VAALCO Energy Inc (EGY) 2008 Q4 法說會逐字稿

Ladies and gentlemen, good morning, thank you for standing by, and welcome to the VAALCO Energy fourth quarter year end earnings conference call. At this time all lines are in a listen-only mode. Later there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

This time I would like to turn the conference over to our host, Chief Executive Officer, Mr. Robert Gerry. Please go ahead.

Thank you, Tom, and good morning, ladies and gentlemen, and welcome to VAALCO's 2008 conference call. Bear with me while I again read our forward-looking statement. This conference call 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 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 include future production rates, completion and production time tables, and costs to complete wells. Investors are cautioned that forward-looking statements are not guarantees of future performance and that actual results or developments may differ material from those projected in the forward-looking statements. These risk are further described in VAALCO's annual report on form 10K for the year ended December 31, 2008, and other reports filed with the SEC.

Thank you for your patience. The format this morning will be, I'll make a quick remark here in the beginning and then I'll turn it over to Greg Hullinger, our CFO, and then he'll turn it over to Russell Scheirman, our President and COO, and then he'll give it back to me for a wrap-up, and then we'll take questions. I thought I would begin by updating you all, before I turn it over to Greg, just quickly on our drilling activity in the North Sea. We're getting close on it. We're running a core barrel currently into the gas formation. We have gas shells in, we're running 170 feet high to the shell well that this whole -- that this well was really akin to. That's good news. So keep your fingers crossed and we'll see what happens. We should know results from that probably 48 hours from now. So with that, a bit of good news, I'll turn it remember to Greg, and go ahead, Greg.

Thank you, Bobby, good morning, it's my pleasure to take you through the VAALCO Energy's 2008 financial results. I would with like to start with a couple superlatives, we increased net income by 56%, 2008 versus 2007. And we also maintained a very strong balance sheet with having $125 million of cash and $5 million of debt as of the end of the year. Now I'll take you through some of the details. For the 12 months ended December 31, 2008, VAALCO reported net income of $29.7 million or $0.50 per diluted share. This compares to a year ago where we reported net income of $19.1 million or $0.32 per diluted share.

For the full year 2008, we have revenues of $169.5 million, this compares to $125 million from a year ago. In a youthful measure of cash flow, called discretionary cash flow, which is a non-GAAP financial measure for the full year 2008 was up 27% to $66.6 million compared to $41.4 million in 2007. So this was a good achievement of generating cash flow. When we talk about more information about our results, we sold last year $1 million, 827,000 net barrels of crude oil equivalent at an average price of $92.81. This compares to a year ago of 1.759 million net barrels at an average cost of $71.10. Of course we all know 2008 was a volatile year for crude oil prices. We had a total of 17 liftings from our FPSO. That's where we have the actual sales take place. If we just look on a quarterly average over 2008, in quarter one, we sold our crude for an average of $95. In quarter two, it was $119. In quarter three, $107, and in quarter four it dropped all the way to $41. So quite a bit of volatility there. This certainly reflects in the financial results.

Our 2008 operating income was $106.5 million compared to $68.7 million in 2007. We had a fairly aggressive capital expenditures program, especially towards the end of the year. We spent a total of about $25.7 million and $15.5 million of that was the cost to install the Ebouri platform. This was built in the US and placed in the [Gabodine's] off-shore waters in July of 2008 and then the drilling program we started late in the year, we spent $2.7 million on the appraisal and the development well in Ebouri. We also spent a couple of million dollars on the FPSO, upgrading the facility there's, particularly with I think the [flair] and with water handling facilities and we spent $2.2 million getting ready for our on shore drilling activities in Gabon. In addition, there were some advance expenses for our share of costs for a well that we are not the operator for in the British North Sea and that was $0.8 million that we spent in 2008.

