VAALCO Energy Inc (EGY) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the VAALCO Energy second-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions being given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Robert Gerry. Please go ahead.

Good morning ladies and gentlemen, and welcome to VAALCO's second-quarter investor conference call. Bear with me while I read our Safe Harbor statement.

This conference includes forward-looking statements as defined by the US securities laws. Forward-looking statements are those concerning VAALCO's plans, expectations, and objectives for future drilling, completion, and other operations and activities. All statements included in this conference that address activities, events or forward developments that VAALCO expects, believes, or anticipates will or may occur in the future are forward-looking statements. These statements include future production rates, completion, and production timetables and cost to complete wells. Investors are cautioned that forward-looking statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. These risks are further described in VAALCO's Annual Report on Form 10-K for the year ended December 31, 2007 and other reports filed with the SEC.

Thank you for bearing with me. Now, regarding our second quarter, it was really very good. Obviously the price of the commodity worked in VAALCO's favor as we averaged approximately $119 per barrel. And the buyer of our crude listed at about 113,000 barrels more during the quarter than we sold in the same quarter a year ago. But once again, the taxman cometh and took about 50% of our revenues. However, we're now building expenses in our cost account and the tax taketh this and ensuing quarters should be considerably less. But Russell may have more to say about that.

I will now turn the call over to Russell Scheirman, our President and CFO, who will take us through our second-quarter and six-month financial statements. Russell?

We sold 400 -- in the second quarter, we sold 464,000 net barrels at an average price of $119.18 for revenues and $55.4 million compared to 351,000 barrels sold in the second quarter of 2007 at an average price of $68.77 for revenues of $24.1 million. Our operating costs were $14.7 million in the second quarter of 2008 compared to $8.9 million in the second quarter of 2007. We matched our operating expenses with production, so a large portion of that increase in operating costs was as a result of the fact that we sold 464,000 compared to 351,000 barrels in the quarter.

Our actual operating expense per barrel was $9.78 for the quarter compared to $8.48 for the previous quarter, so it's up about $1.30. Part of that is this new tariff that we have to pay on the FPSO for production in excess of 20,000 barrels a day. The other big factor in there is the cost of fuel that we consume in our field operations.

Our depletion rate was actually about stable, $11.29 per barrel compared to $11.59 in the second quarter of 2007. We also experienced some higher G&A due to some non-recurring costs associated with our annual meeting and our proxy solicitations. That gave us operating income of $40.7 million for the quarter compared to $15.2 in the previous quarter. And then, as Bobby mentioned, we had income taxes of $26.5 million in the second quarter. And after taking the minority interest of about $2 million, we ended up with net income of $13 million for the quarter or $0.22 a share. That compared to after we saw $11.3 million in taxes and minority interest to net income of $3.7 million in the second quarter or $0.06 per share, so a much better quarter than the previous year's quarter.

For the six months, we have sold 910,000 net barrels at an average price of $107.06 compared to 861,000 barrels sold in the previous year's six-month period at an average price of $61.81 that gave us revenues of $97.5 million for the six months compared to $53.3 million.

Our operating expenses were $32.7 million, up from $25.7 million -- $28 million in the previous quarter. Part of that is due to the dry hole in the North Sea that we had. Our exploration expense is $8 million for the six months compared to $5.5 million for the previous six months. Also, part of that is due to the higher operating costs. For the six months, we averaged $9.81 a barrel operating costs compared to $8.41 for the previous year. That gave us an operating income for the six months of $64.8 million compared to $27.5 million. However, income taxes were $47.9 million compared to $18.5 million. After taking into account the minority interest, we end up with net income of $14.8 million for the six months or $0.25 a share compared to $8.3 million or $0.14 per share.

With that, Bobby, I will turn it back over to you.

Thank you, Russell. We will get to our drilling program and exploration program here in a second, but just a few fillers. As many of you are aware in May of this year, we settled our proxy contest with Nanes Delorme and held our annual meeting in early June. Subsequent to that event, during the second quarter, we purchased under our buyback authorization 1 million shares of VAALCO at a cost of about $7.5 million, bringing our total expenditure under the buyback to slightly more than $11 million.

The Board has authorized management to spend up to $20 million in the buyback. And I think with our current cash position of over $100 million, we will continue to prudently purchase our shares in the open market. Operationally, our Ebouri platform was successfully towed across the Atlantic and installed on location, on budget and on schedule, which I think is a great compliment to the operations team here at VAALCO.

