VAALCO Energy - Earnings Call - Q3 2019

Transcript

Speaker 0

Hello, and welcome to the VAALCO Energy Inc. Third Quarter twenty nineteen Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Al Petrie, Investor Relations Coordinator. Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to Dowco Energy's Third Quarter twenty nineteen Conference Call. After I cover the forward looking statements, Cary Bounds, our Chief Executive Officer, will review key highlights of the third quarter along with operational results. Liz Prochnow, our Chief Financial Officer, will then provide a more in-depth financial review. Terry will then return for some closing comments before we take your questions.

During our question and answer session, we ask you to limit your questions to one and a follow-up. You can always reenter the queue with additional questions. I'd like to point out that we posted an investor deck on our website this morning that has additional financial analysis, comparison and guidance that should be helpful. With that, let me proceed with our forward looking statement comments. During the course of this conference call, the company will be making forward looking statements.

Investors are cautioned that forward looking statements are not guarantees of future performance, and those actual results or developments may differ materially from those projected in the forward looking statements. Valco disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise. Accordingly, you should not place undue reliance on forward looking statements. These and other risks are described in yesterday's press release, the presentation posted on our website and in the reports we file with the Securities and Exchange Commission, including the 10 Q that was disseminated earlier today. Please note that this conference call is being recorded.

And now let me turn the call over to Carey. Thank you, Al. Good morning, everyone, and welcome to our third quarter twenty nineteen earnings conference call. We've had

Speaker 2

a very exciting past few months and have achieved several significant milestones. In August, we completed our annual planned maintenance shutdown at Etame and restored production with no safety or environmental incidents. In September, we kicked off our twenty nineteen-twenty twenty drilling campaign and recently announced the nine I'm sorry, the Etame 9P appraisal drilling results, which were better than expected for the Gamba and Dentale reservoirs. On September 26, we began trading on the London Stock Exchange, which complements our listing on the New York Stock Exchange by providing us the opportunity to diversify our shareholder base and attract additional research coverage. The new listing also gives us additional options to raise new capital to grow our business in the future.

In October, we began drilling the Etame 9H horizontal development well targeting the Gamba Reservoir. We plan to update you on the results in the coming weeks. Turning to operational results for the third quarter. We produced an average of 3,081 net barrels of oil per day, which was within our guidance range. We completed our annual planned maintenance shutdown at Etame in August on schedule and on budget and subsequently restarted production.

Production and sales volumes were lower in the quarter by about two fifty net barrels of oil per day due to the temporary shutdown. Production was also impacted by the loss of the Etame 10H, Etame 4H and North Ciballa 2H wells that are temporarily shut in. Earlier this year, the electric submersible pump failed in the Etame 10H well after operating for four point five years. Prior to the pump failure, the Etame 10H well was producing approximately 200 net barrels of oil per day. We are considering utilizing the Vantage drilling rig to perform a workover and replace the failed pump in the Etame 10H well.

In total, production is down approximately 400 net barrels of oil per day due to these three wells. Looking ahead to the fourth quarter, we are currently drilling the Etame 9H well, which is expected to start producing in December. Taking into account the production uplift from the Etame 9H well and production deferrals from the three wells I just mentioned, we expect production for the fourth quarter to be in the range of 3,100 to 3,500 net barrels of oil per day. As a reminder, the production impact from our twenty nineteen-twenty twenty drilling campaign is expected to increase our 2019 exit rate and should have a significantly greater impact on 2020 production. We currently estimate our 2019 exit rate to be in the range of 3,800 to 4,100 net barrels of oil per day, assuming the Etame 9H is completed and online.

Now I would like to give you additional details on the drilling campaign that is underway now. As part of the PSC Extension in Gabon, we committed to drilling at least two development wells and two appraisal wellbores by September 2020. As previously announced, the Etame 9P appraisal wellbore was drilled successfully and encountered both the Gamba and Dentale reservoirs at targeted depths as anticipated. Based on the information we gathered in the Etame 9P wellbore, the Gamba oil column is thicker than predrill expectations and may result in higher ultimate oil recovery from the Etame field, including the Etame 9H development well that we are currently drilling as well as the Etame 11H development well, which we plan to drill shortly after the Etame 9H. In addition, the preliminary analysis indicates that the Etame 9P wellbore encountered at least 45 feet of good quality Dentale oil sands with estimated gross recoverable oil resources of three nine million to 14,900,000 barrels of oil in the Dentale reservoir.