Production expenses in 2008 were $18.5 million as compared to $15.1 million in 2007, and the increase in expenses were attributable to a few reasons. One was just the increased volume sold which will raise the expenses. We did have 17 liftings in 2008 versus 14 liftings in 2007. Each lifting attracts costs including marine vessel so that's another reason, and then just over the course of the year, fuel costs were conservatively higher and we use a lot of diesel where you have to pay for the fuel and the boats and the helicopters, etc. So this was a significant increase in the spending as well. Expiration costs in 2008 were $14.9 million, this was almost identical to a number in 2007 at $15.3 million. We did start off a year by writing off the remainder of another well in the British North Sea that was determined to be non commercial in early 2008. This was a $6.4 million write-off that occurred at the beginning of the year, and then actually in early 2009, we had two unsuccessful wells, one in the on-shore Gabon block Mutamba Iroru and a second one in the North Etame area. So we discovered these to be unsuccessful in early 2009 and accounting regulations require that you go back and you write off any expenses that have been incurred for those wells all the way up through the end of the year. So we did that.

$2.5million in expiration cost was expensed for the on-shore wells and $0.3 million for the north Etame well. We go on to explain that we expect to be writing off an additional $9.3 million in the first quarter of 2009 for these wells and break out is $5.5 million for the on-shore well and an additional $3.8 million for the north Etame. You might remember the on-shore well is 100% owned by VAALCO. The north Etame is 30% owned by VAALCO. Additionally, in expiration costs in 2008 we spent in the fourth quarter, $3 million for seismic for acquiring and processing seismic data in Angola. We also had a $1.1 million for aeromagnetic gravity data and that was shot over the Mutamba Iroru block and then there was additional seismic costs with the Etame Marin block of $0.7 million.

A significant item that is always confusing is around income taxes. In 2008, the company incurred $73 million of Gabonese income taxes compared to $48.1 million paid in 2007. An increase year on year was due to higher production rates and oil prices. We do provide quite a bit of supplemental information on this in the 10K report, it shows up on page F-24, where it talk busy how you start with the lifting amounts, you take away royalty. That then allows for up to 77% of those volumes to be applied to the cost account. So if you have been busy with spending money in capital expenditures, you're able to get those recoveries there and then the remainder becomes profit oil, which then is featured with the income tax rates and that income tax rate can vary based on production. A little complicated but essentially we benefit overall from the increased prices, but that does have an impact on the income tax, and certainly with higher production rates the same applies. We do get to take the overall amount of income taxes down when we are busy spending money which we were doing more of that in the fourth quarter of 2008 and there's more planned in 2009.

At the end of the year we had cash balances of $125.4 million and additionally we had funds in escrow of $23.1 million. Funds escrow are really there in support of the UK well that was spudded in February of this year. And that's being grilled by the operator Silverstone, we're the non-operator, and the remainder of that escrow is in support of our Angolan commitments. If we look specifically at fourth quarter 2008, VAALCO reported a net loss of $7.5 million or a loss of $0.13 per diluted share in the fourth quarter. This compared to net income of $2 million or $0.03 per diluted share for the same period in 2007. Fourth quarter 2008 revenues were $16.5 million compared to $37 million in the fourth quarter of 2007. And the 2008 fourth quarter results, obviously reflect the overall decline of crude oil prices from a year-ago quarter and also we had increase in production and expiration expenses. In fact our expiration expenses for the year, we spent 44% of that in the fourth quarter alone and that was primarily with the unsuccessful wells and the acquisition of the seismic in Angola.

During the fourth quarter of 2008, VAALCO sold 399,000 net barrels of crude oil equivalent and that was at the average price of $41.29 and this compared to 425,000 net barrels of crude oil equivalent at an average price of $86.92 per barrel in the fourth quarter of 2007. Operating loss was $0.1 million in the fourth quarter of 2008 compared to a positive operating income of $17.4 million in the fourth quarter. Discretionary cash flow, this is where we talk about for the 12 month ended December 31, 2008, the net cash provided by operating activities was $106.6 million, of which the working capital changes net of non-cash comprised $40 million of that which left a discretionary cash flow of $66.6 million.

