VAALCO Energy, Inc. (EGY) Q3 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter 2013 Earnings Report. At this time all the participant are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) And as a reminder, this call is being recorded. I’d now like to turn the conference over to Robert Gerry. Please go ahead.

Thank you, Linda, and good morning, ladies and gentlemen. And welcome to VAALCO Energy’s third quarter conference call. Joining us today is VAALCO’s new CEO, Steve Guidry; along with our President, Russell Scheirman; and Chief Financial Officer, Greg Hullinger. Before I introduce Steve and turn the proceedings over to him, please bear with me while I read our Safe Harbor statement. This presentation call includes forward-looking statements within the meanings of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities 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 included expected capital expenditures, prospect evaluations, negotiations with governments and third parties, and reserve growth. Investors are cautioned that forward-looking statements are not guarantees of future performance and that actual results or 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, 2012, and other reports filed with the SEC that can be reviewed at www.sec.gov. Steve Guidry officially assumed the CEO position of VAALCO on October 21st, though he had spent the prior few weeks in our office familiarizing himself with all the internal and external operations and business of the company. All of us here at VAALCO are excited over the new leadership and speaking for myself, I’m most impressed with his knowledge of the industry, his high level of energy and his astute business acumen. I truly believe VAALCO has found the right individual to…

Thank you very much, Bobby. I appreciate that introduction. I’m very pleased and very excited to have joined VAALCO Energy and I look forward to working with the team as we move the company forward. As Bobby mentioned, my 32 years of experience, much of which was on the African continent, along with my time in M&A, I believe has prepared me well for the role of CEO at VAALCO. I have confirmed what I observed from the outset. VAALCO has quality assets, great people and a strong desire to grow the business. I’m excited about the slate of projects already in progress, the setting of the two platforms at Etame and Southeast Etame North Tchibala and the drilling of the six development wells, I believe provides the necessary resource development to continue VAALCO’s long established track record of offsetting declines at Etame. These projects will enhance the company’s production and cash flow providing the much needed liquidity for future growth. While we’re at the beginning of our process to formulate and validate and use strategic planning, I can tell you, that the strategy will include a more balanced growth focus. The strong reliance on growth through exploration drilling will make way for a more aggressive discovered resource acquisition strategy. Balance is what is needed to provide greater certainty on production and reserve growth from value accretive development opportunities. We will be sharing more details on this strategy with you in the coming months. Recognizing that our investors are most interested in the status of our plans to drill our identified exploration aspects at Angola and at Equatorial Guinea, I have an update that I think all of you will find interesting. Let me first began, however, by offering caution that we still do not have a completely clear path…

Thank you, Steve, and good morning, everyone. Thank you for joining us on the call. I will take you a bit through our Q3 performance, as well as some year-to-date information. VAALCO reported net income of $2.4 million or $0.04 per share in the third quarter of 2013 versus $0.1 million or zero cents per share for the same period in 2012. Through the first nine months of the year, VAALCO’s net income stands at $16.7 million or $0.29 per share, compared to $19.6 million or $0.34 per share for the same period in 2012. Next let me give you a recap of some of the key drivers of the financial results in the third of 2013 versus the same period in 2012. Foremost at the top would be our Gabon crude lifting, we lifted essentially the same quantity in each comparative period. We lifted 337,000 net barrels in Q3, 2013 versus 342,000 net barrels in quarter two, I’m sorry, in quarter three of 2012, a 1% decrease. And in either quarter actually featured the late September lifting which then obviously set us up for of a four lifting quarter in Q4 as the crude purchaser has an end of year commitment to lift the available crude on board the FPSO. The sales price for the crude in quarter three of 2013 averaged $110.54 versus $107.94 in Q3 2012 that was the 2% increase. And then after you consider volumes and prices, which there wasn’t a tremendous amount of difference, the three principal movers were higher operating expenses, higher exploration expenses and lower taxes paid to the Republic of Gabon. More on those three items in a moment, but first let me take you to some information from the balance sheet. Unrestricted cash remains solid at slightly over $100 million…

