VAALCO Energy Inc (EGY) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the year-end 2010 earnings report conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions) And also as a reminder, this teleconference is being recorded.

At this time, I will turn the conference call over to your host, CEO and Chairman of the Board, Mr. Robert Gerry. Please go ahead, sir.

Thank you, Tony, and good morning, ladies and gentlemen. And welcome to VAALCO Energy's fourth-quarter and year-end 2010 conference call. Bear with me for a moment while I read our Safe Harbor disclaimer.

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 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, 2010, and in other reports filed with the SEC.

The format this morning will be -- I will turn this over shortly to Greg Hullinger, our CFO, and then he'll turn it over to Russell Scheirman, our President and COO, who will update you on our operations and future drilling. A few quick comments. We picked a hell of a day to have this earnings conference call. I don't think we could have picked a worse day, with what's happening in Japan, and somewhat, the disarray that's going on in the marketplace.

VAALCO is very proud of its 2010 earnings, as Greg will further describe, and we actually are anticipating even a better year in 2011. I think we view this unrest, if you want, in the marketplace, especially in the oil and gas sector, as an opportunity for VAALCO to invest its cash -- its anticipated cash flow in opportunities to increase our daily production and to increase our reserve base. So, where others may see disarray, we see it as an opportunity for VAALCO to benefit.

Having said that, I will now turn it over to Greg, who will take you through the 10-K.

Thank you, Bobby.

First, I'm just going to review a series of numbers for you, kind of comparing fourth quarter 2010 to fourth quarter 2009, and I'll give you a briefing on the full-year results. Our net income attributable to VAALCO for the fourth quarter was $8.9 million. That compared to $2.2 million from a year ago. Earnings per share, $0.15 versus $0.04. Our average crude sales price was up 21%, at $87.02. Revenues were stronger, $38.3 million versus $32.6 million. Our sales volume was down 3%, at 439,000 barrels. Production was similar; it was down 4%. We averaged 20.2000 barrels a day gross production, versus 21.1000 in the fourth quarter of 2009.

Production expense, very similar in both periods, $6.2 million versus $6.1 million. Exploration expense during the quarter was $4.7 million versus $1.6 million a year ago, and our exploration expense in the fourth quarter of last year included the Omangou unsuccessful exploration effort, at $2.6 million. Our Gabon income taxes were $8.4 million versus $13.9 million, and our Gabon taxes are -- in this quarter, were definitely impacted by the fact that our cost account was fuller, which avoids having barrels being taxed as profit oil.

Moving on to the full year 2010, our net income attributable to VAALCO was $37.3 million. That compared to a negative $7.9 million from a year ago. Earnings per share for the full year, $0.65 a share versus a minus $0.14. Our average crude sales price for the year was $78.45. This was 32% higher than a year ago at $59.54. Revenues, quite a bit stronger at $134.5 million versus $115.3 million, a 17% increase.

Sales volumes were down from 1.7 million barrels in the fourth quarter of -- sorry, for the full year 2010, versus 1.9 million barrels from a year ago. Production on an annual basis, we averaged 20.1000 barrels per day, compared to 22.4000 barrels a year ago. Production expense, again, very similar for the entire year, at $22.1 million, comparing that to a year ago at $22.0 million. Exploration expense was $6.8 million for the year versus $36.5 million a year ago, and our year-ago figure had several unsuccessful exploration efforts in those numbers.

Our Gabon income taxes for the year, very similar, $35.3 million versus $36.9 million. We had $81.2 million worth of cash at the end of the year, plus an additional $15.8 million that is in escrow, and the amounts in escrow include $10 million for our drilling commitments in Angola. And we have a new requirement this year, and we had to fund bank guarantees for -- to guarantee customs amounts for our equipment in Gabon. Actually, once our drilling program finished last year, most of those bank guarantees have now been released back into cash. We have no debt at the end of the year. Our working capital was significantly improved year-on-year at $112.7 million, versus $81 million a year ago.

