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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
FORM
________________________________
(Mark One)
For the quarterly period ended
For the transition period from _______ to _______
Commission file number
________________________________
(Exact name of registrant as specified in its charter)
________________________________
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(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
| (Zip code) |
(
(Registrant’s telephone number, including area code)
________________________________
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock | EGY | London Stock Exchange |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ¨ |
| Accelerated filer | ¨ |
x |
| Smaller reporting company Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No
As of April 30, 2022, there were outstanding
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VAALCO ENERGY, INC. AND SUBSIDIARIES
Table of Contents
Unless the context otherwise indicates, references to “VAALCO,” “the Company”, “we,” “our,” or “us” in this Quarterly Report on Form 10-Q are references to VAALCO Energy, Inc., including its wholly-owned subsidiaries.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
VAALCO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
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| As of March 31, 2022 |
| As of December 31, 2021 | ||
ASSETS |
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Current assets: |
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Cash and cash equivalents |
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| $ | |
Restricted cash |
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Receivables: |
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Trade, net |
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Accounts with joint venture owners, net of allowance of $ |
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Other, net |
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Crude oil inventory |
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Prepayments and other |
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Total current assets |
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Crude oil and natural gas properties, equipment and other - successful efforts method, net |
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Other noncurrent assets: |
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Restricted cash |
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Value added tax and other receivables, net of allowance of $ |
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Right of use operating lease assets |
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Right of use finance lease assets |
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Deferred tax assets |
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Abandonment funding |
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Other long-term assets |
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Total assets |
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| $ | |
LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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| $ | |
Accounts with joint venture owners |
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Accrued liabilities and other |
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Operating lease liabilities - current portion |
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Finance lease liabilities - current portion |
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| — |
Foreign income taxes payable |
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Current liabilities - discontinued operations |
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Total current liabilities |
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Asset retirement obligations |
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Operating lease liabilities - net of current portion |
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Finance lease liabilities - net of current portion |
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Total liabilities |
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Commitments and contingencies (Note 10) |
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Shareholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Less treasury stock, |
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Retained earnings |
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Total shareholders equity |
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Total liabilities and shareholders equity |
| $ | |
| $ | |
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See notes to condensed consolidated financial statements.
VAALCO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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| Three Months Ended March 31, | ||||
| 2022 |
| 2021 | ||
| (in thousands, except per share amounts) | ||||
Revenues: |
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Crude oil and natural gas sales | $ | |
| $ | |
Operating costs and expenses: |
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Production expense |
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Exploration expense |
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Depreciation, depletion and amortization |
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General and administrative expense |
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Bad debt expense and other |
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Total operating costs and expenses |
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Other operating expense, net |
| ( |
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| ( |
Operating income |
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Other income (expense): |
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Derivative instruments loss, net |
| ( |
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| ( |
Interest (expense) income, net |
| ( |
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Other (expense) income, net |
| ( |
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Total other expense, net |
| ( |
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| ( |
Income from continuing operations before income taxes |
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Income tax (benefit) expense |
| ( |
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Income from continuing operations |
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Income loss from discontinued operations, net of tax |
| ( |
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| ( |
Net income | $ | |
| $ | |
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Basic net income per share: |
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Income from continuing operations | $ |
| $ | ||
Loss from discontinued operations, net of tax |
| — |
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| — |
Net income per share | $ | |
| $ | |
Basic weighted average shares outstanding |
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Diluted net income per share: |
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Income from continuing operations | $ |
| $ | ||
Loss from discontinued operations, net of tax |
| — |
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| — |
Net income per share | $ | |
| $ | |
Diluted weighted average shares outstanding |
| |
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See notes to condensed consolidated financial statements.
VAALCO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
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| Common Shares Issued |
| Treasury Shares |
| Common Stock |
| Additional Paid-In Capital |
| Treasury Stock |
| Retained Earnings |
| Total | |||||
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| (in thousands) | |||||||||||||||||
Balance at January 1, 2022 |
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| ( |
| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | |
Shares issued - stock-based compensation |
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Stock-based compensation expense |
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Treasury stock |
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Dividend Distribution |
| — |
| — |
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Net income |
| — |
| — |
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Balance at March 31, 2022 |
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| ( |
| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | |
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| Common Shares Issued |
| Treasury Shares |
| Common Stock |
| Additional Paid-In Capital |
| Treasury Stock |
| Retained Earnings |
| Total | |||||
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| (in thousands) | |||||||||||||||||
Balance at January 1, 2021 |
| |
| ( |
| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | |
Shares issued - stock-based compensation |
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| ( |
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Stock-based compensation expense |
| — |
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Treasury stock |
| — |
| — |
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Net income |
| — |
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Balance at March 31, 2021 |
| |
| ( |
| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | |
See notes to condensed consolidated financial statements.
VAALCO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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| Three Months Ended March 31, | ||||
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| 2022 |
| 2021 | ||
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| (in thousands) | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
| $ | |
| $ | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Loss from discontinued operations, net of tax |
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Depreciation, depletion and amortization |
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Bargain purchase gain |
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| — |
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| ( |
Deferred taxes |
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| ( |
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Unrealized foreign exchange loss (gain) |
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| ( |
Stock-based compensation |
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Cash settlements paid on exercised stock appreciation rights |
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| ( |
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Derivative instruments loss, net |
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Cash settlements paid on matured derivative contracts, net |
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Bad debt expense and other |
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Other operating expense, net |
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Operational expenses associated with equipment and other |
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Cash advance for other long-term assets |
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| ( |
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| — |
Change in operating assets and liabilities: |
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Trade receivables |
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| ( |
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| ( |
Accounts with joint venture owners |
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| ( |
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Other receivables |
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| ( |
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| ( |
Crude oil inventory |
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| ( |
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Prepayments and other |
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| ( |
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| ( |
Value added tax and other receivables |
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| ( |
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Accounts payable |
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| ( |
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| ( |
Foreign income taxes receivable/payable |
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Accrued liabilities and other |
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| ( |
Net cash (used in) provided by continuing operating activities |
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Net cash used in discontinued operating activities |
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Net cash (used in) provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Property and equipment expenditures |
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Acquisition of crude oil and natural gas properties |
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Net cash used in continuing investing activities |
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Net cash used in discontinued investing activities |
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Net cash used in investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from the issuances of common stock |
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Dividend distribution |
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| ( |
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| — |
Treasury shares |
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| ( |
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| ( |
Net cash used in continuing financing activities |
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Net cash used in discontinued financing activities |
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Net cash used in financing activities |
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NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
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| ( |
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| ( |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD |
| $ | |
| $ | |
See notes to condensed consolidated financial statements.
VAALCO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURES (Unaudited)
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| Three Months Ended March 31, | ||||
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| 2022 |
| 2021 | ||
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| (in thousands) | ||||
Supplemental disclosure of non-cash investing and financing activities: |
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Property and equipment additions incurred but not paid at end of period |
| $ | |
| $ | |
Recognition of right-of-use finance lease assets and liabilities |
| $ | |
| $ | — |
Asset Retirement Obligations |
| $ | — |
| $ | |
See notes to condensed consolidated financial statements.
VAALCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s consolidated subsidiaries are VAALCO Gabon (Etame), Inc., VAALCO Production (Gabon), Inc., VAALCO Gabon S.A., VAALCO Angola (Kwanza), Inc., VAALCO Energy (EG), Inc., VAALCO Energy Mauritius (EG) Limited, VAALCO Energy, Inc. (UK Branch) and VAALCO Energy (USA), Inc.
These condensed consolidated financial statements have been prepared in accordance with rules of the Securities and Exchange Commission (“SEC”) and do not include all the information and disclosures required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. They should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
In July 2021, OPEC+ agreed to increase production beginning in August 2021 and to gradually phase out prior production cuts by September 2022. The decision to continue to increase production was reaffirmed by an OPEC+ meeting held on March 31, 2022. For the three months ended March 31, 2022, the average brent crude oil price was over $100 per barrel. The average brent crude oil price for the three months ended March 31, 2021, June 30, 2021, September 30, 2021 and December 31, 2021 was $61 per barrel, $69 per barrel, $73 per barrel and $79 per barrel, respectively.
While the current community price environment is favorable and the Company has not experienced disruptions to its operations as a result of COVID-19 any new outbreak or emergence of a new variant. may have a material adverse impact on financial results and business operations of the Company, including the timing and ability of the Company to complete future drilling campaigns and other efforts required to advance the development of its crude oil and natural gas properties.
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| As of March 31, | ||||
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| 2022 |
| 2021 | ||
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| (in thousands) | ||||
Cash and cash equivalents |
| $ |
| $ | ||
Restricted cash - current |
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Restricted cash - non-current |
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Abandonment funding |
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Total cash, cash equivalents and restricted cash |
| $ |
| $ | ||
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The Company conducts regular abandonment studies to update the estimated costs to abandon the offshore wells, platforms and facilities on the Etame Marin block. This cash funding is reflected under “Other noncurrent assets” as “Abandonment funding” on the condensed consolidated balance sheets. Future changes to the anticipated abandonment cost estimate could change the asset retirement obligation and the amount of future abandonment funding payments. See Note 10 for further discussion.
On February 28, 2019, the Gabonese branch of the international commercial bank holding the abandonment funds in a U.S. dollar denominated account advised that the bank regulator required transfer of the funds to the Central Bank (“Central Bank”) for African Economic and Monetary Community (“CEMAC”), of which Gabon is one of the six member states, for conversion to local currency with a credit back to the Gabonese branch in local currency. The Company’s production sharing contract related to the Etame Marin block located offshore Gabon (“Etame PSC”) provides these payments must be denominated in U.S. dollars and the CEMAC regulations provide for the establishment of a U.S. dollar account with the Central Bank. Although the Company requested establishment of such account, the Central Bank did not comply with its requests until February 2021. As a result, the Company was not able to make the annual abandonment funding payments in 2019, 2020 or 2021 totaling $
The Company routinely assesses the recoverability of all material receivables to determine their collectability. The Company accrues a reserve on a receivable when, based on management’s judgment, it is probable that a receivable will not be collected and the amount of such reserve may be reasonably estimated. When collectability is in doubt, the Company records an allowance against the accounts receivable and a corresponding income charge for bad debts, which appears in the “Bad debt expense and other” line item of the condensed consolidated statements of operations.
