VAALCO Energy Inc (EGY) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2011 earnings conference call. (Operator Instructions). And as a reminder, this conference is being recorded. I would now like to turn our conference over to our host, Mr. Robert Gerry, Chairman and CEO. Please go ahead.

Thank you, Jeanine, and good morning, ladies and gentlemen, and welcome to VAALCO's second quarter and six-months earnings conference call. Please bear with me, while I read our Safe Harbor Statement.

This investor conference 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, completion and other operations and activities. All statements included in this investor conference call that address activities, events or developments that VAALCO expects, believes or anticipates, will or may occur in the future are forward-looking statements. These statements include future production grades, expected capital expenditures, prospect evaluations, drilling, timing, completion, and production timetables and costs to complete wells.

These risks are further describes in VAALCO's annual report on Form 10-K for the year ended December 31, 2010, and our 10-Q for the quarter ended March 31, 2011 and other reports filed with the SEC, which can be reviewed at www.sec.gov.

The format this morning will be similar to what we have used the last few meetings. I'm going to turn the meeting over to Greg Hullinger here in a minute, our CFO, who will take you through our financial statements. He in turn will turn it over to Russell Scheirman, our President and COO, who will discuss our production, future drilling plans, et cetera. And then he'll turn it back to me, and I'll update you with some closing comments. So having said that, Greg, please go ahead.

Thank you, Bobby. Good morning, everyone, thank you for joining us. I'm pleased to report another strong financial quarter for the Company. Let me start with net income. For the quarter we were at $11.8 million, versus $10.0 million, this is net income attributable to VAALCO that translates into an earnings per share amount of $0.20 versus $0.18 for the same quarter a year ago.

On a six-month basis, we have got net income of $23.0 million, versus $16 million, and that's a $0.40 EPS versus $0.28 for the same period back one year ago. Not too much of a mystery, we see strong revenues out there, that's a function of very high prices, but we also had production and sales increase in there, and also we'll see the offset of that, which is the Republic of Gabon must be very happy with us with the amount of income taxes that we're paying there. I'll talk about all three of those areas because they are the key drivers.

On the revenue side for the quarter we had gross revenues of $58.5 million, versus $33.7 million for a quarter a year ago. That's a 74% increase.

For the first six months of the year we're at $105.3 million versus $63.7 million a year ago. That's 65% higher year on year.

If we look at the sales price for the quarter, we averaged $119.37, that compares to $76 in the same quarter a year ago, a 57% increase, and on a year basis for the first six months, we still averaged almost $112 a barrel, compared to a little over $75 a barrel for the first six months last year, so, again, incredibly strong prices.

If we look at volumes of sales, which are of course going to be a function of our production, for the quarter we sold 490,000 barrels of oil compared to 443,000 barrels a year ago. Looking at production on a daily basis. in the second quarter of this year, we were at 22,200 barrels of oil per day on a gross basis, that's 11% higher than a year-ago quarter at 20,000 barrels a day.

Looking at the entire six-month period, we sold 941,000 barrels of crude. That compares to 846,000 for the first six months a year ago, and on a production basis for the first six months we averaged 22,700 barrels of oil per day compared to 19,800 barrels of oil per day a year ago.

Take a look at the cash flow. Just one indicator here, our cash flow provided for operating activities for the six month period we generated $41 million in cash flow compared to $15 million for the same six months a year ago.

Looking at CapEx for the year, so far we have spent $9.5 million, and of that $5.1 million of it was associated with our first Granite Wash well. Russ will be talking more about that in a moment, and we also picked up acreage in Montana of $2.6 million. So not an incredible amount of CapEx was actually spent in Gabon in the first half of this year. We will be talking about that as well.

Switching over to the balance sheet, you can see an incredibly strong balance sheet. It just gets stronger every quarter I come back here. We have got over $125 million in cash, including escrow. Of course, no debt on the books at all.

If I talk about expenses our production expenses are right on target. Exploration expenses really have been minimal so far this year. We have spread it out in our regions. We're planning on doing some seismic later in this year, which will bump that up, but there is not a lot of exploration expense in the first six months.