And lastly, our reserves -- our total proved reserves at the end of the year were 6.9 million barrels, and that's 6% lower than a year ago at 7.4 million. And that's kind of the highlights for the year. It was our best performance in the last four years, on both our net income and our earnings per share, and I'll be glad to entertain questions at the end of the program, if you have any.

And at this point, I'll turn it over to Russell for an operational update.

Thanks, Greg.

At the last conference call, we discussed the two wells that we had one workover and one new well at Ebouri, as well as the discovery we had at southeast Etame. Since that time, we've added a new development well at the south Tchibala field platform, which began producing in November of last year, and we also drilled a subsea well at the Etame, the Etame 7H, which was drilled in the southern fault block as a replacement for the Etame 1B well, and that well began producing oil in December of 2010. With those two new wells on, we are currently producing about 22,500 barrels a day from the Etame complex. Also in the fourth quarter, as Greg mentioned, we drilled the Omangou prospect, which came in low, and was water-bearing and was subsequently abandoned.

As we move into the new year, our first new project -- we plan to acquire 3D seismic in May of this year. We will be shooting about 240 square kilometers of seismic in a shallow water area over a prospect that we've identified there. We originally were going to shoot that seismic in the fourth quarter, but we were delayed for environmental reasons, and we've rescheduled it for May. Onshore in Gabon on our Mutamba blocks, as you know, we have a joint venture with Total. That joint venture is off and running now with seismic processing, which began in the first quarter of 2011, and we expect to drill a well there, end of 2011 or early 2012.

In Angola, we've had kind of an interesting time there, but in December, we were finally able to have the partner that was in default removed from the project, and we were granted a one-year extension. We opened the data room in the first quarter, and we are currently having companies come through that data room, but ultimately, those companies will have to negotiate with Sonangol to determine whether they can enter into the block.

We expect to close the data room in the second quarter, and then turn over the companies that are interested in coming into the block to the government for negotiations, and we hope that we'll have a new partner by mid-year or so. We are talking to the government about whether we may need an additional extension, depending on how long it takes for them to get us a new partner, and they've indicated that they will consider giving us a further extension if we need it.

We also announced that we have a new venture in the US in the Granite Wash area. We've taken our first 640-acre lease, and we plan to spud our first well there in April. We like the Granite Wash because it's a liquids-rich play, and we're looking forward to getting that first well down in April. I would anticipate that we might have production as early as June or July from that well, depending on scheduling of the frac on that well.

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

Thank you, Russell.

And I think, to maybe add a little flavor to expectations, Gabon is maturing. We've produced probably close to 55 million barrels out of the Etame complex. We anticipate, with our partners, having an additional 50 million to 60 million barrels left. There are two upside opportunities that remain on our Etame block. One will be identified with the shallow water seismic that Russell mentioned. We have a strong lead there that we hope to turn into a prospect, and the other is a deeper-water prospect that we have called [Lily]. This has been on VAALCO's radar here for a couple of years. It's a large prospect, it's slightly deeper water, which would require a floater. And -- however, it could hold up to 300 gross barrels of oil, probably 25% of that could be recoverable; it's a different reservoir. It's deeper than the Gamba, and we are playing off of an old Exxon well that we believe just missed the structure. We've shot 3D over it, and the requirement really, basically, is to get our partners on board of drilling that. I doubt it will be done this year but, certainly, it is beginning to surface through our plans for the next year or so, so, we're looking forward to that.

Obviously, having Total on our team onshore Gabon, I think, is a bit of a feather in VAALCO's cap. Total has numerous producing fields onshore. They've been in Gabon for 40 years, and to have them reviewing the seismic with the anticipation of drilling the well, either at the end of this year or early next year, I think bodes very well. What we're looking for there are slightly smaller reserves, maybe 20 million barrels each. We think there's a couple of drillable prospects there and, certainly, if that comes true, we could substantially add to our reserves in Gabon.

