VAALCO Energy, Inc. (EGY) Q3 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you standing by, and welcome to the VAALCO Energy, Inc. Third Quarter 2012 Earnings Report. Before the conference all participants are in a listen-only mode. There is will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions) As a reminder today’s call is being recorded. With that being said, I’ll turn the conference now over to the Chairman and CEO Mr. Robert Gerry. Please go ahead sir.

Thank you, John, and good morning ladies and gentlemen and welcome to VAALCO Energy’s third quarter conference call. Please bear with me for a moment while I read our Safe Harbor statements. This conference call includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21A of the Securities Act Exchange Act of 1934 as amended. Forward-looking statements are those concerning VAALCO’s plans, expectations, and objectives for future drilling, completion, and other operations and activities. All statements included in this conference call that address activities, events or developments that VAALCO expects, believes, or anticipates will or may occur in the future are forward-looking statements. These statements include expected capital expenditures, prospect evaluations, negotiation to government and third parties and reserve growth. Investors are caution that forward-looking statements are not guaranteed of future performance and that actual results are developments may differ materially from those projected in the forward-looking statements. These risks are further described in VAALCO’s Annual Report on Form 10-K for the year ended December 31, 2011 and other reports filed with the SEC that can be reviewed at www.sec.gov. Now joining me today will be Russell Scheirman, President and COO and Greg Hullinger, our CFO, but before I turn the meeting over to Greg to taking through our financials, I would like to mention a few things that have happened in the year past few days that Russell will elaborate on. You will note that from our earlier press release yesterday that we have found hydrocarbons onshore Gabon with our partner the French Total, because we have an agreement with Total to grow well as the tight hold we are not ready at this time to discuss the detail. So surprise to say that so far we are extremely pleased with the results, and I believe our shareholders will be equally pleased, where we’re able to discuss it in some detail. Our third quarter earnings were actually pretty good, we start for the write off we had to take on our Granite Wash Greek, in fact if you take out the impairment we would have earned approximately $0.13 in other words more than triple our third quarter 2011. And after Russell takes you through our operations, I’ll have a few more remarks with conclusion of the prepared remarks. So with that Greg, I’ll turn it over to you.

Great. Thank you, Bobby and good morning everybody. Thank you for joining us. As Bobby mentioned our earnings were rather flat that’s not for the non-cash impairment that we took on our Granite Wash property. Let me run through some numbers for you, our third quarter revenues were almost identical to the same period a year ago at $37.6 million compared to $37.4 million and net income to VAALCO was $2.4 million or $0.04 a diluted share for the comparable period in 2011. As Bobby mentioned, we have the non-cash impairments of our Granite Wash property and if you are probably seeing there are a lot of companies have taken impairments this quarter. I will show some numbers here for you in a moment, but sufficed to say that our reduction in the natural gas price took quite a toll on the investment there. By taking the impairment now, however with less investment to write off in the future, which may improve our results in the time periods to come. Let me take you through some of numbers now. In Gabon, our revenues for the quarter were $37 million; that compares to the $36.4 million in same period for last year. On a nine month basis, we had a $140 million worth of revenue compared to $147 million, so very comparable. The volumes associated with those revenues in the current quarter, 342,000 barrels that compared to 322,000 barrels in the same period a year ago and for the year so far where 1.25 million barrels compared to 1.26 million barrels. The price per barrel were still low about $100. For the quarter, we sold our crude at almost $108, that’s $5 less than the same period a year ago and looking at the year in aggregate, we had an average…

Thanks, Greg. I’m Russell, Chairman, President, COO of VAALCO, and I’d like to spend the next few minutes taking you through our Gabon activities both onshore and offshore. We have some updates on Angola, we recently announced the acquisition of block in Equatorial Guinea. And then we’ll finish up with the discussion of the activity in on our domestic properties in Montana. I’ll start with our biggest news onshore Gabon on the Mutamba block. We mobilize the rig on to the N'Gongui island on September 1, this was the same island on which we have drilled an unsuccessful test in 2010 that was a vertical well we drilled, we were suspicious that we were near oil based on the geochemical results from that well, we proceeded to executed farm out and brought to (inaudible) is a carrying partner for 50% with them carrying us on the next well that was followed by joint seismic reprocessing effort to try and figure out which direction we might want to go to confirm whether that was all near by and it was decided between Marcellus and Total to drill a directional well from the same surface location, we actually drilled at about a kilometer east of the island and the result was a discovery of an oil column on that first directional test. We’ve since drilled three sidetracks to delineate that column. The discovery is in the Gamba sandstone at a depth of just under 4,000 feet, that is the same prolific sandstone that we produced from our offshore field at Etame. We expect to get fluid samples over the weekend. The third sidetrack we drilled was much more near vertical so that we can get wire lines tools down and get fluid examples, so that we can analyze those or flow assurance…

