VAALCO Energy Inc (EGY) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the VAALCO Energy Inc. first quarter 2010 earnings report. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). Instructions will be given at that time. As a reminder, this conference is being recorded. I'll like to turn the conference over to Robert L. Gerry, CEO and Chairman. Please go ahead.

Thank you, Paul, and good morning, ladies and gentlemen, and welcome to VAALCO Energy's first quarter 2010 conference call. Please bear with me again while I 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. 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, 2009, and other reports filed with the SEC.

I'm joined this morning by Russell Scheirman, our President and CEO [sic], and Greg Hullinger, our CFO, and shortly I'll turn the meeting over to Greg to take you through our 10-K and then Russell will update you on our current drilling and future plans. A comment before I turn you over to Greg, I think we had a good first quarter, earning $0.11 per share, but really the best news is that the 4H well was drilled and completed as a new take point in the Ebouri Field and I'm pleased to announce it is currently flowing into the FPSO at a rate of about 3,700 barrels per day. The 3H workover is under way and it is going as planned. We expect to have it flowing into the FPSO probably in about seven days and it should produce, again, as our announced rate, between 3,000 and 4,000 barrels per day. We are currently producing about 30 -- excuse me, about 21,700 barrels a day into the FPSO, so we're getting -- when the 3H comes on, we ought to be getting close to our 25,000 barrels a day.

I'll have some more comments after Greg and Russell, but with that, Greg, why don't you take us through our 10-K?

Thank you, Bobby. It's my pleasure to talk with all of you again and thank you for your interest in VAALCO Energy. I'm going to review the key financials for the first quarter of 2010 with you this morning. The Company reported net income attributable to VAALCO of $6 million, or $0.11 per diluted share for the first quarter of 2010. This compared to a net loss attributable to the Company of $12.6 million, or a -$0.22 per diluted share in the first quarter of 2009. Three factors drove the difference in the year-to-year quarterly income numbers.

The sales price at $74.33 in quarter one 2010 was 76% higher than the $42.15 we received in the first quarter of 2009. Partially offsetting the effect of the higher crude oil prices was a decrease in the volume of crude oil sold. Volume sold in quarter one of 2010 were 403,200 barrels. This was about 20% lower than the quarter one 2009 sales volume of 503,700 barrels. I'll explain a bit of the decrease here in just a moment. The results of higher price and lower volumes resulted in higher overall revenues of $30.0 million in the first quarter of 2010 versus revenues of $21.3 million in quarter one 2009. Besides price and volume sold, the third main factor impacting net income was that exploration expense was $19.5 million lower in the first quarter of this year versus the same period in 2009 and that decrease is, of course, attributable to the lower exploration dry hole costs.

Operating income was $17.9 million in the first quarter of 2010 compared to an operating loss of $10.5 million for the first quarter of 2009. Crude oil production from the Etame, Avouma, South Tchibala and Ebouri fields averaged 19,330 barrels of oil per day in the first quarter of 2010 compared to 21,302 barrels of oil per day during the same period in 2009. The decrease in production is due primarily to the Ebouri 3H well, which has been struggling with nonworking electric submersible pumps. Bobby mentioned this well just a moment ago and Russ is going to talk more about it when he gives us an operational update here in just a minute. I can say right now that the Sapphire Driller rig is working on that well as we speak. Otherwise, natural decline in increasing water cut from some of the other wells is also a factor in the production decline.

We had capital expenditures of $3.2 million during the first quarter of 2010 and this was primarily on the Ebouri 4H well, which is, of course, our new well that just came on production on May 2, 2010 and also for the 7H well in the Etame field, which will be drilled as part of the current drilling program. Capital expenditures will increase in the second quarter, as the drilling rig is expected to be active for the entire quarter. The Company expects to incur between $25 million and $40 million of capital expenditures in 2010 in Gabon and Angola. Production expense for the 2010 first quarter was $4.9 million compared to $5.7 million in quarter one 2009. A decrease in the volume of crude oil produced and sold accounts for the decrease in expense. Exploration expense of $1.0 million was spent in the first quarter of 2010. This compares to $20.5 million in the same time period in 2009, which again was largely comprised of dry hole costs in onshore and offshore Gabon and the North Sea.

