VAALCO Energy, Inc. Announces Second Quarter 2022 Results

Source: www.gulfoilandgas.com 8/10/2022, Location: Africa

VAALCO Energy, Inc. reported operational and financial results for the second quarter of 2022.

Highlights and Recent Key Items:
- Reported strong Q2 2022 net income of $15.1 million ($0.25 per diluted share) and Adjusted Net Income(1) of $30.7 million ($0.52 per diluted share);
- Increased Adjusted EBITDAX(1) by 81% quarter-over-quarter to $60.8 million in Q2 2022 a record high for VAALCO driven by strong pricing and increased sales volumes;
- Increased Q2 2022 average daily production by 14% to 9,211 net revenue interest (“NRI”)(2) barrels of crude oil per day (“BOPD”), or 10,587 working interest (“WI”)(3) BOPD, compared to Q1 2022;
- Sold record quarterly high 958,000 barrels of oil in Q2 2022;
- Announced plans to exercise extension option on currently contracted drilling rig and add two additional wells to current 2021/22 drilling program for a total of six wells:
- Currently drilling the ETBNM 2H-ST on the Southeast Etame North Tchibala (“SEENT”) platform, the fourth development well in the 2021/2022 program;
- Funded $37.1 million cash capital expenditures during Q2 2022 with cash on hand and cash from operations;
- Maintained a strong balance sheet with no debt and an unrestricted cash balance of $53.1 million, not including the proceeds from the May and June liftings of $70.3 million, which were received in July and August 2022;
- Replacement of existing Floating Production, Storage and Offloading unit (“FPSO”) proceeds on schedule and new Floating Storage and Offloading (“FSO”) vessel is scheduled to arrive offshore Gabon on August 12th;
- Submitted a plan of development (“POD”) to the Ministry of Mines and Hydrocarbons (“MMH”) in Equatorial Guinea for the Venus development in Block P on July 15, 2022 in which VAALCO, if approved, will hold an 80% WI;
- Announced quarterly cash dividend payment of $0.0325 per common share to be paid on September 23, 2022, the third dividend approved to be paid in 2022; and
- Announced strategic and accretive combination with TransGlobe creating a diversified African-focused E&P company focused on supporting shareholder returns and sustainable growth.

George Maxwell, VAALCO’s Chief Executive Officer commented, “We had a very strong second quarter, delivering record sales volumes, benefiting from the improved commodity price environment, and generating significant cash flow. The combination of these positive factors is allowing us to continue to execute on our accretive growth strategy, fully fund our capital commitments and firmly place VAALCO in a financially stronger position. We delivered record Adjusted EBITDAX and net sales volumes while continuing to generate meaningful cash to pay for our growth and returns to our shareholders. Enhancing our production, reducing our costs and extending the economic life at Etame is a driving force for VAALCO’s continued success.”

“The FSO is arriving at Etame this week and we are progressing our full field reconfiguration and FPSO to FSO conversion as planned in the third quarter of 2022. We expect to realize substantial and sustainable operating costs savings from this project that will begin in the fourth quarter and carry on through the remainder of the decade. In July, we submitted a POD in Equatorial Guinea for the Venus development in Block P to the EG MMH. We look forward to receiving approval of our POD in which we will hold an 80% working interest in the Venus development as a result of our joint venture owner opting to not participate. We are continuing to move forward with our discovery at Block P which is expected to add meaningful reserves and another strong operational asset to the portfolio. As you can see, we are poised for continued success in this strong commodity price environment, with no debt and strong free cash flow generation. We will remain firmly focused on delivering meaningful shareholder returns while we continue to progress our strategic objective of accretive growth.”

Operational Update

Gabon

2021/2022 Drilling Campaign
VAALCO began its 2021/2022 drilling campaign in December 2021 with the drilling of the Etame 8H-ST development well. The well came online in February 2022 and had an initial production ("IP") rate of approximately 5,000 gross BOPD, but was choked back to about 4,200 BOPD for reservoir management purposes. VAALCO moved the contracted jack-up rig to the Avouma platform to drill the Avouma 3H-ST development well. The well was completed and brought online in April 2022 with an IP rate of approximately 3,100 gross BOPD. This is another successful development well targeting the Gamba reservoir.

