(2) All WI production rates and volumes are VAALCO’s 31.1% WI.
(3) Adjusted EBITDAX, Adjusted Net Income and Adjusted Working Capital are Non-GAAP financial measures and are described and reconciled to the closest GAAP measure in the attached table under “Non-GAAP Financial Measures.”
Cary Bounds, VAALCO’s Chief Executive Officer commented: “We continued to perform well operationally in the third quarter with net production of 4,405 BOPD, despite our annual planned full field maintenance shutdown at Etame and production curtailment due to an OPEC+ mandate for Gabon. From a financial perspective, we reported net income of $7.6 million in the quarter, even with the impact of those production curtailments and low oil prices, and generated $7.0 million of Adjusted EBITDAX, highlighting the economic robustness of the Etame field. Our cash balance remained strong at $42.0 million, which includes $6.0 million in joint venture owner advances. Additionally, given that the vast majority of our operating expenses are fixed, our higher sales volumes and proactive measures to manage costs have helped to drive down our unit production costs and enhanced our profit margins year-over-year.”
“We have maintained our focus on operational excellence and execution, which continues to allow us to maintain a healthy cash position, and cost discipline remains a core priority for the Company as we seek to maximize our profitability. We completed a highly successful drilling program earlier this year that demonstrated the quality of the Etame asset that we have been operating and growing since 1995. Our recent announcement that we are acquiring new proprietary 3-D seismic data over the entire Etame Marin block underscores the confidence we have in the long-term potential at Etame. We believe that we are well positioned to deliver both near-term and long-term profitable growth, as we continue to execute on our strategic objectives.”
In connection with planning for future drilling programs at the Etame Marin block offshore Gabon, VAALCO recently agreed to acquire new 3-D seismic data. VAALCO expects the seismic survey to begin and conclude in the fourth quarter of 2020, with processing to be fully completed by the fourth quarter of 2021. The Company expects that the full field 3-D survey will optimize future drilling locations, provide better imaging of existing satellite and infill locations, as well as identify additional upside opportunities. VAALCO projects the gross cost of both the acquisition and processing of the seismic survey to be between $12 million and $15 million, or $4 million to $5 million net to VAALCO. The Company plans to fund the costs with cash on hand and through cash from operations.
VAALCO has a 43% WI in Block P offshore Equatorial Guinea. VAALCO is continuing commercial discussions with Levene HydroCarbon Limited (“Levene”) regarding VAALCO’s potential assignment of a portion of the Block P interest to Levene in exchange for Levene covering all or substantially all of VAALCO’s cost to drill an exploratory well on Block P. Levene and VAALCO have not executed any binding agreements, and there can be no certainty a transaction will be completed or that the EG MMH will approve the assignment. As of September 30, 2020, the Company had $10.0 million recorded for the book value of the undeveloped leasehold costs associated with the Block P license.
Financial Update – Third Quarter of 2020
Net income of $7.6 million ($0.13 per diluted share) for the third quarter of 2020 compared favorably with a net loss of $3.9 million ($0.07 per diluted share) in the same period in 2019. The third quarter of 2020 reflected an income tax benefit of $2.8 million while the net loss in the third quarter of 2019 was impacted by income tax expense of $7.7 million. Lower realized crude oil prices of $43.63 per barrel for the third quarter of 2020 compared to $61.26 per barrel in the third quarter of 2019 were more than offset by higher sales volumes year-over-year as a result of additional production associated with the three successful wells from the 2019/2020 drilling program. Net income of the third quarter of 2020 additionally benefitted from lower operating costs and expenses compared with the third quarter of 2019.
With respect to the second quarter of 2020, net income was $0.6 million ($0.01 per diluted share) which reflected the impact of lower realized crude oil prices of $28.31 per barrel. The impact of lower prices was partially offset by higher sales volumes for the second quarter of 2020 as a result of four liftings. The second quarter also included a loss on derivatives of $0.8 million ($0.01 per diluted share) and an income tax benefit of $2.2 million.
Adjusted Net Income for the third quarter of 2020 increased to $2.3 million ($0.04 per diluted share) from an Adjusted Net Loss of $0.6 million ($0.01 per diluted share) for the third quarter of 2019, primarily as a result of lower general and administrative expenses. The lower Adjusted Net Income for the third quarter of 2020 as compared to $5.3 million ($0.09 per diluted share) of Adjusted Net Income in the second quarter of 2020 was primarily the result of realized gains on derivatives of $6.5 million ($0.11 per diluted share) in the second quarter of 2020.
Adjusted EBITDAX totaled $7.0 million in the third quarter of 2020 compared with $4.5 million in the same period of 2019. In the second quarter of 2020, Adjusted EBITDAX was $10.1 million. Adjusted EBITDAX for the third quarter of 2020 was higher than the same period in the prior year primarily due to increased sales volumes associated with new production from the three wells completed as part of the 2019/2020 drilling campaign and lower operating costs and expenses, partially offset by lower realized prices. Adjusted EBITDAX for the third quarter of 2020 was lower than the second quarter of 2020 primarily due to realized gains on derivatives of $6.5 million in the second quarter of 2020.
