VAALCO Energy Inc (EGY) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Vaalco Energy, Inc. second quarter earnings call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for questions and instructions will be given at that time. (Operator Instructions) I would also like to remind you that today's conference is being recorded and will be available for replay for the next 30 days.

I'll now turn the conference over to your host, CEO, Robert Gerry. Please go ahead, sir.

Thank you very much, and good morning, ladies and gentlemen, and welcome to our second quarter conference call. First, let me get through our Safe Harbor Statement. This document 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 address activities, events or developments that Vaalco expects, believes or anticipates will or may occur in the future are forward-looking statements. 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, 2008 and other reports filed with the SEC.

Having gone through that, we are -- or I am joined this morning by Russell Sherman, our President and COO and Greg Hullinger. our CFO. Shortly, I'm going to turn the meeting over to Greg who will take you through our financial statements, and then he will turn it over to Russell, who will take you through our current operations and our plans for the immediate future. One quick comment by me, I think that it was not a bad quarter for Vaalco, albeit with lost $0.03, but that certainly is an improvement over the $0.22 we lost in the first quarter. I think that the future looks pretty rosy insofar as this quarter will culminate with the write-offs we had with our dry holes that we drilled at the end of last year and the beginning of this year. So I think again, our income statements will look a great deal better as we move through the third quarter and in the fourth quarter. But to give you a better overview of that, I'll now ask Greg Hullinger to take us through our 10-K and bullet points that he has planned for you.

Thanks, Bobby. It's my pleasure to review our results with you today. You actually, in a capsule, talked about many of the key components that drove our results in the second quarter, but I'll step through with a little bit of detail here. Vaalco Energy, Inc. experienced a net loss attributable to the company of $1.7 million, or $0.03 per diluted share for the second quarter of 2009.

For the first half of 2009, the net loss attributable to Vaalco Energy was $14.3 million or $0.25 per diluted share. This compared to net income of $13 million or $0.22 per diluted share in the second quarter of 2008 and $14.8 million or $0.25 per diluted share for the first half of 2008. The key items contributing to the net loss for the current quarter can be attributed to incurring $12 million of expected dry hole costs. This amount is in line with the projection of dry hole costs I mentioned in the last earnings conference call in May. Dry hole costs incurred for the six months ended June 30, 2009 totaled $32 million for the four unsuccessful exploration wells. Second quarter 2009 revenues were $32.1 million compared to $55.4 million in the same -- well, in the second quarter of 2008.

During the second quarter of 2009, the company sold approximately 544,000 net barrels of oil equivalent at an average price of $59.10 per barrel compared to 464,000 net barrels at an average price of $119.18 per barrel in the first quarter of 2008. Despite a 17% sales volume increase, the oil sales price decreased by a whopping 50%, 5-0. Operating income was $6.6 million in the second quarter of 2009 compared to operating income of $40.7 million in the second quarter of 2008. This decrease is, of course, due to the combination of the dry hole costs plus the lower oil prices that we received.

An important reminder is that crude oil sales are a function of the numbers and size of crude oil listings from the FPSO and thus, crude oil sales do not always coincide with volumes produced in any given quarter. Crude oil production from the four offshore Gabon fields, Etame, Avouma, South Tchibala and Ebouri averaged 24,000 barrels of oil per day in the quarter ending June 30, 2009 compared to 21,500 barrels of oil per day during the same period in 2008. The 24,000 barrels of oil per day average in the second quarter of 2009 is a company production record.

In June 2009, a realignment agreement was signed with a joint venture partner that originally did not participate in an appraisal well and one of the development wells in the Ebouri field. Pursuant to the agreement, the partner paid for its proportionate shares of the capital expenditures for the two wells, thereby reducing the company's capital expenditures in the second quarter of 2009 by $5.7 million. In addition, the company and the remaining three partners benefit from their share of a risk premium being paid by this partner totaling $15 million. Vaalco's share of this risk premium is $6.5 million. In the second quarter of 2009, the company received $2 million of the risk premium payment, and this was recorded as Other Operating Income. The remaining $4.5 million of risk premium proceeds are expected to be received and recognized as income in the third quarter of this year. Capital expenditures excluding the dry hole costs for the second quarter of 2009 were $2.4 million, but this was more than offset by the $5.7 million capital expenditures adjustment I mentioned a minute ago by the partner buying back into the two wells in the Ebouri field. Production expenses were solid for 2009.

