VAALCO Energy, Inc. reported operational and financial results for the fourth quarter and full year of 2020.
Highlights and Recent Key Items:
|(1)||All NRI production rates and volumes are VAALCO’s 31.1% WI less 13% royalty volumes.|
|(2)||All WI production rates and volumes are VAALCO’s 31.1% WI.|
|(3)||Adjusted EBITDAX, Adjusted Net Income and Adjusted Working Capital are Non-GAAP financial measures and are described and reconciled to the closest GAAP measure in the attached table under “Non-GAAP Financial Measures.”|
|(4)||“SEC reserves” are Netherland, Sewell & Associates estimates prepared in accordance with the definitions and regulations of the U.S. Securities and Exchange Commission as of December 31, 2020.|
|(5)||“2P CPR Reserves” are Netherland, Sewell & Associates proved plus probable estimates prepared in accordance with the definitions and guidelines set forth in the 2018 Petroleum Resources Management Systems approved by the Society of Petroleum Engineers as of December 31, 2020 using VAALCO’s management assumptions for escalated crude oil price and costs.|
|(6)||Estimated acquisition cost per barrel for SEC proved reserves and 2P CPR reserves are calculated based on VAALCO management’s internal estimates of SEC proved reserves and 2P CPR reserves acquired from Sasol.
See “Supplemental Non-GAAP Financial Measures” below for additional information.
Cary Bounds, VAALCO’s Chief Executive Officer commented: “Despite the difficult conditions in 2020, VAALCO performed extremely well, generating $26.6 million in Adjusted EBITDAX while investing only $10.5 million in capital expenditures to complete a highly successful drilling program. The drilling program brought three new development wells online, boosting Etame field production by almost 7,000 gross BOPD in 2020. Cost discipline and operational excellence remain core priorities for VAALCO as we seek to maximize profitability and maintain a strong balance sheet with a healthy cash position. In the fourth quarter of 2020, we continued to perform well operationally with net production of 4,662 BOPD, despite curtailing production to support Gabon meeting OPEC+ production mandates. Although year-end SEC proved reserve additions for extensions and performance were equivalent to 90% of 2020 production, these positive additions were offset by negative revisions due to lower average pricing in 2020. Our 2P CPR reserves for year-end 2020 were 10.4 MMBO WI, which is substantially the same volume as year-end 2019 2P CPR reserves. We expect that our year-end 2021 reserves will be meaningfully higher if recent oil price trends continue through year-end 2021, coupled with the reserve additions attributable to the acquisition of Sasol’s ownership in Etame.”
“As we announced in February 2021, we are very excited to have closed the Sasol acquisition which nearly doubles our net production and reserves with minimal increase in G&A expense. Over the past several years, we have executed on our strategy of accretive growth and free cash flow generation through cost effectively maintaining core production, executing a successful drilling program and acquiring Sasol’s ownership in the Etame license. With the rising price environment thus far in 2021, we are forecasting a significant increase in free cash flow which will further strengthen our financial position as we begin our next Etame drilling campaign late this year or early next year. In anticipation of the next drilling campaign, we recently completed the acquisition of 3-D seismic over the entire Etame field and we expect to complete the processing by the fourth quarter of 2021. Interpretation of the new seismic is underway in order to optimize and de-risk our drilling locations and potentially identify new drilling locations. We are planning to drill up to four wells in the upcoming drilling campaign, which we expect could increase gross field production by 7,000 to 8,000 BOPD when the drilling program is completed in 2022. We have made substantial progress toward achieving our growth objectives and we believe that VAALCO is well positioned to continue to profitably grow production and reserves well into the future.”