Thank you, Russell and Greg. In summary, let me just say that starting December this year, we probably will have drilling rigs working for VAALCO and our partners throughout most of 2013. We will be drilling large prospects in Angola and Equatorial Guinea while developing and maintaining our core area offshore Gabon. We of course will announce at a later our future players for onshore Gabon. Domestically, we are evaluating the ongoing opportunities for Poplar Dome on Roosevelt County, Montana as Russell has mentioned and Salt Lake in Sheridan County, Montana where we are working with our Poplar Dome partner to ask stating the best drilling procedures and locations for perhaps future drilling. There is a lot going on now in VAALCO. I know our stockholders have always been keen on getting our prospects drill to offshore Africa and I think 2013 will show the results of that. But I’m sure you all have some questions, so with that, John, I’ll turn it back to you to open the floor for any questions that maybe out there.

(Operator Instructions) And first we go to line of Leo Mariani with RBC. Please go ahead.

Hey, guys. Just real quick on Equatorial Guinea, you talked about it is been discovery at Venus there. Can you kind of give us a little bit more color on that in terms of what you think the size of that discovery maybe and additionally what type of capital we’re talking about developed that and then maybe how much would it cost to drill some of expiration wells there?

Yeah, Leo. The discovery would probably require three wells to develop it, one of which would be an injector well into the gas cap. Gas cap is small, but you don't want it to shrink or you smear oil up in there and you lose recovery. I think each of those wells completed would be comparable to what we've spent on our subsea well in Gabon, which is something north of $50 million per well. And then the FPSO undoubtedly would be rented. There would be a small cost of getting it installed, but I think the entire project would be in the $150 million to $200 million range, and we have a 31% share of that, so $50 million, $56 million net to VAALCO. As I mentioned the reserves the $30 million number was Gabon’s number. Gabon originally owned this in barrel, sorry 30 million barrels – it was actually dollars. The 30 million barrels was Gabon’s number. When Gabon sold out the Zafiro field, this was kind of a satellite that came with it, and the 15 million barrels, low end number is consulting firm that GEpetrol hired. I think there is some politics going on these numbers because the government wants the big prospects to be drilled. They don’t want the thing to be developed just for Venus. They want to see these other two prospects drilled. These other two prospects are kind of lookalikes to the Sabra Field, it’s operated by (inaudible) in that area. So I mean they are big, but there is a chance for to be gas there, as well as oil, so they need to be drilled to see what’s there.

Russell to be monitors these prospects or couple of $100 million together conceivably net to VAALCO.

So we’re equally in drilling…

As the government of Equatorial Guinea is?

Yeah I’m sure. Okay that’s a very helpful color there, and then I guess are you guys tendering for a rig kind of as we speak, right now this block has been approved?

Yeah, we actually have a meeting with GEPetrol next week. It was interesting, we had a meeting with the Minister of Mines, to get approval of this deal, last month. And at that meeting, he requested a joint letter from VAALCO and GEPetrol as to how this block will be operated. So we got to sit down, we didn’t have any standing really we have been attending some of these meetings as an observer, we’ve told GEPetrol that we were making the acquisition, but until it was approved by the government, we couldn’t really do anything other than just kind of standby and listen. But now that we are officially in it’s time to sit out with GEPetrol and figure out how we are going to take this thing forward and we’ll get started on that next week.

All right. That’s helpful color for sure. Just kind of jumping over Angola, you all talked about sounds like the government is they are on negotiations with your partner here, I guess I’m assuming that would come along with another extension on this lock to drill there also.

But we’ve got it till the end of 2014, so. For sure, we’re going to get one Subsalt prospect that we delineated done. Just as soon as we can organize a rig and the partner is on board with that, that was the reason they wanted to get in the block. The government has made it clear that as long as we are actively studying, pursuing, processing they will give us whatever time we need to determine when and where we drilled the second well. So I suspect if we can’t get it all done by the end of 2014, and we’ve shown good faith and we bought the seismic and we spent the money to reprocess that we could get an extension. But we will talk about that year from now kind of things.