Income tax expense for the fourth quarter-- I'm sorry, income tax expense for the first quarter of 2009 -- 2010, my goodness, was $10.8 million. This compared to $2.4 million in the 2009 first quarter. The increase in income tax reflects the higher crude prices in Q1 2010 versus the same period last year. Also the percentage of barrels allocated as cost oil barrels versus profit oil barrels was lower in the first quarter of this year versus the same time period of 2009. That results in higher income taxes. Again, as a reminder, when oil prices are high and capital expenditures are low, income taxes will be at their highest point since more barrels will be allocated as profit oil and that bears income tax. Conversely, during periods where capital expenditures are being made and crude oil prices are low, income taxes will be at their lowest because then more of the barrels will be allocated as cost oil barrels rather than profit oil barrels.

Cash and cash equivalents, including amounts in escrow, were $106.5 million at the end of the first quarter of 2010. The Company does not have any debt on its books. Lastly, here's a few per barrel statistics. Production costs in the first quarter of this year were $12.25. This compared to $11.29 in the same period a year ago. Depletion cost is $9.67 a barrel and that compares to $11.22 in the same time period a year ago. So that concludes my review of VAALCO Energy, Inc.'s first quarter 2010 financials. Let me turn the meeting over to Russell Scheirman, our Chief Operating Officer, and he's going to provide you with an operational update.

Thanks, Greg. As Bobby mentioned, we put the Ebouri 4H well on last week. We drilled a 1,500-foot lateral in that well in the top of the Gamba sand and completed it with a gravel packed liner. The well's making 3,700 barrels a day on a 38/64 choke with 440 pounds of flowing tubing pressure and no water. The well was drilled on schedule and on budget at a cost of $24 million gross, $7.2 million net to the Company. We then moved the rig over to the Ebouri 3H well to replace the submersible pumps that failed last year. We present -- our present operation is we have everything out of the hole and we're going back in the hole with the new pumps. We expect to complete that workover by Friday night, May 14th, and should have the well online next week. The cost of that work over is $5.4 million, $1.6 million net to the Company, and so far it's proceeding right on schedule.

When we finish the Ebouri workover we're then going move to an open water location and drill the southeast Etame exploration well. This is a 27 million-barrel Gamba Dentale test. It'll take about 35 days to drill that well at a cost of $14.5 million, or $4.3 million net to the Company. We have provisions to do up to two side tracks on that well depending on the outcome of the well, if we decide we need to further delineate what we find. We'll then move to the Etame 7H well, which is a horizontal replacement well for the original discovery well, the Etame 1B. The Etame 1B has made over six million barrels without producing any water and it is in a separate fault block from all the other wells in the Etame field, so we are inclined to believe that that fault block contains more oil than was originally thought because of the performance of the vertical well and that's the reason we're going to put a horizontal well in there to accelerate the drainage of that oil. It's a 50-day well, it's a $44 million project, $13.2 million net to VAALCO. It will be a sub C completion with gas lift and it will take us about three weeks from the completion of the well to actually coming on production because we have to install the gas lift line with the dynamically positioned vessel in order to kick the well off and start production.

We have two remaining option slots on the vantage rig after we finish these four wells that I've discussed. We had a partners meeting last week and we are tentatively now planning to add an additional development well in the South Tchibala field. This will give us an additional take point from that platform. We do have one slot remaining on that platform and should allow us to have a good buffer of excess production capacity as we move through the balance of this year and into next year. For the remaining slot on the vantage rig we are still discussing with partners whether we will drill the [Amandu] exploration well or depending on the outcome of the southeast Etame, whether we will need to drill another open water vertical well. So we'll make that decision after we see the results of the southeast Etame well.

On the production front, Bobby mentioned we're currently producing over 21,000 barrels a day. Total fluid production is 30,000 barrels of fluid a day, which puts us right at the FPSO capacity for total fluid. What this means is, when we start turning on these other wells, the Ebouri 3H and the Etame 7H well, we'll be cutting back some of the higher water cut wells to make room for the additional oil to try and optimize the system at about 25,000 barrels of oil per day. I would mention we do have water handling facilities on the Ebouri Platform that we have not been using at the present time because we really haven't needed to, but that will allow us to filter out any water that Ebouri is producing to help us manage that process.

With that, Bobby, I'm going to turn it back to you for an update on Mutamba, (inaudible) Gabon and on Angola.