The third well drilled and completed was the South Tchibala 1HB-ST, which discovered two potential Dentale producing zones, the Dentale D1 sand and the Dentale D9. The first completion was in the shallower D1 which included a hydraulic fracture treatment to increase both the production flow rate and recovery from the D1 interval. The additional Dentale D9 (15 meters net hydrocarbons) interval can be tested and completed in the future and has an estimated original oil in place range of 4 to 15 MMBO.

Following the completion of the South Tchibala 1HB-ST well, the rig was mobilized to the Southeast Etame North Tchibala ("SEENT") Platform to drill the ETBSM 2H-ST well, targeting the Dentale formation, which is productive in other areas in the Etame license. This mobilization was delayed by two weeks due to weather and the rig began operations on the well in late July. After setting up the equipment and completing operations to re-enter the well, VAALCO began drilling the ETBSM 2H-ST well on August 8th. The Company exercised its options to extend the contract for the rig. As a result, the Company plans to add two additional wells to the program, the Ebouri 4H development well targeting the Gamba formation and a Northeast Avouma well that is a near-field exploration well also targeting the Gamba formation and if successful is expected to be tied into the Avouma platform at a later date. VAALCO now estimates the total cost of the 2021/2022 drilling campaign at Etame to be between $174.0 million and $213.0 million gross, or between $111.0 million and $135.0 million net to VAALCO’s 63.6% participating interest.

FSO Conversion and Field Reconfiguration
In August 2021, VAALCO and its co-venturers at Etame approved the Bareboat Contract and Operating Agreement (collectively, the “FSO Agreements”) with World Carrier Offshore Services Corp to replace the existing FPSO with an FSO at the Etame Marin block offshore Gabon for up to eight years with additional option periods available. The current FPSO contract expires in September 2022. VAALCO is currently working with the FPSO charterer regarding timing for commencing shutdown of production, schedule for decommissioning and associated costs to ensure a smooth transition to the FSO. VAALCO currently believes that all of the associated engineering, long-lead equipment and significant contracts are proceeding in-line with the anticipated timelines and expected delivery schedules for the deployment of the FSO in the third quarter of 2022. Field reconfiguration began in March 2022, as planned. The Teli, a double-hull crude tanker built in 2001 that was re-engineered into a FSO, left the shipyard in early July 2022 following completion of sea trials and is arriving in Gabon this week.

Modifications to the Etame platform to support the full field reconfiguration are also on schedule. VAALCO recently completed the first of several short facility outages to allow for flare system upgrades and the installation of tie-in points for the process equipment. All major deck components arrived in Gabon and additional major components are in transit. Installation of all equipment began in July and will continue through August, with final hookup and commissioning expected to occur in the third quarter, once the Teli is moored on location.

Preparation for the subsea reconfiguration is also underway with the first portion of the Bourbon/ RANA dive program which began in mid-July. The DOF Skandi Constructor vessel arrived in Gabon and will commence reconfiguration of the existing lines and installation of the new lines.

Compared to the current FPSO agreement, the new FSO is expected to significantly reduce storage and offloading costs by almost 50%, increase effective capacity for storage by over 50%, and lead to an extension of the economic field life, resulting in a corresponding increase in recovery and reserves at Etame. The energy industry is experiencing inflationary pressures related to goods and services particularly impacting fuel prices, services and equipment prices, availability of equipment and global logistic cost increase and delays. These factors coupled with additional engineering requirements for the FSO conversion and field reconfiguration have increased current total field level capital conversion estimates to $55 to $70 million gross ($35 to $45 million net to VAALCO). This capital investment is projected to save approximately $20 to $25 million gross per year ($13 to $16 million net to VAALCO) in operational costs through 2030.

