VAALCO Energy Inc (EGY) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the VAALCO Energy Inc. first quarter 2011 earnings report. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, instructions will be given at that time. (Operator Instructions). I'd like to turn the conference over to Mr. Robert Gerry, Chairman and CEO. Please go ahead.

Thank you, Paul. And good morning, ladies and gentlemen. And welcome to VAALCO Energy's May 10 first quarter conference call. Again bear with me while I read our forward statement. This conference call includes forward-looking statements, as defined by the US Security Laws. Forward-looking statements are those concerning VAALCO's plans, expectations and objectives, for future drilling completions 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, 2010, and other reports filed with the SEC.

Thank you for bearing with me and this morning I'm joined by Russell Scheirman, our President and COO and Greg Hullinger, our CFO. The format will be I'll introduce Greg here in a moment to take you through our first quarter financials. He'll turn it over to Russell to bring you up to date on our drilling activities. And then I'll have some closing remarks. So with that, Greg?

Thank you, Bobby. And good morning, everybody. Thank you for joining us. Our first quarter financials were very strong for VAALCO. We had net income attributable to VAALCO of $11.2 million. This translates to $0.19 per diluted share for the first quarter. This compares to a year ago numbers of $6.0 million and $0.11 per diluted share.

Our first quarter 2011 revenues were $46.8 million, compared to $30 million in the same period a year ago. And the strong results reflect both an increase in our production levels and substantial help in the oil price. If we look at the volumes sold, we sold in the quarter 450, almost 451,000 net barrels of oil. We averaged $103.76 per barrel. This compares to a year ago at 403,200 barrels and an average price of $74.33. So our sales volume was up 12% and we had a 40% increase on price.

In terms of production, for the quarter we averaged 23,200 gross barrels of oil per day. That compares to 19,300 for the same period a year ago. And this increase in the year-over-year production volume primarily reflects the production from three new development wells that we've put under production last year, as well as the repair of our Ebouri 3-H well where we replaced a submersible pump. All of that being offshore Gabon.

Expenses were pretty much in line, kind of a boring quarter. We didn't have much in the way of capital expenditures. We were busy paying our bills from the end of the drilling program from the prior year. And our results operationally were very good for the quarter.

The one uptick that you will see is on income tax expense. And on this we reported $18.3 million of income tax expense, compared to $10.8 million in the same quarter a year ago. And this is just a function of the cost account and again the oil that we sell is either allocated as cost oil or profit oil. Cost oil barrels take care of our expenses, plus capital expenditures. And we didn't have a lot of capital expenditures in the first quarter.

As such, a lot of the barrels were allocated as profit oil barrels, where the split goes 55% to the government and 45% to VAALCO and its partners. So we see kind of a healthy income tax amount. But on the other hand this is revenue, we keep the Delta. Balance sheet. We continue to remain extremely strong. We have unrestricted cash of $92.6 million and no debt.

And that is really the highlights of the financials. And with that, let me turn it over to Russ.

I'll start out with the update on our activities in Gabon where we're currently producing between 21,000 and 22,000 barrels per day. We completed the installation of the switch gear that we needed at Ebouri, so that we are now able to power all three of the Ebouri wells. Prior quarter we were only producing from two of them. We are doing this same similar project at Avouma, where we have one well that's not on production, because we can't run the ESP until we get the switch gear upgraded. And that should happen during the second quarter.

We have the total fluid to the tanker pretty much maxed out at 30,000 barrels of fluid per day, pending a project that we're working on at Avouma to add water knockout. So we're keeping our highest water cut well at Avouma closed in order to take some of the pressure off the FPSO. We expect to have the Avouma water knockout project done early next year. That will knock out 5,000 to 6000 barrels of water that the FPSO is currently having to process and that will make room for some additional oil production.

To get that oil production, we are planning a drilling program to begin in the fourth quarter of 2011. That will encompass, at a minimum, one development well at Ebouri, one development well at Avouma, as well as we want to work over one of the Avouma wells where we have a pump issue. We have one of the, we run dual pumps and one of them has failed in one of the wells. And the idea is, anytime we're on the platform and there's a well that has one or both pumps fail, we would change it out.

Our philosophy here is this way we're not put under pressure if one pump goes out, having to rush out there and get a rig. We can do it at the next planned drilling campaign. Also during that drilling campaign, we will drill one exploration well. That will be a structure that is to the south of Ebouri, we call it the Ebouri platform prospect.

It was set up by the results of some drilling last year and we want to see if there's not a second structure there at Ebouri that we could develop from the existing platform. There's also the possibility of a second development well at Ebouri, either to develop the platform prospect, should it be successful or we still think we have room for a fourth development, excuse me, a fifth development well at Ebouri. And we'll see about whether we can drill that as part of this drilling campaign.