Thanks, Greg. I would just like to provide some additional information on the upcoming two-well program at Etame, the status of the two platforms we are building for Etame and then briefly touch on our onshore Gabon, Mutamba project, Equatorial Guinea and Angola At Etame, we are currently producing 18,000 barrels per day, which is up about 1,000 barrels a day from where we were at the end of last quarter and I will talk about why that is in a minute. On the drilling side, we have completed our six well drilling and workover program with a 350-foot jackup rig, Ben Rinnes owned by KCA Deutag. As we noted at the last conference call, we successfully drilled and completed the Avouma 3H well and it’s producing just under 2,000 barrels per day. We also completed two workovers on the Avouma platform. The generator problems that we talked about last quarter at Avouma had mostly been solved, which has allowed us to return one of the two wells that we were holding off production, while those generator problems were being taken care of on the production. Unfortunately, when we attempted to return the second well to production, we encountered problems which we believe are related to the casing in the well. We believe we’ve got part of casing in that well. And we are currently studying this issue to determine if the well can be restored or if it will require sidetracking. We then moved the rig to Ebouri where we discussed the successful workover on the Ebouri platform last quarter in the dry hole on the Ebouri prospect. This quarter, we also announced that the Ovoka open water well encountered only water bearing formation and the Gabon was abandoned. The rig is currently on a two well program with…

Okay. Thanks, Russell. Just sort of close things out. Just to mention a few of the things and kind of highlight and summarize some of what we’ve heard about sort of the future and what we see in the near-term and then in the longer-term for VAALCO. Greg mentioned it but our internal estimates suggest that our full year 2013 performance will be strong on the back of the four liftings in the fourth quarter of 2013 at Etame. This combined with the increased capital spend will certainly result in the lower tax rate, as Greg mentioned, for total 2013. And that will have a positive impact on our financials. Our team continues to make great progress with the construction of the two platforms, as Russell mentioned and we believe that that sets us up for a very strong 2015 production performance. I’m very pleased with what I’ve seen to this point with the demonstrated ability to progress both the development projects and the exploration prospects that Russell mentioned, with the Dimba being our near-term example of that, which we would hopefully -- we plan to spud by December -- in December 2013. So we’re encouraged by the potential for Dimba. We’re encouraged by the progress we are making at Angola and E.G. both. And we believe that all of these results in a great value-add for the VAALCO portfolio, so a lot of positive things happening in VAALCO currently. So, with that, what we’d like to do is now just open the conference call to questions.

(Operator Instructions) And we do have a question from the line of Brad Heffern, a private investor. Please go ahead.

Hey, guys. It’s Brad Heffern with RBC. Congratulations on your new role, Steve. Just a question on Angola, I was wondering if you could provide some context as to whether the process that’s currently going on is similar to the sort of farm-out path that you guys were taking or if Sonangol has decided to just approve things in a more standard way that they were talking about before. And also, I think, maybe, I heard in the prepared comments, Steve, that you said partners. I was wondering if that is your preferred partner in Sonangol or if there’s another partner being added to the mix? Thanks.

Thanks, Brad. I appreciate that. The indications that we’ve received from the concessionaire of Sonangol E&P sort of laid out the plan as they currently have it envisioned. We are currently not really at liberty to talk about exactly what that plan is. So, unfortunately, we can’t say any more than that. I will tell you that my experience has been when Sonangol E&P reduces to writing their intention that typically you’ll find it in a fairly short order. They follow up on what they say, so we’re encouraged by that. We will just have to wait and see exactly what they do and how they formalize their plan before we really say anymore about how then we move forward. But we are confident that their plan does clear the way for us to move forward.

Okay. Understood. Talking about onshore, Gabon, can you talk a little bit about what the current negotiations are discussing, is it still over this proposed industrial zone that you guys talked about last quarter, is there something else going on?

Yeah. It’s basically just about some changes they want to make to the production sharing contract that we’ve just got to iron out with them. And so we were going to meet with them this week. Unfortunately, I had a conflict and was not able to go, so we pushed it back another couple of weeks and I intend to go over there just as soon as I can to see if we can put this thing into bed. But we had a meeting with Total this week and they’re excited about the project. This is one of their first onshore discoveries in Gabon in over a decade. So they are anxious to keep the project moving. So they are helping us behind the scenes.

Okay, got it. And then finally, Steve you know in your prepared comments you talked about more of a balanced growth strategy for VAALCO in the future. You know respecting that you guys are going to put out more detail over the coming months. I was just wondering if you could provide a little more color. Does that mean, you know, just more focus on exploration or does that mean adding new assets, any color you’re willing to provide? Thanks.

