VAALCO Energy Inc (EGY) 2011 Q4 法說會逐字稿

Ladies and gentlemen, we thank you for standing by, and welcome you to VAALCO Energy's end of year 2011 earnings report. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session with instructions given at that time. (Operator Instructions). And as a reminder this conference is being recorded.

I will now turn the conference over to your host, VAALCO's CEO and Chairman Robert Gerry. Please go ahead.

Thank you, Melinda, and good morning ladies and gentlemen, and welcome to VAALCO's fourth-quarter and year-end 2011 investor conference call. I'm joined this morning by Russell Scheirman, our President and COO, and Greg Hullinger, our CFO. Please bear with me for a moment while I read our safe haven statement.

This presentation includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Forward-looking statements are those concerning VAALCO's plans, expectations and objectives for future drilling, completion and other operation and activities. All statements included in this presentation 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 expected capital expenditures, prospect evaluations, negotiations with governments and third-parties and reserve growth. 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, 2011 and other records filed with the SEC that can be reviewed at www.SEC.gov.

Before turning to Greg for financials, let me make a few comments. I think we had a very good year in 2011. And if we didn't take the impairment charge in the Granite Wash and an ongoing write-down of our Angola properties, VAALCO would have earned probably around $0.75 a share for the full year, which was about 16% better than we earned in the previous year.

But speaking about Angola, we have discussed in the past the oil possibilities for our Block 5, our 1.4 million acre block in the Kwanza Basin of Angola. And with the recent announcement by Cobalt of their sub-salt discovery in the same basin, additional focus has zeroed in on VAALCO's holdings.

We have suggested in previous presentations and conference calls that Block 5 could -- and the keyword here is could -- contain up to 300 million barrels of oil in place. And Sonangol has further suggested that they believe it could be up to 500 million barrels of oil in place.

Our estimates, and I think Sonangol's, are based on only the shallower post-salt depositions. And while we have always stated a desire to test the sub-salt, Cobalt's success has made this even more compelling.

We have a legitimate sub-salt prospect called Loengo, which we intend to drill. However, and let me emphasize this, the post-salt also remains an enticing target with potential reserves that could be a company-maker for VAALCO. We may very well drill the post-salt first and conceivably 100% VAALCO, while we sort through potential partners to drill a deeper in, more expensive pre-salt.

Cobalt's discovery has created added interest in our Block and we currently have six parties reviewing or about to review our data. Basically, I think our near-term goal is to secure drilling rig and decide which post-salt prospect to tackle first. But should a partner be secured quickly we would more than likely drill Loengo first.

Without a doubt we have a few regulatory hoops to jump through with Sonangol before we are off to the races, but I'm reasonably confident that this could be accomplished. And I will have a few more comments about all this after Greg and Russell get through their presentations. So with that I will turn it over to Greg for our financial review.

Thank you, Bobby. Good morning everybody and thank you for joining our call. I'm going to take you through quarter-four financial information, and then give you a brief full-year recap as well.

I think what I'm going to talk about though really has a recurring theme; it is prices, volumes and taxes. The majority of our pricing is based on dated Brent, so we're benefiting from very high prices. Our volumes are primarily coming from Gabon offshore, which have been strong, not only during the quarter but all year long. And taxes, which refer to our taxes that we pay to the Republic of Gabon, were extremely high. So the results are heavily geared around high prices, high volumes and high taxes.

Okay, now for some numbers. Net income attributable to VAALCO in the fourth quarter of 2011 was just slightly lower than the quarter a year ago at $8.7 million. It was $8.9 million a year ago. Earnings per share on a diluted basis was identical at $0.15 per share.

Our sales revenues were significantly higher at $67.8 million versus $38.2 million. And this was on volumes of 623,000 barrels compared to 441,000 barrels. We did have four liftings in the fourth quarter of 2011 where we had three liftings in the fourth quarter of 2010. Many of you will recall from our quarter-three where we only had two liftings that that impacted revenues and volumes for the third quarter.