DD&A is up, and that's kind of a good thing because DD&A will go up with the higher production volumes, but it's also a function of rate. Our rates are actually higher than a year ago, and that comes with the investments that we made on new wells back in 2010.

I'm going to switch gears and talk a little bit more about taxes than normal, because if you look at the numbers they are large. That always generates questions. So I'm going to talk about some numbers, but if you want to follow along on a piece of paper, write down a little column that says June 30, 2011 and one that says June 30, 2010.

If we start the tax calculation, we start on gross revenues for the period in question here, write down $58.5 million for gross revenues for this year compared to $33.7 million for a year ago. From that, what we do is we recover the cost oil first out of our revenues, so our operating expenses plus any capital that we have spent gets reimbursed to us in the form of cost oil.

So in this last period, we didn't do much investing in Gabon, our cost account was rather low, so we recovered oil to the tune of $5.2 million, worth of cost oil recovery, which then subjects $53.4 million to the profit oil split. From there then it's a 55/45 split. 55% goes to the Republic of Gabon, so that generated $29.6 million in tax.

And if I just [plot] through the numbers quickly from a year ago, again, gross revenue $33.7 million, but our cost oil account was larger a year ago at $16.2 million. So that left us with $17.5 million of revenues that was subject to the profit oil split, and thus income tax. And on that $17.5 million, we paid $8.7 million in tax.

So you can see that when revenue is high, in our case it was high, certainly in the first quarter and most certainly the second quarter, -- the revenue gets high and then depending on the level of cost account balance, if we're left with a lot left in the profit oil split, we're going to be generating a lot of taxes. I hope that helps, if not give me a call afterwards or ask a question during the Q&A portion. But that's where we are with the taxes.

In summation that was another good quarter for VAALCO, strong financial results, great EPS and our machine is working well; operating expenses, SG&A, everything is in line. And with that, let me turn it over to Russ.

Thanks, Greg. I'll start off discussing our activities in Gabon. Currently we're producing about 22,500 barrels a day. Our production sells at a premium to Brent, which Brent is still well north of $100 a barrel despite this softness we have seen in the last week or so.

We have a shutdown scheduled for later this month for a couple days to do some maintenance on the FPSO, but otherwise the wells are behaving quite nicely and production is staying stable.

I mentioned last quarter that we had completed an electrical upgrade to Ebouri that allowed us to bring an additional Ebouri well on. In the second quarter we also completed the same type electrical upgrade on our Avouma at Tchibala platform which allowed us to bring on one additional well from that complex.

We're currently adding slots to the Ebouri and Avouma platform. That work is ongoing, as well as we're building a water knock out skid for Avouma to knock out water to take pressure off the FPSO and allow us to maintain higher production rates. The slot addition should be completed later this year, which will then allow us in 2012 to get in there with a drilling rig and add some additional development wells.

We have two wells planned for Ebouri. We have a workover and one well planned for Avouma, and just based on the results of those wells, we'll determine how many additional wells we might need.

We also continue to work on our expansion project, which we believe is going to lead to an additional platform at Etame in 2013, from which we'll be able to drill wells with dry trees to get a couple of key locations that we need to fully develop the Etame field.

We were scheduled to shoot shallow water seismic in July, unfortunately that had to be rescheduled to October of this year. The seismic vessel had some mechanical problems on a shoot it was doing in South Africa for another operator and we ran in to the turtle nesting season in the Mayumba National Park which is south of our concession. That will be finished in September.

We now have a vessel that we've identified from PGS that will come do the survey in early October. We're pretty confident they are going to make it this time. They have agreed to a penalty if they do not come. Apparently they have a little more control of their destiny, but I think this vessel is in having some dry dock work and it will be coming out specifically for our job.

Onshore Gabon in Mutamba, we continue in our joint venture with Total to process the three leads that are our favorites. We look to be on track to complete that process in the fourth quarter of this year, and that should lead to a well sometime in the first quarter of next year in our Iroru block, and we are being carried by Total on that activity.