Thank you, gentlemen, and the report on Mutamba, which you know is our on-shore Gabon concession, we are in discussions -- in serious discussions, in fact, negotiations with a third party to join us in a seismic effort there. The terms of what we are discussing, I think, will remain confidential, but it's a very interesting partner for VAALCO to have and we hope to bring that to a conclusion here within the next couple of weeks. So Mutamba is far from dead. We expect to have a deal done within a couple of weeks. We are going to apply for a year's extension, however, and the Gabinese were here last week, as Russell mentioned, and they have indicated, at least verbally, they don't see a problem in granting us that.

As far as really Angola is concerned, I know there are a number or at least we get a number of phone calls concerning what the status of that is. It is moving forward, albeit at a pace that is very slow by our standards, but we currently have absolutely no reason to believe that we will not get at least one-year's extension from the Angolan government due to the financial problems that our partner, [Inner Royal] out of Norway, is having, so we remain very optimistic that that will be forthcoming. We remain very optimistic on the three structures -- prospects that we have uncovered on this block and VAALCO certainly looks forward to getting on with it. The process probably will be that we will work with Senegal on finding a partner for VAALCO. That may take some time, but after we're granted the extension I think the process will move forward fairly rapidly.

We continue to look for other areas of opportunitiy for VAALCO. We are reviewing a number of them, some may come to fruition. I might mention the state of the world out there just for a moment. Obviously the euro problems in Europe are somewhat of a detriment to the market general. I know that there's a lot of conversation, certainly in the oil industry, certainly in the Houston area on the oil spill in the Gulf here. It's a difficult one. I think the whole industry is pulling together to try to solve the problem and assist BP in any manner that they can provide. We have certainly dusted off our oil spill response program in Gabon, but I would remind everybody that the circumstances that BP is dealing with are far and away different than what VAALCO is facing. We're in 300, approximately, feet of water, they're in 5,000 feet of water. We are 6,200 feet for our reservoir, they're over 18,000 feet and high pressure. So we have certainly a much more benign atmosphere to operate in than they do, but we are looking very hard at our own operations to make sure that not only we have enough insurance coverage, but that our operating procedures are at the highest level of expertise.

So with that I'll turn it over to you, Paul, to open it up for any questions we may have.

(Operator Instructions). Our first question is from [T.J. Schulze], please go ahead.

Hey, good morning, guys.

Good morning, T.J.

On the -- can you just give a breakdown, the 21,700 in the Etame concession for what's flowing from Etame, from Avouma and from Ebouri?

It is about 8,000 -- excuse me, 7,000 barrels from Ebouri, 6,000 barrels from Avouma and the balance from Etame.

Okay. And as you bring on some of the higher oil content wells and cut back on some of the higher water wells, where will most of those water well be?

The two highest water cut wells are the Etame 5H well. which is the lowest well on structure in Etame and it makes about 735 barrels a day of oil and about 1,700 barrels a day of water. And then the other high water cut well is on the -- is the Avouma well and it makes, I'm going to say, something like 4,000 barrels of water a day along with a couple thousand barrels of oil, so it's -- those are the two wells that we'll be playing with.

Okay. On Mutamba I know you don't want to get into too much detail, but can you just give me generally what you're thinking there over the next, whatever, 12-to-18 months. Would it be a period of looking at the seismic and when would it be possible that you'd drill there again?

I think the process will be we will be looking at seismic for a period of probably -- it's hard to say, T. J., but ten-to-12 months, whatever, and we certainly are negotiating for a well to be drilled. That would probably be one of the reasons that Gabon would extend for a year, at least, our concession by us agreeing to drill a well. If it works out the way we plan and drill a well, it ought to set it up -- and it's successful, it ought to prove up this seismic and we would be looking then at two-or-three additional onshore wells. So all in all, Mutamba is getting to be pretty exciting again. If everything worked perfectly -- and we presented this to the Gabonese when they were here last week -- we could conceivably net to VAALCO be looking at possibly up to 50, 60 million barrels net to VAALCO if two or three of these wells developed into what we think they could.

There's actually been a break-through in processing of seismic in the last year that we've been using to reprocess our offshore data and it allows us to see faults under the fault a lot better than we've ever been able to see them before and we've test processed some of the 2-D lines onshore and it's amazing the difference it makes. So that's what we'll be doing is reprocessing a bunch of those lines.