As of March 31, 2022, the outstanding VAT receivable balance, excluding the allowance for bad debt, was approximately $
The following table provides a roll forward of the aggregate allowance for bad debt:
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| Three Months Ended March 31, | ||||
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| 2021 | ||
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Allowance for bad debt |
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Balance at beginning of period |
| $ | ( |
| $ | ( |
Bad debt charge, net of receipts |
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Adjustment associated with Sasol Acquisition |
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Foreign currency gain |
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Balance at end of period |
| $ | ( |
| $ | ( |
A liability for ARO is recognized in the period in which the legal obligations are incurred if a reasonable estimate of fair value can be made. The ARO liability reflects the estimated present value of the amount of dismantlement, removal, site reclamation, and similar activities associated with crude oil and natural gas properties. The Company uses current retirement costs to estimate the expected cash outflows for retirement obligations. Inherent in the present value calculation are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit-adjusted discount rates, timing of settlement, and changes in the legal, regulatory, environmental, and political environments. Initial recording of the ARO liability is offset by the corresponding capitalization of asset retirement cost recorded to crude oil and natural gas properties. To the extent these or other assumptions change after initial recognition of the liability, the fair value estimate is revised and the recognized liability adjusted, with a corresponding adjustment made to the related asset balance or income statement, as appropriate. Depreciation of capitalized asset retirement costs and accretion of asset retirement obligations are recorded over time. Depreciation is generally determined on a units-of-production basis for crude oil and natural gas production facilities, while accretion escalates over the lives of the assets to reach the expected settlement value. Where there is a downward revision to the ARO that exceeds the net book value of the related asset, the corresponding adjustment is limited to the amount of the net book value of the asset and the remaining amount is recognized as a gain. See Note 12 for further discussion.
production rates, as well as a gross carried working interest of
Black-Scholes and Monte Carlo models employ assumptions, based on management’s best estimates at the time of grant, which impact the calculation of fair value and ultimately, the amount of expense that is recognized over the life of the stock options or SAR award. These models use the following inputs: (i) the quoted market price of the Company’s common stock on the valuation date, (ii) the maximum stock price appreciation that an employee may receive, (iii) the expected term that is based on the contractual term, (iv) the expected volatility that is based on the historical volatility of the Company’s stock for the length of time corresponding to the expected term of the option or SAR award, (v) the expected dividend yield that is based on the anticipated dividend payments and (vi) the risk-free interest rate that is based on the U.S. treasury yield curve in effect as of the reporting date for the length of time corresponding to the expected term of the option or SAR award.
For restricted stock, the grant date fair value is determined using the market value of the common stock on the date of grant.
The stock-based compensation expense for equity awards is recognized over the requisite or derived service period, using the straight-line attribution method over the service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards.
Unless the awards contain a market condition, previously recognized expense related to forfeited awards is reversed in the period in which the forfeiture occurs. For awards containing a market condition, previously recognized stock-based compensation expense is not reversed when the awards are forfeited. See Note 14 for further discussion.
Judgment is required in determining whether deferred tax assets will be realized in full or in part. Management assesses the available positive and negative evidence to estimate if existing deferred tax assets will be utilized, and when it is estimated to be more-likely-than-not that all or some portion of specific deferred tax assets, such as net operating loss carry forwards or foreign tax credit carryovers, will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that are estimated to not be realizable. Factors considered are earnings generated in previous periods, forecasted earnings and the expiration period of carryovers.
In certain jurisdictions, the Company may deem the likelihood of realizing deferred tax assets as remote where the Company expects that, due to the structure of operations and applicable law, the operations in such jurisdictions will not give rise to future tax consequences. For such jurisdictions, the Company has not recognized deferred tax assets. Should the expectations change regarding the expected future tax consequences, the Company may be required to record additional deferred taxes that could have a material effect on the condensed consolidated financial position and results of operations. See Note 15 for further discussion.
The Company records balances resulting from commodity risk management activities in the condensed consolidated balance sheets as either assets or liabilities measured at fair value. Gains and losses from the change in fair value of derivative instruments and cash settlements on commodity derivatives are presented in the “Derivative instruments loss, net” line item located within the “Other income (expense)” section of the condensed consolidated statements of operations. See Note 8 for further discussion.
Level 1 – Inputs represent quoted prices in active markets for identical assets or liabilities (for example, exchange-traded commodity derivatives).
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs).
Level 3 – Inputs that are not observable from objective sources, such as internally developed assumptions used in pricing an asset or liability (for example, an estimate of future cash flows used in the internally developed present value of future cash flows model that underlies the fair-value measurement).
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| As of March 31, 2022 | ||||||||||
| Balance Sheet Line |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
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| (in thousands) | ||||||||||
Liabilities |
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SARs liability | Accrued liabilities and other |
| $ | — |
| $ | |
| $ | — |
| $ | |
Derivative liability - crude oil swaps | Accrued liabilities and other |
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| — |
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| — |
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| $ | — |
| $ | |
| $ | — |
| $ | |
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| As of December 31, 2021 | ||||||||||
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| Total | ||||
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Liabilities |
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SARs liability | Accrued liabilities and other |
| $ | — |
| $ | |
| $ | — |
| $ | |
Derivative liability - crude oil swaps | Accrued liabilities and other |
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| — |
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| — |
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| $ | — |
| $ | |
| $ | — |
| $ | |
Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) related to the calculation of credit losses on financial instruments. All financial instruments not accounted for at fair value will be impacted, including the Company’s trade and joint venture owners’ receivables. Allowances are to be measured using a current expected credit loss (“CECL”) model as of the reporting date that is based on historical experience, current conditions and reasonable and supportable forecasts. This is significantly different from the current model that increases the allowance when losses are probable. Initially, ASU 2016-13 was effective for all public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and will be applied with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The FASB subsequently issued ASU No. 2019-04 (“ASU 2019-04”): Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives, and Topic 825, Financial Instruments and ASU No. 2019-05 (“ASU 2019-05”): Financial Instruments-Credit Losses (Topic 326) - Targeted Transition Relief. ASU 2019-04 and ASU 2019-05 provide certain codification improvements related to implementation of ASU 2016-13 and targeted transition relief consisting of an option to irrevocably elect the fair value option for eligible instruments. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. This amendment deferred the effective date of ASU No. 2016-13 from January 1, 2020 to January 1, 2023 for calendar year end smaller reporting companies, which includes the Company. The Company plans to defer the implementation of ASU 2016-13, and related updates, until January 2023.
Acquisition of Sasol Gabon S.A.’s Interest in Etame
On February 25, 2021, VAALCO Gabon S.A. completed the acquisition of Sasol’s
The following amounts represent the allocation of the purchase price to the assets acquired and liabilities assumed in the Sasol Acquisition.
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| February 25, 2021 |
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| (in thousands) |
Purchase Consideration |
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Cash | $ | |
Fair value of contingent consideration |
| |
Total purchase consideration | $ | |
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| February 25, 2021 |
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| (in thousands) |
Assets acquired: |
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Wells, platforms and other production facilities | $ | |
Equipment and other |
| |
Value added tax and other receivables |
| |
Abandonment funding |
| |
Accounts receivable - trade |
| |
Other current assets |
| |
Liabilities assumed: |
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Asset retirement obligations |
| ( |
Accrued liabilities and other |
| ( |
Bargain purchase gain |
| ( |
Total purchase price | $ | |
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All assets and liabilities associated with Sasol’s interest in Etame Marin block, including crude oil and natural gas properties, asset retirement obligations and working capital items, were recorded at their fair value. The Company used estimated future crude oil prices as of the closing date, February 25, 2021, to apply to the estimated reserve quantities acquired and market participant assumptions to the estimated future operating and development costs to arrive at the estimates of future net revenues. The future net revenues were discounted using the Company’s weighted average cost of capital to determine the fair value at closing. The valuations to derive the
purchase price included the use of both proved and unproved categories of reserves, expectation for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and risk adjusted discount rates. Other significant estimates were used by the Company to determine the fair value of assets acquired and liabilities assumed. The Company had one year from the date of closing to record purchase price adjustments as a result of changes in such estimates. As a result of comparing the purchase price to the fair value of the assets acquired and liabilities assumed a $
The actual impact of the Sasol Acquisition was an increase to “Crude oil and natural gas sales” in the condensed consolidated statements of operations of $
The unaudited pro forma results presented below have been prepared to give the effect to the Sasol Acquisition discussed above on the Company’s results of operations for the three months ended March 31, 2022, and March 31, 2021, respectively, as if the Sasol Acquisition had been consummated on January 1, 2020. The unaudited pro forma results do not purport to represent what the Company’s actual results operations would have been if the Sasol Acquisition had been completed on such date or to project the Company’s results of operations for any future date or period.
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| Three Months Ended March 31, |
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| 2021 |
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| (in thousands) |
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Pro forma (unaudited) |
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Crude oil and natural gas sales |
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| $ | |
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Operating income |
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Net income |
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Basic net income loss per share: |
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Income from continuing operations |
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Net income per share |
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Basic weighted average shares outstanding |
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Diluted net income per share: |
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Income from continuing operations |
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Net income per share |
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Diluted weighted average shares outstanding |
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________________
(a)The pro forma net loss for the three months ended March 31, 2021 excludes nonrecurring pro forma adjustments directly attributable to the Sasol Acquisition, consisting of a bargain purchase gain of $
Under the terms of the SPA, a contingent payment of $
Discontinued Operations - Angola
The Company’s operations are based in Gabon and the Company has an undeveloped block in Equatorial Guinea. Each of the Company’s
Segment activity of continuing operations for the three months ended March 31, 2022 and 2021 as well as long-lived assets and segment assets at March 31, 2022 and December 31, 2021 are as follows:
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| Three Months Ended March 31, 2022 | ||||||||||
(in thousands) |
| Gabon |
| Equatorial Guinea |
| Corporate and Other |
| Total | ||||
Revenues-crude oil and natural gas sales |
| $ | |
| $ | — |
| $ | — |
| $ | |
Depreciation, depletion and amortization |
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| — |
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Bad debt expense and other |
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| — |
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| — |
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Other operating expense, net |
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| ( |
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| — |
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| — |
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| ( |
Operating income (loss) |
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| ( |
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| ( |
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Derivative instruments loss, net |
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| — |
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| — |
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| ( |
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| ( |
Other, net |
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| ( |
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| ( |
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| ( |
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| ( |
Income tax expense (benefit) |
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| — |
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| ( |
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| ( |
Additions to crude oil and natural gas properties and equipment – accrual |
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| — |
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| — |
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| Three Months Ended March 31, 2021 | ||||||||||
(in thousands) |
| Gabon |
| Equatorial Guinea |
| Corporate and Other |
| Total | ||||
Revenues-crude oil and natural gas sales |
| $ | |
| $ | — |
| $ | — |
| $ | |
Depreciation, depletion and amortization |
|
| |
|
| — |
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| |
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| |
Operating loss |
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| |
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| ( |
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| ( |
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Derivative instruments gain, net |
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| — |
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| — |
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| ( |
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| ( |
Other, net |
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| ( |
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| ( |
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Income tax expense |
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| ( |
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Additions to crude oil and natural gas properties and equipment – accrual(1) |
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| — |
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| — |
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(1) Excludes assets acquired in the Sasol acquisition.
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(in thousands) |
| Gabon |
| Equatorial Guinea |
| Corporate and Other |
| Total | ||||
Long-lived assets from continuing operations: |
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As of March 31, 2022 |
| $ | |
| $ | |
| $ | |
| $ | |
As of December 31, 2021 |
| $ | |
| $ | |
| $ | |
| $ | |
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(in thousands) |
| Gabon |
| Equatorial Guinea |
| Corporate and Other |
| Total | ||||
Total assets from continuing operations: |
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As of March 31, 2022 |
| $ | |
| $ | |
| $ | |
| $ | |
As of December 31, 2021 |
| $ | |
| $ | |
| $ | |
| $ | |
Information about the Company’s most significant customers
The Company currently sells crude oil production from Gabon under term crude oil sales and purchase agreements (“COSPAs”) with pricing based upon an average of Dated Brent in the month of lifting, adjusted for location and market factors. The Company signed a COSPA with ExxonMobil Sales and Supply LLC (“Exxon”) that covered sales from February 2020 through January 2022 with pricing based upon an average of Dated Brent in the month of lifting, adjusted for location and market factors. The COSPA with Exxon has been amended and extended several times, most recently in January 2022, to extend the date of the COSPA through the end of July 2022.