This is very positive news for us as our predrill estimate was 4,600,000 barrels of oil. As anticipated, we did not encounter H2S in either reservoir. As you can imagine, we are very excited about the results as we plan for future development wells in the Dentale Reservoir. After reaching total depth in the Tom 9P wellbore, the drill pipe became stuck one line nearly horizontal in the Dentale section. After several attempts to break free, we decided to cut and pull the drill pipe, but a portion of the drill pipe and the bottom hole assembly could not be recovered.

We then plugged back to a shallower depth and began drilling the Etame 9H development well as planned. While are still early in the drilling campaign, the additional time spent on the 9P coupled with the loss of drill pipe in the bottom hole assembly will likely add $3,000,000 to $5,000,000 net to the ultimate overall cost of the drilling program. Thus far, we have not encountered any significant issues drilling the Etame 9H development well. We expect production to come online in December at a stabilized rate of approximately 2,500 to 3,500 gross barrels of oil per day or six seventy five to nine sixty net barrels of oil per day. Following the Etame 9H well, we plan to drill the Etame 11H development well into the same Gamba Reservoir.

After we complete the 11H well, we are considering executing a workover to replace the electric submersible pump in the Etame 10H well, which is on the same platform. We then plan to move the rig to the Southeast Platform to drill the Southeast Etame 4P appraisal wellbore to evaluate a Gamba step out area in Southeast Etame. Upon drilling the second appraisal wellbore, our drilling commitment as part of the PSC Extension that we signed last year will be complete. I do want to point out that if the Southeast Etame 4P appraisal wellbore proves up the Gamba in that area, then with our joint interest owners and government approvals, we plan to drill a third development well as part of this drilling campaign. So far, we are off to a great start, and our vision is to repeat similar drilling campaigns at Etame over the next several years and continue adding reserves and production.

I can't stress enough the importance of our capital discipline and operational execution as it allows us to continue to generate significant free cash flow, build our cash balance and fund our capital programs at Etame from cash on hand and cash flow from operations. In addition to funding our drilling program, we are also actively returning value to our shareholders through a share repurchase program. We believe the share repurchase program is an excellent opportunity to buy our common shares at a significant discount to their intrinsic value, and the program also reflects the Board's confidence in the current value proposition of our stock. We are confident that we can continue to execute our share repurchase program and fully fund our twenty nineteen-twenty twenty drilling campaign from cash on hand and cash from operations. Later on, Liz will provide additional details regarding the share repurchase plan.

Before I turn the call over to Liz, I would like to discuss our listing in The U. K. We believe our story resonates well with The U. K. Investor audience who have a strong interest in companies with the type of assets that we operate in Africa.

It has already generated interest in VAALCO with new equity research coverage and increased access to international oil and gas investors. While we don't have a current need for additional funding, should we find something particularly accretive and compelling and in line with our inorganic growth objectives, we can potentially use our London listing to tap into a deeper pool of capital. As you can see, we've had a very busy and productive 2019. We've enhanced our corporate, financial and operational capabilities and positioned VAALCO to succeed for many years to come. With that, I would like to turn the call over to Liz to discuss our financial results.

Speaker 3

Thank you, Carey, and good morning, everyone. As Carey mentioned, it's an exciting time for us at VAALCO with our drilling program well underway and with the early positive results. Additionally, we completed our listing on the London Stock Exchange, and we are very pleased to have two new analysts now providing research coverage on our company. In the third quarter, we reported a net loss of $3,900,000 or $07 per diluted share. This was impacted by a noncash expense of $5,100,000 or $09 per share related to deferred income tax, which was partially offset by noncash benefit of $1,800,000 or $03 per diluted share related to unrealized gains on crude oil swaps.