Consortium Provisionally Awarded Two Offshore Blocks in Gabon
The consortium of VAALCO, BW Energy and Panoro Energy (the “BWE Consortium”) has been provisionally awarded two blocks in the 12th Offshore Licensing Round in Gabon. The award is subject to finalizing the terms of the production sharing contracts (“PSC”) with the Gabonese government. BW Energy will be the operator with a 37.5% working interest, with VAALCO (37.5% working interest) and Panoro Energy (25% working interest) as non-operating joint owners. The two blocks, G12-13 and H12-13, are adjacent to VAALCO’s Etame PSC as well as BW Energy and Panoro’s Dussafu PSC offshore Southern Gabon, and cover an area of 2,989 square kilometers and 1,929 square kilometers, respectively. Both Etame and Dussafu have been highly successful exploration, development and production projects undertaken by the BWE Consortium members over the past 20 years with approximately 250 million barrels discovered to date.

The two blocks will be held by the BWE Consortium and the PSCs will provide for two exploration periods totaling eight years which may be extended by two additional years. During the first exploration period, the joint owners intend to reprocess existing seismic and carry out a 3-D seismic campaign and have also committed to drilling one exploration well on each of the two blocks. In the event the consortium elects to enter the second exploration period, the BWE Consortium will be committed to drilling at least one exploration well on each of the awarded blocks.

Equatorial Guinea
VAALCO owns a working interest in Block P offshore Equatorial Guinea, where there are previously discovered but undeveloped resources as well as additional exploration potential. VAALCO has completed a feasibility study of a standalone production development opportunity of the Venus discovery on Block P. On July 15, 2022, VAALCO, on behalf of itself and Guinea Ecuatorial de Petroleós (“GEPetrol”), submitted to the EG MMH a plan of development for the Venus development in Block P. The other Block P joint venture owner, Atlas Petroleum International Limited, opted not to participate in the plan of development. As a result, VAALCO will hold an 80% working interest in the Venus development in Block P and GEPetrol will hold a 20% carried interest. The Block P PSC provides for a development and production period of 25 years from the date of approval of the POD. VAALCO expects to add new 2P reserves once the development plan is approved.

TransGlobe Combination
On July 14, 2022, VAALCO announced that they have entered into a definitive arrangement agreement (the “Arrangement Agreement”) pursuant to which VAALCO will acquire all of the outstanding common shares of TransGlobe in a stock-for-stock strategic business combination transaction valued at $307 million (the “Transaction”). Under the terms of the Arrangement Agreement, VAALCO will acquire each TransGlobe share for 0.6727 of a VAALCO share of common stock, which represents a 24.9% premium per TransGlobe common share based on the companies’ respective 30-day volume weighted average share prices as of market close on July 13, 2022. The Transaction will result in VAALCO stockholders owning approximately 54.5% and TransGlobe shareholders owning approximately 45.5% of the Combined Company.

Financial Update – Second Quarter of 2022
Net income of $15.1 million ($0.25 per diluted share) for the second quarter of 2022 was up 24% compared with net income of $12.2 million ($0.20 per diluted share) in the first quarter of 2022 and up 157% compared to $5.9 million ($0.10 per diluted share) in the second quarter of 2021. The second quarter of 2022 reflected stronger revenue compared with both prior periods driven primarily by higher realized pricing and sales volumes.

Adjusted Net Income for the second quarter of 2022 increased significantly to $30.7 million ($0.52 per diluted share) from Adjusted Net Income of $21.1 million ($0.36 per diluted share) in the first quarter of 2022, and Adjusted Net Income for the second quarter of 2021 of $8.4 million ($0.14 per diluted share). The increase for both periods was primarily driven by improved realized pricing and increased sales partially offset by higher production costs, higher realized losses on derivatives and higher current income tax expense.

Adjusted EBITDAX totaled a record $60.8 million in the second quarter of 2022, an increase of 81% compared with $33.5 million in the first quarter of 2022 and nearly three times the $21.9 million generated in the same period in 2021. Adjusted EBITDAX for the second quarter of 2022 was higher compared to the prior periods primarily due to improved realized prices and sales volumes partially offset by higher production costs and higher realized losses on derivatives.