Transformational Acquisition Closes
As previously announced, VAALCO completed its acquisition of Sasol’s 27.8% working interest(7) in the Etame Marin block offshore Gabon from Sasol Gabon S.A., increasing the Company’s total working interest to 58.8%. The transaction almost doubles VAALCO’s total net production and reserves. The effective date of the transaction was July 1, 2020 and net cash flows generated from the Sasol interest from the effective date through the closing date reduced the final cash settlement amount of the agreed $44 million purchase price. In addition, VAALCO made a cash deposit to Sasol in November 2020 of $4.3 million. Taking into account the deposit, the net cash flow from Sasol’s interest through closing and other purchase price adjustments, VAALCO paid $29.6 million to Sasol at closing from cash on hand. The terms of the agreement also include a contingent payment of $5.0 million which will be payable to Sasol if the average Dated Brent price over a consecutive 90-day period from July 1, 2020 to June 30, 2022 exceeds $60.00 per barrel. The cash consideration, together with the $5.0 million contingent payment totals $38.9 million. VAALCO’s reserves, production and financial results for the Sasol interest acquired will be included in the Company’s results for periods starting on February 25, 2021, the closing date of the transaction. Based on management’s internal estimates, the Company estimates that approximately 2.7 MMBO of proved NRI reserves and 9.1 MMBO of 2P CPR WI reserves were acquired.
|(7)||Prior to the closing of the acquisition, VAALCO’s working interest in Etame was 31.1% and its participating interest was 33.6%; Sasol’s working interest in Etame was 27.8% and its participating interest was 30%. All NRI production rates and volumes are based on working interest less 13% royalty volumes.|
In connection with planning for future drilling programs, VAALCO completed the acquisition of nearly 1,000 square kilometers of new dual-azimuth proprietary 3-D seismic data over the entire Etame Marin block offshore Gabon during the fourth quarter of 2020. The information provided from the acquisition, processing and analyzing of this data will be used to optimize and de-risk future drilling locations and potentially identify new drilling locations. The Company expects the seismic data to enhance sub-surface imaging by merging legacy data with the newly acquired seismic allowing for the first continuous 3-D seismic over the entire block. VAALCO estimates the total gross costs of both the acquisition and processing of seismic data to be approximately $16.1 million gross, $12.6 million of which was incurred in 2020. Fourth quarter 2020 financial results included exploration expense of $3.6 million and development costs of $0.6 million related to VAALCO’s net share of these costs. Processing of the seismic data began in January 2021 with all data expected to be fully processed and analyzed by the fourth quarter of 2021.
2021/2022 Drilling Program
VAALCO is planning for the commencement of the next drilling campaign at Etame in late 2021 or early 2022. The locations of the wells will be determined in conjunction with the new seismic processing and interpretation, and VAALCO is currently planning for a four-well program with two development wells and two appraisal wells. Preliminary production uplift estimates for the drilling campaign are between 7,000 and 8,000 gross BOPD of peak production from the four wells. The estimated cost of the program is $115 million to $125 million gross, or $73 million to $79 million, net to VAALCO’s 63.6% participating interest.
VAALCO and its joint venture owners are evaluating the timing and budgeting for development and exploration activities on Block P. The Block P production sharing contract provides for a term of 25 years from the date of approval of a development and production plan. The non-binding memorandum of understanding with a third party to cover all or substantially all of the Company’s cost to drill an exploratory well on Block P has expired; however, the Company continues to evaluate alternatives to funding the cost to drill an exploratory well in Block P. There can be no certainty any such transaction will be completed or that VAALCO will be able to commence drilling operations on Block P. As of December 31, 2020, the Company had $10.0 million recorded for the book value of the undeveloped leasehold costs associated with the Block P license.
Financial Update – 2020 Fourth Quarter
Net loss of $3.6 million, or $0.06 per diluted share, for the fourth quarter of 2020 included the impact from $3.6 million in exploration expense related to the Etame seismic program during the quarter and a charge of approximately $2.2 million for stock-based compensation expense. The lifting scheduled for December 2020 was delayed to January 2021 which reduced sales volumes and revenues while increasing capitalized crude oil inventory costs for the fourth quarter of 2020. This delayed the lifting for approximately 155 MBO NRI barrels.
Net income of $1.0 million, or $0.02 per diluted share, for the fourth quarter of 2019 included the impact from a non-cash charge of approximately $3.1 million for a mark-to-market loss related to the Company’s crude oil swaps, stock-based compensation of approximately $0.7 million and a $1.8 million tax benefit related to a decrease in the valuation allowance on deferred tax assets. Net income of $7.6 million, or $0.13 per diluted share, for the third quarter of 2020 included an income tax benefit of $2.8 million which reflected the impact from a decrease in the valuation allowance on deferred tax assets of $5.3 million, or $0.09 per diluted share.