Sure. Thanks Brad. I appreciate that. One of the things that I quickly came to realize after joining VAALCO is really the remarkable job that VAALCO has done in continuing to develop additional reserves at Etame. If you look at the history of Etame over the last 10 years, VAALCO has done a wonderful job of finding additional resource, developing that resource, adding reserves, adding production and that for the most part kept that FPSO at or near capacity which has been a pretty phenomenal effort. So looking forward you ask yourself, what’s next, how does -- how might VAALCO then capitalize off of that competency and build rates. Well, when you think about adding additional rigs and reserves, first thing that comes to mind of course is the project we have in front of us, Southeast Etame, North Tchibala and the Etame platforms. And so that’s great but I think the real key is how do we then duplicate that and bring additional opportunities forward. Well the logical place to look in the near-term is EG and Angola where we have very perspective blocks. However it’s my view that it would make sense for VAALCO to balance that growth strategy by looking at discovered resource opportunities, maybe even looking at producing assets to give us greater certainty around the production growth and around the reserve growth and look to temper to some extent being totally reliant on exploration success as the growth engines for VAALCO. So that’s sort of the -- strategically that is kind of the view that we have at this point.

That’s great. Thank you.

Next we will go to the line of Bill Dezellem with Tieton Capital. Please go ahead.

Thank you. Actually following up on that last comment relative to Etame, the two new platforms that are going in, do we understand correctly that the outcome there will likely be to maintain production at the field and offset decline rates as opposed to growing production in that field?

Well, it will grow it back to peak levels that we saw back in 2010 and 2011. We currently are producing around 18,000. We anticipate in the range of 15% to 20% decline now and when we start bringing these new wells on. But then we’ll rapidly push it back up over 20,000 barrels per day and perhaps as high as 22,000, 23,000 barrels a day depending on how the FPSO behaves. And we should be able to hold it there for a year plus and then we will actually expect to have a little bit of surplus production capacity that will then ease into, as other wells decline. So we’re always limited by the FPSO which can handle more than 25,000 barrels of oil a day no matter what we do so…

And given what you know right now, what would be your anticipated time frame to get actual production back up to that 20,000 plus level?

The first half of ‘15.

All right. That is helpful. Thank you. And then secondarily, I believe that there was reference about Sonangol and when they put their plan in writing then it’s really is solid . Have they put their plan in writing yet and I apologize if you actually did say that I missed it?

We have received -- this is Steve. We have received correspondence from Sonangol that exclusively indicates what they plan to do with the 40% interest that has been the subject of our discussions with them. So it’s really -- we are in a position now where we are waiting for them to act on that plan. And we believe that they have already begun to take action so -- but we need to see that that has been codified and documented and that’s what we are waiting on.

Yes, this is the first time that they’ve ever given us anything in writing. They’ve always talked to us about what they might do or this or that but they’ve actually given us something in writing this time. So we think that’s a big step.

Thank you, both.

Next we will go to the line of Eric Anderson with Hartford Financial. Please go ahead.

Yes, if I could just follow-up a little bit on the -- your plan to sort of have more development of proven reserves as opposed to the entire exploration focus. Are we to assume that this would still be sort of in the Western Africa area or might you look at developing reserves in other locations either there or in the United States?

This is Steve. A fair question. Just today, I guess I complete my third week on the job but I have been -- that has been a question that we’ve been asking ourselves regularly in the first three weeks and working closely with the team here. What we are doing is putting together kind of a higher level of strategy review that we will be taking to the board. And that will allow us to then sort of come to agreement between the management team and the Board as to exactly where we prefer to look for these developed -- discovered resource opportunities or producing asset opportunities. It has been my experience that when you look everywhere you’re essentially looking nowhere. And so what we will do is we will arrive at what we think is the best option for the company and then we will increase our efforts around looking for discovered resources or producing assets in that particularly area. So it’s -- to this point that’s undecided.

And as a follow-up, would you have a preference for them being offshore or might you consider onshore in that area, Western Africa?

I think, at this point it’s not decided. At this point, we’re still open to either.

Okay. I appreciate you taking my question.

Well, thanks, Eric.