And with that, I guess the only other item I would mention that show up in our earnings release and there's always interest in the cost per barrel, but in the table we show the comparison of production costs for the year ended December 31, 2008, versus 2007. Production costs were $10.11 at year-end 2008 and that was for the entire year versus $8.57 in 2007. We also showed depletion cost and G&A costs. If you add up all three components, in 2008, the combination of production costs, depletion costs and G&A costs was about $26 a barrel and that compares to $23 a barrel from the prior year. That's sort of a rundown of VAALCO's financial information. What I would like to do now is turn it over to Russell Scheirman, the President and COO, and he's going to take us a bit through the reserves information and also our 2009 capital program.

Yes, I'll start with the reserves. We started our drilling campaign in the fourth quarter of 2008 with two rigs running off-shore Gabon. They were both drilling in the vicinity of the Ebouri discovery, the first rig, the Adriatic VI was drilling a development well to off the platform to bring the Ebouri field online. The second rig, the Pride Cabinda, was drilling an exploration well although it was within the development area, so it was called an appraisal well to determine if the structure was larger than what was originally mapped based on the discovery well. That well was successful.

We found -- we actually drilled two penetrations with that rig and found oil full to base in the thickest sand, the thickest section of the Gabon sand we found anywhere on the block, it's about 22 meters thick. We then proceed after drilling the first development well on Ebouri to drill a second development well to develop the northern portion of Ebouri that we have found with the Pride Cabinda well. We used the Adriatic VI to drill that second well. As a result we were able to book 1.8 million net barrels of additions to the Ebouri fields, giving us total reserves in Ebouri of just under three million barrels. In addition, we also, based on the performance of Etame and Avouma booked an additional $1. million in revisits for a total of three million barrels of reserve adds for the year. Our production for the year was 1.8 million-barrels, so we ended up with a net increase in reserves of about 19% and 166% replacement of production to 7.4 million barrels oil equivalent total for the company. We don't report it in any of our SEC data, but our prove plus probable is now 12.1 million, the P2 number. That's up from 10.4 million in year-end 2007.

In 2009, we have a $56.7 million nondiscretionary capital budget if you will, i.e., wells and projects that we have committed on, some of which we already know the results of. We had three wells off-shore Gabon planned. We've drilled expiration wells -- excuse me, we've drilled two of them. One was successful, one was dry. We've drilled two Ebouri development wells, both of which were successful. We should have the second Ebouri well online. It looks like it's going to slip into the first week in April now. We actually drilled that well 30 days faster than we thought we were going to be able to drill it and at considerably lower cost. It was originally budgeted as a $30 million gross well we got it done for $22 million.

The reason, we were in the salt and salt drills much quicker, and so we were able to get that well done. We have some problems the pumps on that well and may have to use a cool tubing unit to bring well in, although we're trying procedure to try and mitigate the issue with the pumps. If have to do the coil tubing job, then it will be first or second week in April. If we're able to get the pumps to kick off, then we'll have it on two or three days after we finish a lifting that's scheduled on March 30th and 31st.

The third exploration well, we're taking advantage of the softening rig market. We went ahead and released the Pride Cabinda, because we'd satisfied the number of days that we were committed, and we've made a deal to get the Adriatic VI back after it finished two wells for another operator in Gabon, at a day rate that's about $170,000 a day less than what we were paying for it when we were drilling the Ebouri development wells in. So it means the deferral of a couple two, three months on that third expiration well, but we felt like since we could save at least $2 million on the expiration well that was justified. The other capital expenditure program that's ongoing is Gabon is on-shore where we drilled first of two wells. The first well was unsuccessful. The second well is expected to spud March 20th and should be about a 20-day well, 20 to 25 day well to get that to total depth.

In the North Sea, Bobby mentioned we are in the objective zone right now coring the well. We should be able to log that well in the next few days and hopefully report the results of that, but it's encouraging. We're 170 feet high. The objective there was, there are better sands in the lower section of the reservoir, and the reason Shell did not develop discovery is a time they were drilling on 2D seismic and the sands they encountered that had gas in them were not particularly high quality, but at the base of the gas water contact in that well were some very good sands. And we were, based on 3-D hoping to get high and pull those good sands up into the reservoir, so that we can get good rate for the well. The last area where we have planned capital expenditures is in Angola. We have a well planned for the fourth quarter. It will be dependent on rig availability. It could slide into next year. We actually have a meeting scheduled with the Angolans this week to try and get that planned out, sorted out. With that, Bobby, I'll turn it over to you.