Moving to Angola, we have selected a rig, the GSF 135 semi-submersible rig which should be available in March of next year. We have been told by Sonangol that they will grant us an additional one year extension to November of 2012 to accommodate the delay. We'd hope to have a rig in November, but there just weren't any available when we went out for bid.

We continue to have discussions with Sonangol about a partner. We know they are in some active discussions with two or three companies, and just remains to be seen whether they assign one of those to us as a partner or whether they choose to take up the interest themselves, which they said they would do, if they do not assign us a partner. I think we're finally starting to get some movement in Angola.

Switching to the US, on the Granite Wash we drilled our first well. We fracked it last week, and we are currently flowing back to frac water and anticipate going to the shales later this week. We're not going to be able to announce any flow rates on this meeting, but we should have something for you later in the week. Best I can tell you is the well seems to be performing nicely. It's cleaning up, and we should know something here in a few days.

We currently have a thousand net acres under lease in the Granite Wash and expect to increase that to about 1800 acres with an additional lease that we're looking at, which would give us something like 10 to 12 locations that we could drill on those leases, in whatever order we choose to do that.

In the Bakken, we announced two deals in the last couple of months. The first one is in Sheridan County, Montana where we have 5,200 acres under lease, 3,600 net acres to VAALCO. And the second is in Roosevelt County, Montana where we're in a letter of intent and working on a production and sales agreement for 23,000 acres, a little over 14,000 net acres to VAALCO.

The Roosevelt County acreage is on the Poplar Dome, which is a nice structure, and we are currently looking for a rig to get in there in the fourth quarter and try and get at least one well in each of the areas. Of course, rigs are hard to come by there, and we're having to work with another operator to see if we can't put a program together, but we are confident we'll get something going here rather quickly.

Both of the areas, where we took these Bakken leases are on structures. They are four-way type closure structures, so in addition to the Bakken potential that we see there, we will also have deeper objectives in the Nisku and the Red Fork that we'll be evaluating. So we're really excited about these two projects, because it has the potential to give us some additional reserves from these deeper formations. With that, Bobby, I'm going to turn it back to you.

Okay. Thank you, gentlemen. To give you a little more flavor on what VAALCO is doing, the Bakken is an area that we are very interested in, obviously, with our purchase of acreage. In the Poplar Dome which Russell just mentioned, the 23,000 acres, we have 65% of that, but if you run out the math, there's the possibility that we could have a bit that meets our projections. We could have a hundred locations, possibly, and that could add considerable reserves to VAALCO if it pans out the way we think it will.

I think it's very important to remember what Russell said, there are other formations beneath the Bakken. And I caution you that we only have interest for the Bakken down to basement here. There is some shallow production, but we don't participate in that.

But the other formations, namely the Nisku, the Red River, et cetera, could be very prolific. So the hundred locations I mentioned would be Bakken, any additional formations that we're able to uncover will be in addition to that. So, again, we're very excited about it.

The Granite Wash looks like is going to live up to our expectations. I think VAALCO is going to be conservative in the flow-back and it's production, rather than opening these things wide open. I think we favor the more conservative long-term aspects to that. But it looks like we're right on target.

The international portfolio that VAALCO has -- finally we're arriving at a spot with Angola, that we are feeling more and more comfortable with. Again as Russell mentioned, we look like at least we're going to get two wells drilled there, hopefully in the first half of next year. The comfort we're getting is that we're now receiving some emails guaranteeing, certainly, extension for another year, and I'll just mention that -- which we've mentioned before that Sonangol has always indicated to us that if we're getting ready to drill and don't have a partner, that Sonangol will be our partner, so we're looking forward to that.

Bare in mind also that Angola, we have 1.4 million acres under lease on block 5 which is our concession. What we're looking at here is only a tiny portion of our entire block.

