VAALCO Energy, Inc. (EGY) Q1 2016 Earnings Report, Transcript and Summary

My name is Ersaly and I will be your conference operator today. At this time, I would like to welcome everyone to the VAALCO Energy’s First Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions] I would now like to turn the conference over to VAALCO Chief Financial Officer, Don McCormack. Sir you may begin your conference.

Thanks, operator. And on behalf of the management team, I welcome all of you to today's conference call to review VAALCO's first quarter 2016 operating and financial performance. After I cover the forward-looking statements, Steve Guidry, VAALCO's CEO, will review key highlights of the first quarter. Following Steve's comment, Cary Bounds our COO will then review operational results in more detail and our plans for 2016. I will then provide a more in-depth financial review and 2016 guidance. Steve will then return for some closing comments before we take your questions. During our question session, we ask you limit your questions to one question and then a follow-up. With that let me proceed with our forward-looking statement and comments. During this conference call, the Company will be making forward-looking statements. We caution you that any statement that is not a statement of historical fact is a forward-looking statement. Forward-looking statements are those concerning VAALCO's plans, expectations, future drilling and completion activities, expected capital expenditures, sources of future capital funding and liquidity, future strategic alternatives, prospect evaluations, negotiations with governments and third parties, reserve growth and other operations. Investors are cautioned that forward looking statements are not guarantees of future performance and those actual results or developments may differ materially from those projected in the forward looking statements. VAALCO disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, you should not place undue reliance on forward looking statements. These and other risks are described in yesterday's press release and in the reports we filed with the Securities and Exchange Commission, including the Company's form 10-K and the first quarter 2016 form 10-Q that will be filed soon. Please note that this conference call is being recorded. Let me now turn the call over to Steve.

Thank you Don good morning everyone and welcome to our first quarter 2016 earnings conference call. On the call this morning we will reference an updated investor handout that has been posted in the presentation section of our website under the Investor Relations tab. The first quarter of 2016 was another challenging one from a realized price perspective, but we were able to reduce our production costs and our G&A successfully the planned field wide maintenance turnaround at the Etame field and we've received a welcome payment from our Angola Block 5 partner for $19 million. In early 2016, we completed our multiyear offshore Gabon development program and a subsequent workover program that replaced down haul equipment in wells on the Abuma platform. After further significant decline in oil prices late last, year we decided to release the rig after the workover program was complete in January and are currently negotiating the remaining amount due. We need to see sustained commodity price improvement and a strengthening of our balance sheet before we initiate any further drilling campaign. Looking to the future, we've identified 17 new drilling opportunities on the Etame block and are developing an update Etame field development plan. While most of these projects are uneconomic in the current low price environment opportunities such as these along with developing our onshore Gabon discovery and the development of our existing discoveries in Equatorial Guinea demonstrate the potential VAALCO has when the pricing environment becomes more positive. In Angola, we're in discussions with the government to extend our Block 5 license beyond November 2017. Turning now to cost, the steps we took in 2015 as well as the additional steps we're taking in 2016 to further reduce our production costs and our G&A expenses came through in the first quarter results. Starting with production expenses Cary's team did an excellent job last year achieving approximately $8 million in gross field level operating cost savings through reductions in helicopters, boats, personnel and chemicals without sacrificing efficiency, safety or the environment. The team has been tasked with repeating that performance in 2016 with the target of an additional $6 million to $10 million in gross field level reductions. The first quarter shows that they are well on their way to achieving these reductions. As shown on Slide 11, ongoing lease operating costs excluding workovers and first quarter 2015 Crude Sweetening Project or CSP costs declined 25% to $16.95 per BOE in the first quarter of 2016 compared with $22.50 per BOE in the same quarter of 2015. With our Gabon development project now behind us, Cary and his team are focused on operating efficiency and reducing costs. These continued reductions will help us to maximize value in this prolonged low price environment. On the G&A front, we took major steps in 2015 and in the first quarter of 2016 to significantly reduce our G&A costs. Through a combination of employees separations, reductions in cash compensation and board fees and cutting contract and third-party expenditures we've been able to significantly reduce our overhead costs. The first quarter total G&A cost declined 39% to $3 million compared to $4.9 million in the first quarter of 2015. We're achieving our cost reduction goals. While we're on track to meet our full-year guidance we will continue to look for additional opportunities to lower overhead costs this year. Our adjusted EBITDAX loss of $3.1 million in the first quarter reflects the significant negative impact of $28.54 per BOE realized pricing. In our last call, we said that our go-forward cash breakeven costs which excludes workovers, asset retirement obligation, rig release cost and CapEx at the field level is less than $25 BOE realized price, and at total corporate level it's about $31 per BOE realized price. This is detailed on Slide 8. Assuming cash costs continue as they did in the first quarter at recent, at recent Brent pricing levels around $45 we're forecasting positive cash flow. Combined with the benefit of the cash payment we received from our Angola partner in March, we have good reason to feel more optimistic about the future. Turning to our capital expenditure program, in the first quarter we had no capital expenditures, with our offshore Gabon drilling campaign complete and the rig release we expect our 2016 capital program to be dramatically lower at $1 million to $4 million which is comprised primarily of maintenance capital. We do not plan to drill any wells in 2016 in any of our concession areas. We are laser focused on strengthening our balance sheet and bolstering our liquidity. As such, we don't expect our 2016 capital plans to change. With that in mind, we established a $40 floor on one-third of our forecasted production from June 2016 to February 2017, by purchasing crude oil put contracts. Don will go into more detail on our derivate position that will offer us some downside price protection. Let me now turn the call over to Cary for a more detailed review of our operations.