Basic earnings per share (“EPS”) is calculated using the average number of shares of common stock outstanding during each period. For the calculation of diluted shares, the Company assumes that restricted stock is outstanding on the date of vesting, and the Company assumes the issuance of shares from the exercise of stock options using the treasury stock method.
A reconciliation of reported net income (loss) to net income (loss) used in calculating EPS as well as a reconciliation from basic to diluted shares follows:
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| Three Months Ended March 31, | ||||
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| 2022 |
|
| 2021 |
| (in thousands) | ||||
Net income (numerator): |
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Income from continuing operations | $ | |
| $ | |
Income from continuing operations attributable to unvested shares |
| ( |
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| ( |
Numerator for basic |
| |
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Income from continuing operations attributable to unvested shares |
| — |
|
| — |
Numerator for dilutive | $ | |
| $ | |
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Loss from discontinued operations, net of tax | $ | ( |
| $ | ( |
Income from discontinued operations attributable to unvested shares |
| — |
|
| — |
Numerator for basic |
| ( |
|
| ( |
Income from discontinued operations attributable to unvested shares |
| — |
|
| — |
Numerator for dilutive | $ | ( |
| $ | ( |
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Net Income | $ | |
| $ | |
Net income attributable to unvested shares |
| ( |
|
| ( |
Numerator for basic |
| |
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| |
Net (income) loss attributable to unvested shares |
| — |
|
| — |
Numerator for dilutive | $ | |
| $ | |
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Weighted average shares (denominator): |
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Basic weighted average shares outstanding |
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Effect of dilutive securities |
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Diluted weighted average shares outstanding |
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Stock options and unvested restricted stock grants excluded from dilutive calculation because they would be anti-dilutive |
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Revenues from contracts with customers are generated from sales in Gabon pursuant to COSPAs. COSPAs with customers are renegotiated near the end of the contract term and may be entered into with a different customer or the same customer going forward.
Except for internal costs, which are expensed as incurred, there are no upfront costs associated with obtaining a new COSPA. See Note 4 under “Information about the Company’s most significant customers” for further discussion.
COSPAs with customers are renegotiated near the end of the contract term and may be entered into with a different customer or the same customer going forward. Except for internal costs, which are expensed as incurred, there are no upfront costs associated with obtaining a new COSPA.
Customer sales generally occur on a monthly basis when the customer’s tanker arrives at the FPSO and the crude oil is delivered to the tanker through a connection. There is a single performance obligation (delivering crude oil to the delivery point, i.e. the connection to the customer’s crude oil tanker) that gives rise to revenue recognition at the point in time when the performance obligation event takes place. This is referred to as a “lifting”. Liftings can take one to two days to complete. The intervals between liftings are generally 30 days; however, changes in the timing of liftings will impact the number of liftings that occur during the period. Therefore, the performance obligation attributable to volumes to be sold in future liftings are wholly unsatisfied, and there is no transaction price allocated to remaining performance obligations. The Company has utilized the practical expedient in ASC Topic 606-10-50-14(a), which states that the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation.
The Company accounts for production imbalances as a reduction in reserves. The volumes sold may be more or less than the volumes that the Company is entitled based on the ownership interest in the property, and the Company would recognize a liability if the existing proved reserves were not adequate to cover an imbalance.
For each lifting completed under a COSPA, payment is made by the customer in U.S. dollars by electronic transfer
Generally, no significant judgments or estimates are required as of a given filing date with regard to applicable price or volumes sold because all of the parameters are known with certainty related to liftings that occurred in the recently completed calendar quarter. As such, the Company deemed this situation to be characterized as a fixed price situation.
In addition to revenues from customer contracts, the Company has other revenues related to contractual provisions under the Etame PSC. The Etame PSC is not a customer contract, and therefore the associated revenues are not within the scope of ASC 606. The terms of the Etame PSC includes provisions for payments to the government of Gabon for: royalties based on
To date, the government of Gabon has not elected to take its royalties in-kind, and this obligation is settled through a monthly cash payment. Payments for royalties are reflected as a reduction in revenues from customers. Should the government elect to take the production attributable to its royalty in-kind, the Company would no longer have sales to customers associated with production assigned to royalties.
With respect to the government’s share of Profit Oil, the Etame PSC provides that the corporate income tax liability may be satisfied through the payment of Profit Oil. In the condensed consolidated statements of operations, the government’s share of revenues from Profit Oil is reported in revenues with a corresponding amount reflected in the current provision for income tax expense. Prior to February 1, 2018, the government did not take any of its share of Profit Oil in-kind. These revenues have been included in revenues to customers as the Company entered into the contract with the customer to sell the crude oil and was subject to the performance obligations associated with the contract. For the in-kind sales by the government beginning February 1, 2018, these sales are not considered revenues under a customer contract as the Company is not a party to the contracts with the buyers of this crude oil. However, consistent with the reporting of Profit Oil in prior periods, the amount associated with the Profit Oil under the terms of the Etame PSC is reflected as revenue with an offsetting amount reported as a current income tax expense. Payments of the income tax expense are reported in the period that the government takes its Profit Oil in-kind, i.e. the period in which it lifts the crude oil. The Company has a $
Certain amounts associated with the carried interest in the Etame Marin block discussed above are reported as revenues. In this carried interest arrangement, the carrying parties, which include the Company and other working interest owners, are obligated to fund all of the working interest costs that would otherwise be the obligation of the carried party. The carrying parties recoup these funds from the carried interest party’s revenues.
The following table presents revenues from contracts with customers as well as revenues associated with the obligations under the Etame PSC.
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| Three Months Ended March 31, | ||||
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| 2022 |
| 2021 | ||
Revenue from customer contracts: |
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|
Sales under the COSPA |
| $ | |
| $ | |
Other items reported in revenue not associated with customer contracts: |
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|
Carried interest recoupment |
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| |
|
| |
Royalties |
|
| ( |
|
| ( |
Crude oil and natural gas sales |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
The Company’s crude oil and natural gas properties and equipment is comprised of the following: |
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| As of March 31, 2022 |
| As of December 31, 2021 | ||
|
| (in thousands) | ||||
Crude oil and natural gas properties and equipment - successful efforts method: |
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|
Wells, platforms and other production facilities |
| $ | |
| $ | |
Work-in-progress |
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| |
|
| |
Undeveloped acreage |
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| |
|
| |
Equipment and other |
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| |
|
| |
|
|
| |
|
| |
Accumulated depreciation, depletion, amortization and impairment |
|
| ( |
|
| ( |
Net crude oil and natural gas properties, equipment and other |
| $ | |
| $ | |
|
|
|
|
|
|
|
Extension of Term of Etame Marin Block PSC
On September 25, 2018, VAALCO, together with the other joint venture owners in the Etame Marin block (the “Etame Consortium”), received an implementing Presidential Decree from the government of Gabon authorizing an extension for additional years (“PSC Extension”) to the Etame Consortium to operate in the Etame Marin block. The Company’s subsidiary, VAALCO Gabon S.A., currently has a
In accordance with the Etame PSC, the Etame Consortium maintains a “Cost Account,” which accumulates capital costs and operating expenses that are deductible against revenues, net of royalties, in determining taxable profits. Under the PSC Extension, the Cost Recovery Percentage increased to
Proved Properties
The Company reviews the crude oil and natural gas producing properties for impairment quarterly or whenever events or changes in circumstances indicate that the carrying amount of such properties may not be recoverable. When a crude oil and natural gas property’s undiscounted estimated future net cash flows are not sufficient to recover its carrying amount, an impairment charge is recorded to reduce the carrying amount of the asset to its fair value. The fair value of the asset is measured using a discounted cash flow model relying primarily on Level 3 inputs into the undiscounted future net cash flows. The undiscounted estimated future net cash flows used in the impairment evaluations at each quarter end are based upon the most recently prepared independent reserve engineers’ report adjusted to use forecasted prices from the forward strip price curves near each quarter end and adjusted as necessary for drilling and production results.
There was no triggering event in the quarter ended March 31, 2022 that would cause the Company to believe the value of crude oil and natural gas producing properties should be impaired. Factors considered included higher forward price curves for the first quarter of 2022, and expected capital expenditures in the period related to the Etame Marin block.
Undeveloped Leasehold Costs
VAALCO acquired a
Company acquired an additional working interest of
As a result of the PSC Extension discussed above, the exploitation area for the Etame Marin block was expanded to include previously undeveloped acreage. The Company allocated $
Capitalized Equipment Inventory
The Company uses derivative financial instruments from time to time to achieve a more predictable cash flow from crude oil production by reducing the Company’s exposure to price fluctuations.
On May 6, 2021, the Company entered into commodity swaps at a Dated Brent weighted average price of $
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Settlement Period |
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| Type of Contract |
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| Index |
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| Barrels |
| Weighted Average Price | |
April 2022 to June 2022 |
|
| Swaps |
|
| Dated Brent |
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| |
| $ | |
April 2022 to June 2022 |
|
| Swaps |
|
| Dated Brent |
|
| |
| $ | |
July 2022 to September 2022 |
|
| Swaps |
|
| Dated Brent |
|
| |
| $ | |
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While these commodity swaps are intended to be an economic hedge to mitigate the impact of a decline in crude oil prices, the Company has not elected hedge accounting. The contracts are being measured at fair value each period, with changes in fair value recognized in net income. The Company does not enter into derivative instruments for speculative or trading proposes.
The crude oil swap contracts are measured at fair value using the Income Method. Level 2 observable inputs used in the valuation model include market information as of the reporting date, such as prevailing Brent crude futures prices, Brent crude futures commodity price volatility and interest rates. The determination of the swap contracts’ fair value includes the impact of the counterparty’s non-performance risk.
To mitigate counterparty risk, the Company enters into such derivative contracts with creditworthy financial institutions deemed by management as competent and competitive market makers.
At times, the Company’s counterparties require that it post collateral for changes in the net fair value of the derivative contracts. This cash collateral is reported in the line item Restricted cash on the condensed consolidated balance sheets.
