VAALCO Energy, Inc. (EGY) Q2 2016 Earnings Report, Transcript and Summary

Good morning. My name is April and I will be your conference operator today. At this time, I would like to welcome everyone to the VAALCO Energy Second Quarter 2016 Earnings Conference Call. Today's host will be Liz Prochnow, Chief Accounting Officer; Steve Guidry, CEO; and Cary Bounds, COO. 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]. Thank you. Ms. Prochnow, you may begin your conference.

Thanks April. And on behalf of the management team, I welcome all of you to today's conference call to review VAALCO's second quarter 2016 operating and financial performance. After I cover the forward-looking statements, Steve Guidry, VAALCO's CEO, will review key highlights of the second quarter. Following Steve's comments, Cary Bounds, our COO and soon to be interim CEO, will then review operational results in more detail. I will then provide a more in-depth financial review and updated 2016 guidance. Steve will then return for some closing comments before we take your questions. During our questions session, we ask that you limit your questions to one question and a follow-up. I would like to point out, that we posted an updated Investor Deck on our web site this morning, that has additional financial analysis, comparisons and updated guidance, that should be helpful. With that let me proceed to our forward-looking statement comments. During the course of 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. Statements made during 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 are based on the assumptions made by VAALCO based on its experience, perception of historical trends, current conditions, expected future developments and other factors we believe that are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond VAALCO's control. 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 file with the Securities and Exchange Commission, including the second quarter 2016 Form 10-Q that was filed yesterday. Please note that this conference call is being recorded. Let me now turn the call over to Steve.

Thank you, Liz, and good morning everyone. Welcome to our second quarter 2016 earnings conference call. The second quarter of 2016 showed a marked improvement in our financial results, compared with the first quarter of this year. Revenues rose 72%, due to the combination of higher oil prices that were up 48% from the first quarter, and increased sales volumes that were up 14%. Our production volumes of 4,796 BOE per day exceeded the high end of our production guidance. From a cost perspective, we were within guidance on all of our costs. Cary and Liz will review costs in more detail later in the call. The improvement in revenue and continued close control of our costs, led to a higher operating income, which totaled $4.6 million compared to a loss of $6.6 million in the first quarter. We reported a small loss of $300,000 compared with a loss of $8.1 million in the prior quarter, and our EBITDAX rose $11 million from a loss of $3.1 million in the first quarter, to a gain of $7.7 million. These numbers reflect the significant positive impact even a modest improvement in pricing to $42.13 per barrel can have on our results, since we took the actions over the last 18 months to better position the company for the current downturn. Just as importantly, we reported a number of positive achievements during the quarter. First, we announced last month that we reached a fair and amicable agreement, regarding the remaining contract term on the rig we had used in our offshore Gabon drilling program. We agreed to a payment of $5.1 million net to VAALCO's interest for unused rig days under the contract. This amount, plus the company's share of demobilization charges is payable in seven equal monthly installments, with the first installment having been paid in July. Next, we announced that we converted the $15 million outstanding balance on our ISC credit facility to a fixed period loan with attractive rates and terms. We also arranged for the opportunity to request up to $5 million, an additional loan proceed, which would be available through the end of this year, subject to the ISC's approval. We are pleased with this new arrangement, which provides us with increased certainty and financial flexibility and eliminates the need for semi-annual redeterminations. Last and most significantly, we announced last week that we are acquiring an additional 3.23% participating interest in our flagship producing asset, at Etame, from our partner Sojitz, effective August 1. This will increase our production by 11% and we anticipate the transaction to close within the next 90 days. As operator of the field since the initial discovery in 1997, VAALCO knows the area extremely well, and is pleased to increase our total participating interest in Etame. While we obviously will share the overhead and operating costs in our new higher working interest percentage, the acquisition will not require any new staffing for us to assimilate that increased interest into VAALCO. We believe this transaction fits perfectly with our goal of enhancing shareholder value, with targeted opportunistic acquisitions. The net result of these accomplishments, plus the receipt of the payment from our Angolan partner last quarter, certainly improved our near term outlook and better position the company to benefit from the ultimate recovery in oil prices. As you have heard us discuss before and as outlined in our slide presentation, we believe Etame has significant upside potential remaining. We have identified at least 17 future drilling opportunities we can pursue, when prices recover, that we estimate, could include about 65 million barrels of gross, unrisked, recoverable contingent resources. Turning to our capital investment program; in the second quarter, we did not undertake any new capital projects. With our offshore Gabon drilling campaign complete and the rig released, we continue to expect our 2016 capital program to total about $1 million to $4 million, which excludes the Sojitz acquisition, and is comprised primarily of maintenance capital. We do not plan to drill any wells in the balance of 2016 in any of our concession areas. Until we see sustainable higher prices, we will stay focused on strengthening our balance sheet and bolstering our liquidity, by reducing costs and increasing production. Before turning the call over to Cary for a more detailed review of our operations, I'd like to make a few comments about my retirement that I announced last week. It has been an honor to serve as VAALCO's senior officer since 2013, and a real privilege to have worked closely with my management team and our entire board. The industry downturn created many challenges at VAALCO as it did with all small E&P companies, and I greatly appreciate the support that I have received during my tenure. We made a lot of tough decisions during that time, but I think we are seeing the positive impacts of the changes in our second quarter results. My wife and I agree that now is the right time for me to step away from corporate life and spend more time with her and the family. Cary, I believe is an excellent choice to assume my responsibilities as interim CEO, and I believe the ongoing strong leadership provided by the board, Cary, and other members of the senior management team, will continue to guide VAALCO forward, as the oil and gas environment improves. So Cary, you have the floor.