Price is strong. For the quarter we averaged on a BOE basis $111 even, and for a year-ago quarter $87.02.

Production expenses were higher in the fourth quarter of 2011 versus 2010, $11.2 million versus $6.2 million. And the primary reason for that increase is that we match our production expense to sales. So, again, two liftings in the third quarter, four liftings in the fourth quarter. And this comparison is taking, again, fourth-quarter of this -- 2011 versus the same period in 2010.

Exploration expense was nominal at $2.1 million compared to $4.7 million in the fourth quarter last year. And the majority of that money was associated with a seismic shoot that we are doing in Gabon, which started in the fourth quarter, and $1.4 million of that total was spent on that effort.

Income tax. This is a tough one to swallow -- $28.4 million in the quarter compared to $8.4 million in the fourth-quarter last year, 2010, a full $20 million higher. I will talk a little bit more about taxes when I get to full year.

There is only one really unusual item in our fourth-quarter, Bobby mentioned it. It is the Hefley well impairment. That is our first Granite Wash well. We did am impairment of almost $5 million during the quarter. And essentially the story there is that soon after initial production which began in August of last year, the production rates over a period of months come down, and the production really was at the lower end of our expectations.

We did some wireline work to try and understand what was going on with the well. We ran into some obstructions. We actually tried to mill them out, and in the end we put the well back on production, where it is currently making about 20 barrels of oil per day and 1.5 MMcf a day.

As such Netherland Sewell, our independent reserve estimators, came through and assigned rather low reserves to this well. The reserves -- PDP reserves were a little over 13,000 barrels of oil and about 830 MMcfs of gas. At our current production rate that is only about two years' worth of production. So hopefully we can keep this well going for a long period of time and exceed that.

But in any case, the accounting rules have use take the reserves that are [kind]. We compare that to the value of the well. And so we take our initial investment, we added in a bid of leasehold. We used forward strip pricing, and then we ended up reducing the value of the well to its current value, and that was just below $5 million that we took during the quarter.

That is the big items for the fourth-quarter. Let me shift over to the full year. And again the same theme applies -- prices, volumes and taxes.

Net income attributable to VAALCO for the full year was $34.1 million, just a little less than a year ago for 2010, $37.3 million. Our earnings per share in 2011 was $0.59 on a diluted basis compared to $0.65 in 2010.

The sales rev'ed significantly higher at $210.4 million compared to $134.5 million. Sales volume, 1.9 million versus 1.7 million barrels of oil equivalent. And strong pricing at -- we average for the year on a BOE basis almost $112, and that compared to $78.38 in 2010.

Production expenses for the full year, a little bit higher, $26.7 million compared to $22.1 million. And the primary drivers of that increase are partly it is the variable costs associated with the higher production. And then in the third quarter I talked about the concept of the domestic market obligation that we have to pay in Gabon, where essentially it is a subsidy that we pay to the government for running the one and only refinery in the country. All the producers of oil and gas have to subsidize the refinery essentially at 25% discount for the crude that they purchase.

Moving on. Exploration expense for the full year was $5.7 million compared to $6.8 million in 2010. And I already mentioned that the majority of that, or a good bit of it, is associated with the seismic shoot that was going on in Gabon in the fourth quarter.

Income taxes for the year, $93.5 million in 2011 compared to $35.3 million in the prior year. Income tax, again, is a function of the concept of cost oil and profit oil. Essentially we are allowed to recover cost oil -- it is an allocation, and the cost oil that we get returned to us is tax-free. The cost oil essentially takes care of any of our operating expenses, plus any investment that we are doing in the country.

Once we run through those balances the remainder of the oil constitutes profit oil, and we split that with Republic of Gabon where they take 55% and the remaining 45% gets split out to VAALCO and its partners.