Adjusting for the net impact of these items totaling $3,400,000 third quarter adjusted net loss was

Speaker 4

600,000

Speaker 3

or $0 per share. Third quarter twenty nineteen net loss was also impacted by lower revenues, reflecting lower sales volumes as well as a $1,200,000 or $02 per diluted share noncash expense for stock options, restricted stock and stock appreciation rights. Adjusted EBITDAX totaled $4,500,000 in the 2019, which was likewise impacted by lower pricing and production. Through the first nine months of twenty nineteen, we have generated $27,100,000 of adjusted EBITDAX, which has helped us fund our capital program and remain free cash flow positive. Third quarter twenty nineteen oil sales totaled 279,000 net barrels compared with 329,000 net barrels in the same period a year ago and 357,000 net barrels in the 2019.

Third quarter twenty nineteen sales volumes were impacted by lower production volumes during the quarter, which was the result of the planned full field maintenance shutdown that occurred in August 2019 as well as the impact from the wells currently shut in. For the 2019, we expect sales to increase as a result of higher estimated production from the Etame 9H well, which is currently being drilled and which is expected to come online in December. Our realized oil price for the 2019 averaged $61.26 per barrel, down 19% from $75.4 in the 2018 and down 11% from $68.62 in the 2019. In the third quarter, we recorded noncash mark to market unrealized gains related to our crude oil swaps of $1,800,000 while we realized a cash gain of $500,000 on the swaps which settled during the quarter. These swap agreements are at a Dated Brent weighted average price of $66.7 per barrel.

As of September 3039, there were swaps outstanding for 394,735 barrels for the period from and including October 2019 through June 2020. We will continue to evaluate ways to mitigate price risk, ensure future cash flows for our drilling program and allow for upside to rising commodity prices through our hedging program. Turning to expenses. Total production expense, excluding workovers for the third quarter twenty nineteen, was $9,500,000 or $34.1 per barrel of oil sales. This compares with $7,500,000 or $22.93 per barrel in the same quarter of 2018 and $9,800,000 or $27.45 per barrel in the 2019.

For the 2019, we expect production expense excluding workovers to be between $9,000,000 and $11,000,000 or $30 to $36 per barrel. Production expense for the fourth quarter is expected to continue to be somewhat high as a result of planned preventive maintenance. DD and A for the 2019 was $1,500,000 or $5.41 per barrel of oil. This compares to $1,100,000 or $3.43 per barrel in twenty eighteen third quarter and $1,900,000 or $5.35 per barrel in the 2019. The year over year increase in DD and A per barrel of oil reflects an increase in depletable costs associated with the PSC Extension, partially offset by a favorable impact of the upward revisions to reserves at December 3138.

We continue to expect our full year DD and A rate to be in the range of $5.5 to $6.5 per barrel of sales. General and administrative expense for the 2019, excluding noncash stock compensation, was $3,600,000 or $12.86 per barrel of oil as compared to $1,800,000 or $5.59 per barrel of oil in the 2018 and $2,800,000 or $7.93 per barrel of oil in the 2019. The expense for the third quarter was higher due to the increased professional fees associated with our listing on the London Stock Exchange as well as our growth initiatives. We expect our fourth quarter G and A excluding noncash compensation to be between $2,000,000 and $3,000,000 Noncash stock based compensation expense related to stock appreciation rights or SARs was a charge of $1,000,000 during the three months ended September 3039 as compared to a charge of $800,000 in the comparable 2018 period and a credit of $700,000 in the 2019. SARs are revalued quarterly based on the closing stock price at the end of the quarter, which was $2.3 at the end of the third quarter twenty nineteen versus $1.67 per share on June 3039.

Stock price variability greatly impacts the fair value of the SARs, and there will be an expense or credit every quarter associated with the mark to market value of the SARs. Income tax expense for the three months ended September 3039, was $7,700,000 This is comprised of $5,100,000 of deferred tax expense and a current tax provision of $2,600,000 For the three months ended September 3038, the company had a current provision of $4,000,000 and a current deferred tax benefit of $66,200,000 The decrease in the current provision between the 2019 and the 2018 is primarily attributable to Gabon income taxes, which are impacted by a decrease in revenues. With respect to deferred income tax for periods prior to the three months ended September 3038, the company had full valuation allowances on its net deferred tax assets, and deferred income tax was zero. The deferred income tax benefit of $66,200,000 in the 2018 related to the recognition of deferred tax assets and the reversal of valuation allowances on the other deferred tax assets. With respect to the 2019, the deferred tax expense of $5,100,000 in the 2019 includes a $4,800,000 charge to increase the valuation allowance on U.