The issue is going to be generating capacity and making sure that we could actually run that fifth well at this time. Onshore Gabon at Mutamba, as people may well know, we are in a joint venture with Total and we are reprocessing seismic and that is continuing. We'll have our first progress meeting with them in the middle of June, so we ought to be able to report on what we're seeing on that at the next conference call.

Moving to Angola, we are continuing our dialog with the Republican of Angola and have had some pretty encouraging results. We have several potential partners that are in discussions with the Angolans and with us. And, in addition, the Angola government has given us some assurances that if we are not able to have the partner in place by the time we're ready to drill, that they would assume their share of the drilling until such time as the partner could be put in place.

So we are actively moving forward to drill the two exploration wells, we've ordered long lead time items. We have a rig tender that's due May 12 and we'll have the bid opening next week with the government of Angola. So hopefully from that, we can start moving towards signing a drilling contract, perhaps sometime in June or early July. In the meantime we'll keep working with these companies that we've identified that are still interested to see which one of them will become our new partner.

Lastly, I'll just mention that we started our first Granite Wash well yesterday. It's in Hemphill County. We set surface casing last night and we're nippling up BOPs this morning. It's about a 45-day well and we're on the frack schedule to have that well fracked. We'll do a 13-stage frack on that well in July.

So we're excited about that opportunity and we ought to be able report something on that as well at the next conference call. With that, Bobby, I'll turn it back to you.

Thanks, Russell and, Greg, I take that we are equally excited about drilling our first US well in many a year. The Granite Wash, which Russell mentioned, as many of you know, we have a small acreage position there. But we are in active conversations to enlarge our acreage position. However, the 640 acres is a great way for VAALCO to get its feet wet. We operate it. We have 100%.

And I think that the experience we gather during this operation will bode well for other activities that we are currently looking at. And by looking at, I mean that VAALCO is spending a lot of time looking for the next best unconventional play that we can participate in. We are looking at the Niobrara, we are looking at the Eagle Ford, we are looking at the Bakken and we've even taken a hard look at Marseilles.

So VAALCO intends to become a player in these plays or at least in two of them. And we're keeping our cash balances in the bank, preparing that we're going to have to spend some money here over the next six to 12 months. The other very exciting thing, of course, is what Russell mentioned on Angola. Is looks like we are jumping through that hurdle, which has taken us a year and a half to get over. We should be able to spud those wells later this year.

Again VAALCO is looking for some place between 50 million and 70 million barrels net to VAALCO, if we grow both those wells. And that would be a quintuple or better of what our current reserves are. So it's a very exciting prospect that should happen later this year.

And then behind that, coming early next year, we hope, or at least certainly in the first half is Total's experience onshore Gabon. We hope to drill at least two wells onshore in the beginning of next year. So what that means is, VAALCO is sitting on some very important upside exploration prospects. We have the cash in the bank. And the projected cash flow to handle that.

We are actively looking for entrants into US plays. I'm often asked, well, why don't you stay to your netting in Africa? The African coast is being explored by many of the majors and national oil companies. The deals that we've been able to uncover where VAALCO can participate, for the most part are mega deals. That's not to say that VAALCO is not trying to shoe horn our way into a few of them.

We have put out a bid for a project in Equatorial Guinea. That letter went out earlier this week and we'll see what the results of that may be. Again that's a high impact venture to VAALCO, if we're successful in our bid. And we'll keep you informed of the results of that. I'm again frequently asked, well, why don't you buy in your stock or why don't you pay a dividend?

We are now projecting that VAALCO is going to spend a lot of money here in the next six to 12 months. Primarily again in Angola and primarily in establishing a position in the unconventional plays domestic United States. VAALCO is of the belief these unconventional plays are really in its teenage years. There is going to be more and more you'll hear about, about new unconventional plays. VAALCO is hiring people here internally to be able to guide us correctly in what we ought to be doing there.

And we are again looking very hard at certain of these plays. We are in negotiations, very important negotiations on certainly one of these. We're very close I think to maybe coming to a meeting of the minds. But anything can happen. So we will continue to examine all possibilities, to enable VAALCO to participate in those plays. So I think the idea for VAALCO this year was to grow VAALCO. We were in the process of doing that, as Russell mentioned.

Our Granite Wash started on Monday. 45 days later we ought to know something. We've got room for at least two, maybe three more wells. And I might mention that the cost of those probably is going to be in excess of $25 million to VAALCO. So there goes some of our cash also. Of course, that should come back to us fairly swiftly.