We didn't have that much going on investment-wise in 2011. Russell is going to talk about our ambitious plans in 2012 in Gabon, but in 2011 we were kind of modifying our platforms to get ready for drilling in 2012, and not a whole lot else. So our investment numbers were low in Gabon and our operating expenses were essentially normal. So, again, with the high prices and with the high production volumes, which turned into high sales volumes, we ended up having a lot of oil in the profit oil bucket that we ended up paying income tax on.

Unusual for the year, I just mentioned the Hefley impairment that we recorded in the fourth quarter. And the other unusual was the Angola Accounts Receivable write-down and, again, I explained that in the third quarter. But while we're sorting out our situation with the Republic of Angola and getting a new partner on board, any expenses that we have incurred above our 40% working interest, plus the 10% carry our share for the government participation, we end up putting into our Accounts Receivable.

Once we get a new partner we are going to recover -- it is our intention anyway to recover those monies from the new partner that will join us on the block. But accounting rules have it where we actually have to write those numbers down while we don't have a partner in place. So for the year we have impaired ourselves $4.4 million, which we hope we will put back into the income statement in 2012.

So it is in our full-year results. It impacted us by, I believe, $0.07 a share. And again that will come right back to us if we successfully get a partner on board and move forward that way.

Balance sheet. I'm just going to mention cash. We finished the year at $137.1 million. We have gotten an additional $12.2 million of restricted cash, which is primarily a commitment in Angola to drill two wells.

With that, that is the highlights of our financials. It was a good year for us, and I will turn it over to Russ for an operational update.

Thanks, Greg. I would like to spend the next few minutes taking you through our offshore Gabon (inaudible) projects, our onshore Gabon drilling plans at Mutamba, our second well at the Granite Wash, and the well that we just completed at the Poplar Dome in Montana. I will also update you on our future drilling plans in the US.

At Etame we continue to maintain production rates at 21,000 barrels per day with good performance from all three fields. We have completed the platform modifications to accommodate the new wells at South Tchibala, Avouma and at Ebouri on the platform. And we are also currently performing electrical upgrades and modifications to power up the new wells as they come on stream, including adding generators to both the Avouma and the Ebouri platform.

Our four well drilling program offshore Gabon has firmed up for this summer when we will begin using the 350 foot jackup rig, the KCA Deutag, Ben Rinnes. We will start that program with an exploration pilot hole at Ebouri in a new fault block. This is our net best potential for reserve adds at Etame this year as we are targeting about 7 million barrels of recoverable oil from Mutamba, which would be about 1.7 million net to VAALCO in the most likely case if the well is successful.

An additional 1 million to 2 million of oil gross, about 0.5 million barrels net to VAALCO, is potentially recoverable in the deeper Dentale, which we will test if Mutamba is successful.

In the Ebouri pilot hole success case our plans are to complete one well, one new development well in the pilot hole area, and then we will follow that up with one new well in the main field fault block. If the pilot hole is unsuccessful we will complete a second Ebouri well in the main fault block, so either way we're going to have two new development wells producing at Ebouri this year.

At South Tchibala, Avouma, we are planning a development well in the Avouma fault block to improve recovery from that portion of the field. These are reserves that are currently being carried as proved undeveloped.

We will also be performing a workover on the Avouma 2H well, which is the best while in the South Tchibala Avouma field. This well has had a failure of one of two ESPs in the well, and we're currently running that well with the second ESP.

We have a philosophy that we run two ESPs -- this is submersible pump. In the event the first one fails we will change out both ESPs at the first available opportunity to maintain the well and keep the well on production. So far the philosophy is working. We lost an ESP, but were able to keep the well going with the second one. And we will change out both once we get a rig over to the Avouma platform.

We have two optional well slots for the Ben Rinnes. I could envision a second workover if we have any ESP failures over the course of the year, so we wanted to have the flexibility to change that out if that were to happen.