Thanks Steve. I appreciate your kind words and it has been a pleasure to work with you and have your leadership during a very challenging period for the oil and gas industry. I assure you, that we will build on the strategic direction laid out by you and the board, and continue running the business with a focus on maximizing shareholder value. Now, I would like to spend the next few minutes reviewing our second quarter operational results, expand on recent operational events, and talk about our near term path forward, which demonstrates our commitment to increasing margins by optimizing production and maintaining our positive cost savings momentum. VAALCO's total production increased 6% from 4,516 barrels of oil equivalent per day in the first quarter of 2016, to 4,796 barrels of oil equivalent per day in the second quarter of 2016. The production increase was due to minimal, unplanned downtime, continued strong performance from the wells added in the recent Etame development program, and there were no planned shutdowns as we had in the first quarter of 2016. We exceeded second quarter production expectations, primarily due to the fact, that from the end of the shutdown earlier this year in February through midyear 2016, the company has achieved greater than 97% runtime. As we previously disclosed, we temporarily lost production from one of our Avouma platform producing wells at the end of June, when the electric submersible pumps or ESPs failed in the South Tchibala 2H well. Prior to the ESP failures, the well was producing approximately 1,700 barrels of oil equivalent per day gross or 415 barrels of oil equivalent per day net. In late July, we experienced a third ESP failure, when one of the two ESPs in the Avouma 2H well failed. Prior to attempting to start the backup ESP in the well, we are working closely with Schlumberger, who installed and manufactured the ESPs on the startup procedure, and we are sourcing additional equivalent to monitor the startup and ensure we are operating within the design limits of the ESP. Additionally, we have multiple teams, including Schlumberger and other third party experts, who are investigating the causes of all three ESP failures to determine if they are due to operation, design or installation of the equipment. Prior to the ESP failure in Avouma 2H, the well was producing approximately 2,700 barrels of oil equivalent per day gross, or 660 barrels of oil equivalent per day net. Including the South Tchibala 1HB well, which went down in the first quarter, we now have three wells with ESP failures on the Avouma platform. As we mentioned in our July press release, VAALCO was already mobilizing a hydraulic workover unit on to the Avouma platform, to replace the ESPs in the South Tchibala 2H well. I would like point out, that when compared to using a drilling rig, the cost of replacing ESPs using a hydraulic workover unit is significantly less. In fact, we are looking at approximately 50% lower cost using the hydraulic workover unit. We now have three wells with ESP failures on the same platform and the hydraulic workover unit will be able to workover all three wells, with no additional mobilization or demobilization costs. We anticipate completing this work early in the fourth quarter of this year. By utilizing the hydraulic workover unit in the future, it will reduce the overall costs associated with workovers, and allow us to economically extend the life of the Etame field. For example, the South Tchibala 1HB well, that had the ESP failure in the first quarter, was a lower rig well and the economics of working the well over with the drilling rig and bringing it back on production are challenged. But by reducing the cost to workover the well by approximately 50% with the use of the hydraulic workover unit, we can now economically restore production and maximize shareholder returns. Although the ESP failures will negatively impact our third quarter and overall production for the year, the impact is offset by strong performance from other new wells, including the Southeast Etame 2H. In fact, production from the Southeast Etame well is so strong, we expect our next development drilling campaign to start in the Southeast Etame area. For the third quarter, we estimate our production will be between 3,700 and 4,000 barrels of oil equivalent per day. Despite the lower third quarter guidance, we believe that our strong first half production performance and the plan to workover volume uplift in the fourth quarter, will allow us to meet our full year production guidance, even without any incremental volumes associated with the Sojitz acquisition. With these factors taken into account, we are tightening the range of our full year production guidance with our new estimate at between 3,900 and 4,300 barrels of oil equivalent per day, maintaining our same full year midpoint estimate. Let me now give a quick review of our other areas of operations. We have exciting opportunities in offshore Gabon, Equatorial Guinea and Angola that we are continuing to examine. We are researching alternative lower cost development options for the discoveries in the Mutamba permit, onshore Gabon, and in Block P offshore Equatorial Guinea. At Mutamba, the company has had numerous discussions with the Government of Gabon, regarding a revised production sharing contract, to allow for development of the discovery. At Block P, the Ministry of Mines, Industry and Energy and GEPetrol, the current block operator, are reviewing a revised joint operating agreement, which would name VAALCO as operator. We are also reevaluating the terms of the EG production sharing contract, to determine which terms we may seek to renegotiate. These discoveries offer unique development opportunities that will be reevaluated as prices recover. In offshore Angola, the license for Block 5 expires in November 2017, and we continue seeking alternative solutions, including extending the term of the exploration license, to assist with the three well drilling commitment deadline. We are in the early stages of these discussions and remain hopeful that we will reach a resolution that benefits all parties. Now let me review our production expenses; in addition to achieving runtimes greater than 97% in the second quarter, we also maintain our cost reduction focus and maintain the momentum for lowering operating expenses in 2016. Our second quarter 2016 expenses excluding workovers, came in at $18.16 per BOE, below the midpoint of our guidance of $17 to $20 per BOE of sales. For the first half of 2016, our production expense per BOE of sales has averaged $18.16, which is a strong improvement over the first half of 2015, which came in at about $20.75 per BOE of sales. We believe that in the third quarter of 2016, we will see a small increase in our per BOE costs, primarily due to lower projected liftings as a result of the ESP failures. Accounting for third quarter sales, we estimate third quarter production expense to be between $21 and $23 per BOE of sales. Despite this quarterly increase, we believe our full year production guidance of $18 to $21 per BOE of sales is still achievable, especially, given the strong performance in the first half of 2016, which again averaged $18.16 per BOE of sales. We remain committed to capturing savings in every area of our business, to enhance operational cash flow and prolong the life of the Etame field. As I have mentioned in the past, none of our cost reductions have impacted our asset integrity programs, safety programs, or environmental performance, and we are proud of the strong safety culture we are fostering. VAALCO has now gone 13 months without a recordable incident and 12 months without an environmental incident. To close out, I would like to make a few summary comments on activity moving forward. Our operations team is 100% focused on driving down costs, optimizing production and maximizing value. We do not plan to have any drilling rigs active for the balance of 2016 in Gabon. There are also no plans to move forward with development or exploratory drilling in Equatorial Guinea or Angola this year. We have some significant development opportunities in offshore and onshore Gabon as well as in Equatorial Guinea that are available for us to pursue and prices rise to appropriate levels. With the help of the board, we will advance our strategic objectives and work tirelessly to be good stewards for all stakeholders, as we focus on operational excellence and value-adding opportunities. With that, let me turn the call over to Liz Prochnow, our Chief Accounting Officer and Principal Financial Officer.