Thank you, Greg and Russell. Needless to say, the oil market or energy market in general is somewhat in disarray. I don't have to tell any of you that but VAALCO remains very strong. Our cash position remains very strong. Our balance sheet remains very strong. We had a good year, unfortunately the fourth quarter we showed a loss, I think we were probably in very good company. I think everybody showed a loss, but thus in some of the pitfalls of being a successful efforts company, we have to write-off everything that is associated with dry holes. In fact we write-off everything that's associated with drilling to a great extent. Probably the first quarter of this year will not be our best quarter either because of write-offs, but with our cash position, we remain very viable. In fact, we are quite excited here at VAALCO. Opportunities are coming our way.

We remain as one of the very few small cap energy companies with a robust balance sheet. VAALCO is slowly beginning to look at buying production. We always felt that when the commodity price was high we ought to drill for it. Now the commodity price is low. And so we have our feelers out, looking to buy production. We would prefer to buy it in west Africa . Where we have good knowledge but we're looking at other areas, and I would mention that if there is ever a time where we would consider coming to the United States if the right deal comes our way, we would perhaps consider that. The lifting that Russell mentioned, we should lift 750,000 barrels at the end of this month, hopefully that will fall in the third quarter -- excuse me, in the first quarter and not the second quarter, but that's up to Total who we sell to.

So as far as our overall exploration program goes, the jury is still out really on four of our prospects, has been mentioned, the North Sea, the second well on-shore Mutamba, southeast Etame and of course Angola. We have shot a seismic. We had previously in Angola and we are just beginning to process that, preliminarily it looks like that may be very interesting area. It's a little bit north of where we currently are planning to drill, but again, very preliminarily there are some interesting potential prospects. So Angola may turn out to be something that we all expected. Again, I think it's important for you all to recognize that we are really only halfway through our exploration program. Some it's been very good. Some of it obviously is disappointing, but that's the business that VAALCO is in.

And again, we are looking at a number of transactions, none of which are in the fruition stage yet, but a couple look very interesting to our analysts. So we will proceed diligently, but aggressively in trying to add some reserves through the purchase of production, hopefully to go with some additional reserves that we hope will find in our exploration program. So, we remain excited. We think it's a good opportunity. Again having cash is putting us in a category that there aren't many people in our sized company and we fully expect to be able to capitalize on that. So, I will now open it up to questions from anyone that wants to ask. Tom, I'll take it back to you.

I appreciate that. Thank you. (Operator Instructions) And we'll open today's questions with a question from Steve Berman representing Pritchard Capital Partners. Please go ahead.

Good morning, gentlemen. First question, historically on your realized price, you've been within a couple of dollars that are benchmarking blend crude in your case. What happened in the fourth quarter? It wasn't even close? Why so far off blend which I think averaged in the high to mid $50s.

We did not get a listing in October. So basically we got all our liftings in the fourth quarter in November and December. And rent averaged I think about $68 in October, and so if you take that out of the mix then you'll see what happened.

Okay. So going forward if it's a smoother number spread out evenly over a quarter you should be -- there's no reason to say you won't still be on a normal basis within that couple of dollars?

Right.

And then in terms of capacity on the FPSO as you bring these new development wells on, I think you've talked about outgrowing that capacity on the FPSO. Is there anything in the CapEx budget to deal with that? Can you talk a little bit about that?

We actually did that work this year to insure that we could get 30,000 barrels of fluids through that FPSO. We have the ability to -- for the first time we're going to have the ability to have surplus oil production capacity, such that we will probably have to do some balancing acts with some of the higher water cut wells to maximize oil production.

All right, but is there a need to at least start thinking about bringing in a bigger platform at some point here?

I think that is going to depend on southeast Etame.

Okay. And then in terms of the balance sheet one reason it seems like cash went up so much was that the payables went up a lot, is that just a timing thing? Can you talk a little bit about that?