Thank you, Steve. I will spend the next few minutes reviewing our first quarter operational results, which demonstrates our commitment to increasing margins by optimizing production and lower costs. Starting with production, the Etame wells drilled and completed year are meeting expectations and the new SEENT wells continue to exceed expectations, as a result of closely monitoring well performance and adjusting operating conditions to maximize production we've been able to hold SEENT production relatively flat at approximately 5,500 barrels of oil per day gross. Unfortunately we lost one of our Avouma platform producers in the first quarter when the electric submersible pump or ESP failed in the South Tchibala [1-HB] (Ph) well. Prior to the ESP barrier the well was producing approximately 1,000 barrels of oil per day gross or 250 barrels of oil per net and the loss contributed to first quarter production coming in slightly below our guidance range. However, as a result of production optimization across the entire field total company production averaged approximately 4,800 BOE per day net in April. Given our success at optimizing production, we are not changing our full-year guidance - our full-year production guidance of 3,700 BOE per day net to 4,500 BOE per day net. Now I would like to spend a few minutes recapping the work over campaign that was conducted earlier in the year, as I mentioned down the call in March we conducted three workovers at Avouma starting in December 2015 and finishing in January 2016. The objectives of the work over program were to replace electric submersible pumps or ESPs in three wells on the Avouma platform. Two of the wells were not producing at the time of the workovers and the third well was producing at constrained rates due to mechanical degradation of the ESP. We successfully restored production at full capital in two of the wells and suspended the third work over due to mechanical issues. The increase in production capacity from the two successful workovers combined with other field optimization efforts has offset the production loss from South Tchibala 1-HB. Another first quarter operational focus was the field wide turnaround that occurred during February, the 2016 planned maintenance turnaround for the FPSO and four platforms was completed on schedule in just under six days, on budget and with no environmental or safety incidence. The result of the maintenance and inspection work confirmed our asset integrity programs are effective and the next turnaround originally planned for September 2016 is now rescheduled for 2017. Following the turnaround production has remained strong which is another sign that our asset integrity programs are effective. We continue to be pleased that after experiencing less than1% unplanned downtime in 2015 we're able to continue that trend in the first quarter of 2016. In addition to achieving runtimes greater than 99% and growing production to 4800 BOE per day by the end of the quarter, we also realized significant reductions in operating expense. Excluding workovers operating expense for the first quarter totaled $7 million, which was down by $1.5 million compared to first quarter 2015 operating expense. While we realized cost savings across our entire business the most significant savings were reductions in fuel cost, transportation and personnel. Diesel costs continue to trend lower on a unit cost basis and we are finding ways to use less diesel. We were able to reduce transportation cost by sharing some port vessels and helicopters and negotiating reduced rates. Personnel costs are also down year over year as a result of realigning our workforce to fit our focus on production operations. Work is underway to capture savings in every area of our business and in 2016 we are already well on our way to the targeted gross cost reductions of an additional $6 million to $10 million gross. As you can see on Slide 11, the captured savings have caused our operating costs per BOE of sales to decline about 25% versus the first quarter of 2015 and we will strive to maintain this downward trend throughout 2016. As I have mentioned in the past, none of these cost reductions have impacted our asset integrity programs, safety programs or environmental performance and we're proud of the strong safety culture we are fostering. In fact as indicated on Slide 26 VAALCO has not experienced a single recordable incident in the last 11 months. To close out, I would like to make a few comments on planned activity for the remainder of the year. As Steve indicated, we don't plan to have any rigs active for the balance of 2016 in Gabon. There are also no plans to move forward with development or exploratory drilling in EG or Angola this year. My operations team is 100% focused on driving on costs, optimizing production and maximizing value. Our technical teams are also evaluating the multiple drilling opportunities we identified in conjunction with our recent drilling campaign offshore at Gabon. We want to ensure that these development opportunities are available for us to pursue when prices rise to appropriate levels to undertake our next drilling program. With that, let me turn the call over to Don for a review of the financials.