As well, we shot that shallow water seismic that Greg referred to last November. It should be processed by the third and fourth quarter of this year. We have what we call the end-lead, which was the main reason we shot that seismic. And it is about a 50 million barrel recoverable prospect. It is a big prospect. It has three potential zones, Mutamba and some of the deeper [millennia] zones that we will be looking at in that well.

So depending on how things go with the seismic reprocessing, we may be able to get that well added onto the tail of our program, but that would be sometime in 2013.

We mentioned over the past year we have been studying a new platform at Etame, and I'm happy to announce that we have awarded detailed engineering to McDermott to commence that platform design for installation in late 2013 and drilling in 2014.

We anticipate three to five wells from that platform over its life. We're also finalizing our recommendation for a fourth platform in the Etame area to develop the Southeast Etame discovery in the North Tchibala field. The North Tchibala field also contains a gas resource, which will be valuable for fuel in the later life of the Etame complex.

North Tchibala is a Dentale field that was discovered by [Elk] back in the '80s. It has had wells that have tested an excess of 2,000 barrels a day from the Dentale. It would be a new frontier for the consortium if we decided to develop that field, but we are pretty close to making the recommendation that we do that and we will be meeting with our partners next week to discuss that in more detail.

Each platform represents about a $32 million net investment for VAALCO plus the cost of the wells. The wells run about $7.5 million each net to VAALCO. So were we to drill three wells at a time and a couple, two, three wells at Southeast Etame and Avouma, we would be talking about $100 million net to VAALCO over the course of those two years to do those two projects. But our goal with these two projects is to maintain production near or above 20,000 barrels per day into 2016.

Moving to the onshore, our Mutamba block, we have agreed on a target zone with our partner, Total, which clears the way for an exploration well this summer. This is a 10 million to 20 million barrel Mutamba prospect in which will have a 50% working interest.

The good news is if successful the prospect can be easily tied back to the Total-operated Atora field, which is about a 40, 50 million barrel field that Total has that is nearby, which will allow us to have early production from our Mutamba block. So we're looking forward to that well later this year.

Bobby has discussed our plans in Angola, so I will now move to our Texas and Montana activities in the US. In the Granite Wash in North Texas we completed our second well and we're in the process of performing a 14 stage frac job on the 4,000 foot lateral that we drilled. The frac should be completed by next week, and we hope to begin testing the well the week after that. We had good shows in the lateral, so we have high hopes for this well.

Greg mentioned on our first well, we think we may have had parted casing in that well. We were only able to get down to the third stage of the 14 fracs that we did in that well when we tried to go in and see which stages were producing to understand better why the rates were low.

We know of an offset well that is just southeast of us that has been a fantastic well. So we're in a good area, we just need to get the right frac on this second well and hopefully it will do better.

At the Poplar Dome in Montana we just completed a vertical well to gather data on the Bakken -- the Three Forks, the Nisku, Red River and Winnipeg formations. We successfully cored the Middle Bakken and the Nisku and a portion of the Three Forks and we will be analyzing that core over the next few weeks.

Besides the Bakken and Three Forks, we had encouraging indications of hydrocarbons in the Nisku, Red River and the Winnipeg formations. We have cased the well, and once we complete our core analysis, plans are to go in and test the zones of interest using a service rig, which I would expect to commence in the next four to eight weeks.

In terms of drilling, we are planning four wells for 2012. We will drill two wells at the Poplar Dome, at least one of which will be a horizontal Bakken test. And depending on the outcome of that well we will either drill a second Bakken, or after we see what kind of hydrocarbons we have in the other formation we may be drilling a development well to further develop one of those.

We are also planning two horizontal Bakken wells in the Salt Lake area in Sheridan County, which is up near the Canadian border, where we have an interest in about 6,000 acres. The drilling program is currently scheduled to commence in May.

So with that, Bobby, I will turn it back to you.

Thank you both. I think probably there is more questions out there, and I think that that is the best way for me to travel is to listen to what you want to ask and then try to answer to the best of our ability. So, Amanda, why don't you see who wants to ask a question.