We picked up two rigs in late November. In November and so the builds were just starting to pour in for those two off-shore rigs.

And so any sense what that cash position might look like say at the end of the first quarter? Will we get back to a normal payables level?

Probably near $100 million.

$100 million plus the escrow?

That's correct.

All right --

The North Sea portion of the escrow will be gone so it will be just be the Angola escrow.

Okay. All right, I'll let somebody else jump in. Thank you.

And next we'll go to Kevin [Poundsline] with Nutmeg Securities. Please go ahead.

Hi, gentlemen. Given the extremely low level of oil and gas prices, especially gas, are you contractually obligated to pump the oil in Gabon now, or could you basically run a small amount until prices came back up given the fact you're not hedged?

Well we certainly could shut in if one wanted to, and I may point out before I -- we have no gas in effect. So --

The North Sea will be gas, right?

The North Sea will be gas but it's still fairly robust in the UK, and so that ought to be still profitable, but we don't have any intention of shutting in Gabon. The price of rent, I believe, is somewhere around $45 currently. And that's been very profitable to VAALCO. So we will continue production to generate cash flow. I mentioned earlier that we would look at buying production. VAALCO could conceivably hedge in that case. Hedge some of the production that we may be able to buy, but we'll just have to wait and see.

Is there a price that it doesn't make sense to pump out your limited supply of oil? Is it $35, $38?

I don't think we're going to shut in.

I understand that you prefer not to. I'm just saying is there a number that's out there that it just doesn't make sense for you guys to deplete your reserves at.

Down in the low $20s. Our cash lifting costs are -- even with -- if you throw everything in G&A and etc., Greg mentioned we are around $23 a barrel and ex G&A they're down in the low teens. So -- and G&A includes all of the geologists and geophysicists we have working on in Angola, North Sea and on-shore, and we could certainly trim that number if we had to, but there are no plans to do so.

I understand, I was just trying to see what that is. Some people think natural gas could even go into the twos this year with the increased L&G production around the world and so forth. So it potentially could be some delays in actually producing that North Sea well, even if it comes into your expectation?

We won't be on production probably until the first quarter of 2010.

Okay. Well that's a good number to know. Production -- okay.

And that's at the earliest. A lot of that's going to depend on how fast we can get a tree if we're successful.

Great. And I guess finally, with the share price back down, is the company considering any share buybacks this year.

Not currently.

Okay, great, I'll give someone else a chance.

And next we'll open up TJ Schultz's line representing RBC Capital. Please go ahead.

Thanks, guys. Can you give me at production just from the Etame field, whether it was fourth quarter or currently?

It's running between 10,000 and 11,000 barrels a day, I believe.

Okay. On your reserves, I know you said the revisions were for Avouma and Etame. Can you just talk about what went into that, and any detail on what on the revisions was attributed to kind of better performance from Mutamba versus the Etame field?

Of that $1.2 million in ads, .5 million was associated with Etame and about 740,000 barrels were associated with Avouma. And this is a pattern that we've seen before. At Etame we started out with something like, on a gross basis, 16 million barrels developed from three wells we produced over 40 million barrels from that field with six wells, excuse me, five wells. At Mutamba they raise the the reserves over 50% after seeing a year's of production performance. Their model shows there's probably another 50% to go that they're calling probable right now, so that's kind of the breakdown.

Okay.

And I will tell you that the Ebouri number that we booked is about 55% of what our model projects for Ebouri. So, I would hope that a year from now that after Ebouri is getting shown some decent performance we'll get some revisions from the reserve engineers as well.

Okay. Just moving over to exploration here. Can you just talk a little bit more about north Etame and what happened there, and kind of differences you've seen there versus some of the other wells?

Well the north Etame well was a little bit of an anomaly. It was out of the fairway of the Avouma, Etame and Ebouri discoveries. It was an attempt to open up kind of a new trend to the north and a little bit shallower water and it just didn't work. The issue with these wells is always the velocities through the various strata that we penetrate and specifically the carbonate that sits on top of the salt and the salt itself, and the salt in this case turned out to be faster velocity and faster velocity pushes the structure back down in terms of what you see in your -- when you're doing your interpretation, slower velocity pulls things up. So we were using the same velocity for the salt that we had seen in the Ebouri and Etame areas, and it turned out it was faster and the structure wasn't there.