So if we are successful in finding some production, we have a huge swathe of acreage, and there is a 3-D available on portions of the acreage that we have not yet purchased. We were in the mode to purchase an additional 3-D, but our former partner was unable to come up with the money to pay their share, so we let it pass. But there's a lot more potential work that we can do in Angola, and we finally feel that's right around the corner to be able to bring into our portfolio.

I'm frequently asked now that you are coming to the United States, are you abandoning West Africa? Not at all. We remain very excited about West Africa. We are always looking for additional opportunities over there. We have a offer out on the table for a property in a different country than either Angola or Gabon. I think we're in the hunt on that, and we'll see how that plays out.

But the reason, basically, to come to the United States is to supplement our international portfolio. There are a number of opportunities that a small company like VAALCO can participate in on a much more frequent basis here in the domestic market than we can internationally. It's getting expensive in West Africa. It's getting expensive in the United States too, but West Africa is now becoming a happy hunting grounds, if you want, of the large major international companies, and the national oil companies.

VAALCO senses that we will be able to do more transactions domestically, and certainly the unconventional shale plays throughout the United States are a target that we are looking hard at. VAALCO probably will take on no more than three of these plays, domestically. Never say never, but that's what our thought process is. We remain a fairly small company at the moment, and we believe that three plays, obviously, the Bakken is the predominant one at the moment, is what we can handle.

VAALCO's other opportunities, we feel, exist in the corporate world. VAALCO is diligently looking at the possibilities of buying someone. We're also certainly considering merging someone into VAALCO, and we feel that the opportunities to do that have never been better. Obviously, with the market in somewhat disarray, it's difficult, but, again, that introduces opportunities.

We have a pristine balance sheet, which Greg mentioned. Again, well over $100 million-plus now in cash, no debt. We will cash flow this year someplace between $60 million and $70 million based on the commodity obviously -- excuse me -- the price of the commodity, and no debt.

So now is the time, I think, that VAALCO would like to be a $1 billion market cap within the next three years. One of the quick ways to get there is to buy somebody or merge somebody into VAALCO. It's not going to be easy, but I think the -- again, with the opportunities that we see in the United States, certainly, will give us a leg up to be able to use our balance sheet to accomplish that.

We will stick pretty much with the oilier shale plays. We are 99% oil, but that is not to say if the right gas deal comes along, VAALCO will certainly consider that. I think that we feel here that the downside risk in gas is minimal, and we would prefer to find a conventional gas play with upside. We could go to the NYMEX and buy gas contract. We're not going to do that, but we're looking for upside in anything we can do, so that's on our plate also if the right transaction comes along.

We would look in to Canada if there are opportunities there. And some Canadian, small cap companies probably are selling at less value than some of their US counterparts, and Canada is on our radar screen.

So in a nutshell, we're excited about this. We think times have never been better for VAALCO to really initiate a growth pattern. As I have mentioned before, we have been fairly flat for a couple of years, but the next 12 to 18 months is the opportunity for VAALCO to really grow itself, and this is what we intend to do.

So with that, I'll open it to questions from the audience, and Jeanine, I'll turn it back to you.

(Operator Instructions). And we do have a couple of questions. And the first one is from Steve Berman from Pritchard Capital. Please go ahead.

I'm sorry, Russell if you touched on this, but on the Granite Wash, is drilling the second well not until late this year or early next a function of rig availability, or is it just you watch how this first well performs for a period of time before you drill the next one?

It's probably a combination of both. We may get in there a little sooner than we thought. If rig availability is an issue, but we have been offered a rig that we're looking pretty closely at. If this well behaves itself, then we'll probably take it and get going.

Okay. And then in Gabon, could you talk about the possible dollars involved in new platforms?

A new platform, the decision we have to make is whether we make at it full-blown production platform capable of separating gas, and flaring, and whether we make it a water knockout platform like Ebouri. I believe that an Ebouri style platform would run $80 million to $90 million gross, that would be $30 million our share. And if we go to the full-blown production platform, you are probably talking another $20 million to $25 million gross above that.

The issue there is if we had a full-blown production platform, we might have a little more leverage with TINWORTH with respect to extensions, et cetera, on that vessel. We could process oil on the platform as opposed to on the FPSO, so that's kind of what we're looking at.