S. Deferred tax assets, which was primarily due to a decrease in future estimated taxable earnings, primarily as a result of lower oil prices. As detailed on Slide 23 in the presentation deck posted this morning on our website, we currently estimate that VAALCO's operational breakeven in 2019 is approximately $37 per barrel of oil sales, and our free cash flow breakeven in 2019 is approximately $47 per barrel of oil sales, with both amounts including workover expense. In general terms, we estimate that each $5 increase in realized oil prices increases our annual adjusted EBITDAX by $6,000,000 This clearly shows our strong leverage to higher oil prices. At the end of the third quarter, we had a cash balance of $57,200,000 which included $11,800,000 of cash attributable to non operating joint venture, Homer Adances.

At the end of the third quarter, VAALCO had $29,000,000 of working capital from continuing operations. This metric excludes lease liabilities and amounts attributable to discontinued operations. On June 2039, VAALCO announced that its Board of Directors had authorized a stock repurchase program. Since inception of this program through November 5, we have purchased nearly 1,600,000.0 shares of our common stock at an average price of 1.8 representing a total investment of approximately $2,900,000 This represents 2.6% of the 59,800,000.0 shares of common stock outstanding as of June 3039, just prior to implementing the program just post implementing the program. Despite the weakness in oil prices, VAAF's cash position remains very strong.

We can continue to opportunistically execute our buyback program and also fully fund our planned twenty nineteen-twenty twenty drilling program at Etame from cash on hand and cash flow from operations. For the nine months ended September 3039, we invested $8,400,000 in accrual basis capital expenditures, primarily for the drilling program and to a lesser degree for equipment and other. The current estimated net capital expenditure range for 2019, which is primarily associated with our drilling program is expected to be at 20,000,000 to $25,000,000 However, as Carey mentioned, the total cost of the twenty nineteen-twenty twenty drilling program is now estimated to be approximately 3,000,000 to $5,000,000 higher than the original $25,000,000 to $30,000,000 estimate. Due to additional rig and service costs associated with the 9P well. The full twenty nineteen-twenty twenty drilling program will include up to three development wells and two appraisal wellbores.

We anticipate that it will be completed in the 2020. With this, I will now turn the call over to Terry.

Speaker 2

Thanks, Liz. Over the past several years, we have worked diligently to strengthen our financial position and create opportunities for growth. We are debt free with over 45,000,000 in cash on hand, excluding cash attributable to joint owner advances, and we are generating strong operational cash flow that can be used to fund our drilling program. The twenty nineteen-twenty twenty drilling program is the first in a series of drilling campaigns where we hope to create significant value. I'm pleased that we have already seen results that are better than expected from the first appraisal well in the program.

We are looking forward to the expected production increase from the next two Etame development wells on the drilling schedule, followed by an appraisal wellbore at Southeast Etame with the potential to add meaningful reserves. I believe that moving forward, we will create substantial value for our shareholders by growing reserves and production at Etame and building our asset portfolio through mergers and acquisitions. In short, this is a very exciting time for VAALCO, and we are well positioned to deliver profitable and accretive growth. Thank you. And with that, operator, we are ready to take questions.

Speaker 0

Yes, thank you. We will now begin the question and answer session. And the first question comes from Charlie Straub with Canaccord.

Speaker 5

Just one quick question. You outlined the successful results from 9P in the plan and how that might impact 9H and 11H. Have you had any chance yet to assess perhaps a wider implication across the license? Or is that something that's work in train?

Speaker 2

Right. That is work in progress, Charlie. That's a great question. And the better than expected results that we saw in the Gamba will affect, you're right, the 9H and 11H, but it affects the entire Etame field. And I say field, know, on the Etame license, we have four fields and the Etame field is one of them in the Gamba Reservoir.

There are two other wells right now, the 10 and the 12 that are producing from the platform or the 10 is shut in, but anyway and then there's also the subsea wells, the six and the seven. So we think the good news we saw in the Gamba actually spreads across all of those wells and are we're evaluating the results and the impact and we'll work with our reserve auditors and probably make an announcement when we finish our year end reserves.