Angola remains somewhat up in the air, but I think it's fair to say we did have one partner who had taken it to their upper management. They wanted 20% of the deal. Big company; I won't go into who they were but, unfortunately, they called us the next day and said that unfortunately, the parent company decided to sell the exploration division, so that fell by the wayside. We have one offer already on the table, and we are inviting them in for further discussions.

I think what is also occurring in VAALCO are opportunities, domestic USA. We are actively engaged in searching for another area of opportunity. I think once the word was out that VAALCO was looking in the US, a number of opportunities have come our way, mainly in the unconventional shale plays. We are disregarding somewhat the pure gas plays, and are concentrating -- as are many other companies -- concentrating in the liquid-rich plays, namely the Granite Wash, which Russell discussed briefly. We're looking very hard at the Bakken in Montana and North Dakota, and perhaps into Alberta, and we're also looking very hard at an oily play in Canada itself.

Probably today, we currently are reviewing three Bakken plays. Whether or not we're able to pull the trigger on them, I don't know. We still need some further work from our scientists, really, to see if that's an opportunity for VAALCO. The market is -- VAALCO is situated very well for the marketplace at the moment. There's a lot of transactions that are out there. The shell plays are taking up a lot of money from various companies, small and mid-sized, and this is opening up opportunities also for VAALCO in conventional plays. A number of companies are finding themselves, either forced or willingly, selling conventional plays to take that money and invest in the unconventional plays.

So, VAALCO has its plate full of opportunities out there, that I think can add substantial reserves and cash flow to us in the next couple of years, so we're excited. Again, we have a pristine balance sheet, with about $100 million in cash. We anticipate 2011, probably some place between $60 million and $70 million in cash flow and, again, we have no debt. One more word on Angola. As we search for the partner, we will open here a conversation shortly with Sonangol, who's really running this block, about getting a further extension to ensure ourselves that we have plenty of time to drill the necessary wells.

We would consider even drilling one well straight up in VAALCO. That would cause someplace between $30 million and $40 million, we'll say $35 million, to drill one of those wells. We are considering -- "considering" -- doing that 100%, and we're looking for reserves someplace between 30 million and 40 million barrels recoverable. So, if we went that route, that would be an exciting prospect for the shareholders of VAALCO. We could certainly triple our reserve base if we were successful at doing that.

But, I'm sure you all have some questions, so Tony, I'll turn it back to you to answer -- or to put people on the line that want to ask questions.

Thank you, sir.(Operator Instructions) Your first question will come from the line of Leo Mariani with RBC. Please go ahead.

Yes, good morning here, guys. Question on southeast Etame. Do you guys book any reserves there at year-end 2010? And what are you thinking about timing on production?

Russell?

We did not book any reserves there. We are running what we are calling our Etame Expansion Project Task Force, that is looking at sort of the final needs to fully exploit the reserves at Etame. And we are looking at another platform -- a third platform, that would be set in the Etame area. And we are trying to decide whether we want to tie back southeast Etame to that platform by a subsidy well or another smaller platform -- a well-head platform.

We probably will need to drill a well at the north Tchibala field to make that decision. That's something the partners have been mulling over. If we drill a well at north Tchibala, which is right next door to southeast Etame, then we can develop those concurrently. So, we're kind of in a state of flux on deciding how we want to go on that with this task force, but we are looking at a third platform, probably installed in 2013, and then we would have a development plan for southeast Etame in connection with that.

Okay. I mean, looking at your CapEx for 201 -- fairly wide range, $35 million to $60 million. Can you give us an idea of what sort of gets you to the top of the range versus the bottom of the range? And how much money are you going to spend in the Etame concession here in 2011?

It all depends on what we do in Angola. If we gear up and drill that one well, there goes $30 million, $35 million and the balance of what's on the books there is pretty much development drilling and infrastructure in Gabon. I think there's a component in there for the Granite Wash.

Yes, two wells.

Two wells. So, that's about it.