Adjusted Net Loss for the fourth quarter of 2020 totaled $5.6 million, or $0.10 per diluted share, as compared to Adjusted Net Income of $5.5 million, or $0.09 per diluted share, for the fourth quarter of 2019. The decrease in earnings between these periods was mainly due to lower revenues as a result of lower oil prices and lower sales volumes due to a delay in the lifting scheduled for December 2020 to January 2021, coupled with $3.6 million of exploration expense related to the seismic acquisition costs in the fourth quarter of 2020. In the third quarter of 2020, VAALCO reported $2.3 million in Adjusted Net Income, or $0.04 per diluted share. Adjusted EBITDAX totaled $3.5 million in the fourth quarter of 2020 compared with $10.4 million in the same period of 2019. In the third quarter of 2020, Adjusted EBITDAX was $7.0 million. As with the net loss and Adjusted Net Loss, Adjusted EBITDAX was impacted by the lower sales volumes resulting from the delay in the lifting scheduled for December discussed above.
|Revenue and Sales|
|Q4 2020||Q4 2019||% Change Q4
2020 vs. Q4 2019
|Q3 2020||% Change Q4
2020 vs. Q3 2020
|Production (NRI BOPD)||4,662||3,664||27||%||4,405||6||%|
|Sales (NRI BO)||290,000||318,000||(9||)||%||412,000||(30||)||%|
|Realized crude oil price ($/BO)||$||42.07||$||65.80||(36||)||%||$||43.63||(4||)||%|
|Total crude oil sales ($MM)||$||12.6||$||21.9||(42||)||%||$||18.3||(31||)||%|
The fourth quarter of 2020 saw an increase in NRI production from 3,664 BOPD in the fourth quarter of 2019 to 4,662 BOPD primarily due to the new development wells coming online from the 2019/2020 drilling program. Revenues for the fourth quarter of 2020 were negatively impacted due to a delay in the lifting scheduled for December 2020 until January 2021. While this delay reduced revenues for 2020, pricing improved between December 2020 and January 2021, increasing the amount realized from the lifting, the impact of which was realized in the first quarter of 2021.
|Costs and Expenses|
|Q4 2020||Q4 2019||% Change Q4
2020 vs. Q4 2019
|Q3 2020||% Change Q4
2020 vs. Q3 2020
|Production expense, excluding workovers ($MM)||$||6.6||$||9.8||(33||)||%||$||9.1||(28||)||%|
|Production expense, excluding workovers ($/BO)||$||22.66||$||30.70||(26||)||%||$||22.21||2||%|
|Workover expense ($MM)||$||(0.1||)||$||0.1||(200||)||%||$||(0.2||)||(50||)||%|
|Depreciation, depletion and amortization ($MM)||$||1.3||$||2.1||(38||)||%||$||2.2||(41||)||%|
|Depreciation, depletion and amortization ($/BO)||$||4.37||$||6.64||(34||)||%||$||5.37||(19||)||%|
|General and administrative expense, excluding stock-based compensation ($MM)||$||2.5||$||2.2||13||%||$||2.4||4||%|
|General and administrative expense, excluding stock-based compensation ($/BO)||$||8.73||$||6.96||25||%||$||5.89||48||%|
|Stock-based compensation expense (benefit) ($MM)||$||2.2||$||0.7||214||%||$||(0.2||)||(1,200||)||%|
|Current income tax expense (benefit) ($MM)||$||2.0||$||2.4||(17||)||%||$||2.5||(20||)||%|
|Deferred income tax expense (benefit) ($MM)||$||(2.8||)||$||1.8||(256||)||%||$||(5.3||)||(47||)||%|
Total production expense, excluding workovers, decreased compared to both prior periods primarily due to lower sales volumes in the fourth quarter of 2020 resulting from the delayed lifting. The per-unit production expense, excluding workovers, decreased significantly in the fourth quarter of 2020 as compared to the fourth quarter of 2019 due to higher overall production rates and was in-line with the per-unit production expense in the third quarter of 2020. Included in total production expense are COVID-19 related costs incurred to protect the health and safety of the Company’s employees. In the fourth quarter of 2020 and the third quarter of 2020, total production expense is approximately $0.4 million and $0.4 million higher, respectively, due to additional costs incurred as a result of the pandemic. For the full year, these costs were $1.6 million.
