VAALCO Energy, Inc. reported operational and financial results for the third quarter of 2021 and announced its Board of Directors has adopted a quarterly cash dividend policy of an expected $0.0325 per common share commencing in the first quarter of 2022.
Highlights and Recent Key Items:
- Reported strong Q3 2021 net income of $31.7 million ($0.53 per diluted share) driven by increased sales, higher realized pricing, and a $22.7 million non-cash deferred tax benefit;
- Generated $10.0 million ($0.17 per diluted share) of Adjusted Net Income(1);
- Grew Adjusted EBITDAX(1) to $23.3 million in Q3 2021 and has now generated $63.2 million in the first nine months of 2021;
- Sold 741,000 barrels of oil in Q3 2021, an increase of 15% over Q2 2021 and produced 7,694 net revenue interest (“NRI”)(2) barrels of crude oil per day (“BOPD”), or 8,844 working interest (“WI”)(3) BOPD in Q3 2021, near the high end of guidance despite the annual seven-day field-wide turnaround;
- Efficiently completed the annual turnaround in September, on time and within budget;
- Undertook and completed a second scheduled turnaround in early October for maintenance needed on the FPSO;
- Successfully performed two workovers in September and October which resulted in an increase to production of approximately 1,050 BOPD gross (540 BOPD net);
- Provisionally awarded two offshore blocks in Gabon adjacent to Etame as part of a consortium with VAALCO owning a non-operated working interest of 37.5%;
- Grew cash balance to $52.8 million as of September 30, 2021; and
- Adopted a quarterly cash dividend policy of an expected $0.0325 per common share commencing in the first quarter of 2022.
(1) 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.”
(2) All NRI production rates and volumes are VAALCO’s 58.8% WI from and after February 25, 2021, less 13% royalty volumes.
(3) All WI production rates and volumes are VAALCO’s 58.8% WI from and after February 25, 2021.
George Maxwell, VAALCO’s Chief Executive Officer commented, “We are very encouraged by our strong third quarter operational and financial results, as well as the key strategic developments accomplished over the past several months. We efficiently completed our annual turnaround on time and within budget in the third quarter and still produced nearly 7,700 NRI BOPD near the high end of guidance. We generated $23.3 million in Adjusted EBITDAX and grew our cash position to $52.8 million, ensuring we can fully fund our 2021/2022 drilling campaign from cash on hand and through cash from operations. We are delivering operationally, benefiting from the improved commodity price environment and generating significant cash flow, firmly placing VAALCO in a financially stronger position and poised to execute on accretive growth initiatives.”
“In addition to strong operational and financial performance, we progressed several key strategic initiatives. In October, we were provisionally awarded two offshore blocks, as part of a consortium, that will broaden our presence and relationships in Gabon. The consortium of VAALCO, BW Energy and Panoro Energy is uniquely positioned with the knowledge, experience and expertise of progressing world-class discoveries in Gabon adjacent to these awarded blocks. We also recently announced the completion of our drilling feasibility study for the standalone development of the Venus discovery in Block P, Equatorial Guinea, and are moving forward now with an evaluation of the engineering options and economics towards a field development concept.”
“Enhancing our production, reducing our costs and extending the economic life at Etame is the priority focus and a driving force for VAALCO’s continued success. In August, we finalized an agreement with World Carrier that will allow us to sustain our operational excellence and robust financial performance at Etame through 2030 with a new FSO solution. This new solution, which comes into effect in September 2022, costs almost 50% less than the current FPSO and is expected to reduce our overall costs by approximately 17% to 20%. This will significantly improve our margins and enhance our cash flow generation once operational. This summer we secured a jack-up rig for our 2021/2022 drilling campaign and will begin drilling our first well, the Etame 8H-ST, in December 2021. We believe that executing another successful drilling campaign with the goal of adding material production and reserves will significantly improve our size and scale, further enhancing our ability to execute on our accretive future growth initiatives. The objective of the drilling campaign is to increase production by 7,000 to 8,000 barrels of oil per day gross. We are confident we can achieve these objectives given our drilling track record at Etame and are excited to get our next drilling campaign underway. We believe this is the first step of a multi-year accretive growth plan with upside potential at Etame and Equatorial Guinea.”
Maxwell concluded, “In the current environment, we believe that it is important E&P companies commit to return cash to shareholders. The decision to initiate this dividend policy reflects the strength of our business. Our Board considered several alternatives to provide a meaningful return to our shareholders and believe the implementation of a sustainable, quarterly cash dividend is the right approach for VAALCO, based on our strong balance sheet and ability to generate meaningful free cash flow.”