The following table sets forth the loss on derivative instruments on the Company’s condensed consolidated statements of operations:
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| Three Months Ended March 31, | ||||
Derivative Item |
| Statement of Operations Line |
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| 2022 |
| 2021 | ||
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|
|
| (in thousands) | ||||
Crude oil swaps |
| Cash settlements paid on matured derivative contracts, net |
|
| $ | ( |
| $ | ( |
|
| Cash settlements not paid on matured derivative contracts, net |
|
|
| ( |
|
| ( |
|
| Derivative instruments loss, net |
|
| $ | ( |
| $ | ( |
Accrued liabilities and other balances were comprised of the following:
|
|
|
|
|
|
|
|
| As of March 31, 2022 |
| As of December 31, 2021 | ||
|
| (in thousands) | ||||
Accrued accounts payable invoices |
| $ | |
| $ | |
Gabon DMO, PID and PIH obligations |
|
| |
|
| |
Derivative liability - crude oil swaps |
|
| |
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| |
Capital expenditures |
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| |
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| |
Stock appreciation rights – current portion |
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| |
Accrued wages and other compensation |
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| |
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| |
ARO Obligation |
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| |
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| |
Other |
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| |
|
| |
Total accrued liabilities and other |
| $ | |
| $ | |
|
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|
Abandonment funding
Under the terms of the Etame PSC, the Company has a cash funding arrangement for the eventual abandonment of all offshore wells, platforms and facilities on the Etame Marin block. As a result of the PSC Extension, annual funding payments are spread over the periods from 2018 through 2028, under the 2018 abandonment study. The amounts paid will be reimbursed through the Cost Account and are non-refundable. In November 2021, an abandonment study was done and the estimate used for this purpose is approximately $
On March 5, 2019, in accordance with certain foreign currency regulatory requirements, the Gabonese branch of an international commercial bank holding the abandonment funds in a U.S. dollar denominated account transferred the funds to the Central Bank for CEMAC, of which Gabon is one of the six member states. The U.S. dollars were converted to local currency with a credit back to the Gabonese branch. During the three months ended March 31, 2022, the Company recorded a $
FPSO charter
In connection with the charter of the FPSO, the Company, as operator of the Etame Marin block, guaranteed all of the charter payments under the charter through its contract term. At the Company’s election, the charter could be extended for
performance under the charter guarantee is remote, the Company recorded a liability of $
The FPSO charter payment includes a $
Regulatory and Joint Interest Audits and Related Matters
The Company is subject to periodic routine audits by various government agencies in Gabon, including audits of the Company’s petroleum cost account, customs, taxes and other operational matters, as well as audits by other members of the contractor group under the Company’s joint operating agreements.
In 2016, the government of Gabon conducted an audit of the Company’s operations in Gabon, covering the years 2013 through 2014. The Company received the findings from this audit and responded to the audit findings in January 2017. Since providing the Company’s response, there have been changes in the Gabonese officials responsible for the audit. The Company is working with the newly appointed representatives to resolve the audit findings. The Company does not anticipate that the ultimate outcome of this audit will have a material effect on the Company’s financial condition, results of operations or liquidity.
Between 2019 and 2021, the government of Gabon conducted an audit of the operations in Gabon, covering the years 2015 and 2016. The Company has not yet received the findings from this audit.
In 2019, the Etame joint venture owners conducted audits for the years 2017 and 2018. In June 2020, the Company agreed to a $
FSO
On August 31, 2021, VAALCO and its co-venturers at Etame approved the Bareboat Contract (the “Bareboat Contract”) and Operating Agreement (collectively, the “FSO Agreements”) with World Carrier Offshore Services Corp. to replace the existing FPSO with a Floating Storage and Offloading unit (“FSO”). The FSO Agreements require a prepayment of $
Dividend Policy
On November 3, 2021, the Company announced that the Company’s board of directors adopted a cash dividend policy of an expected $
Other contractual commitments
In June 2021, the Company entered into a short-term agreement with an affiliate of Borr Drilling Limited to drill a minimum of
Under the leasing standard that became effective January 1, 2019, there are two types of leases: finance and operating. Regardless of the type of lease, the initial measurement of the lease results in recording a ROU asset and a lease liability at the present value of the future lease payments.
Practical Expedients – The Company elected to use all the practical expedients, effectively carrying over its previous identification and classification of leases that existed as of January 1, 2019. Additionally, a lessee may elect not to recognize ROU assets and liabilities arising from short-term leases provided there is no purchase option the entity is likely to exercise. The Company has elected this short-term lease exemption.
Operating leases
The Company is currently a party to several operating lease agreements for the corporate office, rental of marine vessels and helicopters, equipment and the FPSO. The duration for these agreements range from
During the third quarter of 2019, the Company notified the lessor of the FPSO of its intent to extend the lease term by the first option that extends the FPSO lease to September 2021. Similarly, during the third quarter of 2020, the Company gave notification to extend the FPSO lease to September 2022.
The FPSO agreement also contains options to purchase the assets during or at the end of the lease term. The Company does not consider these options reasonably certain of exercise and has excluded the purchase price from the calculation of ROU assets and lease liabilities.
The FPSO and helicopter, marine vessels and certain equipment leases include provisions for variable lease payments, under which the Company is required to make additional payments based on the level of production or the number of days or hours the asset is deployed, or the number of persons onboard the vessel. Because the Company does not know the extent that the Company will be required to make such payments, they are excluded from the calculation of ROU assets and lease liabilities.
Financing leases
In August 2021, the Company signed the FSO agreements to lease a FSO to replace the current FPSO whose term will end in September 2022. Under the terms of the FSO agreements, a third party is expected to modify the leased vessel in order to meet the Company’s crude-oil production requirements. The vessel is expected to arrive on location in the Etame Marin block in September 2022 at which time control of the vessel will transfer to the Company and at which time the Company will record the ROU asset and Lease liabilities associated with this lease.
On February 15, 2022, the Company signed a contract for a finance lease of generators and related parts. The minimum lease term is
All leases
For all leases that contain an option to extend, the Company has evaluated whether it will extend the lease beyond the initial lease term, which payments have been included in the calculation for the ROU assets and liabilities. The discount rate used to calculate ROU assets and lease liabilities represents the Company’s incremental borrowing rate. The Company determined this by considering the term and economic environment of each lease, and estimating the resulting interest rate the Company would incur to borrow the lease payments.
For the three months ended March 31, 2022 and 2021, the components of the lease costs and the supplemental information were as follows:
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| Three Months Ended March 31, | ||||
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| 2022 |
| 2021 | ||
Lease cost: |
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| (in thousands) | ||||
Finance lease cost (1) |
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| $ | |
| $ | — |
Operating lease cost |
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| |
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| |
Short-term lease cost (2) |
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Variable lease cost (3) |
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Total lease expense |
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Lease costs capitalized |
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| |
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| — |
Total lease costs |
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| $ | |
| $ | |
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Other information: |
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Cash paid for amounts included in the measurement of lease liabilities: |
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| 2022 |
| 2021 | ||
Operating cash flows attributable to finance leases |
|
| $ | — |
| $ | — |
Weighted-average remaining lease term |
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| |
Weighted-average discount rate |
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| — | |
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Operating cash flows attributable to operating leases |
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| $ | |
| $ | |
Weighted-average remaining lease term |
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| ||
Weighted-average discount rate |
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(1)Represents depreciation and interest associated with financing leases.
(2)Represents short term leases under contracts that are 1 year or less where a ROU asset and lease liability are not required to be recorded.
(3)Variable costs represent differences between minimum lease costs and actual lease costs incurred under lease contracts.
The table below describes the presentation of the total lease cost on the Company’s condensed consolidated statement of operations. As discussed above, the Company’s joint venture owners are required to reimburse the Company for their share of certain expenses, including certain lease costs.
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| Three Months Ended March 31, | ||||
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| 2022 |
| 2021 | ||
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| (in thousands) | ||||
Finance lease cost |
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| $ | |
| $ | — |
Production expense |
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General and administrative expense |
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Lease costs billed to the joint venture owners |
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Total lease expense |
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Lease costs capitalized |
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| |
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| — |
Total lease costs |
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| $ | |
| $ | |
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The following table describes the future maturities of the Company’s lease liabilities at March 31, 2022:
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| Operating Leases |
| Finance Leases |
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Year |
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2022 |
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| $ | |
| $ |
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2023 |
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2024 |
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2025 |
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Thereafter |
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Less: imputed interest |
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Total lease liabilities |
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| $ | |
| $ | |
|
The following table summarizes the changes in the Company’s asset retirement obligations:
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(in thousands) |
| As of March 31, 2022 |
| As of December 31, 2021 | ||
Beginning balance |
| $ | |
| $ | |
Accretion |
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Additions |
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| — |
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Revisions |
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| — |
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Ending balance |
| $ | |
| $ | |
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Accretion is recorded in the line item “Depreciation, depletion and amortization” on the condensed consolidated statements of operations.
Preferred stock – Authorized preferred stock consists of
Treasury stock – For the majority of restricted stock awards granted by the Company, the number of shares issued to the participant on the vesting date are net of shares withheld to meet applicable tax withholding requirements. In addition, when options are exercised, the participant may elect to remit shares to the Company to cover the tax liability and the cost of the exercised options. When this happens, the Company adds these shares to treasury stock and pays the taxes on the participant’s behalf.
The Company’s stock-based compensation has been granted under several stock incentive and long-term incentive plans. The plans authorize the Compensation Committee of the Company’s board of directors to issue various types of incentive compensation. The Company had previously issued stock options and restricted shares under the 2014 Long-Term Incentive Plan (“2014 Plan”) and stock appreciation rights under the 2016 Stock Appreciation Rights Plan. On June 25, 2020, the Company’s stockholders approved the 2020 Long-Term Incentive Plan (as amended, the “2020 Plan”) under which
For each stock option granted, the number of authorized shares under the 2020 Plan will be reduced on a one-for-one basis. For each restricted share granted, the number of shares authorized under the 2020 Plan will be reduced by twice the number of restricted shares. The Company has no set policy for sourcing shares for option grants. Historically the shares issued under option grants have been new shares.
As referenced in the table below, the Company records compensation expense related to stock-based compensation as general and administrative expense associated with the issuance of stock options, restricted stock and stock appreciation rights. During the three months ended March 31, 2022, the Company settled in cash $
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| Three Months Ended March 31, | ||||
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| 2022 |
| 2021 | ||
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| (in thousands) | ||||
Stock-based compensation - equity awards |
| $ | |
| $ | |
Stock-based compensation - liability awards |
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Total stock-based compensation |
| $ | |
| $ | |
Stock options and performance shares
Stock options have an exercise price that may not be less than the fair market value of the underlying shares on the date of grant. In general, stock options granted to participants will become exercisable over a period determined by the Compensation Committee of the Company’s board of directors that is generally a period, vesting in three equal parts on the anniversaries from the date of grant, and may contain performance hurdles.
In March 2022, the Company granted options to certain employees of the Company that are considered performance stock options to purchase an aggregate of
The Company used the Monte Carlo simulation to calculate the grant date fair value of performance stock option awards. The fair value of these awards will be amortized to expense over the derived service period of the option.
For options that do not contain a market or performance condition, the Company uses the Black-Scholes model to calculate the grant
date fair value of stock option awards. This fair value is then amortized to expense over the service period of the option.
During the three months ended March 31, 2022 and 2021, the weighted average assumptions shown below were used to calculate the weighted average grant date fair value of option grants under the Monte Carlo.