(Operator Instructions). Kim Pacanovsky, MLV & Co.

I am curious about the difference -- the very large difference in the estimates for Angola between you and Sonangol, between 300 million barrels and 500 million barrels. What are some of the assumptions that account for those differences?

Sonangol had the higher estimates. I think they're working off a more promotional set of figures than VAALCO is, to be honest with you. 350 million is the figure we used in earlier presentations. There is no great science to that.

I would refresh your memory in that there have been 12, 13, 14 wells drilled on Block 5 in the past. At least five of them had oil shows in them and a couple produced -- well, one produced close to 2,000 barrels a day. Another one tested about 700 barrels.

These are all drilled by major oil companies. Back in the '80s the price of oil was probably around $14 to $16 a barrel. And without a doubt these are not billion barrel oil fields, which they were looking for. These are more in the neighborhood, again, of each field maybe up to 100 million barrels in place. And they all walked -- again, they were looking for 500 million on up, and the price of oil at $14, $16 a barrel was not interesting to them.

A little flavor on all this, the reason Angola and perhaps Gabon have become hot topics now is all because of South America being connected with Africa hundreds of millions of years ago. And people have always thought, well, if it works in East South America why shouldn't it work in West Africa. And nobody has really tested that until along comes Cobalt -- and Maersk, can't forget Maersk.

Now I don't want to overemphasize it, but we are 100 miles north of Cobalt. There is a lot of water and a lot of geologic changes that can happen in that distance, but it is -- we are still in the Kwanza Basin. This is where the discoveries are. And I am told there is no reason that the pre-salts couldn't exist where we are. So we are most anxious to give it a try.

Now, again, we have got a few hoops to jump through to get there, to be able to drill this. And I do want to go into all the details, because we're talking to Sonangol about this, but we are optimistic we can get there and at least drill a post-salt well this year, even if we have to do it 100% VAALCO.

And what is the cost difference between a post-salt and a pre-salt well?

What was the what?

What would the difference in the ESP be between (multiple speakers)?

About probably $10 million to $15 million. (multiple speakers).

$25 million versus $35 million.

Sorry, I am sorry. Can you repeat that again -- $10 million to $15 million?

Yes, $25 million for a post solid versus $35 million for a -- to go through salt (multiple speakers).

Okay, okay, great. And when you -- what kind of downtime are you expecting to replace those two ESPs?

It is about a 10-day workover (multiple speakers).

Oh, okay. And what is that well producing?

It is producing around 2,000, 2,200 barrels a day. It is a good well.

Okay, and just a couple of numbers questions. What are you anticipate the tax rate to be in the first quarter? Should I assume it is going to be similar to the fourth quarter?

Yes. We won't (inaudible) the major expenditures until third quarter.

Yes, so first and second quarter will be similar?

Will be similar.

Right.

Okay, and finally liftings for first quarter, what are you expecting?

First quarter we should have three liftings. We have already had two. We actually got a little lucky on this one. We have -- January lifting kicked into February, and prices for February are about $10 a barrel higher than they would have been in January. So we have had two liftings in February and we expect to have a third lifting -- the two liftings so far, I believe, are about 1.35 million barrels gross and they have nominated 700,000 barrels for the end of March. So we will be right at 2 million barrels gross that we will have lifted in the first quarter.

Okay, great. That is it for me. Thanks, guys.

Brad Heffern, RBC Capital Markets.

I just had a quick expense question for you. Looking at the production costs, I know that there were -- there was an extra lifting in the fourth quarter, so you matched the expenses to the production there. But on a per barrel basis, it looked like it was up pretty significantly from the previous quarter, so I was wondering what was going on there.

There was not too much in there, Brad. Besides that there were a couple of small adjustments, but nothing really significant.

Okay, but what I'm getting at is the previous quarters it was like maybe $11, $12, $13 a barrel, but it was something like $18 a barrel in the fourth quarter.