VAALCO had four liftings in the second quarter of 2022, which resulted in total sales volumes of 958,000 barrels compared to 616,000 barrels in the first quarter of 2022 and 642,000 barrels for the same period in 2021. Second quarter of 2022 realized pricing rose 3% compared to the first quarter of 2022 and 63% compared to the second quarter of 2021.

Total production expense, excluding workovers, increased in the second quarter of 2022 compared to the first quarter of 2022 and the same period in 2021. The increase was primarily driven by higher costs associated with boats, personnel, chemicals and costs associated with increased sales volumes. Production expense for the second quarter of 2022 included approximately $0.5 million in additional costs related to proactive employee-related measures taken in response to the ongoing COVID-19 pandemic. There were no workover expenses in the first or second quarters of 2022. Production expense per barrel was lower than the first quarter of 2022 due to greater sales volumes, but slightly above the same quarter in 2021 due to the increased costs driven in part by price inflation.

Depreciation, depletion and amortization (“DD&A”) expense in the second quarter of 2022 was higher compared to the prior periods presented due to higher depletable costs associated with the 2021/2022 drilling campaign.

General and administrative (“G&A”) expense, excluding stock-based compensation, in the second quarter of 2022 was lower than both the first quarter of 2022 and the second quarter of 2021 primarily because of lower wages and reduction in severance costs of key personnel which occurred in second quarter 2021.

Non-cash stock-based compensation expense for the second quarter of 2022 was $0.8 million and was comprised of non-SARs related expense of $0.6 million and SARs related expense of $0.2 million. For the first quarter of 2022, stock-based compensation was $1.4 million and for the second quarter of 2021, stock-based compensation expense was $0.5 million.

Foreign income taxes are attributable to Gabon and are settled by the government taking their oil in-kind. Income tax expense for the three months ended June 30, 2022 was an expense of $46.3 million. This is comprised of $25.9 million of deferred tax expense and a current tax expense of $20.4 million. Income tax expense for the three months ended June 30, 2021 was $2.8 million, comprised of $3.3 million of deferred tax benefit and a current tax expense of $6.1 million. For both the three months ended June 30, 2022 and 2021, VAALCO’s overall effective tax rate was impacted by non-deductible items associated with derivative losses and corporate expenses. Additionally, the higher realized prices have contributed to higher revenue but also higher taxes.

Financial Update – First Six Months of 2022
Production for the first six months of 2022 was higher by 31% at 1,563 MBbls net crude oil compared to 1,196 MBbls net crude oil production in the first six months of 2021. The increase was driven by production from new wells from the 2021/2022 drilling campaign and by the additional production associated with the Sasol Acquisition completed in February 2021. The first half of 2022 saw sales volume increase 25% to 1,574 MBbls net crude oil compared to 1,261 MBbls for the first half of 2021. Crude oil sales are a function of the number and size of crude oil liftings in each quarter and do not always coincide with volumes produced in any given period.

The average realized crude oil price for the first six months of 2022 was $111.92 per barrel, representing an increase of 71% from $65.54 realized in the first six months of 2021. This sharp increase in crude oil price reflects the strong recovery in 2022 following downward pressure resulting from the COVID pandemic as well as supply and demand imbalances that occurred in 2020 and into 2021.

The Company reported net income for the six months ended June 30, 2022 of $27.3 million, which compares to $15.8 million for the same period of 2021. The meaningful increase in operating results for the six months ended June 30, 2022 compared to the same period in 2021 was primarily due to increased sales volumes and higher oil prices in the first half of 2022 partially offset by higher production costs, higher DD&A, higher losses on derivatives and higher tax expense.

Environmental, Social and Governance
As part of the Company’s commitment to environmental stewardship, social awareness and good corporate governance, VAALCO published its annual ESG report in June 2022. The report covers VAALCO’s ESG initiatives and related key performance indicators for the three-year period 2019 through 2021. In the preparation of the qualitative and quantitative information and data, the Company continued to consult the Sustainability Accounting Standards Board’s (“SASB”) Oil and Gas Exploration and Production Sustainability Accounting Standard, and this year took a more meaningful dive into the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”). VAALCO remains focused on showing progress and improvement in its environmental, social and governance metrics.