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| Three Months Ended March 31, | |||||
| 2022 |
| 2021 |
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Weighted average exercise price - ($/share) | $ |
| $ |
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Expected life in years |
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Average expected volatility |
| % |
| % | ||
Risk-free interest rate |
| % |
| % | ||
Expected dividend yield |
| % |
| — |
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Weighted average grant date fair value - ($/share) | $ |
| $ |
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| Number of Shares Underlying Options |
| Weighted Average Exercise Price Per Share |
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| Weighted Average Remaining Contractual Term |
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| Aggregate Intrinsic Value | |
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Outstanding at January 1, 2022 |
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Granted |
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Exercised |
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Unvested shares forfeited |
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| — |
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Vested shares expired |
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Outstanding at March 31, 2022 |
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| $ | |
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Exercisable at March 31, 2022 |
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Stock option activity associated with the Black-Scholes model for the three months ended March 31, 2022 is provided below:
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| Number of Shares Underlying Options |
| Weighted Average Exercise Price Per Share |
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| Weighted Average Remaining Contractual Term |
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| Aggregate Intrinsic Value | |
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| (in thousands) |
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| (in thousands) | |
Outstanding at January 1, 2022 |
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| $ | |
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Granted |
| — |
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Exercised |
| ( |
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Unvested shares forfeited |
| — |
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| — |
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Vested shares expired |
| — |
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| — |
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Outstanding at March 31, 2022 |
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| $ | |
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| $ | | |
Exercisable at March 31, 2022 |
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| $ | |
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During the three months ended March 31, 2022,
Restricted shares
Restricted stock granted to employees will vest over a period determined by the Compensation Committee that is generally a period, vesting in three equal parts on the anniversaries following the date of the grant. Restricted stock granted to directors will vest on the earlier of (i) the first anniversary of the date of grant and (ii) the first annual meeting of stockholders following the date of grant (but not less than fifty (50) weeks following the date of grant). In March 2022, the Company issued
The following is a summary of activity for the three months ended March 31, 2022:
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| Restricted Stock |
| Weighted Average Grant Date Fair Value | |
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| (in thousands) |
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Non-vested shares outstanding at January 1, 2022 |
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| $ | |
Awards granted |
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Awards vested |
| ( |
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Awards forfeited |
| ( |
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Non-vested shares outstanding at March 31, 2022 |
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| $ | |
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During the three months ended March 31, 2022,
Stock appreciation rights (“SARs”)
SARs may be granted under the VAALCO Energy, Inc. 2016 Stock Appreciation Rights Plan and the 2020 Plan. A SAR is the right to receive a cash amount equal to the spread with respect to a share of common stock upon the exercise of the SAR. The spread is the difference between the SAR exercise price per share specified in the SAR award (that may not be less than the fair market value of the Company’s common stock on the date of grant) and the fair market value per share of the Company’s common stock on the date of exercise of the SAR. SARs granted to participants will become exercisable over a period determined by the Compensation Committee of the Company’s board of directors. In addition, SARs will become exercisable upon a change in control, unless provided otherwise by the Compensation Committee of the Company’s board of directors.
During the three months ended March 31, 2022, the Company did
SAR activity for the three months ended March 31, 2022 is provided below:
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| Number of Shares Underlying SARs |
| Weighted Average Exercise Price Per Share |
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| Term |
| Aggregate Intrinsic Value | ||
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| (in thousands) |
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| (in years) |
| (in thousands) | |
Outstanding at January 1, 2022 |
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| $ | |
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Granted |
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| — |
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Exercised |
| ( |
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Unvested SARs forfeited |
| — |
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| — |
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Vested SARs expired |
| — |
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| — |
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Outstanding at March 31, 2022 |
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| $ | |
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| $ | | |
Exercisable at March 31, 2022 |
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| $ | |
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| $ | | |
Other Benefit Plans
VAALCO and its domestic subsidiaries file a consolidated U.S. income tax return. Certain foreign subsidiaries also file tax returns in their respective local jurisdictions.
Income taxes attributable to continuing operations for the three months ended March 31, 2022, and 2021 are attributable to foreign taxes payable in Gabon as well as income taxes in the U.S.
Provision for income taxes related to income from continuing operations consists of the following:
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| Three Months Ended March 31, | ||||
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| 2022 |
| 2021 | ||
U.S. Federal: |
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| (in thousands) | ||||
Current |
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| $ | — |
| $ | — |
Deferred |
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| ( |
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| ( |
Foreign: |
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Current |
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Deferred |
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Total |
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| $ | ( |
| $ | |
The Company’s effective tax rate for the three months ended March 31, 2022 and 2021, excluding the impact of discrete items, was
As of March 31, 2022, the Company had
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are intended to be covered by the safe harbors created by those laws. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included in this Annual Report that address activities, events or developments that we expect or anticipate may occur in the future, including without limitation, statements regarding our financial position, operating performance and results, reserve quantities and net present values, market prices, business strategy, derivative activities, the amount and nature of capital expenditures, payment of dividends and plans and objectives of management for future operations are forward-looking statements. When we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “forecast,” “outlook,” “aim,” “target,” “will,” “could,” “should,” “may,” “likely,” “plan,” and “probably” or the negative of such terms or similar expressions, we are making forward-looking statements. Many risks and uncertainties that could affect our future results and could cause results to differ materially from those expressed in our forward-looking statements include, but are not limited to:
the impact of the coronavirus (“COVID-19”) pandemic, including its impact on global demand for crude oil and crude oil prices, potential difficulties in obtaining additional liquidity when and if needed, disruptions in global supply chains, quarantines of our workforce or workforce reductions and other matters related to the pandemic;
the impact of any future production quotas imposed by Gabon, as a member of the Organization of the Petroleum Exporting Countries (“OPEC”), as a result of agreements among OPEC, Russia and other allied producing countries (collectively, “OPEC+”) with respect to crude oil production levels;
volatility of, and declines and weaknesses in crude oil and natural gas prices, as well as our ability to offset volatility in prices through the use of hedging transactions;
the discovery, acquisition, development and replacement of crude oil and natural gas reserves;
impairments in the value of our crude oil and natural gas assets;
future capital requirements;
our ability to maintain sufficient liquidity in order to fully implement our business plan;
our ability to generate cash flows that, along with our cash on hand, will be sufficient to support our operations and cash requirements;
the ability of the BWE Consortium of VAALCO, BW Energy and Panoro Energy to successfully execute its business plan;
our ability to attract capital or obtain debt financing arrangements;
our ability to pay the expenditures required in order to develop certain of our properties;
operating hazards inherent in the exploration for and production of crude oil and natural gas;
difficulties encountered during the exploration for and production of crude oil and natural gas;
the impact of competition;
our ability to identify and complete complementary opportunistic acquisitions;
our ability to effectively integrate assets and properties that we acquire into our operations;
weather conditions;
the uncertainty of estimates of crude oil and natural gas reserves;
currency exchange rates and regulations;
unanticipated issues and liabilities arising from non-compliance with environmental regulations;
the ultimate resolution of our abandonment funding obligations with the government of Gabon and the audit of our operations in Gabon currently being conducted by the government of Gabon;
the availability and cost of seismic, drilling and other equipment;
difficulties encountered in measuring, transporting and delivering crude oil to commercial markets;
our ability to effectively replace the floating, production, storage and offloading vessel (“FPSO”);
timing and amount of future production of crude oil and natural gas;
hedging decisions, including whether or not to enter into derivative financial instruments;
general economic conditions, including any future economic downturn, the impact of inflation, disruption in financial markets and the availability of credit;
our ability to enter into new customer contracts;
changes in customer demand and producers’ supply;
actions by the governments of and events occurring in the countries in which we operate;
actions by our joint venture owners;
compliance with, or the effect of changes in, governmental regulations regarding our exploration, production, and well completion operations including those related to climate change;
the outcome of any governmental audit; and
actions of operators of our crude oil and natural gas properties.
The information contained in this Quarterly Report and the information set forth under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”), identifies additional factors that could cause our results or performance to differ materially from those we express in forward-looking statements. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions and therefore also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this Quarterly Report and the 2021 Form 10-K, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. When you consider our forward-looking statements, you should keep in mind these risk factors and the other cautionary statements in this Quarterly Report.
Our forward-looking statements speak only as of the date the statements are made and reflect our best judgment about future events and trends based on the information currently available to us. Our results of operations can be affected by inaccurate assumptions we make or by risks and uncertainties known or unknown to us. Therefore, we cannot guarantee the accuracy of the forward-looking statements. Actual events and results of operations may vary materially from our current expectations and assumptions. Our forward-looking statements, express or implied, are expressly qualified in their entirety by this “Cautionary Statement Regarding Forward-Looking Statements,” which constitute cautionary statements. These cautionary statements should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances occurring after the date of this Quarterly Report.
INTRODUCTION
VAALCO is a Houston, Texas based independent energy company engaged in the acquisition, exploration, development and production of crude oil. As operator, we have production operations and conduct exploration and development activities in Gabon, West Africa. We also have opportunities to participate in development and exploration activities in Equatorial Guinea, West Africa. As discussed further in Note 3 to the condensed consolidated financial statements included in this Quarterly Report, we have discontinued operations associated with our activities in Angola, West Africa.
RECENT DEVELOPMENTS
Marine Construction Agreement for Subsea Reconfiguration
On March 17, 2022, VAALCO Gabon, SA (“VAALCO Gabon”), a wholly owned subsidiary of the Company, entered into an Agreement for the Provision of Subsea Construction and Installation Services (the “Marine Construction Agreement”) with DOF Subsea Canada Corp. (“DOF Subsea”), to support the subsea reconfiguration in connection with the replacement of the existing FPSO vessel with a Floating Storage and Offloading vessel (“FSO”) at the Company’s Etame Marin field offshore Gabon. Pursuant to the Marine Construction Agreement, DOF Subsea agreed to, among other things, provide all personnel, crew and equipment necessary to assist in the reconfiguration of the Etame field subsea infrastructure to accommodate all field production to the flow to the FSO, which is currently under conversion, including (i) assistance with retrieval of over 5,000 meters of new flexible pipelines from a manufacturing facility in the United Kingdom, transporting the pipelines to Gabon and installing the pipelines in the Etame field, (ii) performing the retrieval and relocation of existing in-field flowlines and umbilicals to accommodate the reconfigured field development plan and (iii) assistance in the connection of new risers to the FSO (collectively, the “Services”). Pursuant to the Marine Construction Agreement, DOF Subsea will provide an offshore construction vessel to facilitate the performance of the Services. The Marine Construction Agreement provides that the Services will commence in early July 2022 and be completed by the end of September 2022, subject to certain conditions therein. As consideration for the Services provided to the Company, the Company agreed to pay DOF Subsea certain fixed fees upon the completion of the achievement of Service-related milestones, as well as a day rate, subject to certain conditions, as set forth in the Marine Construction Agreement.
Recent Operational Updates
Provisional Award of Two Offshore Blocks in Gabon
On October 11, 2021 we announced our entry into a consortium with BW Energy and Panoro Energy (the “BWE Consortium”) and that the BWE Consortium has been provisionally awarded two blocks in the 12th Offshore Licensing Round in Gabon. The award is subject
to concluding the terms of production sharing contracts (“PSCs”) 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 our 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.
Charter Agreement for the Floating Storage and Offloading Unit
We are currently a party to an FPSO charter for the storage of all of the crude oil that we produce. This contract will expire in September 2022. In August of 2021, we and our co-venturers at Etame approved the Bareboat Contract (the “Bareboat Contract”) and Operating Agreement (the “Operating Agreement” and collectively, the “FSO Agreements”) with World Carrier Offshore Services Corp. (“World Carrier”) to replace the existing FPSO with an FSO. The FSO Agreements require a prepayment of $2 million gross ($1.3 million net) in 2021 and $5 million gross ($3.2 million net) in 2022 of which $6 million will be recovered against future rentals. Current total capital conversion estimates are $40 to $50 million gross ($26 to $32 million net to VAALCO).