Second quarter totaled $4.5 million, the exact same amount as what was incurred the second quarter of 2008. Income tax expenses for the second quarter of 2009 were $7.3 million compared to $26.5 million in the 2008 second quarter. The decline reflects the lower oil revenues as the commodity prices declined, as well as a higher percentage of oil sales allocated as cost oil versus profit oil. I'll try to help with an explanation again here, but during periods where capital expenditures are being made and crude oil prices are relatively low, income taxes will be at their lowest. Conversely, when oil prices are high and capital expenditures are not being made, in other words, when the cost account is depleted, income taxes will be much higher. We expect to see higher income tax expenses in the third quarter of 2009 as the cost account is largely depleted for the company.

Discretionary cash flow, which is a non-GAAP financial measure, discretionary cash flow shows the amount of cash generated by the company that can be used as working capital to reduce debt or for future investment activities. Discretionary cash flow for the three months ended June 30, 2009 was $32 million compared to $35 million in the second quarter of 2008. Net cash provided by operating activities was $20.6 million in the second quarter of 2009 compared to $55.3 million in the same time period of 2008.

Couple of per barrel indices here, production costs for the six months ended June 30, 2009, production costs were $9.72 per barrel and that compared to $9.81 for the same period in 2008. Depletion costs, six months ended June 30, 2009 were at $10.77, slightly lower than in 2008 when it was $11.18. G&A expenses are in good shape for the six months ended June 30 on a per barrel basis, $3.68 per barrel versus $6.10 a barrel in 2008 for the same time period.

On the balance sheet side here, cash and cash equivalents at the end of June this year, $88.4 million versus $108.6 million for same time period for June 30, 2008. Working capital, $76.7 million currently versus $93.2 million at the end of June of 2008, and long-term debt was exactly the same at $5 million. That was that minimum draw amount with the IFC loans, and we continue to maintain that. As such, our balance sheet remains very strong.

By most measures, I think Bobby kind of alluded to it. Vaalco had a very good quarter. We saw the production record at 24,000 barrels of oil per day on average through the second quarter. Prices, even though they were half of the 2008 level, they did improve significantly over quarter one, and of course the dry hole costs are now behind us. We recognize all of those expenses. And then looking on the forward side, quarter three will benefit from the remaining $4.5 million of income that we'll recognize associated with that risk premium payment coming from that partner. And with that, I will turn it over to Russell to take us kind of through the operational and drilling activity.

Thanks, Greg. We are currently producing from four fields in the Etame area -- the Etame field where we have four wells on production, South Tchibala where we have one well, Avouma also one well and then two wells producing from the Ebouri field. Production as of today stands at about 23,500 barrels per day. The reason it's down a little bit is due to a mechanical problem that we're having with one of the Ebouri wells. When that well was completed, the service contractor made an installation error on the fittings for the downhole pumps that resulted in those pumps shorting out,and we're not able to use those pumps, and so we can't bring the rate up higher, and we can only produce what the well will produce naturally. We have been through some attractive negotiations with that service contractor and they are going to be providing us replacement pumps and installation services which will be ready in the fourth quarter, and we will work that well over and replace those pumps and that should allow us to produce back up close to 25,000 barrels per day.