All right. I appreciate that. I'll get back in the queue. Thank you.

Our next question comes from Brad Hepburn from RBC Capital. Please go ahead.

Good morning, guys. Another question on the Granite Wash here. Given that was your first drilling of this type of well, can you talk through how the drilling operations went and the fracking operations? Was there any hiccups or was it pretty smooth?

It was a learning experience for us. We were able to drill the complete lateral. We did move up and down with the formation more than we would have liked, but we stayed within the section that we wanted for the entire 4,500 or 4,600 foot interval.

The frac -- the first few stages weren't as good as the last few stages, and we don't know if that's common, or if that's just the way our formation was. I have looked at some other frac results and seen similar patterns where they don't get as much sand out in the first few fracs as they do in the last few, so that may just be the nature of the area.

But all in all, we drilled the well on budget, and I think it took four days or five days longer than we had in our original drilling schedule, so that's not too terrible.

Okay. And the new -- I guess 340 acre acquisition there, and the other one that you can looking at, are those contiguous to your acreage, or are they elsewhere in the county?

They are not contiguous, but they are within five miles of where we are.

Okay. If you get is this new 800 acres or so, do you still have more appetite and is there more available in the play?

We'll just keep our eyes on what is out there, and react accordingly. We would probably be looking at a two-well program here later this year. We have a two-well commitment on the first lease, and then this second lease, we only have a one-well commitment, but that would get us going, and then we'll just see how thing goes from there.

Okay. Thanks.

(Operator Instructions). Okay. We have a question from [Neil Nelson from DRS Group]. Please go ahead.

Could you give some color on the Montana Bakken acreage? And would you be able to use any of the existing gathering system or disposal wells that might exist up there from the people that you are leasing from? From their shallower production areas?

Neil, it's Robert Gerry. We hope to be able to use some of what they have got. It depends a lot on -- they have the rights to the Charles formation. It depends upon how active they get with their drilling program up there. The need for doing all of that. But we're in conversations with them on that issue.

There is infrastructure there. We're not too terribly concerned that we're not going to be able to make a favorable transaction to use that.

I will tell you for example there is a pipeline that goes to market from the Poplar Dome, they are currently sending around 300 barrels a day down that line, which is nothing compared to the peak when it was in the thousands of barrels a day. They have 50,000 barrels of oil storage in the area that they are only putting 300 barrels a day into. There are certainly existing roads to all of the existing wells that will be able to work out a deal to be able to use those.

So I think the answer is, yes. There's infrastructure that we'll be able to work with Magellan, and hopefully we can share nicely.

Next question is in the areas that you have leased up, is there Three Forks-Sainish underlying the middle Bakken there, or do you have any seismic data that would -- or do you plan to shoot seismic data there to collect that information if you don't have it?

We have 3-D seismic over both areas, and there has been Nisku production on the Poplar Dome in one well, but it was based on 2-D. We see three or four Nisku structures that have not been drilled. We also see a couple decent-sized structures in the Red Fork. There had been Red Fork penetration, so we know the formation is there, but they have never been tested or logged with modern logs.

The same is true of the Sheridan County acreage. We have a structure there and we are confident based on some surrounding wells in the area that these deeper formations are present. So we'll be looking at the 3-D seismic to see if we can't get down to one of those structures and see what happens.

Thank you very much.

Great. And there are no further questions at this time. You may go ahead.

Well, no more questions. We thank you for your attention, and appreciate that. So we'll see you at the end of our third quarter. Thank you all very much.

Ladies and gentlemen, this conference will be available for replay afternoon today until September 9 at midnight. You may access the AT&T executive replay service at anytime by dialing 1-800-475-6701, and entering the access code of 211063. Any international participants may dial 320-365-3844. Again those numbers are 1-800-475-6701, international is 320-365-3844, and the access code is 211063. And that does conclude our conference for today. We thank you for your participation, and for using the AT&T Executive Teleconference Service. And you may now disconnect.