Thank you Cary. We filed our earnings release yesterday evening and plan to file our 10-Q no later than next Tuesday May 10. Today I would be covering the earnings release. The updated investor deck on our website also has additional financial analysis in comparison that should be helpful. I'll try to keep my comments brief this morning by reviewing the highlights in that repeating everything disclosed in our release. Our realized oil price for the first quarter of 2016 averaged $28.54 per BOE which was down 41% from the same period last year and down 27% from the previous quarter. That sharp decline in price along with lower sales volumes due to the planned offshore Gabon maintenance turnaround in February significantly reduced our Q1 revenue. The $19 million payment we received on March 14, 2016 from our Angola Block 5 partner consisted of three components. It reduced our accounts receivable by $8 million, we were able to recover $7.6 million which had been previously written off and finally we've included $3.2 million in interest. That benefit was partially offset by our accrual of $8.9 million associated with the rig demobilization and the remaining rig contract term costs. Those are all pre-tax numbers and were contributing factors that resulted in the net loss of $8 million or a $0.14 loss per diluted share on a GAAP book basis. In the first quarter, net production totaled 4,516 BOE per day. This was just below our guidance range of 4600 to 4800 BOE per day. As Cary discussed we lost an Abuma platform well that was producing 250 BOE per day net to us in March. This was a contributing factor to the lower Q1 volumes. However, we did in fact average approximately 4,800 BOE per day in April. Therefore, we do estimate that our net production for the full-year of 2016 is not changing and will be 3700 BOE to 4500 BOE per day as we guided during our last call. For the second quarter of 2016, we expect net production to range from 4300 BOE to 4700 BOE per day. Our production and cost guidance is detailed on Slide 20 in the updated investor deck on our website. Turning to expenses, total production expense for Q1 2016 was $11.3 million which includes $4.3 million related to workovers performed during the quarter. Excluding workovers, our production expense for the quarter was $7 million or $16.95 per BOE of sale compared to $8.5 million or $22.50 per BOE in Q1 for 2015 and $8.7 million or $18.78 per BOE in Q4 of 2015. The previous quarters exclude the costs that were incurred in the review of the Crude Sweetening Project that were expensed in 2015. The benefit of the cost cutting initiatives Cary discussed, were very evident in that significant year-over-year decrease. it is important to note we achieved these lower cost per BOE despite the lower volumes we reported for the quarter. For the second quarter of 2016, we expect our production cost per BOE to be in the range of $17 to $20 and we are leaving our full-year guidance unchanged. We don't anticipate additional work over costs this year. DD&A for Q1 2016 was $2.2 million or $5.81 per BOE, the compares favorably to the $5.9 million or $15.62 per BOE in Q1 of 2015 and $9.5 million or $20.56 per BOE in Q4 of 2015. Guidance for the full-year 2016 and Q2 is expected to be in a range of $5.80 to $6.50 per BOE. The lower rate in 2016 results the significant impairments we've recorded over the last two years. General and administrative expenses for Q1 of 2016 totaled $3 million compared to $4.9 million recorded in the same period a year ago and $3.3 million in Q4 of 2015. As Steve discussed, we've been successful in cutting cash compensation, reducing corporate staff headcount and lowering contract and third-party costs. Our 2016 full-year guidance for G&A expense remains unchanged and is expected to continue to be in the range of $12 million to $14 million with non-cash G&A totaling about $3 million of that total. We had a few other items on the income statement I would like to briefly discuss. The other operating expense of $8.9 million is the accrual of our net share of the maximum estimated expense associated with the big demobilization and the remaining rig contract term, which consisted of $2.1 million and $6.8 million respectively. We previously included the demobilization costs in our estimated 2016 capital expenditures but have since determined that that cost should we expect. As a result, we have decreased our estimated capital expenditures in 2016 to $1 million to $4 million from $3 million to $6 million we previously guided. There we no accrued capital expenditures in the first quarter and the amount in our 2016 budget is primarily for maintenance CapEx as Steve mentioned earlier. You will note that there was a credit of about $450,000 on our income statement for G&A related to shareholder matters. This represents a reimbursement we are receiving from our insurer for cost related to activities of crude oil in May 2015. As I mentioned earlier, we recovered $7.6 million of bad debt and $3.2 million in interest with the $19 million payment received from our partner in Angola. Income tax expense for the first quarter of 2016 was $4.3 million compared to $3.4 million in Q1 of 2015 versus $4.2 million in Q4 of 2015. The increase in accrued income taxes was primarily due to $3 million of Angola tax that will not be paid until 2017. Turning to our balance sheet, unrestricted cash and cash equivalents totaled $24.2 million at March 31, 2016. This does not include the $15.8 million that is classified as non-current restricted cash on our balance sheet. $15 million of that total is related to the three wells joint commitment we have in Angola. In early March, we disclosed that, the borrowing base under our credit facility with the ISC had been lowered to $20.1 million effective December 31, 2015 primarily due to the declined oil prices. Previously were $65 million. At both year-end 2015 and Q1 we had $15 million drawn on that facility. As noted in yesterday's release we recently purchased put options indexed to Brent on approximately one third of our forecasted production for the period June 2016 to February 2017 at a full price of $40 per barrel, this will give us some downside protection if Brent falls below $40. As previously discussed, we collected $19 million from our Block 5 Angola partner which paid in for all amounts outstanding as of 12/31/15 plus interest. The receipt of those funds provided a significant boost to our liquidity when we needed it most, and better positions us to weather the depressed commodity cycles. With our capital investment in work over program completed our cost structure substantially reduced and the protection offered by derivative transaction we are in good position to improve our overall liquidity if oil prices on their current path. That's all for me, I'll turn the call back over to Steve.