Yeah, the goal is where – this week in our office there were six from Angola we went through all this with them and I think Russell is absolutely right, they are enthusiastic now about getting pre-salt wells drilled in Block 5, we showed them this additional prospect, which we need to do some further work on. But at the moment it’s humongous and we’re hoping that the 3D that we intend to acquire, we don’t have to shoot it, this is already been shot. But we just have to buy it and we’ve held our (inaudible) until we have a partner hopefully that the 3D will confirm, what we’re seeing on 2D. And we’ve also finally gotten 2D over the entire block from Conoco so things are working up finally.

Okay, that’s helpful color for sure. And you guys can also maybe just drive the H-2S that you’re seeing offshore Gabon I think in your release, you’ve talked about potentially having to out there and kind of remediate some of these wells and install some new equipment and kind of upgrade the metallurgy our there, any idea of how much that would sort of cost and what the appetite is amongst the partners to be something like that?

Well, I think Leo, that we’re still investigating the best procedures to handle that and it’s still really in the investigatory stage, so we don’t have a definitive plan yet to be able to tell you about, I think the important thing to remember that reverse are still there, they haven’t gone anywhere. So the procedures probably will come around to figuring out away and installing some additional equipment on the platform and whatever in Ebouri, so we’ll see what, we’ll keep your informed on that but it’s a little early.

Alright, thanks guys.

I just got a note handed to me here that our partner has now been approved in the (inaudible). Can we tell them, who it is? Okay, we’re going to hold off telling you who that is until we get more of a just note handed to me here. So but they’ve approved so now that opens up all kinds of opportunities for us in Luengo.

That’s great news for sure.

Yeah, terrific. We are on a roll.

Yeah, for sure, all right. Well, thank you for the color.

Okay. I can help it, as the CFO mentioned that, with that approval, that company has prepared to make the payment that is owed to us for that 40% hangover since the other party laps, so that’s all write to income that number is $5.5 million.

(Operator Instructions) And we’ll go to line of Kim Pacanovsky with MLV & Company. Please go ahead. And Kim your line is open, possibly take yourself off mute.

Sorry about that, good morning everybody.

Good morning.

Good morning, Kim.

Good morning. It sounds like there is good news all around. Can we just talk about the discovery and I know that you really can’t give us any specifics, but maybe you can talk about what your thinking was before the well was drilled, maybe what the predrill was? And if you can’t go into that, maybe you can tell us what the initial well predrill was? And what kind of structure you are looking at compared with the structure at Atora which I assume is also in the Gabon?

Well, I know in past presentations certainly that I have done when we talk about our concession on shore Gabon when ask what do you think your reserves are I will use the figure of about 20 million barrels and I think I am just going leave it right there.

Okay. And that was the target size for the entire concession.

No that’s just for this prospect.

Okay that’s right I saw it. Okay, all right.

Right, this Discovery now sets up four or five additional leads…

Right.

That we have, that will now take a hard look about turning into prospects.

Okay.

In fact we have some $20 million in sunk cost that we are associated with two wells that we previously drilled, that we are not successful.

Okay.

And we’ll be able to recover those sunk cost out of production from this field, if we get it all…

So we got a carry forward of $20 million in the cost to cap.

Right.

Okay. And what is the timeline that it would take to build the infrastructure to carry crude oil up to Atora?

We’ll probably, we will be able to talk about all that Kim probably in the next 30 days to 45 days…

Okay.

My guess on that, I really want to sort of leave that get out of it for a moment.

Okay, right. That’s fine. I’ll move on to another subject, I understand. As far as H2S has concerned, did the samples get actually finally get out of the country, or they in a lab right now or they being analyzed, do you know anything about concentrations any more details?

Well, we had the samples tested a lab in Congo to confirm that both wells have H2S and there were some people thought isn’t it wearied both wells would show with H2S at the same time. One of them is a much lower concentration than the other and it maybe that we’ve been producing some H2S we just really didn't know it until the second well came in, and it came fairly strong. What we haven't gotten back yet is the announces that is ongoing is to whether this is bacterial or volcanic H2S. And that will maybe help us understand where this stuff is coming from if we get those results. But we have ascertained that another operator in Gabon, had H2S in their wells and they bolted on one of their platforms a facility that treats it and cleans it up. And as we speak today, they are doing that to about six to 7,000 barrels a day of solid oil that they produce and they clean it up and send it on, onshore to the shale (inaudible) terminal. So we won't be breaking any new ground here we decided to do something similar to that I think our existing platform probably couldn't handle all of the weight of that equipment so we'll probably looking at some sort of a satellite facility that we have set right next door to our Ebouri platform that would have basically what you do as you heat the step up and you treat it with sweet gas which sucks all the power stuff out. And then you burn the power gas.