We have put out a press release and we have also discussed it here in our second-quarter earnings reports of our upcoming drilling and development schedule. We have about 12 prospects remaining to be drilled on our Etame concession. I mention again this is on our Etame concession itself. It does not include our onshore Gabon properties. Nor does it include Angola, nor the opportunity that is forthcoming in the North Sea.

Again, these prospects, these 12 prospects total in excess of 80 million barrels net to VAALCO if we are successful. And that is obviously a speculative figure. I doubt if we will reach that very lofty goal, but I can assure you that we all are very excited around here. The drilling program should kick off late in September or in the month of October. A lot of it is timing. Timing is at the mercy really of the rig companies themselves, and the operators who have the rigs in front of us, i.e., if they take longer than expected to drill their wells or they want to keep the rig for a period of time to complete some other operations, we are strictly at their mercy. So occasionally, these numbers may slip, but we have been working on this for the better part of two years. And we think that this is the opportunity that VAALCO has been eagerly anticipating.

We should again start this program in a couple of months. We will drill three wells. First of all, North Ebouri, North Etame and Southeast Etame. We will follow that later on in the year with two wells onshore at Gabon and a well in the North Sea. And probably in the first half, maybe late in the first half, we will drill our initial exploratory well in Angola.

VAALCO is well aware of the marketplace. We are cognizant that our peer group really has suffered a bit of a decline in the marketplace primarily due to the weakness in the commodity. I personally think that the weakness in the commodity is probably a good thing for the economy not only of the United States, but the world in general. The price of oil when it gets over $140 a barrel is very susceptible due to a decline in the economies of many of the countries. And subsequent to obviously after that, you could go into a serious recession worldwide. So it doesn't bother me and I don't think it bothers the Board of VAALCO that we are in a downturn here in the price of the commodity. I suspect we're getting close to at least a pretty serious bottom here.

And again, as I mentioned, the Board has authorized VAALCO to purchase up to $20 million worth of the stock in the open market. And I certainly think that we will prudently continue to do that process.

You've all seen again a number of the announcements that we have made regarding the upcoming drilling program. And again, I iterate that we here at VAALCO are looking forward to this opportunity. We believe we're going to be able to add considerable reserves to VAALCO's portfolio.

But with that, I think probably some of you have some questions. So I'm going to defer to you and open the conference up to any questions you all may have.

(Operator Instructions). Daniel Senneff, RBC Capital Markets.

Just looking at the exploration prospects you laid out in the press release, can you give us an idea of what the costs are expected to be on these prospects?

Yes, the offshore exploration wells in Gabon run about $15 million apiece, and our share is 30%, 30.35%, so just under $5 million a well. And then, the onshore wells, we are looking at somewhere in the range of $7 million to $8 million per well for those wells where we have 100% working interest. We haven't decided yet whether we are going to take the whole 100% or whether we will invite partners in.

Then, the North Sea well, our share of the cost of that well will be in the range of $8 million or a 25% working interest. And there is some promote built into that number. The well in Angola is -- we're still working those costs. That will involve a floater. Our share of that well could be in the $15 million plus range of that well.

About how long will it take to drill these wells if you have a rig out there?

The exploration wells will take 30 to 35 days apiece offshore Gabon. The onshore wells are about three weeks apiece. The big cost there is getting the roads and the pad built to drill the well. The actual well doesn't take that long.

Depending on which prospect we drill in Angola, there is one that's deeper than the other. It will either be a 35 or a 45 day well. The North Sea well I believe is about a 30-day well. So there are 30 to 45 days.

Thank you.

(Operator Instructions). Kenneth Pounds, Nutmeg Securities.

I noticed that I think it's Canadian Natural is doing an offshore Gabon product, the Olowi project. I don't know if I am saying that correctly, but is that something near your fields? Does that have any connection to your fields in offshore Gabon?

It's near our field in Gabon. It's a former Pioneer property that the firm out of Canada purchased. It's primarily -- it's a -- they are searching for oil around the gas cap or gas rim. It's got a lot of gas. We looked at it to be thoroughly candid about it and passed. We looked at it a couple of years ago, probably three years ago. It's going to be a very expensive project. There's going to be a number of platforms that have to be placed around this gas cap. I don't know the number yet. But no, it won't affect VAALCO. We wish them the best of luck. We think -- well --

The one potential positive thing is that the FPSO they're going to be using is owned by the same company that owns the FPSO we're using FPL. They actually are going to have -- Fred Olsen managed that FPSO for them, so they have opened an office in Gabon. And in addition to managing the FPSO, they are managing their supply boats. There is some pretty good chances that we will be able to find some synergy there and share boats on lifting some things. We have to go out and spot charter a boat every time we do a lifting.

That would be great, right?