Okay. On Angola, I know you said that could be pushed to 2010. Right now is that included in your $56.7 million CapEx budget?

No, right now we're carrying two wells and we're saying there's kind of a 50/50 probability that either one or the other will get drilled. We need to replace one of the Etame well. We have one vertical well and the Etame discovery well, the 1V well and we know that it's still producing water free and we know that it's in a separate fault block and we need to put a horizontal well in there. If there's no room in the tanker we'll have to wait until Ebouri goes on decline. So we're carrying it and the Angola well in that $56 million number, kind of half of each, figuring that one or the other may get drilled this year.

Okay. Just I know you had said $100 million, maybe at the end of Q1. What of your CapEx have you already spent this year? That assumes the [$7.4 million] in the escrow has been spent by the end of the first quarter in the North Sea. Just trying to figure out at the end of Q1 how much is really left in CapEx.

At the end of Q1, we'll have a southeast Etame which is about $7 million. We'll have a little bit of on-shore well, and then we'll have about another $15 million for Angola. So, comes up to $25 million or so? $24 million? So we'll have been through $32 million of the -- or $33 million.

Understood. Okay, one last thing just real quick, a modeling question here. What is a good DD&A rate or depletion rate for us to use here going forward? I know you were at $10.37 in the -- for 2008, kind a dropoff in Q4 just kind of a normalized level.

I don't think it's going to change a lot because the DD&A rates come way down in Avouma as a result of the adds. It's dropped from $18 a barrel to $8 a barrel or something. The Ebouri rate is going to be up around $20. So, but it's right now in the first quarter it will only have the one well on and it came on January 25th. So I don't think in the first quarter you'll see much change in DD&A.

Much change from Q4?

From Q4, yes.

Okay. Great guys, I appreciate it.

And next we'll go to [Carlo Kanel's] line with [Kanel] Capital Management. Please go ahead. Mr. [Kanel], your line is open.

Hi, can you hear me now?

Yes.

Can you please give us a little bit more detail on the allocation of the drilling budget between the North Sea Angola on-shore/off-shore Gabon? I think you mentioned --

Hold on just a minute. Well, of the $57 million or $56.7 million roughly $25 million of that is offshore. These are 2009 numbers.

Right.

Roughly.

When you say off-shore you mean both Gabon and North Sea?

I'm sorry. Gabon off-shore, on the Etame block. On-shore it's about $11 million. And then the Angola well -- the North Sea well is $8 million. And the Angola well will be about $17 million. And then we've got some miscellaneous CapEx associated with our operations in off-shore Gabon of about $3 million.

Okay. And what would you say the company has spent on the North Sea during the entire history of its exploration there?

I think we'll be up around $20 million.

And has the company found any oil there in the North Sea?

Well, we're drilling -- the well we're right now we're in the formation 170 feet high to a gas discovery that Shell made, and we should have logs out on that well later this week and we'll see what we've got.

All right. So will the company devote more of shareholder assets to the North Sea, less or about the the same going forward?

Depends what deals come our way. It's very hard to put a hard number on that. We have looked at some other transactions in the North Sea, and have turned them all down at the moment. I don't believe we have any active considerations, if you want, for any additional work in the North Sea at the moment.

Okay, so where will the energies focus and resources of company be correct in the next couple of years. Is it North Sea a stepping stone to Russia or Australia, or more global domination or is the company more inclined to focus its focus on Africa?

We certainly prefer Africa, and reduce it even further, we prefer west Africa. There are transactions in other areas. We are not limited just to west Africa. Again, VAALCO's primarily an exploration company, but we are now spreading our wings somewhat to see what we can uncover in the way of buying production. And it's difficult to pin down exactly where those opportunities might come to fruition. They could be Canada. It could be Europe. It could be Africa, and some other areas than west Africa.