2021/2022 Drilling Campaign
In conjunction with the 2021/2022 drilling program, that began in December 2021, we executed a contract with Borr Jack-Up XIV Inc., an affiliate of Borr Drilling Limited, to drill a minimum of three wells with options to drill additional wells. On October 4, 2021, we novated the Borr Jack-Up XIV Inc contract with Borr West Africa Assets, Inc. In December of 2021, we spudded the Etame 8H sidetrack, the first well of the 2021/2022 drilling program. In February of 2022 we completed the drilling of the Etame 8-H well and moved the drilling rig to the Avouma platform to drill the Avouma 3H-ST1 development well, which is targeting the Gamba reservoir. In April 2022, the well was completed and brought online in April with an IP rate of approximately 3,100 gross BOPD, 1,589 BOPD net to VAALCO’s 58.8% working interest in 2022.
VAALCO is currently drilling the ETBSM 1HB-ST2 well also on the Avouma platform and targeting the Gamba reservoir while also testing the Dentale formation, which is productive in other areas in the Etame license, with the potential to complete and produce from the Dentale in this well. We are currently planning to drill a fourth well following the ETBSM 1HB-ST2 well as part of its 2021/2022 drilling campaign.
We estimate the range of cost of the 2021/2022 drilling program with four wells to be between $117.0 million to $143.0 million gross, or $74.0 million to $91.0 million, net to VAALCO’s 63.6% participating interest with about $26 million to about $31 million gross expected in 2021, or about $16 million to $20 million net to VAALCO.
Acquisition of Additional Working Interest at Etame Marin Block
In November 2020, we signed a SPA to acquire Sasol’s 27.8% working interest in the Etame Marin block offshore Gabon. On February 25, 2021, we completed the acquisition of Sasol’s 27.8% working interest in the Etame Marin block offshore Gabon pursuant to the SPA. The effective date of the transaction was July 1, 2020. Prior to the Sasol Acquisition, we owned and operated a 31.1% working interest in Etame. The Sasol Acquisition increased our working interest to 58.8%. As a result of the Sasol Acquisition, the net portion of production and costs relating to our Etame operations increased from 31.1% to 58.8%. Reserves, production and financial results for the interests acquired have been included in our results for periods after February 25, 2021. All assets and liabilities associated with Sasol’s interest in Etame Marin block, including crude oil and natural gas properties, asset retirement obligations and working capital items were recorded at their fair value. See Note 3 for further information.
ACTIVITIES BY ASSET
Gabon
Offshore – Etame Marin Block
Development and Production
We operate the Etame Marin Block on behalf of a consortium of companies. As of March 31, 2022, production operations in the Etame Marin block included eleven platform wells, plus three subsea wells tied back by pipelines to deliver crude oil and associated natural gas through a riser system to allow for delivery, processing, storage and ultimately offloading the crude oil from a leased FPSO anchored to the seabed on the block. We currently have fourteen producing wells. The FPSO has production limitations of approximately 25,000 barrels of oil per day and 30,000 barrels of total fluids per day. During the three months ended March 31, 2022 and 2021, production from the block was 1,416 MBbls (725 MBbls net) and 1,253 MBbls (466 MBbls net), respectively, as discussed below in “Results of Operations”.
Equatorial Guinea
Our working interest will increase to 45.9% once the EG MMH approves a new amendment to the production sharing contract. As of March 31, 2022, we had $10.0 million recorded for the book value of the undeveloped leasehold costs associated with the Block P license. We have completed a feasibility study of a standalone production development opportunity of the Venus discovery on Block P. We are now proceeding to a field development concept and will work closely with the other joint venture owners to complete this over the coming months. The Block P production sharing contract provides for a development and production period of 25 years from the date of approval of a development and production plan.
DISCONTINUED OPERATIONS-ANGOLA
In November 2006, we signed a production sharing contract for Block 5 offshore Angola (“PSA”). Our working interest is 40%, and we carried Sonangol PP, for 10% of the work program. On September 30, 2016, we notified Sonangol PP that we were withdrawing from the joint operating agreement effective October 31, 2016. On November 30, 2016, we notified the national concessionaire, Sonangol E.P. that we were withdrawing from the PSA. Further to our decision to withdraw from Angola, we have closed our office in Angola and do not intend to conduct future activities in Angola. As a result of this strategic shift, the Angola segment has been classified as discontinued operations in the Financial Statements for all periods presented. See Note 3 to the Financial Statements. For the three months ended March 31, 2022 and 2021, the Angola segment did not have a material impact on the Company’s financial position, results of operations, cash flows and related disclosures.
CAPITAL RESOURCES AND LIQUIDITY
Cash Flows
Our cash flows for the three months ended March 31, 2022 and 2021 are as follows:
|
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|
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|
|
| Three Months Ended March 31, | |||||||
|
| 2022 |
| 2021 |
| Increase (Decrease) in 2022 over 2021 | |||
|
| (in thousands) | |||||||
Net cash provided by operating activities before changes in operating assets and liabilities |
| $ | 26,407 |
| $ | 13,453 |
| $ | 12,954 |
Net change in operating assets and liabilities |
|
| (27,147) |
|
| (11,698) |
|
| (15,449) |
Net cash (used in) provided by continuing operating activities |
|
| (740) |
|
| 1,755 |
|
| (2,495) |
Net cash used in discontinued operating activities |
|
| (18) |
|
| (13) |
|
| (5) |
Net cash (used in) provided by operating activities |
|
| (758) |
|
| 1,742 |
|
| (2,500) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
| (23,148) |
|
| (19,056) |
|
| (4,092) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
| (2,118) |
|
| (56) |
|
| (2,062) |
Net change in cash, cash equivalents and restricted cash |
| $ | (26,024) |
| $ | (17,370) |
| $ | (8,654) |
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|
|
|
|
|
|
|
The $13.0 million increase in net cash provided by our operating activities, before changes in operating assets and liabilities for the three months ended March 31, 2022 compared to the same period of 2021, was mainly due to positive contributions from adding back to cash the change in unrealized derivative losses. The net decrease in operating assets and liabilities of $15.4 million for the three months ended March 31, 2022 compared to the same period of 2021 was primarily related to an increase in assets of $25.5 million which was partially offset by a $10.1 million increase in liabilities.
The $4.1 million increase in net cash used in investing activities during the three months ended March 31, 2022 was due to increases in capital spending in 2022 for the Etame-8H development well and Etame field reconfiguration and other items to support the 2021/2022 drilling Campaign. For the three months ended March 31, 2021, cash used in investing activities was mainly due to cash used in the purchase of Sasol’s interest in the Etame Block.
Net cash used in financing activities during the three months ended March 31, 2022 included $1.9 million for dividend distribution, $0.4 million for treasury stock as a result of tax withholding on options exercised and vested restricted stock as discussed in Note 14 to our condensed consolidated financial statements, partially offset by $0.2 million in proceeds from options exercised.
Capital Expenditures
For the three months ended March 31, 2022 we had accrual basis capital expenditures attributable to continuing operations of $31.8 million compared to $2.5 million accrual basis capital expenditures in 2021, excluding the Sasol acquisition. For the three months ended March 31, 2022, our efforts were focused on spending related to the 2021/2022 drilling campaign and Etame field reconfigurations and FSO projects. During the same time in 2021, our spending was concentrated on the Sasol acquisition and obtaining certain long lead items for the 2021/2022 drilling campaign.
See table below in “Capital Resources, Liquidity and Cash Requirements” for further information.
Regulatory and Joint Interest Audits
We are subject to periodic routine audits by various government agencies in Gabon, including audits of our petroleum Cost Account, customs, taxes and other operational matters, as well as audits by other members of the contractor group under our joint operating agreements. See Note 10 to the Financial Statements for further discussion.
Commodity Price Hedging
The price we receive for our crude oil significantly influences our revenue, profitability, liquidity, access to capital and prospects for future growth. Crude oil commodities and, therefore their prices can be subject to wide fluctuations in response to relatively minor changes in supply and demand. We believe these prices will likely continue to be volatile in the future.
Due to the inherent volatility in crude oil prices, we use commodity derivative instruments such as swaps to hedge price risk associated with a portion of our anticipated crude oil production. These instruments allow us to reduce, but not eliminate, the potential effects of variability in cash flow from operations due to fluctuations in commodity prices. The instruments provide only partial protection against declines in crude oil prices and may limit our potential gains from future increases in prices. None of these instruments are used for trading purposes. We do not speculate on commodity prices but rather attempt to hedge physical production by individual hydrocarbon product in order to protect returns. The counterparty to our derivative transactions is a major oil company’s trading subsidiary, and our derivative positions are generally reviewed on a monthly basis. We have not designated any of our derivative contracts as fair value or cash flow hedges. The changes in fair value of the contracts are included in the condensed consolidated statement of operations. We record such derivative instruments as assets or liabilities in the condensed consolidated balance sheet. We do not anticipate any substantial changes in our hedging policy.
On September 24, 2021, we entered into additional commodity swaps at a Dated Brent weighted average price of $72.00 per barrel for the period from and including March 2022 to June 2022 for a quantity of 460,000 barrels. On January 6, 2022, we entered into additional commodity swaps at a Dated Brent weighted average price of $76.53 per barrel for the period from and including July 2022 to September 2022 for a quantity of 375,000 barrels. On February 23, 2022, we entered into additional commodity swaps at a Dated Brent weighted average price of $85.01 per barrel for the period from and including April 2022 to June 2022 for a quantity of 234,000 barrels.
The following is a list of outstanding contracts at March 31, 2022:
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|
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|
|
|
|
|
|
|
|
|
|
Settlement Period |
|
| Type of Contract |
|
| Index |
|
| Barrels |
| Weighted Average Price | |
April 2022 to June 2022 |
|
| Swaps |
|
| Dated Brent |
|
| 345,000 |
| $ | 72.00 |
April 2022 to June 2022 |
|
| Swaps |
|
| Dated Brent |
|
| 234,000 |
| $ | 85.01 |
July 2022 to September 2022 |
|
| Swaps |
|
| Dated Brent |
|
| 375,000 |
| $ | 76.53 |
|
|
|
|
|
|
|
|
| 954,000 |
|
|
|
Cash on Hand
At March 31, 2022, we had unrestricted cash of $18.9 million. We invest cash not required for immediate operational and capital expenditure needs in short-term money market instruments primarily with financial institutions where we determine our credit exposure is negligible. As operator of the Etame Marin block in Gabon, we enter into project-related activities on behalf of our working interest joint venture owners. We generally obtain advances from joint venture owners prior to significant funding commitments. Our cash on hand will be utilized, along with cash generated from operations, to fund our operations.
We currently sell our crude oil production from Gabon under a term contract that began in January 2020 and ends in July 2022. Pricing under this contract is based upon an average of Dated Brent in the month of lifting, adjusted for location and market factors.
Capital Resources, Liquidity and Cash Requirements
Historically, our primary source of liquidity has been cash flows from operations and our primary use of cash has been to fund capital expenditures for development activities in the Etame Marin block. We continually monitor the availability of capital resources, including equity and debt financings that could be utilized to meet our future financial obligations, planned capital expenditure activities and liquidity requirements including those to fund opportunistic acquisitions. Our future success in growing proved reserves, production and balancing the long-term development of our assets with a focus on generating attractive corporate-level returns will be highly dependent on the capital resources available to us.