Those things are getting --

That would help.

-- $50,000 a day. They used to be $8000 a day. And if they have a full-time vessel and we have a full-time vessel and we can share during liftings, as long as we're not lifting at the same time, there would be some synergy there.

Is Marathon selling their Gabon stuff too to -- to Tchatamba? I thought I saw that somewhere.

We haven't heard that they are selling it.

I know they got out of Guinea.

A firm purchase debit interest in that field.

That's what I saw, okay.

Six months ago or so, but we have never heard that Marathon was going to sell.

Why do you think that Devon got out? Is that something just to deal with it was just not material to them?

They got out of Africa totally.

Right.

They are now big players in the US primarily. They claim to use those the funding for the Gulf of Mexico.

Right. Okay, and so you talked a little bit about the tax rate and you thought that perhaps in the third and fourth quarter that would start to come down as you build costs you said? Do you have any more color on that?

I would expect our tax rate to drop down into kind of the 40% range rather than the 50% range in the second and third -- excuse me, the third and the fourth quarters. We had a big expenditure in June but our last lifting was in early June. And so we weren't able to get that into the cost account in time to get it from the June lifting. But we did recover it from the July lifting. And in July, the government share was actually down around 30%, but it was a small lifting.

Were you -- I know you generally don't do hedging. Were you tempted when oil hit 140 to lock in some of that?

We thought about it, should have. But you know, our philosophy here is we will hedge when we need to hedge. We don't have any debt that we have got to worry about. We don't have any vast development project going on that we are required under bank agreements to hedge. When that time arrives, we will certainly consider doing all of that.

But really for VAALCO to hedge right now is pure speculation in what the price of the commodity is going to be. And we are explorers, explorationists, and I don't think that that is a business we should be in right now. It's worked very well, obviously, in our favor at least up until now. But I think we will continue that philosophy. If our stockholders want to go out and hedge, that is up to them. But I don't think we will.

Okay, and finally, it sounds like you are dependent a little bit on rigs and you said 30 days. So probably the first well results are results that could affect your reserve base with we're talking about probably November then?

Yes.

Okay. Great. Thank you very much.

(Operator Instructions). Jamie Wilen, Wilen Management.

Volumes in the first quarter of 446,000 barrels and the second were 464 net to VAALCO, I would assume those numbers now that we've got the FPSO under control and the new field zone would be a bit higher as we move forward?

Yes, they actually did not lift all of our production in the first half. So you may notice that if you look at our balance sheet, our crude oil inventory is around $1.6 million, which represents something like 110,000 or 120,000 barrels of inventory that we had at the end of -- as I mentioned, they lifted early in June. And then they have a lifting schedule for the end of June and it slipped into July.

Okay. So as I'm looking -- there's only one analyst who actually follows the Company. He seems like an unusual sort of fellow. And as he looks at next year's numbers of $0.65, given that you are going to be lifting more volumes, that doesn't seem like a number that is absolutely possible in this world.

I'm sorry can you repeat that, Jamie?

There's one analyst who follows the Company. And as he looks at next year, he puts out an estimate for you of $0.65 per share. Now, given that you are going to be pulling out more volume this year than next year, it would seem to hit that number, oil would have to be somewhere in the neighborhood of $60 a barrel.

We don't disagree, Jamie. You are right. We've got really one analyst with RBC. There's another one really with Pritchard Capital who follows us, but he doesn't really publish a great deal of research. It's somewhat frustrating that we don't have a greater coverage. We've talked to a number of good but medium-sized investment firms to inquire why they won't. They say, oh, we will get right on it. It's the last we hear from them.

I think one of the perhaps uniqueness about VAALCO is that we don't have any domestic production or domestic holdings really. We are West Africa based really, and it may deter somewhat from that, but we are going to continue to prod people to follow us because having one firm period being your First Call kind of representative is not a good position to be in. And I hope we can cure that.

Especially when he seems to have some sort of agenda. A couple of other questions. You obviously have a decent amount of cash. When this current buyback is finished, would you expect that the Board may reauthorize given the balance sheet?

We will discuss it with the Board.

Okay. And lastly, as far as taxes go, obviously your tax rate is somewhat higher because you can apply losses in other jurisdictions. Could you tell us what the NOLs currently that you have to hopefully eventually use in Angola, North Sea, etc.?

It's about 12 million in the North Sea. In Angola, I think we're only got a couple of million dollars in our cost of capital there.

Okay.

And Mutamba, it is also pretty small, less than 1 million.

Then lastly, you mentioned that you may indeed of the properties that you have 100% of, you may indeed at one point in time consider selling off a portion. Would you do that before or after you drill?