So we are not going to Russia. We probably will not go to China. Haven't seen anything in Australia. We turned down a deal in New Zealand. But I can't exactly put a fence around where we will go or we won't go. We'll just have to see what comes our way and there's very interesting opportunities, including the United States.

You made a comment regarding opportunities and acquisitions. Is there a price at which the safest and most attractive acquisition is in fact VAALCO, and acquiring shares of VAALCO at this price?

We think it's undervalued, but we're not going to add much reserves buying VAALCO. I think if we don't find a transaction within three months or four months or so, we would consider buying VAALCO's stock.

Okay. And then the final question is, when is the black-out period lifted for directors and officers, were they to want to purchase some shares?

Doesn't look like it's going to be lifted soon. We've got a lot of drilling activities ongoing. So, and we have to get through all of that.

Well I've got from the notes you said North Sea could be later this week imminent, and then Ebouri may be first, second week of April? And then second on-shore well Gabon, March 20th or thereabouts. So was there a reason after the first or second week of April where the blackout would still be in place?

I think when we get through drilling the well on-shore Mutamba which will probably take 20 days, so we're well into April and we'll just have to see where we stand as far as first quarter earnings. First quarter earnings or southeast Etame.

And next we'll go to the line of Jamie Wilen with Wilen Management. Please go ahead.

Hi, fellows. I heard what you said about buying back stock but for my money as a shareholder, I would be thinking it would be well served if you took $25 million at these prices and you could buy back nearly 10% of the outstanding shares. I don't think you would impact your ability to buy reserves and I think it would be a good thing for the company. You don't have to comment on that. On Mutamba, is there anything about the second structure that's very different from the first place where you drilled?

The second structure is larger, and it's on the edge of the Gabon that sets up these other structures that have been successful on the block to the north of this and actually on our block. It's actually more interesting of the two to me and so I'm anxious to get it drilled.

Okay. Right now your plan is to put 25,000 barrels a Right now your plan is to put 25,000 barrels a day into the FPSO. What would cause you to alter that plan and move to 30,000?

We would have to put an additional train on the FPSO. By that, I mean instead of a set of separators and water treatment facilities, there's room on the FPSO to do that. But we have to be thinking we were going to 35,000 or 40,000 before we -- let's just say 35,000 before we consider doing something like that. Because it would be a substantial capital expenditure to do that or trade out the tanker, but we do have a contract through 2015 on that tanker, and that probably means you would be negotiating with the owner and you wouldn't be able to necessarily go out for bids, because you couldn't afford to pay off that lease just to get an extra 5,000 to 10,000 barrels a day from some other tanker.

I think southeast Etame came in strong. We have to review that.

Okay, so even though you have the capability now of probably going to 30,000, 30,000s not the number you're thinking about. It's 35,000 to 40,000 for to you make that next step?

Yes, and I'm not sure how much -- I'm not sure we could get to 30,000. We could get in the high 20,000s once we get the second Ebouri well on.

Okay. It costs you a little bit extra money because you had additional liftings in 2008 versus 2007. Yet a number of liftings were smaller ones, How much control do you have over the quantity that they're going to take out with each lifting and it seems like it's -- why do a 300,000 barrel lifting when we could wait and do an 800,000 barrel lifting?

Well we did in this latest contract increase the minimum lifting size to 400,000 barrels to 300,000 barrels in an attempt to mitigate this issue, but you can't -- you kind of are walking -- you're walking a path here of, the less flexibility you give the purchaser, the less they're going to pay you for your oil versus the more flexibility and the more they'll pay for the oil. So if we had said the minimum lifting has to be 600,000 barrels, I suspect they would have turned around and offered us a couple of bucks less a barrel for it, because they are co-lifting our oil with other cargos, and to the extent we force them to take larger quantities, that means they've got to balance that against their co-lifting obligations, and so we just have to be a little bit careful there. Shell was trying to develop some additional market for our crude last year when they were lifting, and they took some small parcels that they sent to some other refineries. So [Tom] is co-lifting us with their value light and they have their customers for that and I think that increases the number of liftings they get.