Okay. Just last thing, on the two extra slots on the rig, offshore Gabon, I think the extra thought on the platforms for South Tchibala makes sense. I'm just trying to get a reel for the remaining slot. You'd talked about negotiating with partners, Emangu and [Alily], just what your thoughts there are on those two prospects and what would push those off to drill another well in connection with this southeast Etame, just what you're looking for out of that to determine what would be done with that last slot on the rig?

The issue is that the Southeast Etame structure on paper is a separate structure from the Etame field but depending on what we actually find when we drill that thing, if there's suspicion that the two are connected then there's a saddle area that we map that we would need to delineate and it might make sense to drill that with the last slot rather than the Emangu well, so that's why we want to see that well first before we make that decision. The Emangu well is waiting on the final processing of seismic with this new technology because it's a three-way closure up against a fault and everybody wants to make sure that fault has enough throw on it to make sure that it'll seal. So we think that -- we think it is, but given what we've seen with this new seismic, we think it's worth waiting and that process is supposed to be completed next month to get that seismic processed. So then we kind of have our options laid out in front of us. We'll have the results of Southeast Etame, we'll have the new seismic we can make the best decision for the remaining slot.

Okay. Is Alily still in the plans --?

Alily's still in the works, but that's a semi-submersible and I don't think we're going to get it drilled this year based on what we're -- the feedback we're getting from our partners.

Okay. Great, thanks, guys.

You have a question from Jamie Wilen, please go ahead.

Yes, a little confused about Angola. You talk about drilling potentially in the first half of 2011 yet within your budget for 2010 you have funds for drilling in Angola?

Essentially that would be equipment, pipe, that we would need to purchase in advance of actually drilling the wells.

Okay.

So it's the pre getting the rig on location expenditures that are in the budget for this year.

Okay, so there's really no shot of actually drilling that well in 2010, that's just the free stuff?

Probably not.

Okay. And I might have missed it, but how close are we to -- in negotiations with being able to find another partner for Angola?

That's a good question. We are pressuring -- I don't want to use that word. We are certainly in conversations with Senegal to hurry up and make up their minds on, first of all, the extension for one more year and then let's sit down, Senegal, and come up with together a partner that's acceptable to both of us. Our lawyers in Angola -- they're based basically out of Lisbon in Portugal, but offices in Luanda -- they tell us, really don't worry about it, this it typical of Angola. Time marchs on, they don't seem to worry about it too much, and then there's a flurry of activity and then everything is done. So we're somewhat taking their word for that. We wish the process was much more transparent, if you want, and faster moving, but welcome to West Africa. But we remain of the belief and see. So, again, I reiterate, no barriers on the horizon against any of this, so we'll get it done.

Have we effectively foreclosed on our partner and taken possession or is that still in process?

No. We -- what we've done, we've -- they're out as far as a joint operating agreement is concerned they're out of VAALCO's hair, they're not out of Angola's hair.

Okay.

So that process remains slowly moving along, also.

But aren't we going to acquire that and then find another partner to take over that?

Under the terms of the JOA, we can foreclose on that interest, but under the terms of the PSC, that interest then potentially reverts to the state if they so desire. So, it's kind of two conflicting documents and the PSC probably reigns supreme. But in terms of the JOC, they're out and we'll just have to see whether Senegal wants us to find the partner or whether they have one waiting in the wings.

Okay. And the reason this process is taking so long is it's West Africa? Why wouldn't you say, okay, somebody go look for another partner or we'll do it?

Well -- go ahead.

Until we get the letter from Senegal that acknowledges that Interoil is out and that gives us the guidance of whether they plan to assign us a partner or whether they want us to find a partner, it's a little bit difficult to actually get a partner to agree to take the interest. We are talking to some people quietly to see if they're interested because they've expressed an interest, but we've got to get the legal process sorted out before we can get serious about documenting a relationship with a new partner.

And you have no idea when that will happen?

I think it's going to happen within the next 30 days.

Okay.