We'd do it before. We are not definitively by any means going to do that. Again, I think it's based on our cash position that we have. We can well afford to drill them, and the big demand in our business, of course, is to find prospects to drill. We have had a number of inquiries about our onshore properties from a number of companies. Certainly if the right deal came along -- and this could be based on a promote they are willing to pay. It could be based upon property swap. It can be based on a number of things. And should a transaction like that where it is favorable to VAALCO -- and we intend to keep the vast majority of these prospects. But if there is a way where VAALCO could take advantage of a possibility or a possible transaction, we will do it. But at the moment, we still have 100%.

Okay. Very good. Exciting times ahead.

TJ Schultz, RBC.

Just one quick follow-up on the exploratory program and the wells that you are going to drill. I know you guys laid out pretty well in the press release the kind of gross reserve potential. I was hoping you could just go through each of the wells. And I know it's difficult, but give me your best assessment of your risk or kind of your net risk potential for those wells.

Well, in the three offshore wells in Gabon, the prospects range from about 25 million gross barrels for North Ebouri. Let's see. Southeast Etame is also about 28 million barrel potential. And then, the North Etame prospect is on the order of 35 million barrels. And we think these are kind of one in three shots relative to -- on a risk basis. So they're decent prospects. They're 20 plus million barrels all three of them, and that's why we're excited.

And then onshore, we've got 120 million barrel prospect and a 10 million barrel prospect, and again, these wells are 3500 foot wells, so they are not that deep. The Angola prospect, there's three objective zones. Each one of those could potentially be 50 plus million barrels. Two of them are above the salt. One of them is below the salt. The one below the salt is actually the biggest, but of course, the riskiest. The North Sea, it's a 60 Bcf prospect or something in that range. So our share would be 15 Bcf or a couple of million barrel equivalents.

Okay. Do you have enough information for your Mutamba wells? Just what typical success rates are there onshore Gabon?

We're using success rates between 25% and 30%.

Okay great. I appreciate it. Look forward to the wells.

Kenneth Pounds, Nutmeg Securities.

Just real quick the last caller reminded me of something I wanted to ask about. Since there's so much drilling coming up, you probably seen all of the exciting talk in your neck of the woods about horizontal drilling and new advantages and fracking and so forth. Are you all going to take advantage of some of these new technologies, especially on onshore, the potential for horizontal drilling to make these wells more profitable or make them more economic?

Yes, actually, all of our development wells are completed horizontally except one, and that one had mechanical issues that didn't allow us to re-enter it and take it horizontal. But no, we use horizontal drilling. We typically drill our exploration wells vertical to find out what is there and then come back with development wells based on what we learn from the vertical exploration wells and lay horizontals in there.

We utilize a gravel packing mechanism that is really cool if you are an engineer like I am, where we are able to literally run a wave of sand out to the end of the horizontal and then zip it back to gravel pack these wells to make sure we don't have any problems with the formation collapsing around us, etc. So we try and stay on top of that technology.

I guess there's been some horizontals completed in Louisiana with concrete, right? They're going way out whatever 7,000, 9000 feet and [feeder] 10 frac stages and so forth?

Yes, but that's all the super tight shale gas stuff. Our reservoirs are high ferocity, high permeability and really the horizontal just allows you to drain a larger area with one well.

Right, which would obviously make it much more economic.

Sure. We've got wells that are making 4, 5, up to 12 million barrels from one well. So these are pretty nice wells. We will also --

Great. You should talk about that more.

Probably 2009, we're going to take our one vertical well -- we're going to take it -- horizontal or drill a new well next to it.

Yes, we've ordered the [tree for it].

Yes, that will happen in late 2009.

Because I think that that's something that could be explained about more because not every well is the same and not everybody drills wells the same or obviously, right? So Greg, you mentioned the frustration with the analysts. Is there potential for you guys to come to some of these oil and gas conferences that get put on periodically? I think there is actually one in Houston in October maybe.

We're going to go to a number of them this quarter.

Good. Great, so maybe I will see you at one of those.

(Operator Instructions). [Neil Nelson], Private Investor.

I was wondering if you could provide some color on the development well that is going to drilled, in Ebouri on the -- for a slot on the platform. And when you process that oil back to the FPSO, will that be increased probably in your net production? Or will you blend that down by reducing the flow off of some of the other wells to keep it below 20 to keep it below the breakpoint where their royalty changes?