Response to COVID-19 Pandemic
VAALCO remains fully committed to the health and safety of all its employees and contractors. The Company continues 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 August 9, 2022, VAALCO has experienced no material impact on its Gabon facilities 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 $0.5 million during the second quarter of 2022.

Capital Investments/Balance Sheet
For the second quarter of 2022, net capital expenditures totaled $37.1 million on a cash basis and $38.1 million on an accrual basis. These expenditures were primarily related to costs associated with the 2021/2022 drilling program as well as the FSO conversion and field reconfiguration investments. In the first quarter of 2022, VAALCO invested $23.1 million on a cash basis and $31.8 million on an accrual basis.

At the end of the second quarter of 2022, VAALCO had an unrestricted cash balance of $53.1 million. This does not include the proceeds from the May and June lifting of $70.3 million, which were received in July and August 2022. Working capital at June 30, 2022 was ($8.0) million compared with ($21.3) million at March 31, 2022, while Adjusted Working Capital(1) at June 30, 2022 totaled ($4.6) million, compared with ($14.5) million at March 31, 2022.

Cash Dividend Policy
VAALCO paid a quarterly cash dividend of $0.0325 per share of common stock for the second quarter of 2022 on June 24, 2022. On August 5, 2022, the Company announced its next quarterly cash dividend of $0.0325 per share of common stock for the third quarter of 2022 ($0.13 annualized), to be paid on September 23, 2022 to stockholders of record at the close of business on August 24, 2022. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to approval by the Board of Directors.

Hedging
The Company has continued to opportunistically hedge a portion of its expected production in 2022 to lock in strong cash flow generation to assist in funding its capital program and dividend. On July 25, 2022, the Company entered into a costless commodity collar arrangement for a quantity of 326,000 barrels with a weighted average put price of $70 per barrel and a weighted average call price of $122 per barrel.

At June 30, 2022, the unexpired commodity swaps were for an underlying quantity of 375,000 barrels and had a fair value of $12.5 million and is reflected in “Accrued liabilities and other” line of the condensed consolidated balance sheet.

Guidance
Third quarter 2022 production guidance is expected to be 8,000 to 8,700 NRI BOPD, which is temporarily impacted by the FPSO to FSO changeover and full field turnaround. Third quarter 2022 sales guidance is 6,100 to 8,600 NRI BOPD, which takes into account potentially two or three liftings in the quarter. Following the completion of the FPSO to FSO changeover and full field turnaround, as well as expected success from the new wells, the Company expects the 2022 exit rate for December to be between 10,500 and 11,500 net BOPD.

Third quarter 2022 production expense, excluding workovers, is expected to be $30.00 to $33.00 per barrel of oil sales, which is higher due to FPSO to FSO changeover and full field turnaround. Workover expense for the third quarter 2022 is expected to be between $0 and $3.0 million. Cash G&A expense for the third quarter is expected to be between $2.0 and $3.0 million. Capital expense for the third quarter 2022 is expected to be between $40.0 and $50.0 million.

For the full year 2022, VAALCO recently updated its guidance range for production and sales to be 9,000 to 9,500 NRI BOPD or 10,350 to 10,900 WI BOPD. Production expense, excluding workovers increased primarily due to inflationary impacts and higher expected costs associated with the decommissioning of the FPSO and is expected to range from $82 to $90 million or $24.00 to $28.00 per barrel of oil. Workover expense is expected to be $2.0 to $6.0 million and Cash G&A $9.5 to $11.5 million.

For the full year 2022, the Company has updated its total capital expenditures to be between $130 and $150 million net to VAALCO, which reflects the addition of two new wells and increased costs associated with the FSO conversion and full field reconfiguration. VAALCO expects to fund its 2022 capital expenditures fully from cash on hand and cash flow from operations. All the Company’s guidance metrics are in the Q2 2022 Supplemental Information presentation that will be posted to its website tomorrow morning prior to the conference call.

Transaction costs associated with the proposed combination with TransGlobe will be included in “Other income (expense)” on the income statement and an estimate for the transaction will be detailed in the upcoming proxy.


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