Greg mentioned the realignment agreement with the participant that chose not to participate in the north Ebouri test and then the subsequent Ebouri development well. The good news is that negotiation is behind us. We'll pick up $6.5 million in net income as a result of the risk premium they are having to pay, but now all the partners are realigned and we've been able to agree on a work program to go forward here beginning in the fourth quarter of 2009. We anticipate picking up a rig probably in the beginning of December and we will drill three wells and perform the workover. The first well is the southeast Etame exploration prospect. We want to get that well drilled by year end so that if it's successful, we can book the reserves associated with that well. Then we'll follow on with the workover for the Ebouri well to replace the pumps. And then after that, we will drill a pilot hole and a third Ebouri development well.

We're going to drill the pilot hole to an area that is beneath thick salts where we can't see too well and if it comes in as we expect, we'll complete the well there. If for whatever reason it doesn't work under the salt, we have another location to the east that we would complete, and that would give us the third development well at Ebouri. After that, we'll move to the Etame field where we're going to drill what we're calling the ET7H well, which will be a replacement for a vertical well that we have, the ET1V well, which was the discovery well back in the field back in 1998. That well, being vertical, is not as prolific as our other horizontal wells, and it's in its own fault block where we have not seen any water production after some seven years of production. So we believe that fault block is larger than it was originally mapped and needs a second well in there. So we're going to put a horizontal well in there and drain that fault block.

Those three wells in the workover will cost Vaalco about $30 million for our share of that work. In addition, the partners have agreed to budget a second exploration well for 2010, and that will be drilled on one of three prospects that we're looking at. We have a Southwest Etame prospect, we have a J prospect and then we have the A prospect, which is out in the deeper water. We've been doing a lot of reservoir stimulation on that A prospect and we're becoming more comfortable that it's a viable prospect. As some of you may or may not know, it's the largest structure on the block but being out in the deeper water and in deeper depths, there was concern about the producibility of the reservoir, and we've been studying that in a lot of detail and are to the point now where we think it merits a test. Moving onshore in Mutamba block in Gabon, we have completed all of our well commitments that were required under the two exploration periods that we have for that block. We've decided to discuss a farmout with several companies with the idea that they would shoot some seismic over some identified leads, and then we are negotiating with the Gabonese government to get a third exploration period, an optional third exploration period which once we finish the seismic, if we find a drillable prospect, we could exercise that option going into the third period and drill another well on that block.

Finally, in Angola, we had meetings with the Angolan government in the second quarter and received approval for a two well program to be drilled in 2010. We have one subsalt prospect and we have one Macanza sandstone prospect above the salt. Vaalco's share of that program where we have 40% working interest and paid 50% for the (inaudible) Sonangol, the national oil company, would be somewhere in the $20 million to $25 million range. We haven't firmed up our drilling schedule on that. We have meetings with our partners later this month to go ahead and get a 2010 budget approved and start thinking about finding a rig. In addition, we had acquired some 3D seismic in 2008, and we're just now getting into the detailed reprocessing of that data and we wanted to be sure that if a good prospect came out of that, it was better than one of the ones that we already had that we would have the time to substitute.

So that's basically what we're looking to be doing over the next six to nine months. It's going to start getting busy here again shortly when we pick up the rig. We've actually been out to market for the rig. The rig rates are coming down substantially over what they were when we were in our drilling program earlier in the year and last year. So we look forward to a successful program. And with that, I'm going to turn it back over to you, Bobby.

Thanks, Russell and Greg. And just a few points before I open it up for questions. In our press release, we did mention that Vaalco has purchased through, I guess a couple of weeks ago, about 1.500 million shares of our stock buy-in program. The board authorized us to spend $10 million. We spent $6.2 million on that, on the purchases. We have entered into a quiet period, but we still have the opportunity to purchase some back. Can you still hear me?

Yes.

Okay. I might mention also that we have a cash on our balance sheet in excess of the $88 million. We have roughly $14 million in cash in escrow in Angola and approximately $6 million in cash in the North Sea. So there, again, if you add that in, we've got 20 -- excuse me, we've got $100 million of cash on Vaalco's balance sheet. As Russell mentioned to you, we are going to commence again a very active drilling program at Vaalco starting in the fourth quarter. We have the cash to do it ,and we still have cash to seek other opportunities. We are concentrating our search on West Africa for additional properties to place in Vaalco's portfolio. We have looked at a number of deals, and we have some other transactions on our plate that we are slowly evaluating. So I think the future looks very good. Vaalco is in good financial shape, but I assume you all have some questions, and I think rather than me discussing this any further, I'll open it up for questions.