Speaker 5

Okay, that's great. Thank you.

Speaker 2

All right. Thank you, Charlie.

Speaker 0

Thank you. And the next question comes from Robert Lazaram with Titan Capital.

Speaker 4

Thank you. I actually wanted to continue down this same path. What were you originally expecting in terms of the Combah Sands, in terms of the thickness? It came out, you said, at least 45 feet. Kind of what was for the oil column, what was in your mind going

Speaker 2

That's really a range. And I would say at the low end of the range, probably half that thickness, but somewhere between twenty five and forty five feet.

Speaker 4

And so you also came out with your initial press release with the Dentale that you were thinking the sands were somewhere in the neighborhood of 35 feet. And then with the second release, you came out and said that it was at least 45 feet. What led to that upgrade in the Dentale sands in that intervening time?

Speaker 2

Right. Right. What led to that? That's a good question, Bill. Our we gathered information as we drilled the Etame 9P.

The information we gathered was mainly well logs. And so it took some time to interpret those logs. There was an initial interpretation and we wanted to get the news out very quickly with our initial interpretation. And then after our engineers and geoscientists had more time to study the logs, the interpretation improved and so we made another announcement.

Speaker 4

Great. Well, congratulations on that. And then talk if you would please about the implications of the Dentalsan, which if I understand correctly is underneath the Gamba. And pretty much your entire production, has been from the Gamba. And and so how do we think about this now, that, the Dentale, which is an entirely new reservoir, if we think of it, if I understand this correctly, being at the same thickness as as the Gamba.

Speaker 2

Well, it it is what we found is what we call oil down to. So we know that there's at least 45 feet of oil, it could be thicker. And so that's part of what's driving the range of reserves. I mentioned, you know, 4,000,000 to 15,000,000, 14,000,000 barrels, 4,000,000 to 14,000,000 barrels. So there's a range around thickness and then there's a range around aerial extent, know, how wide or what area does the Dentale cover.

So, know, that's what's driving the range 4,000,000 to 14,000,000 barrels of oil recoverable. It may take two to three wells to recover all of that oil, but that analysis is going on right now. So we're combining what we learned from the wellbore and the well logs that we took, combining that with our seismic interpretation and our mapping and coming up with our best estimate of where to drill development wells.

Speaker 4

Kerry, are you thinking that it is possible that with your assets that you just are on the verge of finding that you have double the oil than what you previously did? And what I'm thinking is that the Dentale, if it is the same as the Gamba?

Speaker 2

You know, structurally, it's different. And so no, the Dentale is not the same as the Gamba. It's a very good quality sand, but not as good as the Gamba. And like I said, structurally, it's different. But, you know, I would point you back, you know, when I think of the future potential in the field, or I should say on the license, I would look across at all of our opportunities.

And, you know, what we've said in our on our website in our investor deck is that we have a line of sight to another 123,000,000 barrels of potential reserves and resources. And to date, we produced over 110. If everything works out as planned, we're halfway through the life of the field or I should say, the life of the license.

Speaker 4

Great. Thank you. And I would like to ask relative to your share repurchase, what was the highest price that you paid?

Speaker 3

We haven't really disclosed that separately. I mean, we have you can kind of gather some of the information. But I think the last quarter we disclosed that the average price was around $1.75 or so. Cumulatively, we're now at around $1.8 So it has the price has kicked up a bit during this past quarter, which you would expect.

Speaker 4

Great. And then one additional question. As I think about your drilling program, you had built cash coming into this. You are paying for the program out of cash and and cash flow. You're then it appears to me as though you'll be benefiting from increased production, cash generation, and then I I suspect, given what you have inferred, that you'll be coming back with another drilling program.

And it it almost seems as though you have a a drill, produce, build cash or I guess increase production, build cash and repeat process that you're starting to develop. Are we understanding philosophically how you're thinking about this?

Speaker 2

That is exactly correct. I have nothing to add to that, Bill. That's exactly what we are doing.

Speaker 4

Okay. Thank you for the help, and congratulations on making it through this quarter.

Speaker 2

All right. Thank you, Bill.

Speaker 0

Thank you.