Well, right now we're producing around 21,000 barrels a day, and so that leaves us 4000 barrels a day for Ebouri. We will probably see some decline between now and the end of the year, maybe 400 or 500 more barrels. So initially, we plan to ramp Ebouri up to get us to that 25,000 barrel a day limit. The issue is going to be if North Ebouri works, then we will drill a second development well off that platform and making room for it. Then we start looking at well maybe we back off one of the high water cut wells in Etame to make room for an oil -- a dry oil well. We will just have to manage that problem.

And then, if we get really lucky and hit two or three of these things, we would have to look at expanding the FPSO. But we won't expand the FPSO unless we think we can go well north of 30,000 barrels a day.

And Mutamba of course is onshore and that's pipeline.

With the processing of the North Ebouri to bring it on-stream if it is successful, be done with the same rig that is drilling the current -- that will drill the current development well?

Yes, we (multiple speakers) used the same rig to drill both of those wells. But then all of that oil would flow into the process facility that is on the Ebouri platform. And actually we've gone ahead and put a full separation facility to knock out water at the platform so we don't overcrowd the FPSO with water production from Ebouri. So we will be shipping clean oil back from the Ebouri platform to the FPSO. It will have to go through the separation process again on the FPSO. It won't actually flow directly into the tanks because it's comingled with Avouma, we have a single pipeline or a single flow line riser coming up to the FPSO that Avouma and Ebouri will mix. But at least we won't be sending a ton of water over there given that we are already bumping up against constraints and we don't want to have all that extra water.

Thank you very much. That answers my question.

Chris Kauffman, Pritchard Capital Partners.

Kind of a multi-part question based on the activity with things and the shifting of the Board membership and whatnot, as far as the North Sea, is that going to be an ongoing area you guys are going to look at? Or is this kind of your last shot up there -- is part one.

Part two, the potential of a dual listing over on the AIM or LSE to get a better valuation multiple for your Company that you can get in the US because of being a West African focused company.

Then the third part, based on Gulf of Mexico multiples and the OCS activity that is being talked about is in favorable tax rates. Any interest in moving into that area to try to mute some of the tax benefit and get more exposure to the US place? Are any of those things being discussed among the Board?

In order of the North Sea, we are an opportunistic company. We will certainly consider another opportunity in the North Sea if we like it. And we haven't seen one yet, but we have seen a few that may be of interest in the future.

As far as the listing is concerned, we're still considering that. One of the reasons to have listed per se in London, even Canada, was to take advantage of the ability to include your -- but besides just proved reserves, be able to include probable reserves in your reserve reports. For both, (technical difficulties) the United States didn't allow that. Now, the SEC is apparently going to allow that, so that took away one of the cornerstones really in our thought process to list over there.

But we still are reviewing that option because we do believe that the investors certainly in the UK are more attuned to an exploration company such as VAALCO, and are probably more attuned to West Africa, the West African potential than some US investors. I caution you though. Certainly I think there's about 100 energy companies listed on the AIM Exchange, which is an adjunct to the London Stock Exchange.

I'm told, and I don't know this, but I'm told that probably 60% of those have lost over 50% of their market value in the last four to six months. And 40% of them are below their offering price. And probably if that's true, and I don't know if that's true, those numbers probably have scared off some potential investors. But we will see. It's something we'll talk about.

As far as the Gulf of Mexico, I believe you mentioned are coming generally to the United States, is not on our radar screen. I appreciate though the safety perhaps of being in the United States as opposed to the foreign countries where VAALCO is. But again, where we are is pretty good. Gabon is considered to be one of the best countries in West Africa to have production. Angola now is ahead of Nigeria as far as daily production at least is concerned, and they are ramping up to bring on onstream in the next couple of years some large, large reserves. And they are the fastest-growing country on domestic numbers I think in Africa. So they've got a -- they keep trying to get more transparent in their government.

Angola is in a boom market. So we feel comfortable over there. We've got offices in both Gabon and Angola. We have no problems with any of it. And I think we'd look to expand actually in West Africa. But I will never say never about coming to the United States. It gets dangerous if you do that. There are opportunities in the United States to amelgamate VAALCO perhaps with another company that is looking for foreign properties or foreign exploration, of which they don't have a part of right now. And maybe there is a transaction that we might be able to entertain in that area.

Thank you very much for the color.

There are no further questions in the queue. Please continue.

If there's no further questions, we appreciate everybody's attendance and we look forward to seeing you at the end of our third quarter. So thank you all very much.

Thank you. And ladies and gentlemen, this conference will be made available for replay after 12 PM today until Friday, September 12th at midnight. You may access AT&T Executive Playback Service at any time by dialing 1-800-475-6701, entering access code 956406. International participants dial 1-320-365-3844. Again, the access code is 956406.

And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.