Total production expense, excluding workovers, decreased compared to the same period in 2019 primarily due to proactive operating cost reductions and was lower compared to the second quarter 2020 due to lower sales volumes. The per-unit production expense, excluding workovers, decreased significantly in the third quarter of 2020 as compared to the third quarter of 2019 as a result of higher sales volumes and lower operating costs due to proactive cost reductions. Production expense for the third quarter of 2020 included approximately $0.4 million in additional costs related to proactive employee-related measures taken in response to the pandemic.
Depreciation, depletion and amortization (“DD&A”) expense in the third quarter of 2020 on a per NRI barrel of crude oil sales basis was substantially unchanged from the comparable prior year quarter. The per-unit DD&A rate in the third quarter of 2020 was higher than the rate in the second quarter of 2020 due to higher volumes attributable to fields with higher depletable costs.
General and administrative (“G&A”) expense, excluding non-cash stock-based compensation, in the third quarter of 2020 was lower than in the third quarter of 2019 as a result of lower professional fees, legal expenses, and accounting and audit fees, but was similar to G&A expense, excluding non-cash stock-based compensation in the second quarter of 2020. The third quarter of 2019 included one-time expenses associated with VAALCO’s dual listing on the London Stock Exchange. Non-cash stock-based compensation expense (benefit) was impacted by the change in the SARs liability as a result of changes in the Company’s stock price during the quarter.
Income tax was a benefit for the three months ended September 30, 2020 of $2.8 million, and included a $5.3 million deferred tax benefit to decrease the valuation allowances on U.S. and Gabonese deferred tax assets.
Income tax expense for the three months ended September 30, 2019 was $7.7 million, and included a $4.8 million charge to increase the valuation allowances on U.S. deferred tax assets due to a decrease in future estimated taxable earnings primarily as result of lower crude oil prices.
Income tax was a benefit for the three months ended June 30, 2020 of $2.2 million, and included a $0.9 million favorable crude oil price adjustment as a result of the change in value of the government’s allocation between the time it was produced and the time it was taken in-kind as well as a $4.1 million benefit to decrease the valuation allowances on U.S. and Gabonese deferred tax assets.
Response to COVID-19 Pandemic and Current Pricing Environment
VAALCO remains fully committed to the health and safety of all its employees and contractors. In response to the COVID-19 pandemic and the current pricing environment, VAALCO has taken the following measures:
- Put into place social distancing measures at our work sites;
- Actively screened and monitored employees and contractors that come onto the Company’s Gabon facilities including testing and quarantine periods with onsite medical supervision;
- Engaged in regular Company-wide COVID-19 updates to keep employees informed of key developments;
- Implemented cost cutting measures with vendors;
- Implemented sharing certain costs, such as support vessels, helicopters, and personnel with other operators in the region;
- Temporarily reduced director, executive and certain non-executive employee compensation; and
- Ceased or deferred certain discretionary capital spending.
VAALCO expects to continue to take proactive steps to manage any disruption in its business caused by COVID-19 and to protect the health and safety of its employees. As of November 5, 2020, VAALCO has experienced no material impact on its Gabon operations directly associated with COVID-19; however, the Company has incurred higher costs related to proactive measures taken in response to the pandemic. These costs were approximately $0.4 million during the third quarter of 2020 and were primarily related to additional personnel-related costs to support enhanced health and safety measures. The situation surrounding COVID-19 remains fluid and unpredictable, and VAALCO is actively managing its response and assessing potential impacts to its financial position and operating results, as well as any adverse developments that could impact the Company’s business.
Capital Investments/Balance Sheet
As discussed above, in connection with planning for future drilling programs at the Etame Marin block offshore Gabon, VAALCO recently agreed to acquire new 3-D seismic data in the fourth quarter of 2020. VAALCO projects the gross cost of both the acquisition and processing of the seismic survey to be between $12 million and $15 million, or $4 million to $5 million net to VAALCO. The Company expects to incur $3.0 million to $3.5 million net to VAALCO in the fourth quarter of 2020 and the balance in 2021. The Company plans to fund the costs with cash on hand and through cash from operations.
At the end of the third quarter of 2020, VAALCO had an unrestricted cash balance of $42.0 million. The unrestricted cash balance includes $6.0 million of cash attributable to non-operating joint venture owner advances. Working capital at September 30, 2020 was $16.6 million compared with $11.7 million at June 30, 2020, while Adjusted Working Capital at September 30, 2020 totaled $29.3 million, compared with $24.1 million at June 30, 2020.
The Company does not have any derivatives currently and continues to evaluate adding derivatives in the future, in line with its strategic objectives.
For the fourth quarter 2020 forecasted NRI production and sales are expected to be between 4,600 and 5,000 BOPD. Production and sales NRI volumes for full year 2020 are expected to be at an average of 4,800 to 4,900 BOPD. The Company’s production expense guidance (excluding workovers) for full year 2020 is $37 to $38 million or $20.50 to $21.50 per NRI barrel of crude oil sales, with production expense for the fourth quarter of 2020 projected to be between $9 and $10 million or $19.00 to $23.00 per NRI barrel of crude oil sales. The Company forecasts between $10 and $11 million in cash G&A expense for full year 2020.