Yes, we -- the CapEx that we'll be spending in Gabon -- we're doing some platform modifications. We added some slots to those platforms to accommodate additional wells, and we have some deck work we have to do. Plus, we have to add power and electrical components to accommodate the wells that we're planning. We probably won't get started on the new wells in Gabon until the fourth quarter of this year. We may have an open water well that we can drill ahead of that, but we have get all of that deck work and power generation stuff behind us before we can come back in and start drilling additional development wells in Ebouri and Avouma.

Okay. So, what is your estimate of, roughly, your Etame spend here, then, in 2011?

It's probably in the range of $15 million to $20 million.

Okay, and that's net to VAALCO?

Yes.

Got you. Okay. I guess you mentioned two Granite Wash wells in 2011. I guess -- are those going to be 100% to VAALCO?Do you have 100% interest in that section that you guys picked up? And are those $9 million wells, what you're thinking, net to VAALCO?

That's correct.

Okay. And I guess -- clearly, 640 acres may be only three wells or so. Just give us a sense of VAALCO's appetite to use some of the cash on the balance sheet to make additional Granite Wash acquisitions of what may be available nearby around your current block.

We're looking for acreage. I think we've -- well, we're looking hard and we may have some more acreage here shortly.

Okay, is there any production on your current block there in the Granite Wash?An old vertical well or something?

No, there's some -- there's an old BP -- or I think, oh, two, maybe two BP wells that are junk, but there's no other production.

They were deep. They were in the [Hunt] and then in the -- I can't think of the formation off of the top of my head. But they were deep [sour] wells that were drilled back in the 60s. And that's one of the reasons we like this particular block, because it was held for all those years by those wells, and there was never any Granite Wash, although there was Granite Wash activity all the way around it. So, that's what made it interesting to us.

Okay. And I guess, is there any sort of target on how much money you could spend in 2011 in acquisitions? Is there sort of a hard cap, where you won't spend more than X, or anything like that?

No, we're opportunity drilling -- opportunity-driven, and we'll take a hard look at what comes in the door.

All right. Thanks, guys.

Thank you. Our next question in queue -- that will come from the line of Steve Berman with Pritchard Capital. And your line is open.

All right. Good morning, guys, and thank you. Let's stick with the Granite Wash here. Can you maybe talk about where in Hemphill County this is? And perhaps, using Forest as a landmark, they're kind of in the middle to the bottom, up against Wheeler, and have had some pretty good wells there. Just trying to get a sense of where this acreage is in the county.

Yes, we're in the southern part of Hemphill County, about five miles north of the county line and we are just east of the Buffalo Wallow Field, in that area. The people who are drilling around us are Chesapeake, Devon, Samson -- all have wells around them there. That kind of should give you an idea where we are.

I think there's five rigs within two miles of us.

There's five rigs -- yes, they're running in every direction around us. So, we feel like we found a lease that's pretty much in the fairway.

And any sense for -- I mean, we're talking $9 million wells -- any sense for how big these wells can be, in terms of EURs, et cetera?

The comparable wells in the area have been making about 2 BCF and 30,000 to 50,000 barrels of condensate, and realize that that gas is probably [12] BTU to [1,250] BTU gas. So, they're stripping off a bunch of liquids from that gas in the gas plant and the gas plant is nearby. There's two pipelines that are adjacent to our lease and we're currently negotiating with those two companies to decide which one. Both of them have gas plants in the area.

And then, kind of more on a bigger scale getting into this, and perhaps you took Bakken and other plays. I mean, we're in an environment where companies with -- that have been there for a while, with some -- even with huge acreage positions, in a tight service environment, are having trouble getting wells completed on a timely basis. How are you going into this situation with that in mind? And how are you tracking the people you need to get into a new business for you, in a way?

Well, we're using -- on the drilling personnel side, we're using people that we already had in-house, that had backgrounds in the mid-continent area, that were working for us in Gabon and other places. The other thing that people probably don't realize is, we did something like $60 million or $70 million worth of business with [Schlumberger] last year, when you look at what we did in Gabon and all the wells we drilled. So, I mean, we're on their radar scope. It's not like we're some new little operator that nobody's ever heard of.