Thank you, Cary. Our realized oil price for the second quarter of 2016 averaged $42.13 per barrel. This is up 48% from the first quarter of this year. Our oil sales volume totaled 436,000 barrels, which is up 14% from 381,000 in the first quarter. Our first quarter sales volumes were lower by the planned six day shutdown of production at offshore Gabon during our maintenance turnaround. Our second quarter 2016 operating income showed a marked improvement to $4.6 million. This compares to a loss of $6.6 million in the first quarter. We reported a net loss of $300,000, basically breakeven, which includes non-cash charges of $900,000 for the write-off of deferred financing costs, and $600,000 related to mark-to-market adjustments on our derivatives. Our adjusted EBITDAX grew to $7.7 million from a loss of $3.1 million in the 2016 first quarter. Turning to expenses; total production expense for the 2016 second quarter was $7.3 million, which includes the benefit of a $700,000 revision to the estimated accrual for prior period workover expenses. Ongoing production expenses, excluding workovers, totaled $8 million or $18.16 per BOE of sales compared to $8.9 million or $19.08 per BOE of sales in the second quarter of 2015, and $7 million or $18.16 per BOE in the first quarter of this year. Our second quarter 2016 production costs were below the midpoint in our guidance range. DD&A for the second quarter of 2016 was $1.9 million or $4.40 per BOE. This compares to $9.3 million or $20 per BOE in 2015 second quarter, and $2.2 million or $5.81 per BOE in the 2016 first quarter. We are reducing guidance for DD&A for the third quarter and full year of 2016 to between $4 and $6 per BOE. The lower rates in 2016 reflect the lower depletable costs as a result of the impairments we have recorded in 2015. General and administrative expenses for the second quarter of 2016 totaled $4 million compared to $2.8 million recorded in the same period a year ago, and $3 million in the first quarter of 2016. As we have discussed in prior conference calls, beginning in 2016, the amount of overhead VAALCO as operator is able to recover from its partners has decreased due to a slowdown in capital investments, following the completion of a drilling program. Even with the cost containment actions we have taken over the last 18 months to reduce gross G&A costs, the lower cost recovery is leading to higher net G&A costs attributable to VAALCO. General and administrative expense includes $800,000, $700,000 and $900,000 of non-cash compensation expense for the quarters ended June 30, 2016; June 30, 2015; and March 31, 2016 respectively. 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. As Steve mentioned earlier, we do not expect to incur any additional staffing as a result of the Sojitz acquisition. Other operating expense totaled $800,000, which includes additional Gabon payroll tax costs, offset by the benefit from a negotiated reduction in costs associated with the release of the drilling rig. Interest expense for the second quarter of 2016 was $1.5 million compared to $300,000 in the second quarter of 2015 and $500,000 in the first quarter of 2016. Second quarter 2016 interest expense includes a write-off of $900,000 of deferred financing costs in connection with the conversion of the ISC line from a revolver to a term loan. In addition, none of the interests incurred on the ISC credit facility was capitalized in the second quarter 2016, while a substantial portion of the interest expense incurred was capitalized in the prior year. Income tax expense for the second quarter of 2016 was $3 million compared to $4.3 million in the same period of 2015 and $4.7 million in the first quarter of 2016. The decrease in tax between 2015 and 2016 second quarter is primarily attributable to lower revenues in Gabon. As discussed last quarter, the first quarter of 2016 contained Angola tax of $3 million associated with Angolan tax on finance related items. This caused income tax to be disproportionately higher in the first quarter 2016, despite lower revenues. I'd like to point out a recent positive development in Gabon. We had talks in prior calls about the significant delays we were experiencing in receiving reimbursement from the government of value added taxes. We worked with them to sign an agreement to receive payment of past amounts due over 36 months period of time. And I am pleased to say, we received the first payment in July, totaling approximately $200,000 net to VAALCO. Turning to the balance sheet; unrestricted cash and cash equivalents totaled $13.7 million as of the end of the quarter. This does not include an additional $800,000 in restricted cash included in current asset, primarily related to deposits in Gabon and $15.8 million in restricted cash, included in long term assets, primarily related to our three well drilling commitment in Angola. As Steve discussed earlier, in late June, we executed an amended and restated loan agreement with the ISC to convert our existing $15 million balance under the revolving credit facility to a term loan. The new agreement provides for quarterly payments of principal and interest payments through June 30, 2019, including interest at a rate of LIBOR plus 5.75%. The loan is secured by our offshore Gabon assets and related inventory. We also arranged the option to request, subject to ISC approval, up to an additional $5 million from the ISC between now and December 31, 2016, with any such drawn amount to be amortized through June 30 of 2018. At June 30, 2016, debt, net of deferred financing costs of $1.7 million, totaled $14.3 million, of which $5 million was classified as current, reflecting the repayment terms of the new loan agreement with the ISC. I will now turn the call back over to Steve.