Okay. And again the price that we get is the average price during the month that the lifting takes place, not the date on which the lifting takes place, is that correct?

That's correct.

Okay. Okay. And lastly, could you give us any guess as to what the tax rate might be for VAALCO in 2009?

It's going to be less than it was in 2008. Yes, let me see. I've got a projection here. Bear with me. I've got it. $40 case versus my $60 case.

More than likely, the price of the commodity will be lower. So that will have a trimming effect. We've spent more money and have put a lot of money into our cost accounts that will reduce the apt that goes into profit oil, so that will reduce the amount as well. I'm hoping that it goes down quite a bit. Russell's doing some calculations here.

Okay.

I have something in the range of 40% of revenues at $40 oil.

Okay. Very good, thanks, fellows, appreciate it.

And next we will go to line of Steve Berman with Pritchard Capital Partners. Please go ahead.

Earlier you mentioned that your -- the Angola drilling was subject to rate availability. Can you talk -- how much that is the actual availability of a rig versus rig rates are coming down so let's wait, and just like you gave the example on the Adriatic getting [$70,000] less and I think the rig you would need to drill out would be a lot more expensive. Can you talk about availability then just biding your time and waiting for rates to keep coming down.

There's a little bit of both going on there. I will tell you when we were looking at committing the rig and we need a semi to drill this prospect. The rates were in the low $400,000s and now we're being offered the same type rigs in the low $200,000s. So, kind of like you say who needs to get in a hurry when you see that much change in just three months. But on the other hand, these are rigs that are working in the theater, and if they go away and you are talking about having to bring one in from Singapore or something, even if you say $250,000 a day you will leave it up on your [mode] cost. We're playing the game a little bit here.

Steve, Russell mentioned this, our Angola partners, and our other partner will be here tomorrow, and we will have Thursday and Friday, we'll have a clear picture of what we want to do after that.

Okay the new administration has a whole bunch of proposals to tax the heck out of our industry. And I'm just wondering since all of your producing assets are outside of the United States, if you can give much thought as to how this will or will not effect you. The one getting the most attention is the inability to expense intangible drilling costs or at least the proposal to eliminate that? Any thoughts -- and that's just one of eight or nine or 10.

Being totally off-shore, probably it's not going to effect VAALCO in any real major way. It's another reason perhaps that some people think some US's companies will move totally off-shore and VAALCO's already there, and so it really shouldn't effect VAALCO. I mean again, it's not a great thing for our industry, obviously. So, I don't know why he has to pick only energy, but he is. So we'll see what happens.

Okay. Thank you.

And our next question is from Neil Nelson with [Turbines, Inc.], please go ahead.

I was curious if the partner who opted out on north Ebouri clock has a limited amount of time that they can buy back in, and how do you envision that transaction as you're interest would go up -- working interest would go up in the north Ebouri well?

You're right, there is a time period. The clock's running. I don't want to get absolutely specific of when that might be, but it's coming very soon. And I think I don't want to speculate on what we would do either -- well I know what we would do if they elected to participate obviously. Our interest would be the same as it is in the rest of the concession, but again rather than speculate, let's wait and see what happens and we don't have very long to wait.

And if you drill the horizontal well in Etame to replace the vertical well, do you envision that you will have more production or more potential production using the gravel-pack method that you refined?

It will be more production and that's the reason we're going to have see how Ebouri performs to see when we need that additional production. No point drilling it if there's no room in the tanker, but if southeast Etame works and we're looking at another platform in a couple of wells in there and another vertical welding, you're talking about needing to expand the FPSO.

Is there any possibility if Angola were successful that you could swap the FPSO to Angola and then bring another FPSO into Etame to handle the higher rates?

Sure, that would be possible. In fact we got that FPSO from Angola. So it's worked in Angola waters in the past.

Okay. Thank you very much.

And gentlemen, there are no other participants queueing up at this time.

Okay. Well thank you all very much, and appreciate your attention, and we'll see you in another quarter. Thank you, Tom.

Thank you, and ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and for using the AT&T executive teleconference. You may now disconnect.