Thanks, Don. As you've heard on the call today our strategy remains clear. Continuing to be proactive in this challenging environment by remaining focused on lowering costs, optimizing production, preserving cash and exploring our optionality. We have a clean balance sheet with only $15 million in debt and $41 million in cash on hand at the end of the quarter included restricted cash. Cary detailed how we are constantly optimizing production and looking for opportunities to maximize our cash flows. Through all of these accomplishments we continue to examine our organic growth opportunities in 2017 and beyond. When prices will hopefully would turn to higher levels. We also have opportunities to develop existing discovered resources in both offshore and onshore Gabon and offshore Equatorial Guinea. We continue to actively pursue a wide range of options and opportunities, as we have announced at the end of January we are looking at strategic alternatives to further enhance shareholder value. This encompasses multiple options including securing additional investment to bolster our liquidity to fund our attractive future development options. We're also considering joint ventures, asset sales, our firm outs as well as the sale or merger of the company. We believe VAALCO has the right structure in place to consolidate and operate a broader portfolio of assets. We have the right management team and a board in place to capture potential upside value in the current market. VAALCO has built an excellent reputation as a proven operator with a track record of success in West Africa. We have safely and successfully executed multiple development programs and have a history of strong co-operation with host governments and local partners. We have the expertise and the operational capacity to execute on organic development opportunity and acquisitions. In summary, I would like to reemphasize our commitment to our stakeholders. We continue to safely achieve strong production results, lower our overall cost structure and focus on preserving cash. We have an opportunity to dramatically impact our future, we are pursuing options to unlock and enhance shareholder value. Thank you for your attention and with that, I think we are ready to take questions.