Our future success in growing proved reserves, production and balancing the long-term development of our assets with a focus on generating attractive corporate-level returns will be highly dependent on the capital resources available to us.
Based on current expectations, we believe we have sufficient liquidity through our existing cash balances and cash flow from operations to support our current cash requirements, including those related to our 2021/2022 drilling program and our ability to fund the FPSO through September 2022 and the FSO charter, through June 2023. However, our ability to generate sufficient cash flow from operations or fund any potential future acquisitions, consortiums, joint ventures or pay dividends for other similar transactions depends on operating and economic conditions, some of which are beyond our control. If additional capital is needed, we may not be able to obtain debt or equity financing on terms favorable to us, or at all. We are continuing to evaluate all uses of cash, including opportunistic acquisitions,
and whether to pursue growth opportunities and whether such growth opportunities, additional sources of liquidity, including equity and/or debt financings, are appropriate to fund any such growth opportunities.
Cash Requirements
Our material cash requirements generally consist of operating leases, purchase obligations, capital projects and 3D seismic processing, the Sasol Acquisition and abandonment funding, each of which is discussed in further detail below.
Sasol Acquisition – As a result of completing the Sasol Acquisition on February 25, 2021, our obligations with respect to development activities in the Etame have increased based on the increase in our working interest in the Etame from 31.1 % at December 31, 2020, to 58.8%. As a result of the Sasol Acquisition, the net portion of production and costs relating to the Company’s Etame operations increased from 31.1% to 58.8%. Reserves, production and financial results for the interests acquired in the Sasol Acquisition have been included in VAALCO’s results for periods after February 25, 2021.
FSO Agreements – We are currently a party to an FPSO charter for the production and storage of all of the crude oil that we produce. This contract will expire in September 2022. On August 31, 2021, we and our Etame co-venturers approved the Bareboat Contract and Operating Agreement with World Carrier to replace the existing FPSO with a FSO unit at the Etame Marin block offshore Gabon. Pursuant to the Bareboat Charter, World Carrier will provide use of the Cap Diamant vessel to VAALCO Gabon for an initial eight-year term, subject to optional two successive one-year extensions. Pursuant to the Operating Agreement, VAALCO Gabon agreed to engage World Carrier for the purposes of maintaining and operating the FSO on its behalf in accordance with the specifications therein and to provide other services to VAALCO Gabon in connection with the operation and maintenance of the FSO. As consideration for the performance by World Carrier of the Operator Services, VAALCO Gabon agreed to pay a daily operating fee (to be paid monthly) beginning on the date of issuance of the Fit to Receive Certificate (as defined in the Operating Agreement) until the end of the term, with such term being the same as the term in the Bareboat Charter.
The FSO Agreements require a prepayment of $2 million gross ($1.2 million net to VAALCO) in 2021 and $5 million gross ($3.2 million net) in 2022 of which $6 million will be recovered against future rentals. In addition, VAALCO Gabon agreed to pay a daily hire rate at certain rates specified therein, with such hire rate being based on the year within the term.
In connection with the implementation of the FSO, we are required to incur certain capital expenses in order to facilitate the FSO. Current total capital conversion estimates are $40 to $50 million gross ($26 to $32 million net to VAALCO).
BWE Consortium – On October 11, 2021 we announced our entry into a consortium with BW Energy and Panoro Energy and that the BWE Consortium has been provisionally awarded two blocks in the 12th Offshore Licensing Round in Gabon. The award is subject to concluding the terms of the PSC with the Gabonese government. BW Energy will be the operator with a 37.5% working interest. We will have a 37.5% working interest and Panoro Energy will have a 25% working interest as non-operating joint owners. The two blocks, G12-13 and H12-13, are adjacent to our 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. The two blocks will be held by the BWE Consortium and the PSCs over the blocks will have two exploration periods totaling eight years which may be extended by an additional two more years. During the first exploration period, the joint owners intend to reprocess existing seismic and carry out a 3-D seismic campaign on these two blocks and have also committed to drilling exploration wells on both blocks. In the event the BWE Consortium elects to enter the second exploration period, the BWE Consortium will be committed to drilling at least another one exploration well on each of the awarded blocks.
Drilling Program – We commenced the 2021/2022 drilling campaign in December 2021 with the drilling of the Etame 8-H development well. In February of 2022 we completed the drilling of the Etame 8-H well and moved the drilling rig to the Avouma platform to drill the Avouma 3H-ST1 development well, which is targeting the Gamba reservoir. The initial flow rate of the ETAME 8-H well was 5,000 BOPD, 2,560 BOPD net to VAALCO’s 58.8% working interest in 2022. In April 2022, the well was completed and brought online in April with an IP rate of approximately 3,100 gross BOPD, 1,589 BOPD net to VAALCO’s 58.8% working interest in 2022.
VAALCO is currently drilling the ETBSM 1HB-ST2 well also on the Avouma platform and targeting the Gamba reservoir while also testing the Dentale formation, which is productive in other areas in the Etame license, with the potential to complete and produce from the Dentale in this well. We are currently planning to drill a fourth well following the ETBSM 1HB-ST2 well as part of its 2021/2022 drilling campaign.
We expect the campaign to include two development wells and two appraisal wells at an estimated cost of $117.0 million to $143.0 million gross, or $74.0 million to $91.0 million, net to VAALCO’s 63.6% participating interest.
In June 2021, in conjunction with our 2021/2022 drilling program, we entered into a contract with an affiliate of Borr Drilling Limited to drill a minimum of three wells with options to drill additional wells. Upon completion of the ETBSM 1HB-ST2 well, the commitment to Borr Drilling Limited will be satisfied.
Dividend Policy – On November 3, 2021, we announced that our board of directors adopted of a quarterly cash dividend policy of an expected $0.0325 per common share commencing in the first quarter of 2022. We paid on March 18, 2022 a quarterly cash dividend of $1.9 million to the shareholders of record on February 18, 2022. Further we announced our intent to pay a dividend of $0.0325 per share of common stock for the second quarter of 2022 ($0.13 annualized), which is payable June 24, 2022 to stockholders of record at the close of business on May 25, 2022.
Payment of future dividends, if any, will be at the discretion of the board of directors after taking into account various factors, including current financial condition, the tax impact of repatriating cash, operating results and current and anticipated cash needs.
Trends and Uncertainties
COVID-19 Pandemic – While crude oil prices are currently at the highest levels seen in recent years, the continued spread of COVID-19, including vaccine-resistant strains, or deterioration in crude oil and natural gas prices could result in additional adverse impacts on our results of operations, cash flows and financial position, including asset impairments. The health of our employees, contractors and vendors, and our ability to meet staffing needs in our operations and certain critical functions cannot be predicted and is vital to our operations. We are unable to predict the extent of the impact that the continuing spread of COVID-19 throughout Gabon may have on our ability to continue to conduct our operations.
Commodity Prices – Historically, the markets for oil and natural gas have been volatile. Oil, natural gas and NGL prices are subject to wide fluctuations in supply and demand. Our cash flows from operations may be adversely impacted by volatility in crude oil prices, a decrease in demand for crude oil and future production cuts by OPEC+. In July 2021, OPEC+ agreed to increase production beginning in August 2021 to phase out a portion of the prior production cuts. Brent crude prices were approximately $107 per barrel as of March 31, 2022. The decision to increase production was reaffirmed by an OPEC+ meeting held on March 31, 2022.
ESG and Climate Change Effects – ESG matters continue to attract considerable public and scientific attention. In particular, we expect continued regulatory attention on climate change issues and emissions of greenhouse gases (“GHGs”), including methane (a primary component of natural gas) and carbon dioxide (a byproduct of crude oil and natural gas combustion). This increased attention to climate change and environmental conservation may result in demand shifts away from crude oil and natural gas products to alternative forms of energy, higher regulatory and compliance costs, additional governmental investigations and private litigation against us. For example, numerous proposals have been made and are likely to continue to be made at the international, national, regional and state levels of government to monitor and limit emissions of GHGs. These efforts have included consideration of cap-and-trade programs, carbon taxes, GHG reporting and tracking programs and regulations that directly limit GHG emissions from certain sources. In addition, institutional investors, proxy advisory firms and other industry participants continue to focus on ESG matters, including climate change. We expect that this heightened focus will continue to drive ESG efforts across our industry and influence investors’ investment and voting decisions, which for some investors may lead to less favorable sentiment towards carbon assets and diversion of investment to other industries. Consistent with the increased attention on ESG matters and climate change, we have prioritized and are committed to responsible environmental practices by monitoring our adherence to ESG standards, including the reduction of our carbon footprint and measurement of GHG emissions. ESG is important to us, and we are in the process of developing a multi-year plan to establish and document our ESG base currently and developing a systematic plan to monitor and improve matters related to ESG and climate change going forward.
Hedging
We seek to mitigate the impact of volatility in crude oil prices through hedging. On September 24, 2021, we entered commodity swaps at a Dated Brent weighted average price of $72.00 per barrel for the period from and including March 2022 to June 2022 for a quantity of 460,000 barrels. On January 6, 2022, we entered into additional commodity swaps at a Dated Brent weighted average price of $76.53 per barrel for the period from and including July 2022 to September 2022 for a quantity of 375,000 barrels. On February 23, 2022, we entered into additional commodity swaps at a Dated Brent weighted average price of $85.01 per barrel for the period from and including April 2022 to June 2022 for a quantity of 234,000 barrels.
See the table below for the unexpired barrels as of March 31, 2022:
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|
|
|
|
|
|
|
|
|
|
|
|
Settlement Period |
|
| Type of Contract |
|
| Index |
|
| Barrels |
| Weighted Average Price | |
April 2022 to June 2022 |
|
| Swaps |
|
| Dated Brent |
|
| 345,000 |
| $ | 72.00 |
April 2022 to June 2022 |
|
| Swaps |
|
| Dated Brent |
|
| 234,000 |
| $ | 85.01 |
July 2022 to September 2022 |
|
| Swaps |
|
| Dated Brent |
|
| 375,000 |
| $ | 76.53 |
|
|
|
|
|
|
|
|
| 954,000 |
|
|
|
CRITICAL ACCOUNTING POLICIES
There have been no material changes to our critical accounting policies subsequent to December 31, 2021.
NEW ACCOUNTING STANDARDS
See Note 2 to the condensed consolidated financial statements.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
Net income for the three months ended March 31, 2022 was $12.2 million compared to net income of $9.9 million for the same period of 2021. See discussion below for changes in revenue and expense.
Crude oil and natural gas revenues increased $28.9 million, or approximately 72.6%, during the three months ended March 31, 2022 compared to the same period of 2021. The increase in revenue is attributable to higher sales prices and Sasol’s additional working interest for the full three months ended March 31, 2022.