And so, we get plenty of attention from some of the service companies, because we make sure that our representative at those service companies plugs us in to the domestic side. And that makes a big difference. So, right now, we have bids for our frac work. And it looks like we're going to -- we're not going to experience any significant delays from the time we finish the well to when we can get the well fracked.

Okay. One kind of housekeeping item. Every year, you usually give a 2P number on the reserves. Do you have that for this year, 2010?

It's probably not a hell of a lot different than it was the last year, is my guess.

I think around 14.

Yes, I think 14 is probably a good number.

Right. But if it's 14, then it's higher. I think it was in the 12's.

12. It may have been 12 something.

I think it was 12.5. You're right. It's about the same.

All right. And then, another question on Angola, and I'll let someone else chime in. I was under the impression that that data room had closed not too long ago, and now I see it's open. So, I'm kind of surprised a little bit that this is taking so long, with [Brent] being $110 and just recently hired. I would think companies might be falling over themselves to get involved here. So, can you elaborate a little bit more, Bobby, perhaps on why this process is taking as long as it is?

It's a good question, Steve. We found that a number of companies, including such majors as Exxon, came in to look at the data room. Why? I'm not that sure. I think one of the problems that the uninitiated, if you want, that came in to the data room were expecting billion-barrel prospects. We've always advertised that's not the case. What we're looking at here in Angola for VAALCO, at least maybe in two wells, is 150 million to 200 million plus barrels of recoverable oil. A number of companies were disappointed that it wasn't 1 billion barrels. So, they said thank you, but no thank you.

What we're seeing is a -- mainly, the smaller independents -- and you don't have to be that small, are taking a hard look at it. The reason we kept it open, or still have it open, is that right at the end, a number of companies appeared out of nowhere that were interested in having a look. So, since we didn't really have the deal that we wanted we decided, why not?What's another couple of months to let everybody have a good look at it. I think those of us here at VAALCO, Steve, are highly confident that we're going to get this deal done. And honestly, as I mentioned before in my other remarks, if Angola will let us, we're ready, willing, and able to go ahead and drill one well.

And I don't want to drill two, because now you're looking at a cost of $60 million cash to VAALCO, and that's a bit rich -- but, with some of the other things that we now have going on. But, I don't mind spending $30 million, $35 million to go after these 35 million barrels, net to VAALCO. So, we'll see -- well, that's not quite net. Sonangol's got a 20% carry. But -- so, we remain highly optimistic that this deal will get done. And we're even getting excited about going ahead and drilling this one well. So, we'll see what happens.

If you go that route, Bobby, where you drill it yourself, how soon could that happen?

By year-end.

Okay. All right, thank you, I'll let someone else jump in. Thank you, guys.

Thank you, Steve.

Thank you. And our next question in queue, that will come from the line of Joe Pratt with Wells Fargo Advisors. Please go ahead.

Hi, good morning, Bobby.

Hi, Joe.

Just a quick question here. Do you guys disclose EBITDA numbers?

We really haven't, but you could probably dig it out of our 10-K. Well, cash flow -- what did we do last year, Greg?$60 million?

Yes, every bit of it, yes.

Yes. And that's kind of a number that we use. And we ought to do better -- depending upon the price of the commodity. Don't forget, we trade off of dated rent, also.

And the $60 million includes all non-cash charges?

Yes.

Yes.

Yes. Okay. Thank you.

Okay.

Thank you. (Operator Instructions)And our next question in queue will come from the line of Jamie Wilen with Wilen Management.

Hi, fellas. I wonder if you could summarize what your current thought process is in southeast Etame. You drilled an exploratory well with a couple of side tracks. I don't think you were sure whether that was connected to an existing structure, or a new one. What is your current thought process there and what's the next step?