And if you had to put may be a best on a worse case scenario on how long it would take to have all this done best case scenario, of being able to treat it with this bolt-on, worse case scenario having to put in a whole separate platform. Again what kind of a timeline, we would be looking at?

Probably 2015.

Okay. And then

I understand that we aren’t still producing the 2H well which was our best well by far in the field. In fact it single-handedly produces almost twice what two wells if we check them.

Right, yes. No, I realize that.

And we will capture a fair amount of the reserves that would have been captured by those two wells we’ve shut in, if we chose not to clean those wells up.

Okay.

In other words, the 2H well is the highest well on structure and everything moves towards it. It is just that were suspicious by 2015 or 2016 maybe these two move far enough to get in that well, and then you have a situation where you just have to clean it up. So we're just going to have to clean it up.

Okay. And then the rig that's coming in is, I assume that’s in transit if you're saying it's coming in December, it's not still working on somebody else’s well, is that correct?

It's been in a yard being going through its five-year upgrade, et cetera and the key was they have to hire a big barge to shift the well from South Africa were its been in the yard up to us, and they have firmed up today when that barge will arrive and we now it's about a two week journey. So the barge is supposed to be there on 18 November something. So once you know that date then you know when the rig is going to get there.

Okay, terrific. And then just one quick last question, coming into the Nisku, the first well was not successful in the Nisku and you’re drilling it Nisku test with the third well. Can you just give us an idea of geologically what change between the location of the first well and the third well that you think that you can be successful there.

Well, we were able to learn a little bit about our seismic with the first well, and we can see we can get high to that well on a Nisku structure, and so that’s also a very cheap well to drill to go ahead and earn the 22,000 acres because it’s like about a two week well then we can just punch down, again it could be converted to a Bakken well, if the Nisku doesn’t work, but we want to get, we have to get that third well drilled by year end in order to earn, so that just seem like we can get high to, the Nisku was oily looking when we drilled it, it just didn’t produce…

Right.

So we know there’s oil in the system and if we can get high to that we think that took a good shop.

Okay, that’s great thanks. Thank you gentlemen.

Thank you.

And we’ll go to Neil Nelson with DERS Group. Please go ahead.

Good morning, are there any comps in South Dakota on the Red River formation that you can use as a guide line for that property?

Yes, but I couldn’t tell you the name of them, it’s also top of my head, but I’d be happy to send you an e-mail or something. It’s a trend that runs for about a 100 miles in where it’s the Red River, they call it goes into what they call kind of trash down where it porosity pinches out and you’re playing a that that the porosity pinch out and we got a well that made about 2,000 barrels on the edge of this thing that was, we think in the trash zone and we think if we go east, which is the way from that trash zone, we can get into the good permeability and hopefully make some wells. The nearest field, I want to say is eight miles or 10 miles away and was 50 million barrels, so I mean the fields can be good if you find something, and we don't think ours is that big, but we think it’s got to 20 chance of being 20 million barrels if it works.

And could you address the human resources given all of the moving parts, which you now have in terms of your ability to develop all of these opportunities?

Yeah, we’ve got probably the scientists that had been working in Angola and Equatorial Guinea that’s all being done in house we put together a group for our domestic program in the Bakken and they are the ones that are driving the South Dakota prospect, so at the moment we are okay, but we probably add a couple of people in our G&T Department over the next four months or five months to make sure that we can process all this new information that we’re getting, but we’re aware that of that and looking for a little bit of additional help.

I’m really encouraged by your patience and waiting out all of these events, but been so long to come to fruition and looks like they are all coming together?

It's been a long wait, and I'm sure the stockholders have been, well, I appreciate the patience of stockholders put it that way.

Thank you very much.

I am assuming there are no further questions in queue.

Okay, well thank you all very much, and look forward to seeing you in about three more months. Okay, good bye.

Ladies and gentlemen that does conclude your conference for today. Thank you for your participation. You may now disconnect