Depreciation, depletion and amortization (“DD&A”) expense was lower than both the fourth quarter of 2019 and the third quarter of 2020 prior periods due to lower sales volumes in the fourth quarter of 2020 resulting from the delayed lifting. The per-unit DD&A rate in the fourth quarter of 2020 was lower than the rate in the fourth quarter of 2019 due to the impairment charge taken in the first quarter of 2020. The per-unit DD&A rate in the fourth quarter of 2020 was lower than the rate in the third quarter of 2020 due to higher production volumes from fields with a smaller depletion base.
General and administrative (“G&A”) expense, excluding stock-based compensation, in the fourth quarter of 2020 was slightly higher than in the same period in 2019 due to higher legal and professional fees and was similar to G&A expense, excluding stock-based compensation, in the third quarter of 2020. The per-unit G&A rate in the fourth quarter of 2020 was higher than both the fourth quarter of 2019 and the third quarter of 2020 due to lower sales as a result of the delayed lifting. Stock-based compensation expense (benefit) was impacted by the change in the SARs liability as a result of changes in the Company’s stock price during the quarters. For the fourth quarter of 2020 the stock-based compensation expense related to SARs was an expense of $1.9 million compared to expense of $0.6 million for the fourth quarter of 2019. For the third quarter of 2020 there was a benefit of $0.6 million rather than an expense related to SARs.
Income tax was a benefit for both the fourth and third quarters of 2020. For the three months ended December 31, 2020 income tax was a benefit of $0.8 million, and included a $2.8 million deferred tax benefit. For the three months ended September 30, 2020 income tax was a benefit of $2.8 million, and included a $5.3 million deferred tax benefit to decrease the valuation allowances on U.S. and Gabonese deferred tax assets. Income tax expense for the fourth quarter of 2019 was $4.2 million, which included $1.8 million of deferred tax expense.
VAALCO did not have any commodity hedges in place during the fourth quarter of 2020. In January 2021, VAALCO entered into new crude oil commodity swap agreements for a total of 709,262 barrels at a Dated Brent weighted average price of $53.10 per barrel for the period from and including February 2021 through January 2022. These swaps will settle on a monthly basis. The Company hedged a portion of its production volumes to protect cash flows which will be used to fund the 2021/2022 drilling program.
Response to COVID-19 Pandemic
VAALCO remains fully committed to the health and safety of all its employees and contractors. In response to the COVID-19 pandemic, VAALCO has taken the following measures:
VAALCO expects to continue to take proactive steps to manage any disruption in its business caused by COVID-19 and to protect the health and safety of its employees. As of March 9, 2021, VAALCO has experienced no material impact on its Gabon operations directly associated with COVID-19; however, the Company has incurred higher costs related to proactive measures taken in response to the pandemic. These costs were approximately $0.4 million during the fourth quarter of 2020 and $1.6 million for the full year 2020 and were primarily related to additional personnel-related costs to support enhanced health and safety measures.
Financial Update – Full Year 2020
Net loss for the full year 2020 was $48.2 million, or $0.83 per diluted share while Adjusted Net Income was $9.0 million, or $0.16 per diluted share. This compares to the full year 2019 net income of $2.6 million, or $0.04 per diluted share, and Adjusted Net Income of $18.6 million, or $0.31 per diluted share. The year-over-year decrease in net income is primarily the result of lower revenues of $17.3 million and a $30.6 million impairment charge to crude oil and natural gas properties. The lower revenues and impairment charge were a result of lower oil prices in 2020. These items were partially offset by a benefit from higher sales volumes. The Company generated $26.6 million in Adjusted EBITDAX for the full year 2020 compared to $37.5 million in 2019. The reduction was primarily the result of lower revenues as a result of lower crude oil prices which was partially mitigated by the higher sales volumes.