Thanks Liz. To wrap up today's call, I'd like to discuss the results of our recent review of the strategic alternatives. In late January, we announced that our Board had formed a strategic committee to explore a range of strategic alternatives to further enhance shareholder value. Senior management was actively involved in that process. Over the last six months, we evaluated a wide range of options and opportunities. We had numerous meetings with a variety of firms, including larger and smaller E&P companies, oil services companies, investment and commercial banks and investment firms. We considered joint ventures, asset sales, form outs, acquisitions, and the possible sale or merger of the company. We also looked at securing additional investment in VAALCO to bolster liquidity and to fund attracted development opportunities and acquisitions. As discussed earlier, over the last few weeks, we announced several significant accomplishments as a direct result of that review process. That included, the resolution of the matter regarding the rig release earlier this year, the conversion of our ISC facility to a term loan and securing potential additional availability under that loan, and most importantly, the pending acquisition of an additional 3.23% participating interest in the Etame Marin concession. After a full review of all alternatives, the board believes, the best path forward is to seek additional targeted acquisitions like we did with Sojitz, where our existing expertise and current staffing can create value for shareholders, particularly in this extended low price environment. While our board will always consider proposals or opportunities presented to us for a review that can enhance value, we believe, continuing to seek attractively valued acquisition opportunities in our focus area and other similarly situated basins, is our best strategy. In summary, we believe that we have taken some key steps to positively impact our future, and we will continue to pursue value adding propositions. VAALCO is committed to safely achieving strong production results, lowering our overall cost structure and generating cash with a focus on enhancing shareholder value. Thank you, and with that April, we will be ready to take questions.