Jamie, just to elaborate a little bit on the timing aspect, Interoil, we placed them -- as operator we placed them in a default position three times during the course of 2009. Twice they came back and paid the amount of money due plus interest. The third time they went in default was at the end of the year and then once the time clock expired you have to allow for a period of time before we can take any further action. It was early in the year that we actually took the steps to go beyond just the default notification and that was with the process that Russ described in the JOA of essentially taking their interest away from them. So it's been a bit of a long process, but it's been in and out, getting paid, then falling behind and then ultimately they -- Interoil just failed to respond or to make any kind of commitment to making the payments.

But their public filings they wrote off their entire Angola investment at the end of 2009 in both our block and their other block 6 that they're in with Petrobras, so they took a complete write down which kind of tells you where they think they are.

Okay. The tax adjustment that you're going to have to make, that will come as an after-tax charge in the second quarter?

It will be a tax that we show as an operating expense, yes.

Okay. That's an operating expense, not as an additional tax?

No.

Okay.

Are you talking about withholding tax?

Withholding, right.

We already accrued for that though, so --

Oh, you have?

Yes, we accrued for that last year.

Okay, so that won't hit the numbers any where?

Won't hit the numbers this year.

Just trueing it up and we're in good shape there.

Okay. Lastly, we do have world-class balance sheet and doing lots of great things. We bought some stock back last year, but the program, I think, is a little bit dormant at the moment. What's your feeling going forward?

I'm always a believer we ought to buy back the stock. We have a board that decides that. There are a couple of board members that don't like to buy back stock, but I bring it up generally at every board meeting. We'll see how the next board meeting goes.

Certainly if we can --

I know that's not satisfying, but it depends where the stock is and what our plans are, what deals may be in the mill to buy back stock. I always think it's a good idea, but I have sometimes some trouble with the board on that.

If we can buy $10 million to $15 million worth of stock below $5.50 it would be a wonderful thing long term in my opinion. Thanks for your time.

I agree with you.

Okay. Thanks for your time, nice job.

We have a question from Neil Nelson, please go ahead.

First question is, could you share any of your experience on the deeper horizon vertical at Ebouri 4H and if you had any indication that there's additional reservoir under that field?

We took the well down into the Dentale to get additional control points for the Dentale sands to see if we can correlate between those sands and some of the other locations. The other thing we were trying to do was to get a pressure reading in the Dentale to see if it was drawn down to give us some idea of whether or not the Dentale is contributing to the overall production. We got all our logging while drilling logs, which gave us the formations, but we were not able to get the pressure tool down. It hung up on some kind of a ledge in the fault so unfortunately, we didn't get that portion done. We weren't expecting any pay in the Dentale in Ebouri because the wells there, they're -- the relief on that field is fairly shallow and if there was going to be any pay it was going to be very minor and we didn't see any in the well. So essentially what we did with the Etame 4H well was we converted proved undeveloped reserves into proved producing reserves.

Are the reserve numbers for Ebouri going to change based on the -- now the three laterals that you have there and the delineation of the field, or are you just moving them from undeveloped PUD to into proven and production?

The latter.

The latter.

No change in the reserves.

But isn't there -- if you drill at Avouma, then -- and are successful and/or at Etame 7H and are successful and increase your production, in either case is there potential upside on your reserve estimates?

There is on those two wells, yes.

Okay.

Because we will be -- on Avouma -- excuse me, on South Tchibala the well that we're looking at drilling is up next to the fault where we can't move the oil with the existing well and the reserve engineers don't give us credit for it, so we believe if we go in there and get that and show them that it's there that we'll get credit for that. And the Etame 7H, we don't know where the oil/water contact is in that fault block and right now the engineers only give us what lowest known oil, if you will, and with this well we may be able to learn some more about that. And the southeast Etame well, that will all figure into the mix.

Are there any nonparticipating partners in the current drilling program?

No.

No, they're all participating.

And the prospects that you have, I think, for 2011 in closer to shore, have you 3-D seismic on those prospects or do you have to shoot seismic?

Still have to shoot the seismic. We're planning to do that this fall.

And is that, again, a partner election issue? Could they -- could someone not participate in the seismic and then participate in the exploration?

Everybody's going to participate in the seismic.

Okay. All right, that answered my questions. Thank you very much.

(Operator Instructions). And there are no further questions in queue at this time.

Okay. Well, thank you all very much. We look forward to seeing you at our next quarterly conference call. And I remind you our annual meeting coming up in June, June 2nd, so hope to see you there. Okay, thanks for your interest.

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