Yes, there is a couple of things going on there. We were paying $2.50 a barrel tariff on production over 20,000 barrels a day. And I think our production with the four liftings was higher -- some more of that tariff got crammed into the fourth quarter.

We have also had some timing of invoices, if you will, that the FPSO, they get to bill us for things like unused maintenance days and some catering cost things. And they tend to -- sometimes they will wait around and you'll get six months' worth of catering in that -- that will hit in one quarter.

So it wasn't anything that was to where we think it is going to $18 a barrel going forward. I think it was more just interquarter type invoice movements.

Okay, (multiple speakers).

Now we are in negotiations with the FPSO owner for a five-year extension on the FPSO, and this is giving them one last bite at the apple, if you will. We probably have one of the cheapest FPSOs in the world right now. We pay something like $65,000 a day for our FPSO, and the market rate for a new one is in excess of $150,000 a day.

So I would expect that in 2012 we will see some increase in cost for our FPSO. It could be on the order of $20,000 a day on a gross basis, of which can be $6,000 a day net to us. Of course, that is cost recoverable. So it goes right into the cost account and we get half that back, if you will, in the form of lower taxes. But just by way of guidance you should know that we are in that negotiation because of this new Etame platform.

Okay, got it. Switching over to Granite --.

Brad, one more item in there was our DMO estimate was quite a bit higher in Q4 versus a year ago. They have $4 million accrued for 2011, so that is at a considerably higher rate. And that is a function, again, of price, and then looking at what we had to pay in the prior year. So we have got $1 million in our fourth-quarter production expenses associated with the DMO obligation.

Okay. Switching over to Granite Wash, I saw a little tidbit in the K that it is expected to cost $14 million. I was curious -- I think the previous well was something like $10 million, $11 million. What is the difference there?

We got stuck 500 feet from the end of the lateral and ended up having to -- we left our motor in about 1,000 feet of casing and had to sidetrack the well and re-drill the collateral. You know, that was a tough well from the standpoint that the rig had a problem and was literally shut down for a week, and we were sitting there with all our drill pipe and mud motors in the hole while they repaired this problem.

At that point the stream came out. We were pleasantly surprised, but when you leave the hole open for that length of time, bad things can happen. You can start getting swelling shales and this, that and the other, and we were just a little unfortunate that the rig had that incident that kept the hole open for probably 10 days longer than it should have been, and we got stuck. So we ended up running pipe to get all that shale and stuck behind us and then re-drilling laterals..

Okay, got it. In the Bakken how long do you guys think these lab results are going to take for the cores?

About a month.

A month? Okay.

That is why I am saying, I'm hoping in the next four to eight weeks to get on that well.

Okay, sure. And is there any update as to when you guys think you're going to make a decision for the platform itself, East Etame?

I suspect we will be able to tell you by the next quarterly conference call. We are trying to get it through. I think we have a majority of the partners that are in favor of it, but we would like to have it be unanimous. We don't want anybody going nonconsent; that is messy. So we just need to work it through with all our partners.

Okay, that's it for me. Thanks, guys.

Sasha Kostadinov, Shaker Investments.

First of all, excellent cash flow in the quarter. But help me think about how to model your income tax expense, because obviously it varies quite a bit depending on your investment spending in Africa. So is there a -- how can we do this? How can I model this looking at you from outside?

Or maybe let me ask the question from kind of a 10,000 foot level. As a shareholder in the US, how do we extract the income that you earn and turn it into benefit to me as a shareholder?

Well, as to your first question, we have $130 million capital budget in Gabon for next year on a gross basis and our share of that is 28%, and we will probably spend 80% plus of that in the third and fourth quarters. So if you have a little model set up where you take out our $15 a barrel in operating costs as cost oil, and then you take out in the third and fourth quarter -- in the first and second quarter about 20% of that $130 million and the balance in the third and fourth quarter, you ought to be able to get pretty close to what kind of tax rates we be looking at each quarter.