But I think buy-back stock is not in VAALCO's future, until we establish our position here in the United States and know exactly what we have in Angola. So, anyway, it's an exciting time for VAALCO. We're excited here. We're gearing up again for these unconventional plays. We're gearing up, as Russell mentioned also, ordering equipment, the long lead times for Angola.

And we think the next six to 18 months are going to be very interesting times. But with that, I'll open up the phone lines for any questions you all might have.

And one moment please. First question is from Brad Heffern with RBC Capital Markets. Please go ahead.

Good morning, guys.

Good morning.

So you mentioned that maybe Angola is going to sort of pick up its share of the partnership until you find another partner. Is there any difference sort of between how it will be with Angola versus how it would be if you selected a partner?

Probably not. I think that we're being very subtle in our press release obviously in talking about this. And I don't want to go into great detail about it. It's probably Angola's preference that, and they have the right, even if they join us, to sell or farm that interest out. But it looks like the same type of transaction with Sonangol will occur that would occur for any third party.

I think the key comment there was we asked for their guidance of whether we should apply for an additional one-year extension or move forward. And their response was move forward and if we haven't awarded the interest to the new partner, then the interest belongs to the government. So they would just take it up. And that was good news to us, because if they had just said, well, we're not going to do anything until the new partner is in place, then we would be back in limbo here. But they are just saying let's move forward.

Okay. And then sort of related. You know I think you guys have been budgeting for the potential that you would have to pay for those Angola wells entirely by yourself in your CapEx budget. Does this sort of tighten up the budget? At the same time, can you give us sort of sense of how the CapEx is expected to vary quarter by quarter, I expect it's pretty back loaded?

Yes. It's back loaded to latter part of the year. But we had always taken the position with the government that we would not pay for 100%. I mean, we have our 40% interest, which requires us to pay on the expiration side for 50%. But that we were not in the position where we wanted to take up the other half of the interest. So they've known that all along.

Okay.

And they've actually, they understand and they, they've been very congenial about this whole process.

Okay. Great. That's it for me. Thanks.

We have a question from Steve Berman with Pritchard Capital Partners. Please go ahead.

Good morning, gentlemen. Just one follow-up question on Angola. And if you said this, Bobby, I apologize. But is the formal process with the data room been wrapped up? Is that data room now closed?

No, because Angola has introduced some companies that they want to come through the data room and so we've kept it open to accommodate them.

Okay.

Companies that came to Sonangol, rather than to us.

Gotcha. And moving to the US, I thought this first Granite Wash well would have spun it sometime back in April. Can you talk a little bit about why only yesterday?

Well, we had Virginia I believe was the company that had the rig. They ran into all sorts of problems, Steve. And it's not VAALCO's fault. It's Virginia's and I believe it's a unit rig. It's their problem. They got delayed a month. They cemented in the drill.

They decided to deepen the well. And then they had some problems with getting the well plugged and whatever, for whatever reason the rig showed up three weeks late.

Okay. And one County over in Roberts Range had an initial well in the St. Louis line, below the Granite Wash that was just lights out good. And I was just wondering if you might, while you're drilling down into the Granite Wash, maybe go a little bit lower just to see what might be down there, if the St. Louis line or anything else deeper ---

Yes, we know about that well. And it kind of lit up that whole area. There aren't any other St. Louis wells that we could find, at least, within the immediate vicinity or even going out a few miles. But it's something that we're thinking about. We haven't made a decision about that.

Also another formation above the Granite Wash, has produced next door to us, called the Cleveland. And we're certainly going to log that as we, in fact the lease next to us produced at least 100,000 barrels from the Cleveland. So all of that is well within our thinking, Steve.

But we do have two deep penetrations on our lease that were old Unocal wells that were drilled down to 16,000 and 19,000 feet. So we actually have logs over the whole interval on our lease.

All right. So I mean at this point do you know if the St. Louis is even there?

We haven't looked at it, though.

Okay. All right. That's it for me. Thank you, gentlemen.

You have a question from Jamie Wilen. Please go ahead.

Hi, fellas. Just want to ask about the Etame and where things stand. You listed side track wells, It seemed like it was in the spring of last year. And just wondering why the process, after you've done all that initial work, takes so long with the partners, that you have to wait until June to decide what the next step is going to be. I thought, I really thought we decide, November, December, January what the next step is. And then move forward.

Well, we knew that we couldn't start drilling until the fourth quarter this year. We finished our last program in the fourth quarter of last year. And we've got some what we call brown field development work to do, which is adding deck space and ordering generators and electrical switch gears and this, that and the other.

And we can't have the rig on the platform when we're doing that kind of work. And we knew that work wasn't going to be done until the fourth quarter. So it didn't make sense to rush into any kind of an investment decision on the south. I think I assume you're referring to the southeast Etame discovery.