[Operator Instructions]. And our first question comes from the line of Glenn William [ph].

Good morning. Thank you for taking my call. Just a couple of quick questions. First, looking at some of the comments in the recent filing, it looks like you guys have the ability to generate positive operating cash flow at the second quarter pricing levels. Given that, are you going to be inclined to add additional hedges, if we see, should pricing stay where it is or move like north of $46 per barrel or so?

Good morning Glenn, thanks for that. The hedging strategy is something that we visit on a regular basis with the board, and it would be premature for me to comment on exactly what we might do going forward. It’s a discussion that we have at the board level. But right now, we are satisfied with the hedge that we have in place, which as you know, as one third of our production is hedged at $40 per barrel put. So we like the protection that that gives us against the downside, but at the same time, we are able to retain all of the upside potential on the full volume. But as it stands right now, as I said, we make that decision on a regular basis, and no decision has been made at this point, as to whether we would take on additional hedges.

Okay. That's fair. And also just as a follow-up, it looks like you guys had some pretty decent success at the Etame complex since the shutdown in February? And I was just curious if there was something specific that you guys have done to improve the runtimes, and also, how does the increase in runtimes compare to where they were pre-shutdown?

Okay. That's one of the things that we are most proud of. But let me ask Cary talk a little bit about what we have done to get to that 97% uptime.