So, then, I know you guys are -- you have a lot of potential there, but you are also shifting to the US. So tell me in terms of, as a US shareholder, how we benefit from this awesome potential reserve in Africa?

Well, hopefully, you benefit through the appreciation of the stock price, if we are correct in all of this. As Russ alluded to, I believe our capital program for this year is roughly $75 million. That does not include Angola --.

That is net to VAALCO.

Net to VAALCO, including -- not including Angola. So we could add on another $30 million some odd on that number. We are now in a little bit of it in excess of $100 million. If we are successful, we can burn a lot of money putting all of that on production. But it will come back to you, we think, in the appreciation of VAALCO's stock price. We had reserves. I mean, I have said this many times, a knock on VAALCO, we don't grow VAALCO.

We sit here with a cash business. It is very nice, but little growth. We've probably last couple of years roughly the same reserves, roughly the same production. And this is the year we hope to reverse that and be able to benefit the stockholders by a substantial appreciation in the price per share of VAALCO.

And I don't know how to better answer that. If people suggest, well, why don't you buy in your stock. I don't think that is a particularly good use of VAALCO's money. We are going to need that money, and you will see we will start using that the second half and well into 2012 -- 2013. So, hopefully, our plan is to increase reserves and increase cash flow and increase the price of VAALCO's stock.

Okay, fair enough. Thank you.

(Operator Instructions). Jamie Wilen, Wilen Management.

Heye, fellas, nice job. I just want to throw one more tax rate question at you. So, basically in the first half of the year you're going to be looking at, let's just say, 70% tax rates, and the back half of the year 25% tax rates, is that in the ballpark?

Yes, that is probably about right.

Yes, the 75% sounds pretty good for the first half, and then much reduced from there. So I think you're fairly close. It is a --.

And then moving forward, we are going to be spending lots of money, so hopefully we are staying at a 25% tax rate the following year for everything?

That is right, because we will be building that Etame platform (inaudible).

The government of Gabon has to love you guys. You have been paying them a lot of taxes for a lot of years. Was there any way we could have avoided paying that major league tax last year?

Well, we had anticipated starting the drilling program a little bit earlier, but rig timing was just such that we couldn't get a rig until this summer.

Okay, but doesn't affect how much you are willing to pay for the rig -- how much you have to pay as an offset in taxes if you can delay paying?

I mean, it wasn't a question of could we get a rig for a higher rate, it was a question of could we get a rig.

Okay.

And, unfortunately, the rig that we have is being used by Chevron, who, as you may or not -- may or may not know had a blowout in Nigeria and they had to -- not only did they lose the rig they had the blowout on, they had to grab two of their other jackup rigs to go drill relief wells. So they are three wells light in their rig fleet, so they hung onto this rig as long as they could contractually, which there was nothing we could do about that. But their time is just about up and we will get the rig.

Could you possibly put on your website just a chart laying out your monthly drilling activities in each of the various regions? I know you have it laid out within your press releases, but it would be nice and easy to see how -- what the monthly flow is as we're putting the drill bit down.

Yes, we have that.

Okay. And lastly in Angola, so the money we have spent, we spent whatever it was, $4 million this year, that is a post-tax number, I assume?

It is.

Okay, and as soon as we sign the partnership that comes right back to us off the -- towards the income statement post tax?

It does. With an interested party to join us on the block all the information goes back to Sonangol and negotiation takes place. But we made sure that Sonangol knows that the first $5 million of whatever they extract from a new partner comes back to VAALCO.

Okay, does this new partner have to be approved by Sonangol, or is this all in your court this time that you can choose a partner that you are more comfortable with?

No, it goes back to Sonangol, but they have been very cooperative with us. We have been providing them with the names of the companies that are interested, and I think we will get good cooperation from them in getting a new partner assigned.

Okay, and are you going to set up some sort of war room with a deadline such that somebody has got to come to the table sooner rather than later?