Right.

Where we are on that, is we have pretty well decided we need another platform at Etame, as part of this Etame expansion project that we've been working on. And if we're going to have a facility to make that heavy lift to install the Etame platform, then it would make sense to install whatever structure we need to develop southeast Etame at the same time because literally two thirds of the cost of doing those heavy lifts is just getting the darn piece of equipment to your site.

And the actual lift takes a few days. It's the 20 days that it's sailing down from Nigeria and back kind of thing that drives the biggest part of the cost of setting those facilities. So we knew that we couldn't get a platform before 2013 probably for Etame. So we're just kind of working things together, so that we can do it all one in fell swoop.

You say in the words, we pretty much decided. We has to be a collective we that all parties have to decide, we want to do it, or have all parties said, yes, we want to do that?

Well, all parties have agreed to go down the route of what we're calling the front end engineering and design for the platform at Etame. We still haven't decided whether we want to put full production equipment on it or just water knockout. But that's the purpose of this feed exercise that we're going to be working ourselves through.

They haven't all agreed on whether they'll also set the well head template at southeast Etame. But everybody's favorably inclined. So at our last meeting, we said well, go do your homework and come back at our next meeting in June and let's decide whether we want to fast track that alongside the Etame project.

So all the decisions should be made in the June meetings?

That's the plan.

Okay. And lastly, the tax rate going forward for the rest of this year, will it be the same as it was in the first quarter?

Pretty much.

Okay. Great. Good stuff, fellas. Thank you.

We have a question from Neil Nelson. Please go ahead.

Can sub-sea completions be accomplished in the initial two Angola target walls that you're going to drill?

Yes. We're drilling them with a floater and they would be sub-sea style completions were we to move forward on some sort of development plan. The water depth there is on the order of 350 feet. It's right on the edge of some of the big monster jack-ups. But the soil is real soft around there. So you get a lot of leg penetrations, which makes it kind of risky to even think about using a jack-up. So it's designed as a sub-sea style completion.

And what happened to the plan to increase the top side water processing capability on the FPSO?

Well, we did do that. We added some, what we call cyclones and things, in order to allow us to accommodate more water. But we've never done any work to breach the 30,000 barrel total fluid. We can handle more water now than we could have and get better quality water that we're sending over the side. But we've never addressed the fluid above 30,000 barrels a day. And actually the bottleneck there is the Polaris system.

Because if you were to have some sort of accident or valve close at the wrong place and all the liquid would start to back up into the flare system, there's a container that catches that liquid and it gives you a certain amount of time before the oil would actually hit the flare stack. All of the alarms go off and you've got ten minutes, basically, to figure out what the problem is and solve it or shut down. And if we were to go above the 30,000 barrel fluid limit, that just shortens the time span that you have and it's a safety consideration is what it really is, is you don't want to get to a point where you don't have enough time to take whatever action in the event there's some sort of emergency out there.

At a previous conference call, Bobby had discussed about taking it, as I recall, from 30 to 40 with the likelihood of taking the total fluid processing to 35,000 barrels a day. Is that out of the picture currently?

Probably until we get the water knockout put in, in Avouma, Neil. And we'll have to see how that goes. I think if we bring southeast Etame on and we haven't talked really about the possibilities. Here also in North Tchibala. While we are experimenting or trying to debate what to do about southeast Etame, we're also considering drilling a pilot well to North Tchibala.

You all may recall that back in the early 1980s, one of those wells produced about 2800 barrels in the [Dentaal] sand. That remains very much in our minds. And a lot of what we're trying to do with water knockout on these platforms, whatever, are anchoring into what happens if we have good production out of Southeast Etame and conceivably North Tchibala. That may be where that 35,000 barrel a day figure comes from.

Does the Southeast Etame platform plan then include the North Tchibala field?

It doesn't right at the moment. But we're talking about it. And again it's a here we go. You know, it's a consortium's decision. They seem to be favorably inclined to do it, at least one partner is very favorably inclined, the other one not so favorably inclined.

But the idea would be that the Southeast Etame platform would be connected to the Etame platform, which would have the watering, so that we keep any pressure off the FPSO. And the only water that the FPSO would have to handle would be from the sub-sea wells that are connected directly to the FPSO. That would potentially allow us to get total fluids up in the range of 40,000 barrels of fluids. Because we'd be knocking out water at Ebouri, Avouma, Etame and just sending 95% oil to the FPSO from those locations.

Thank you very much.

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

Okay. No more questions.

Okay. Well, thank you all very much for your time. And look forward to talking to you at the end of next quarter. Thank you all.

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