[Operator Instructions] and your first question comes from [Bill Develam] (Ph).

Thank you, a couple of questions. First of all would you discuss your plan for the ESP that the sales and given that your CapEx budget is so low.

Bill this is Cary, the plan right now is to leave the well shut in, it was the South Tchibala 1-HB well where we had the failed ESP. Right now, the returns on the economics we're replacing ESP as a shift on economics. So we're going to leave it shut it for now. We can conduct a workover later when prices improve, but for now we're going to leave the well shut in.

And so it's not a timing issue i.e. 2017 first half, second half, it really is a function of oil prices.

It is a function of oil prices, yes. And like I mentioned we've been able to make up - offset that loss with optimization in other areas.

And Cary would you talk to further about that. What you did, how you did that, and given that you were able to accomplish that are there similar opportunities across the other aspects of the business that you do.

Right. Sure, I'll elaborate a little bit. In terms of optimizing production we looked across the entire field and it's really all about removing back pressure and so we were optimizing our processes and facilities. And as you'll recall the platform, the two new platforms were installed in 2014 and first production was in 2015. So you know there's been a lot of troubleshooting on the new platforms and finding, you know understanding how the best way to operate the platforms. And like I mentioned on our SEENT platform, where we have three new wells the two new North Tchibala 1-H and 2-H then our Southeast Etame 2-H. That production has remained flat on that platform and we did this you know we have the same results at the Etame platform and then of course Avouma we're always looking for way to remove a little bit of back pressure here and there and keep production high.

So this a process that you have ongoing across the other platforms but you had to make I guess a concerted extra effort or sprint if you will when this ESP failed.

Right, right, the production optimization is ongoing and it's our team of engineers here in Houston working with our operations team in Gabon. They talk on a weekly basis and look for ways. So optimizing production was already in progress and we’ve had a lot of success.

Thank you. And then second question is relative to the $19 million Angola Block 5 payment. I apologize for being a slow pony here, but I'm not able to reconcile that $19 million with the reconciliation of net income to adjust the net income on the last page.

Hey Bill, Don McCormack here. So the thing to remember, we did receive $19 million but as I mentioned $8 million was in accounts receivable. So the net impact on the working capital would be $11 million and then as far as income goes, we've written off $7.6 million. So that is income to us pre-tax in the quarter and then we had $3.2 million that was interest income that also impacts the quarter, but we adjust those out because they're non-recurring and not something you get every quarter.

And so the remaining component is that EAR that you said was what again please.

$8 million.

Got it. Alright. Thank you very much.

[Operator Instructions] And your next question comes from [indiscernible].

Hi guys congrats on the quarter. just curious with the Angola government discussion, is there a timeframe that you would be looking to extend that until the drilling commitments?

Yes thank you for question James, this is Steve. Typically, extensions of this nature are anywhere from three to five-years, it remains to be seen just one, if we will get an extension, assuming we do, just what might the time that will be? We have lots of reasons to expect that the government will be sensitive to and open to the ideal of an extension. As you would expect right, our partner being Sonangol P&P who is the government national oil company, they are experiencing cash constraints just like the rest of the industry and so we have high level of confidence that we'll be able to work something out there. What exactly we work out, we don't know yet.

Thanks a lot.

And your next question comes from [Neil Nelson] (Ph).

Is VAALCO realizing a premium or a discount to the day applicable Brent for its lifting's and if so what is the amount and when does the current contract expire?

Yes Neil this is Steve, thanks for the question. We are currently marketing our crude at a discount to Brent. I think we have, we've said before that that discount is in the $4 to $5 range. I would tell you that it has been slightly improving, but it's still within that range, and the contract we currently have runs through July.

Thank you. That’s all my questions.

Okay thanks Neil.

[Operator Instructions] And there are no questions.

Okay, well again thanks for everyone's attention and we appreciate your continued interest in VAALCO. And I hope that you saw and sensed what we feel and that is a great sense of pride in what we've been able to accomplish in the improvements we've made in our business with our expense cuts, our G&A cuts and our ability to maximize production. This is exactly what it is, what we needed to do. And so you have our word that we will continue to optimize everywhere we can. So thanks for your interest.

And this concludes today's conference call. You may now disconnect.