(Operator Instructions) Our first question comes from TJ Schultz with RBC Capital Markets.

Hey, guys. I know you said you're at about, in Etame, 23,500 today. Can you just talk if that's a rate that's -- how sustainable that rate is until the Ebouri issue gets resolved over the next -- second half of this year?

Russell, we'll see some decline off that rate I think, but not a significant amount. When I say some, it may be 5 to 750 barrels by the time we're able to get to that workover that we'll lose. The Etame field is definitely on a predictable decline, as is the South Tchibala field. The Avouma field and the Ebouri fields are both producing essentially water-free. We're -- water to break through on one of those fields, that would change my projection. But our models indicate that they shouldn't for a while. So we expect things to stay pretty stable here, maybe lose a few hundred barrels and then once we get that workover on, the three-eighths well is producing about 700 barrels a day, and it was producing 3,000 when we turned on. And the problem is that it's apparently in a little bit tighter reservoir section and without a pump to help it along, we have to keep a fairly high back pressure on those wells because the wells are flowing through an 11-kilometer pipeline over the FPSO and we have to make sure we have enough back pressure to get the oil to the FPSO.

Okay. On your CapEx, kind of moving to -- into the fourth quarter and early next year, you said $30 million for those three wells and the workover. It sounded like the third Ebouri well was somewhat dependent on success of that pilot hole. Is that $30 million assume the third Ebouri well as well?

Yes. The -- we're going to drill the third Ebouri well irregardless of the results of the pilot hole because we have a location that's in the vicinity of where the discovery well was drilled, and we know what the formation looks like over there. The pilot hole is to the -- is in the southwest portion of the field which is under the thick salt, and it's harder to interpret there. We think we can stay high and about flat to the other two development wells over there. It's up against the fault that defines the field. If we get surprised, then we'll have the backup plan of swinging around and going over to the other location to the east. But we're hopeful that -- we just didn't want -- we can drill a pilot hole through the salt very quickly and if it works, then we can back up and go ahead and drill a lateral. We just didn't want to be in a position of having to find that sand under the salt without drilling a pilot hole first.

Okay. I think in your press release, you said that one or two drilling rigs, and it sounds like you're going with one, is that still a decision where you may find two rigs for this program, or are you going with one? And then you talked about day rates on those rigs. Can you give a little more -- try to quantify that a little bit better with what you're seeing on rig rates right now?

Yes. The issue is that the preferred rig that we want, which is capable of running sub C trees off a jack-up, there is the possibility that there's an option well that the company that has the rig right now has that would delay that rig for a month or two. If that were to happen, we could use one of the lower spec rigs that are stacked in Gabon right now to do the work at Ebouri, and then follow on with the ET7H work with that high spec rig later. So that's why we're kind of saying it might be one or two. We expect it will just be the one, but if for some reason that rig is delayed, then we want to jump on the workover or do something while we're waiting on it, we might pick up a second rig, because there are a number of companies that are stacking rigs in Gabon, so the mog, demog is not a large figure. In terms of rig rates, without getting too specific, they are coming down to about half what they were at the peak.

Okay, okay. Thanks, guys.

Thank you. We'll go next to Jamie Wilen with Wilen Management.

Hi, fellas. In pumping up the Ebouri well, approximately how long from the time you get the rig there will you be able to get it to where it can produce at the level which it was intended?

It's a 10-day workover.

Okay.

It's not a big deal. I mean it's frustrating because we had everything done and the company put the wrong fittings in to protect the cables from fluid in the (inaudible) and when they landed, the tubing hangar, it leaked and it shorted out those pumps. All we have got to do is pull the tubing out with the pump, put a new pump on and run back in and button it up, and with the right fittings this time. So it's not that long.