Production for the full year 2020 was 4,853 NRI BOPD or 1.8 MMBO. For the full year 2019, production averaged 3,476 NRI BOPD or 1.3 MMBO. For the full year 2020, VAALCO’s realized crude oil sales price was $40.29 per NRI barrel, or 38% lower than $65.20 per NRI barrel that was realized for full year 2019. Even though there were fewer liftings in 2020, sales volumes increased 30% to 1.6 MMBO in 2020 from 1.3 MMBO in 2019 as a result of higher production in 2020.
For the full year 2020, total production expense, excluding workovers, decreased to $34.8 million compared to $37.2 million in 2019 with the decrease primarily due to higher crude inventory levels from the delays associated with the last scheduled lifting of 2020 as discussed above in “Revenue and Sales”. The production expense rate per barrel of crude oil sales, excluding workover costs, was $21.38 in 2020 and $29.70 in 2019. Workover expense for 2020 totaled $2.5 million and for 2019 totaled $0.5 million.
For the full year 2020, G&A, excluding stock-based compensation, was $10.6 million, a decrease of 7% compared with full year 2019 G&A, excluding stock-based compensation, of $11.3 million. The decrease year-over-year was primarily due to accounting and audit fees associated with VAALCO’s London Stock Exchange listing in 2019 and lower travel related expenses in 2020. G&A includes $0.1 million and $3.5 million of stock-based compensation expense for the years ended December 31, 2020 and December 31, 2019, respectively, that was primarily expense related to SARs.
Year-End 2020 Reserves
The following discussion regarding VAALCO’s reserves and the Present Value of Estimated Future Cash Inflows (“PV-10”) do not include the impact of the acquisition of Sasol’s interest in Etame which closed in February 2021. The impact of this acquisition will be reflected in year-end 2021 reserves and PV-10.
VAALCO’s proved SEC reserves at December 31, 2020 were 3.2 NRI MMBO, all of which are proved developed reserves. The proved developed reserves are 3.7 MMBO on a WI basis. The Company’s SEC reserves were fully engineered by its third-party independent reserve consultant, Netherland, Sewell & Associates, Inc., (“NSAI”) who has provided annual independent estimates of VAALCO’s year-end SEC reserves for over 15 years. In 2020, the Company added 1.6 MMBO of SEC proved reserves through a combination of positive well performance revisions and the SE Etame 4H extension. These additions were offset by a downward revision of 1.6 MMBO due to lower SEC crude oil prices.
The PV-10 value of VAALCO’s proved SEC reserves at year-end 2020, utilizing SEC pricing of $42.46 per barrel of crude oil (average of monthly Brent prices on the first of each month for calendar year 2020 adjusted for price differentials), decreased to $14.7 million from $70.4 million at December 31, 2019. In addition to cash flows from production during the year, the decline was due primarily to lower SEC pricing which declined 33% in 2020 compared with $63.60 per barrel of crude oil in 2019.
|Proved SEC Reserves at December 31, 2019||5.0|
|Extensions and discoveries||0.5|
|Revisions of previous estimates – performance||1.1|
|Revisions of previous estimates – pricing||(1.6||)|
|Proved SEC Reserves at December 31, 2020||3.2|
See “Supplemental Non-GAAP Financial Measures” below regarding proved reserves and PV-10.
At year-end 2020, NSAI provided the 2P CPR estimate of proven and probable reserves which was prepared in accordance with the definitions and guidelines set forth in the 2018 Petroleum Resources Management Systems approved by the Society of Petroleum Engineers as of December 31, 2020 using VAALCO’s management assumptions for future Brent escalated crude oil pricing and costs shown below under “Supplemental Non-GAAP Financial Measures – 2P CPR Reserves”. The 2P CPR reserves attributable to VAALCO’s ownership are reported on a WI basis prior to deductions for government royalties. The year-end 2020 2P CPR estimate of reserves is 10.4 MMBO to VAALCO’s WI. The PV-10 value of VAALCO’s 2P CPR reserves at year-end 2020, utilizing management escalated pricing and cost assumptions, is $84.4 million.
In connection with the acquisition of Sasol’s interest in Etame, VAALCO’s management estimates that it acquired approximately 2.7 MMBO NRI of proved SEC reserves and 9.1 MMBO WI of 2P CPR proven and probable reserves as of the closing date.