Sure. Glenn, the shutdown that we took on in February was primarily to give us an opportunity to do planned maintenance. And planned maintenance preserves asset integrity, which means longer runtimes for our equipment. So that was definitely an outcome of the shutdown, was longer runtimes, because we got our planned maintenance in place, and we executed our asset integrity program. And then also, it's our operations team. They are heavily focused on maintaining production. We have gone from last year, when we were in the midst of a development drilling campaign and our focus was on the development drilling campaign, as well as production operations to 2016, where the team is entirely focused on maintaining production and production operations. And so I think that's a big part of it as well. Now prior to the shutdown, our runtimes were fairly good across the field, except for the Avouma platform, where we had some power issues. But we think we have gotten those resolved. And again, the runtime since the planned shutdown are the result of asset integrity and the focus of our team.

Okay. Thank you very much. I am sorry, just one last one, it was kind of mentioned at the end of the comments that kind of piqued my interest; as it relates to the targeted acquisitions that you guys may have, is it safe to say that you would be looking at, I guess, assets that currently have existing production already in place?

Glenn, we did, I'd say, modify our strategy as it relates to acquisition a bit. For a long time, we were focused clearly on discovered but undeveloped opportunities. But we have certainly turned our attention more towards looking at producing assets, and something that can generate immediate cash flow, is a much higher priority for us now. That's not to say that, we wouldn't give serious consideration to a very attractive discovered undeveloped resource, but production is more attractive today. Having said all of that, I could tell you that exploration is not. And so, we definitely have to put that on the backburner for now.

Okay. Thank you so much for your time.

Thank you.

And our next question comes from the line of Bill Dezellem.

Thank you. I'd like to expose my ignorance here to start with, can you explain how you bought the 3.23% interest and increased your production by 11%? That mismatch, I just don't understand?

Yeah. Bill, good morning. This is Steve. The interest that we purchased is roughly about 11% of our current position, and it takes from the 28.1% interest to upwards of 31% plus interest, and the production associated with that 3% is roughly 11%. So it increases our production. It also will proportionately increase our reserves. But on the reserve side, you have to take into consideration, the impact of timing and production that's occurred to look to arrive at a similar number. But maybe, to give you -- participating interest that we have in the field; you may recall, with the Tullow carry; while we have a 28.1% working interest, our participating interest, includes a portion of the interest that is held by Tullow, because it’s a carried interest. So we pay over 30% of the costs. So when we add 3% plus, that total percentage goes to the 33% level. So there is working interest that goes from 28% to 31%, but there is participating interest that goes from 30% to 33% plus. Does that help?

It does. But ultimately, it's nothing really more complicated than roughly 3% increase in interest on a base of 28%, which is about 11%?

That's right.

Okay, all right. Thank you. And then, would you please discuss your liftings that you had in the second quarter, remind us what they were in the first quarter, and then what you are estimating in terms of liftings in Q3?

Yeah. We don't typically publish our anticipated bookings going forward. But we do have our first quarter and second quarter liftings are included in our Q. if you look -- and they are also on our web site as well. So I don't have them summarized by quarter, but they are on our web site by date, and the number of the liftings. So we can do that math real quick. Why don't we -- let us run the math and tell you what the Q1 and Q2 were, and we will add them up real quickly and we will give you that number.

No problem at all. I can actually go back to the Qs. And then, relative to Q3, I know you don't want to give forward guidance on that, but let me ask, when was your last lifting in Q2 and how full was the tank at the end of Q2?

July 28th was our last lifting in the second quarter. And I talked earlier about how we don't give guidance on liftings on a forward basis, but we do give guidance on production. And our third quarter production guidance is between 3,700 and 4,000 barrels a day net, and of course, that includes the impact of the down wells at Avouma. So we would fully anticipate returning to the higher levels in the fourth quarter, once those wells are back on.

All right. That's helpful. Thank you.

Thank you, Bill.

And our next question comes from the line of Kenneth Palin [ph].

Hi. Good morning. [Indiscernible] for years and years, you guys have had problems with pumps. You said you are looking at a different contractor. What's actually going on with the submersible pumps, and is it something that's a third quarter problem or what exactly?