Does the contractor pay for all of that since it was their error?

They are paying for replacing all the equipment and all the remedial work that we attempted to do to try -- we actually did get the pump to kickoff for seven hours, which is long enough to get the well on production. So that was a good thing. Then it died. But they are also going to provide all the tools and things to rerun everything, as well as the personnel and its -- the service people and equipment. And then there were some penalties that they had to pay because we had an incentive contract that said that if the pump ran for less than a year, there's a penalty. If it runs for more than a year, there is a bonus for them, so they are having to pay that. Now, they are not going to pay for the rig and some of those things, but it was a pretty significant hit for them to have made this error.

Okay, and why wouldn't we just get one of these stack rigs today?

Well, because we won't have the equipment until the fourth quarter.

Okay. Okay, secondly, could you comment on the political situation in Gabon at the moment and what's going on?

Yes, let me jump in on this. They're -- technically, from what we understand, Gabon will have an election August 30, unless it's delayed. The reason it might be delayed is to ensure that all citizens of Gabon are duly registered and all the ballot boxes and whatever are in the right place at the right time. The political situation so far has been fairly benign. There were -- there probably will be about in excess of 20 candidates that run for the presidency. The -- under the election laws of Gabon, a government employee cannot run for president, so a few ministers within the government resigned so they can run, but it's pretty much business as usual.

There have been mild demonstrations against a couple of candidates, but nothing that is untoward, everything remains fairly peaceful. We expect it to be that way until August 30. We don't anticipate any great disruption, either in the government or towards energy companies that are producing or want to produce in Gabon, so it should go fairly normally. We are in Africa. Things don't always go as you plan, but Gabon has got a pretty long history of peaceful governmental activities, and it's hard to imagine that things would completely be disrupted. We don't expect that at all.

Okay, and lastly on the cash on the balance sheet, two things. From the partner realignment, I guess there's another $4.5 million coming, but we have not -- that doesn't show up as a receivable. It will only hit the balance sheet the second it hits the income statement. That's the question. And secondly, we have $6 million in the North Sea. What's the intention there?

Greg, I'll let you deal with that.

Sure. The quicker one there, on the North Sea, that well has just about been completed and we're expecting the funds in escrow to be released at any time. I've actually been trying to get it released for about a month, and the driller up there that enjoys the security of that escrow agreement has maintained that until they have finalized their last billing, then they are not going to release anybody from their escrow.

Do you expect to get the $6 million back, or is there a little bit less--

No, every bit of it will come back. That money was put up only to ensure that the company would make its payments, and we have made every payment that has been cash called on that well and in fact, we'll be doing an audit of the well costs in fourth quarter of this year. So that entire amount of money will turn back from being escrowed into actual cash.

And as far as the partner realignment receivable?

And the partner alignment receivable, the way the agreement was structured, it's a kind of a future-based arrangement. So there actually is no receivable on the books in the second quarter, and this is something that we reviewed with our independent auditors, and we will just be recognizing it as it is received. We've already received a portion of that $4.5 million and the formula on which it is based should have it where there should be no problem with all of it being earned in the third quarter.

And let me just throw one last question at you. Your partner in Gabon (inaudible) being acquired, any -- what's happening there and any -- does that change anything?

No, it hasn't changed anything yet. The slight impact was purchaser of (inaudible) -- all the employees still from (inaudible) are in place. We expect that will change someday, but it hasn't happened yet. But we don't expect any problems with that.

Okay. Thanks, fellas.

Thank you. We now have [Doug DiFillippi] with Scotia Capital.

Good morning, Bobby and Russell. I have a question regarding the FPSO, just in noting that there's a potential for a dry dock in the scheduled maintenance within the next three years. You also mentioned that you might actually use both of these facilities. Is there an incremental cost to the new facility that you, that you foresee? In terms of getting that one up and running?