See “Supplemental Non-GAAP Financial Measures” below concerning 2P CPR reserves.
Capital Investments/Balance Sheet
For the full year 2020, net capital expenditures totaled $20.0 million on a cash basis and $10.5 million on an accrual basis. Capital expenditures primarily related to the 2019/2020 drilling program at Etame.
At the end of the fourth quarter of 2020, VAALCO had an unrestricted cash balance of $47.9 million, which included $1.4 million in net joint venture owner advances. Working capital at December 31, 2020 was $11.4 million compared with $16.6 million at September 30, 2020, while Adjusted Working Capital at December 31, 2020 totaled $24.3 million, compared with $29.3 million at September 30, 2020.
Including the positive impact of the purchase of Sasol’s interest in Etame beginning with the day of closing of the transaction on February 25, 2021, VAALCO currently estimates full year 2021 NRI production to be between 6,800 and 7,400 BOPD. All of VAALCO’s production estimates for 2021 include an estimated 15% annual natural decline in production. For the first quarter of 2021, which will include slightly more than one month of production from the interest purchased from Sasol, NRI production is forecasted between 5,100 and 5,400 BOPD.
For the second quarter of 2021, which will include the impact of a full quarter of production from the interest purchased from Sasol, NRI production is forecasted between 8,000 and 8,600 BOPD.
For the second half of 2021, which includes the impact of a planned annual seven-day full-field shutdown for maintenance in the third quarter, NRI production is forecasted between 7,100 and 7,800 BOPD.
Sales NRI volumes for 2021 are currently estimated to average 7,100 to 7,800 BOPD. This higher sales volumes per day as compared to production volumes reflects the impact of the delay in the December 2020 lifting to January 2021.
VAALCO’s production expense guidance (excluding workovers) for full year 2021 is expected to be between $69 million and $77 million or $24.50 to $29.25 per NRI barrel of crude oil sales, with production expense for the first quarter of 2021 projected to be between $16.5 million and $18.5 million or $26.00 to $31.00 per NRI barrel. Production expense, excluding workovers, on a gross basis, is comparable between 2020 and 2021 with $121 million of gross expense in 2020 as compared to $118 million to $132 million gross estimated for 2021. The Company forecasts between $10.0 million and $12.0 million in G&A expense, excluding stock-based compensation, for full year 2021.
For the first quarter of 2021, VAALCO expects net capital expenditures, excluding any costs associated with the planned 2021 drilling campaign and seismic, to be in the range of $2.0 million to $3.0 million. For the full year 2021, VAALCO estimates its net capital expenditures, excluding the 2021 drilling campaign and seismic, to total $3.0 million to $6.0 million. VAALCO is currently considering several alternatives regarding the leased FPSO for which the contract will expire in September 2022. Estimated 2021 capital expenditures do not include costs related to any of these alternatives.
As previously announced, the Company will hold a conference call to discuss its fourth quarter financial and operating results Wednesday, March 10, 2021, at 9:00 a.m. Central Time (10:00 a.m. Eastern Time and 3:00 pm London Time). Interested parties may participate by dialing (877) 270-2148. Parties in the United Kingdom may participate toll-free by dialing 08082389064 and other international parties may dial (412) 902-6510. Participants should request to be joined to the “VAALCO Energy Fourth Quarter 2020 Conference Call.” This call will also be webcast on VAALCO’s website at www.vaalco.com. An archived audio replay will be available on VAALCO’s website.
VAALCO, founded in 1985, is a Houston, USA based, independent energy company with production, development and exploration assets in the West African region.
The Company is an established operator within the region, holding a 58.8% working interest in the Etame Marin Block, located offshore Gabon, which to date has produced over 120 million barrels of crude oil and of which the Company is the operator.
For Further Information
|VAALCO Energy, Inc. (General and Investor Enquiries)||+00 1 713 623 0801|
|Al Petrie Advisors (US Investor Relations)||+00 1 713 543 3422|
|Al Petrie / Chris Delange|
|Buchanan (UK Financial PR)||+44 (0) 207 466 5000|
|Ben Romney / Kelsey Traynor / James Husband||VAALCO@buchanan.uk.com|