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended March 31, |
|
|
| ||||
|
| 2022 |
| 2021 |
| Increase/(Decrease) | |||
|
| (in thousands except per bbl information) | |||||||
Net crude oil sales volume (MBbls) |
|
| 616 |
|
| 619 |
|
| (3) |
Average crude oil sales price (per Bbl) |
| $ | 109.65 |
| $ | 61.31 |
| $ | 48.34 |
|
|
|
|
|
|
|
|
|
|
Net crude oil revenue |
| $ | 68,656 |
| $ | 39,774 |
| $ | 28,882 |
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
Production expense |
|
| 18,360 |
|
| 16,133 |
|
| 2,227 |
Exploration expense |
|
| 127 |
|
| 142 |
|
| (15) |
Depreciation, depletion and amortization |
|
| 4,673 |
|
| 4,148 |
|
| 525 |
General and administrative expense |
|
| 4,994 |
|
| 4,547 |
|
| 447 |
Bad debt expense |
|
| 492 |
|
| 101 |
|
| 391 |
Total operating costs and expenses |
|
| 28,646 |
|
| 25,071 |
|
| 3,575 |
Other operating expense, net |
|
| (5) |
|
| (360) |
|
| 355 |
Operating income |
| $ | 40,005 |
| $ | 14,343 |
| $ | 25,662 |
The revenue changes in the three months ended March 31, 2022 compared to the same period in 2021 identified as related to changes in price or volume, are shown in the table below:
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
Price (1) |
|
|
|
| $ | 29,667 |
Volume |
|
|
|
|
| (184) |
Other |
|
|
|
|
| (601) |
|
|
|
|
| $ | 28,882 |
(1)The price in the table above excludes revenues attributed to carried interests
The table below shows net production, sales volumes and realized prices for both periods.
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|
|
|
|
|
|
|
| Three Months Ended March 31, | ||||
|
| 2022 |
| 2021 | ||
Gabon net crude oil production (MBbls) |
|
| 725 |
|
| 466 |
Gabon net crude oil sales (MBbls) |
|
| 616 |
|
| 619 |
|
|
|
|
|
|
|
Average realized crude oil price ($/Bbl) |
| $ | 109.65 |
| $ | 61.31 |
Average Dated Brent spot price* ($/Bbl) |
|
| 100.87 |
|
| 61.04 |
*Average of daily Dated Brent spot prices posted on the U.S. Energy Information Administration website. | ||||||
Crude oil sales are a function of the number and size of crude oil liftings in each quarter from the FPSO, and thus, crude oil sales do not always coincide with volumes produced in any given quarter. We made two liftings during the three months ended March 31, 2022 and three liftings during the three months March 31, 2021. Although the number of barrels sold at March 31, 2022 is about the same as the numbers of barrels sold during March 31, 2021, the three months ended March 31, 2022 includes Sasol’s interest for the entire period while during the same period in 2021, Sasol’s interest was included after the acquisition date, February 25, 2021. Due to field start-up operational issues which pushed out the timing of third lifting until April 4, 2022, only two liftings occurred for the three months ended March 31, 2022. Our share of crude oil inventory aboard the FPSO, excluding royalty barrels, was approximately 174,250 barrels and 53,858 barrels at March 31, 2022 and 2021, respectively.
Production expenses increased $2.2 million, or approximately 13.8%, for the three months ended March 31, 2022 compared to the same period in 2021. The increase in expense was primarily related to higher FPSO costs, boat expense, personnel, costs, and domestic market obligation (“DMO”) costs. On a per barrel basis, production expense, excluding workover expense, for the three months ended March 31, 2022 increased to $29.81 per barrel from $26.02 per barrel for the three months ended March 31, 2021 primarily as a result of lower
sales volumes due to production interruptions in order to facilitate the 2021/2022 drilling campaign. While we have not experienced any material operational disruptions associated with the current worldwide COVID-19 pandemic, we have incurred approximately $0.9 million and $0.6 million in higher costs related to the proactive measures taken in response to the pandemic for each of the three months ended March 31, 2022 and 2021, respectively.
Depreciation, depletion and amortization costs increased $0.5 million, or approximately 12.7% due to the higher depletable base as a result of capital expenditures related to the 2021/2022 drilling program.
General and administrative expenses increased $0.4 million, or approximately 9.8% in the three months ended March 31, 2022 compared to the same period of 2021. The increase in expense was primarily related to increase on wages and salaries $0.4 million, professional and audit fees $0.5 million, offset by decrease legal fees $0.2 million and stock-based compensation $0.2 million.
Bad debt expense was higher between the three months ended March 31, 2022 and 2021 primarily due to 1) increased TVA balances as a result of increased interest in TVA balances and 2) increased TVA balances as a result of increased spend as a result of the 2021/2022 drilling campaign. The bad debt expense and related allowance account associated TVA balance has also increased as we have received no payments related to these balances in 2022.
Other operating income (expense), net for the three months ended March 31, 2022 and for the three months ended March 31, 2021 was not material to our results.
Derivative instruments loss, net is attributable to our swaps as discussed in Note 8 to the condensed consolidated financial statements. The $31.8 million and $6.0 million losses for the three months ended March 31, 2022 and 2021 are a result of the increase in the price of Dated Brent crude oil during the two periods. Every quarter in 2021 and continuing in 2022 Dated brent crude oil process have increased. Since the Company owes the counterparty for any Dated Brent price over the initial per barrel value and the Company continued to place on additional hedges in 2021 and 2022, the loss associated with the derivates have increased. Our derivative instruments currently cover a portion of our production through September 2022.
Other, net for the three months ended March 31, 2022 increased $5.4 million from an expense of $0.7 million for the three months ended March 31, 2022 compared to $4.6 million of income in the same period of 2021. For the three months ended March 31, 2022 Other, net primarily consists of foreign currency losses as discussed in Note 1 to the condensed consolidated financial statements. For the three months ended March 31, 2022, the $4.6 million of income in Other, net is primarily attributable to $7.7 million for the bargain purchase gain and expenses of $2.2 million for the difference in book to tax basis caused by the bargain purchase gain and $1.0 million for an acquisition success fee.
Income tax expense (benefit) for the three months ended March 31, 2022 was a benefit of $4.6 million. This is comprised of $12.5 million of deferred tax benefit and a current tax expense of $ (5.7) million. See Note 15 to the condensed consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to market risk, including the effects of adverse changes in commodity prices, foreign exchange rates and interest rates as described below.
Foreign Exchange Risk
Our results of operations and financial condition are affected by currency exchange rates. While crude oil sales are denominated in U.S. dollars, portions of our costs in Gabon are denominated in the local currency (the Central African CFA Franc, or XAF), and our VAT receivable as well as certain liabilities in Gabon are also denominated in XAF. A weakening U.S. dollar will have the effect of increasing costs while a strengthening U.S. dollar will have the effect of reducing costs. For our VAT receivable in Gabon, a strengthening U.S. dollar will have the effect of decreasing the value of this receivable resulting in foreign exchange losses, and vice versa. The Gabon local currency is tied to the Euro. The exchange rate between the Euro and the U.S. dollar has historically fluctuated in response to international political conditions, general economic conditions and other factors beyond our control. As of March 31, 2022, we had net monetary assets of $11.1 million (XAF 6,525.3 million) denominated in XAF. A 10% weakening of the CFA relative to the U.S. dollar would have a $1.0 million reduction in the value of these net assets. For the three months ended March 31, 2022, we had expenditures of approximately $7.3 million denominated in XAF.
COUNTERPARTY Risk
We are exposed to market risk on our open derivative instruments related to potential nonperformance by our counterparty. To mitigate this risk, we enter into such derivative contracts with creditworthy financial institutions deemed by management as competent and competitive market makers.
Commodity Price Risk
Our major market risk exposure continues to be the prices received for our crude oil and natural gas production. Sales prices are primarily driven by the prevailing market prices applicable to our production. Market prices for crude oil and natural gas have been volatile and
unpredictable in recent years, and this volatility may continue. Sustained low crude oil and natural gas prices or a resumption of the decreases in crude oil and natural gas prices could have a material adverse effect on our financial condition, the carrying value of our proved reserves, our undeveloped leasehold interests and our ability to borrow funds and to obtain additional capital on attractive terms. If crude oil sales were to remain constant at the most recent quarterly sales volumes of 616 MBbls, a $5 per Bbl decrease in crude oil price would be expected to cause a $3.1 million decrease per quarter in revenues and operating income (loss) and a $2.8 million decrease per quarter in net income (loss).
As of March 31, 2022, we had unexpired derivative instruments outstanding covering 954 MBbls of production through September 2022. These instruments were intended to be an economic hedge against declines in crude oil prices; however, they were not designated as hedges for accounting purposes. See Note 8 to our condensed consolidated financial statements for further discussion.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We performed an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The evaluation was performed with the participation of senior management, under the supervision of the principal executive officer and principal financial officer. Based on their evaluation as of March 31, 2022, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to litigation claims and governmental and regulatory proceedings arising in the ordinary course of business. It is management’s opinion that none of the claims and litigation we are currently involved in are material to our business.
ITEM 1A. RISK FACTORS
Our business faces many risks. Any of the risks discussed elsewhere in this Quarterly Report and our other SEC filings could have a material impact on our business, financial position or results of operations. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations.
For a discussion of our potential risks and uncertainties, see the information in Item 1A. “Risk Factors” in our 2021 Form 10-K. There have been no material changes in our risk factors from those described in our 2021 Form 10-K.
ITEM 6. EXHIBITS
(a) Exhibits
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Certificate of Incorporation as amended through May 7, 2014 (filed as Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q filed on November 10, 2014 and incorporated herein by reference). | |
Third Amended and Restated Bylaws (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on August 4, 2020 and incorporated herein by reference).
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Certificate of Elimination of Series A Junior Participating Preferred Stock of VAALCO Energy, Inc., dated as of December 22, 2015 (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on December 23, 2015, and incorporated herein by reference). | |
10.1* | Amendment No. 1 to Employment Agreement, effective as of January 27, 2022, by and between VAALCO Energy, Inc. and George Maxwell (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 28, 2022 and incorporated herein by reference). |
10.2* | Amendment No. 1 to Employment Agreement, effective as of January 27, 2022, by and between VAALCO Energy, Inc. and Ronald Bain (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 28, 2022 and incorporated herein by reference). |
10.3(a)** | Agreement for the Provision of Subsea Construction and Installation Services, by and between VAALCO Gabon, SA and DOF Subsea Canada Corp., dated March 17, 2022. |
31.1(a) | Sarbanes-Oxley Section 302 certification of Principal Executive Officer. |
31.2(a) | Sarbanes-Oxley Section 302 certification of Principal Financial Officer. |
32.1(b) | Sarbanes-Oxley Section 906 certification of Principal Executive Officer. |
32.2(b) | Sarbanes-Oxley Section 906 certification of Principal Financial Officer. |
101.INS(a) | Inline XBRL Instance Document. |
101.SCH(a) | Inline XBRL Taxonomy Schema Document. |
101.CAL(a) | Inline XBRL Calculation Linkbase Document. |
101.DEF(a) | Inline XBRL Definition Linkbase Document. |
101.LAB(a) | Inline XBRL Label Linkbase Document. |
101.PRE(a) | Inline XBRL Presentation Linkbase Document. |
104 | Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101). |
(a) Filed herewith
(b) Furnished herewith
* Management contract or compensatory plan or arrangement.
** Information in this exhibit (indicated by asterisks) is confidential and has been omitted pursuant to Item 601(b)(10) of Regulation S-K. Additionally, exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted exhibit or schedule will be furnished supplementally to the SEC or its staff upon request.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VAALCO ENERGY, INC.
(Registrant)
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By | : |
/s/ Ronald Bain |
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| Ronald Bain |
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| Chief Financial Officer (Principal Financial Officer) |
Dated: May 3, 2022