We are working with nine companies that have all expressed an interest. One came through our office this last week. And we are signing up confidentiality agreements and we're trying to get them into our offices as quick as possible, and we are telling them first-come, first-served.

Okay, well, you would hope to have this wrapped up one way or the other by the end of June or prior to that?

You are pushing us. Where are we, March -- April, May, June -- yes, that will give us time to drill.

We have tried to let Sonangol know that we are very anxious to move forward. But we don't control the full clock and we have had -- sometimes it takes a while to get all of that considered and moving as quickly as we would like. So we can commit -- VAALCO is totally engaged in this and we will be pushing Sonangol to try to help us expedite this.

Okay, and the nine players that have somewhat expressed some interest, can you describe the quality from top to bottom of those players as opposed to who we had to deal with last time?

Some of them you heard of. In fact, I am sure everybody has heard of a few. Some are middle market and a few you have never heard of.

Okay, but all with lots of capital and ready to go.

Right. Well, a few may not have the capital.

To be honest, one company said, we are in, but we need to raise the capital. So we took that as a thank you very much, we are going to keep looking.

Good. Okay, nice job, fellows, good luck in 2012. Thank you.

Zachary Prensky, Little Bear Investments.

Assuming that you are on your timetable of choosing your pre-salt partner by June, what logistical issues are there that would prevent you from getting another rig out there and just restarting the drill this year? Because in your prepared remarks it didn't sound at all like when you have a partner the pre-salt will begin to be drilled this year, so it sounds like it is a 2013 event. What is holding that back?

Well, actually, we have ordered all of the tubulars that we need, and we will warehouse those in Aberdeen, Scotland, because is a lot cheaper to warehouse it there than in Angola. So there would be the process of moving those tubulars down to Angola and securing a rig.

I know of a rig that would suit us just fine that is currently sitting in the Port Gentil harbor of Gabon, the Aleutian Key. It just got through drilling a well for Harvest. They drilled a discovery there in Gabon, so it is drill-ready and not working. So I don't think the kind of rig we need is going to be that hard to find, at least saying what I know today.

The submersibles that are tough to find are the ones that are out operating in Ghana in 3,000 meters of water depth, and some of those kind of rigs, these ready high-spec drillships and submersibles. But for the low-spec ones, they are not busy, and we wouldn't have much problem finding one.

So, again, if I understand you correctly, the rig and the tubulars, that is not a problem. So the logistics are not what is going to hold you back here?

That is correct. It is more getting this partner and getting everything buttoned down with Sonangol and getting all their approvals.

Right. And that sounds like that is on or before June of this year.

If we have a partner.

Yes, but with all the interest you have, it sounds like you're confident you can -- obviously, there is no guarantees of anything, but you are pretty confident that the partners and the financial side will be nailed down by the end of June. Is that correct?

I think that is a fair guess. If -- we have got enough of these guys looking, so I think anybody would assume that one of them will come through.

Right. So let's assume somebody does come through. I think given Cobalt and Maersk, I think that is a pretty good bet and that is why we are shareholders. That is why all of us, I think, are shareholders, you guys have had a good track record and the pre-salt is what it is. So assuming that gets done, why can't you start to drill in the fourth quarter of this year?

We could.

You could. So theoretically, conceivably there is a possibility that the CapEx budget for this year goes up, given an additional pre-salt well that you are a partner on.

That is very possible.

Okay, that is excellent. Lastly, do you have any guidance on your free cash flow after your CapEx? Do you believe that given your plans, at least the $75 million outside of Angola, where does that leave you cash flow-wise for the year?

If prices stay where they are today, we are probably cash flow an extra $10 million or $15 million above that.

Good, okay. So that $75 million, given the prices stay stable, you should be okay and actually build cash slightly?

Slightly.

Okay, thank you. No further questions.

There are no further questions in queue. Please continue.

Okay, no more questions. We appreciate it. And thank you all for your attention and we will see you in three months or so. Great. Thanks again. Bye-bye. Thanks, Amanda.

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