All right. Sure Kenneth. This is Cary Bounds. We have run ESPs for many years and over the years we have changed our design, and we have changed our design, mainly to improve runtimes. And so, during this last drilling campaign, we looked at our design and we modified it, in an effort to improve runtimes. And I will say that, we do have some issues at Avouma, that's clear. But there are other wells in the field that were part of the recent development program, that we are not seeing any issues with the ESP installation. So to really understand the root cause of the failures from the Avouma platform, we are going to have to pull the ESP systems, teardown the equipment and do a detailed inspection. And so, part of that -- the first step in that process is to pull the ESPs which we are mobilizing the hydraulic workover unit to pull the ESPs. After that, we have a very detailed plan for inspecting the pumps and understanding the root cause analysis. And I will say, part of the plan is to put as many experts as possible on this issue, which includes all of the internal VAALCO technical team, a technical team from Schlumberger, and then third party experts as well. So we are putting resources to understanding the root cause. But I can't tell you exactly what the root cause is today. We have got to, like I said, do and tear down the equipment and inspect. And that work is planned, and will be underway very soon.

Okay. Maybe I missed the very beginning, was there any update on -- you had some well before there was [indiscernible], there were some sulfur issues, is that correct?

Yes. We have H2S presence at our Ebouri Field. We had to -- couple of years ago, we had to shut-in two wells, because of high H2S content, but we do have one remaining producing well at the Ebouri Field that has relatively low H2S content. And then over at our Etame main fault block, we did see the presence of H2S in our Etame number 5 well, and also the Etame 8 well, when we drilled it in 2015. So we have seen the presence of H2S in those two fields, but we think, even within the Etame field for example, that its limited to areas close to the oil/water contact, and we don't see as much exposure in other fields, such as Avouma, North Tchibala, South Tchibala and Southeast Etame.

Okay. I think at the time you said too, you were working on mitigating that problem. Is there any update on those wells?

Well, we are mitigating the problem in a couple of ways already. We do feel like the source of the H2S is water, and so we do -- we watch the wells very closely, and we operate them to minimize water production. And then we did launch a taskforce to look at H2S removal solutions. So we have all of that technical work that we have done, and we have looked at, I don't know, let's say 30 to 50 different alternatives for H2S removal, and at current pricing and current market conditions, it really just doesn't make sense with the sour resources that we know we have.

Okay, great. I guess then finally, was that Sojitz an entire holding or is there possibility of buying more from them, and did you say what the price was?

Yeah Kenneth, its Steve. What we have purchased is Sojitz's entire interest in the Etame block. So there is nothing more that can be purchased from Sojitz. We continue to evaluate other opportunities for acquisitions and producing assets, both at Etame and in other places as well. And as far as the price is concerned, we are honoring the request of the counterparty, and not publishing the acquisition costs. Not the exact number.

Okay. Is there a number that would need you to borrow more money, or is it something that you can handle with your balance sheet, or?

You know, I think we said before that, while the additional $5 million of availability from the ISC is not earmarked for any acquisition, we were requested that additional financial capacity, in order that should be -- should the Sojitz acquisition close, and we have no reason to believe it won't. We could then go to the ISC and request monies to replenish, whatever monies we might have spent for the Sojitz acquisition.

Okay. All right. Finally, you have other large partners that -- in your field, are those other partners interested in selling or alternatively increasing their position, you are one of about four or five partners?

We are, we are. And it’s a good question, but it's one that probably is better asked of them than of us. We have competition from lots of companies, both in Etame and outside of Etame. But all of those conversations of those sorts are all protected under confidentiality. So that's a question I would suggest you, you talk to them about. But good question.

All right. Well thank you.

Just to circle back with Bill, your question on the liftings; sorry, we had to pull these numbers together on a net basis. But essentially, in Q1, on a gross basis, we lifted 1.55 million barrels, that's 381,000 net to VAALCO, and in Q2, we lifted 1.78 million barrels gross, which is the 436,000 barrels net to VAALCO. So hopefully, that answered your question Bill.

And there are no further questions at this time. Okay. Well, thank you very much for your time and your attention, and VAALCO will be here next quarter with a third quarter story. Thanks.

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