Operational Update
Gabon
2021/2022 Drilling Campaign & Seismic Acquisition
With the 2021/2022 drilling program expected to begin in December 2021, VAALCO executed a contract with Borr Jack-Up XIV Inc., an affiliate of Borr Drilling Limited, to drill four wells with options to drill additional wells. The Company expects to spud the Etame 8H-ST, the first well of the 2021/2022 drilling program, in early December 2021. The Company estimates the cost of the 2021/2022 drilling campaign at Etame to be between $117.0 million and $143.0 million gross, or between $74.0 million and $91.0 million net to VAALCO’s 63.6% participating interest, with about $26 million to $31 million gross expected in 2021, or about $16 million to $20 million net to VAALCO.
In December 2020, VAALCO completed the acquisition of approximately 1,000 square kilometers of new dual-azimuth proprietary 3-D seismic data over the entire Etame Marin block. The Company has used the newly processed 3-D seismic to optimize drilling locations for the 2021/2022 drilling campaign. Additionally, VAALCO continues to review and interpret the seismic to de-risk future drilling locations and potentially identify new drilling locations.
Consortium Provisionally Awarded Two Offshore Blocks in Gabon
The consortium of VAALCO, BW Energy and Panoro Energy has been provisionally awarded two blocks in the 12th Offshore Licensing Round in Gabon. The award is subject to concluding the terms of the production sharing contracts (“PSC”) with the Gabonese government. BW Energy will be the operator with a 37.5% working interest, with VAALCO (37.5% working interest) and Panoro Energy (25% working interest) as non-operating joint owners. The two blocks, G12-13 and H12-13, are adjacent to VAALCO’s Etame PSC as well as BW Energy and Panoro’s Dussafu PSC offshore Southern Gabon, and cover an area of 2,989 square kilometers and 1,929 square kilometers, respectively. Both Etame and Dussafu have been highly successful exploration, development and production projects undertaken by the consortium members over the past 20 years with approximately 250 million barrels discovered to date.
The two blocks will be held by the consortium and the PSCs over the blocks will have two exploration periods totaling eight years which may be extended by two additional years. During the first exploration period, the joint owners intend to reprocess existing seismic and carry out a 3-D seismic campaign on these two blocks and have also committed to drilling one exploration well on each of the two blocks. In the event the consortium elects to enter the second exploration period, the consortium will be committed to drilling at least one exploration well on each of the awarded blocks.
Approved FSO Agreement
VAALCO and its co-venturers at Etame have approved the Bareboat Contract and Operating Agreement (collectively, the “Agreements”) with World Carrier Offshore Services Corp to replace the existing Floating Production, Storage and Offloading unit (“FPSO”) with a Floating Storage and Offloading unit (“FSO”). Compared to the current FPSO agreement, the new FSO will significantly reduce storage and offloading costs by almost 50%, increase effective capacity for storage by over 50%, and is expected to lead to an extension of the economic field life, resulting in a corresponding increase in recovery and reserves at Etame. The Agreements require a prepayment of $2 million gross ($1.3 million net) in 2021 and $5 million gross ($3.2 million net) in 2022 of which $6 million will be recovered against future rentals. Current total field level capital conversion estimates are $40 to $50 million gross ($26 to $32 million net to VAALCO) with about $5 million net expected in 2021 and the remainder in 2022. This capital investment is projected to save approximately $20 to $25 million gross per year ($13 to $16 million net to VAALCO) in operational costs through 2030, giving the project a very attractive payback period of less than two and a half years.
Equatorial Guinea
VAALCO will have a 45.9% WI in Block P offshore Equatorial Guinea, once the Ministry of Mines and Hydrocarbons approves the new amendment to the production sharing contract. VAALCO has completed a feasibility study of a standalone production development opportunity of the Venus discovery on Block P. The Company is now proceeding to a field development concept and will work closely with the other joint venture owners to complete this over the coming months. The Block P PSC provides for a development and production period of 25 years from the date of approval of a development and production plan.
Financial Update – Third Quarter of 2021
Net income of $31.7 million ($0.53 per diluted share) for the third quarter of 2021 compared favorably with net income of $5.9 million ($0.10 per diluted share) in the second quarter of 2021 and $7.6 million ($0.13 per diluted share) in the third quarter of 2020. The third quarter of 2021 reflected stronger revenue due to increased sales in the quarter and higher realized pricing. The third quarter 2021 earnings also included a $22.7 million non-cash deferred tax benefit, partially offset by a $5.1 million loss on derivative instruments, of which $1.0 million was an unrealized loss.
Adjusted Net Income for the third quarter of 2021 increased to $10.0 million ($0.17 per diluted share) from Adjusted Net Income of $8.4 million or ($0.14 per diluted share) in the second quarter of 2021 primarily as a result of increased sales and realized pricing. Adjusted Net Income for the third quarter of 2020 was $2.3 million ($0.04 per diluted share).
Adjusted EBITDAX totaled $23.3 million in the third quarter of 2021, an increase of 6% compared with $21.9 million in the second quarter of 2021 and more than three times the $7.0 million generated in the same period in 2020. Adjusted EBITDAX for the third quarter of 2021 was higher compared to the prior periods primarily due to increased sales volumes and improved realized prices.