Well, it's definitely a separate structure. What happened on that well, as you may recall, is on our first side track, we drilled across a fault and we actually enlarged the Etame field, because we found out that -- we found evidence of oil further down dip than what we had originally mapped, but that made the southeast Etame structure smaller. But it is definitely a separate structure and as I mentioned, we still are looking at whether we want to develop it subsea or with a small platform, and north Tchibala probably figures into that equation.

Okay. As you're looking at all of these drilling prospects and what your plans are, it seems to take a rather lengthy period of time for you to make a decision as to how you're going to proceed. What's the Expansion Task Force's timetable for doing things? It seems like you lay out, we're going to do this over the next couple of months, and then it always adds on to an extended period of time. What's the reason for that?

Welcome to the world of having a lot of partners -- and that's one of the delays we always get into. Don't forget, we have -- Sinopec and SAS Oil have about the same percent ownership in the Etame complex, certainly in Gabon. They've been -- we've had a study group in our office now for probably nine months, thanks to mainly Sinopec's desire to do a thorough study. That's what takes forever. And on the other side of that, when you deal with the governments of both Gabon and Angola, there are inevitably delays.

But Gabon's pretty good with VAALCO. We represent now probably 8% of Gabon's total production. We have sent the country of Gabon well over $1 billion in royalties and revenue and they like VAALCO. They prefer to do business with us, obviously, than majors who try to dictate, ad infinitum, what they want to do. So, we're favorably ensconced, if you want, in Gabon, but it takes a lot of time. I think as we move into the US or North America or whatever, you'll find our timetables will accelerate a great deal swifter than we're able to do internationally.

And as Russell mentioned earlier, we had lined up, and in fact we're shooting seismic in the shallow waters. Gabon and environmentalists objected strongly to that and told us to cease and desist. He had the -- either the President of Gabon, and we were forced to quit that seismic shoot and delay it for another eight months, or roughly until May of this year. Those things happen over there, as part of doing business internationally -- certainly, in Africa.

So, bear with us. We'll get to doing all these things eventually and I agree with you. It's frustrating for us too, to go to the marketplace and say this is what we're going to do under a certain timetable, and then find some roadblocks thrown at us. But we'll get it done.

Let me ask you another way. If you did not have a partner in southeast Etame, and it was your decision as to how you would proceed, what would you do?

We would have the whole thing drilled by now.

And how would you -- would you have additional -- would you have a third platform, would you tie it back?Is that your game plan?

We probably would have done that. We probably would have drilled a [Lily] by now. And we probably would have drilled another prospect. So, the partners just take a long time to wade through all of this.

And unfortunately, we have a provision in our joint operating agreement that was written back in 1995, that requires an exploration commitment well has to be unanimous. So, any one partner can block an exploration commitment well, up until the point where you have to drill it in order to satisfy your government obligations, which is not until July of 2014. I'm not saying that means we won't get anything drilled until then. I'm just saying you really have to work with the partners to get to the point where they'll all agree to drill an exploration well.

Okay. And lastly, on Mutamba, I thought in the press release you said you were going to build -- you were going to drill in the first half, but it seemed in your comments that you were going to drill right at the beginning of 2012. Can you -- ?

It will depend on Total's ability to finish the seismic reprocessing. We're anxious to drill as soon as possible. We have to drill the well by the end of the first half. We have to drill it by May.

Okay. So that's the latest -- ?

-- in the 10-K, and we'll try and accelerate that as best we can.

Okay, very good. Thanks, fellas.

Thank you. At this time, we have no additional questions. Please continue.

Well, if there's no additional questions, I want to thank everybody for attending, and we'll see you next quarter. Thank you, Tony.

Thank you. And ladies and gentlemen, this conference call will be available for replay after 12.00 PM Central Time today through April 15, 2011 at midnight. You may access the AT&T Teleconference replay system at any time by dialing 800-475-6701 and entering the access code of 193152. International participants may dial 320-365-3844. Once again, those phone numbers are 800-475-6701 and 320-365-3844, using the access code of 193152. That does conclude your conference call for today. We do thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.