(Operator Instructions) Now we’ll go to the line of [Neil Nelson with M&I]. Please go ahead.

You touched on the Lucina sands in the drilling of the Ovoka well and weren’t successful. And I believe someone has said that you’ve never seen oil that far south in the Lucina sands in Gabon. And I noticed you’re going back again on the Dimba. Does the seismic tell you something different about these particular sands?

Yes. The seismic signature on the Lucina formation where we’re drilling this well is very similar to the signature we see in some nearby offset wells that have had good sands in them. They were wet sands. I’ll tell you that, but they weren’t on structure either. We have a structure that we see in the Lucina. So that’s what’s encouraging as to take the well deeper. I will mention that in the past you may have heard us talk about a thing called the N Lead that we shot some shallow water seismic on back in 2011. When we finally got that thing processed under 3D, there is a Lucina structure down there but there was no closure in the Gamba. And so we decided not to drill that prospect, because the Gamba is always good if you find it. And if there was no Gamba structure, going just for the Lucina sands we felt would have been too high a risk. But this Dimba prospect has a Gamba closure per the way we map the seismic. And then if the Gamba works, that’d be great. We will then take it on down into the Lucina to see if there is sand down there. So we’ve got two chances at the apple here rather than just one.

And for your CapEx for 2014, do you still have any plans to use debt financing to -- as you start to see this big surge in CapEx for the platforms and wells that are going to be drilled or associated with that plus the Angola, Guinea activities potentially?

We are working to develop a standby revolving debt facility that we can use for these Gabon projects, just as a backup to ensure that we have plenty of cash depending on the outcome of some of these other things that we’re doing.

Okay. Thank you very much.

And next we will go to the line of Joe Pratt with Wells Fargo Advisors. Please go ahead.

Hi, thank you for taking my call, Steve. Can you address what appears to be a holdup in getting the Mutamba situation clarified?

Yes, let me ask Russell who has been more involved in Mutamba, let me ask him to handle that.

Were you on when we had an earlier question about that?

I apologize, I just joined the call.

Okay, no problem. The issue there is that the DGH, as part of our application for the exploitation area, has brought up some additional taxes, if you will, what they are call, it’s called a production fund that they want us to contribute towards in a couple of other things that they are doing to the production share contract that weren’t in our original contract. And we are having to go through these with them because our position was we have a contract and we are now declaring an AEE and then where did these ideas come from. So we are discussing these. They are not huge numbers but there is Presidents involved. And so we feel like we need to get this resolved in a manner that’s fair to us as the contractor. I was supposed to go over there this week to meet with them about this issue. But unfortunately, I was not able to and I’m hoping to get over there in the next few weeks to sit down with the Director General of Hydrocarbons and try to iron these things out. We had the Minister and the Director General here in Houston a few weeks ago to tour the construction of the Etame platforms. And we had some conversations about this. And I have looked at Director General in the eye and said we’ve got to get this solved and he said well, you need to come to Gabon. So we’ll see hopefully we can get it solved.

Okay. Thank you. And are you and Total negotiating that together or separately?

We are consulting with Total. We do not have them in the room per se since we are the operator. But we meet with them before and after in each of these sessions. So they are up to speed and we are getting -- their position is probably stronger than VAALCO’s on some of these things. So we are having to kind of work through with them how we get this sorted out.

And lastly, I apologize if this has already been answered but on Equatorial Guinea and Angola, have your partners been identified and in those two situations whether you and the partners are going to be the operator?

Joe, this is Steve. With regards to Equatorial Guinea, we have meetings with GEPetrol, the national oil company of Equatorial Guinea next week to discuss an arrangement in which we would essentially share operatorship of Block P. So we will have those conversations next week. We will be meeting with both GEPetrol and with the minister to discuss this arrangement. In Angola, VAALCO is the operator in Angola. The partner -- I don’t know if you were on the call but exactly who we end up partnered with, I think will become very clear in the coming weeks. Right now, Sonangol E&P has a plan that we just at this point can’t share until we get that plan finalized.

They did give us a plan in writing which is the first time they have ever done that.

Okay. Thank you.

There are no further questions at this time.

Okay. Well, let me thank, everyone, then for your time and your attention this morning. We appreciate your interest in VAALCO and we look forward to getting back together to talk about our fourth quarter successes next year.

Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.