What we've got in place with the owner of the FPSO is an agreement whereby we're doing annual inspections with the understanding that if the inspector finds anything that would cause us not to be able to keep the vessel out there beyond 10 years, we could address it rather than wait till the tenth year to find out that we have a problem and we're going to have to dry dock it. It's pretty common now to see FPSOs stay out longer than 10 years and we think if we manage this process properly, we can keep that FPSO.

The bigger issue is we're basically capped out at 25,000 barrels a day with this FPSO of oil production and 30,000 barrels of total fluid production. We're addressing that by-- we put water separation facilities on the Ebouri platform so that we wouldn't be crowding out oil with water production. We are looking at putting a remedial water separation system on a Avouma, South Tchibala so that we can knock the water out and water won't be crowding out our oil. What we really need to do though, at least in Vaalco's opinion, is we need to get these exploration prospects drilled because if we find a southeast Etame and we find a J prospect, then we're looking at being well north of 25,000 barrels a day. And that's when we start thinking about whether we want to either add a train to our existing FPSO or replace the FPSO. But we don't have sufficient, if you will, backlog of development projects to suggest that we should be out doing that today.

Okay, thank you very much.

Thank you. We now have a question from Abbott Keller with Kestrel Investment Management.

Yes. You faded out for a few seconds after you were talking about your buyback when you said you went into the quiet period. I wonder if you could talk about what your thoughts are going forward.

Our plans are that we have slightly less than $4 million authorization from the board. We have not committed yet to buy the rest of that in, but it's certainly something that's in the front of our minds. My guess would be more than likely we would buy it in.

Okay, thank you.

Thank you. We have a follow-up from TJ Schultz. Please go ahead.

Just on the Mutamba, on the seismic, can you just give me a little better idea on the timing and cost of the seismic and how the timing coincides with your having to make a decision on the third exploration period with the government?

We have a two-year exploration period that commenced -- I want to say it was May or so this year, to complete the seismic. We didn't feel that it was realistic that we could shoot, process the seismic and drill a well in that period. And we don't have a commitment well in that period because we already drilled the commitment well for the second period. So we're looking probably a year, year and a half before we drill another well out there, assuming we got the seismic, got it processed.

Okay, and what does that -- that's ongoing seismic, I'm sorry, I might have missed the timing.

No, it will be new seismic and basically we're talking a trade with another company where they pay for the seismic to earn an interest in the block and perhaps we have a disproportionate sharing on the well because we've invested over $20 million in the block, so we want somebody to pay for the seismic to earn their way in.

Okay. Then just on the -- I think last time we talked and you mentioned Bobby I think, some of the acquisition opportunities potentially out there in West Africa. Is that still centered around Angola and Gabon, and is that still something that you guys are thinking about or is this kind of moving this exploration up, put that on the back burner at all?

No, it's not on the back burner, it's right on the front burner, and what we are reviewing is in our current area of operations, namely either Gabon or Angola. There are some other opportunities elsewhere in Africa that we also are reviewing, but we are actively pursuing one of these, and it's our hopes to have it accomplished.

Okay. Thanks, guys.

We'll go next to [Neal Nelson] with Nelson, Inc.

The Etame V well located that in located the same side of the fault block where you're going to do the Etame 7H well, was it plugged up with wax, and will it continue to produce, or will it also be reworked?

We do not plan to rework that well. It has stabilized at between 1,100 and 1,300 barrels a day. We think there's some wax obstruction in there because it originally came onstream in excess of 2,000 barrels a day. We don't know how that well will react when we put a horizontal well in there, it would not surprise me. Right now, it's being produced directly into the low pressure separator system in order to try and maintain the rate in excess of 1,000 barrels a day. It would only take about 20 or 30 pounds of draw down in the block from the new well to knock that well off line. So -- but we would be trading at 4,000 to 5,000-barrel a day well for 1,000 barrel a day well.

Thank you. Thank you. Mr. Gerry, we have no further questions. Please go ahead with any closing remarks.

Well, thank you all very much. We appreciate your presence and look forward to our third quarter conference call. So with that, we'll sign off and, again, thank you for participating.

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