VAALCO Energy Inc (EGY) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the second-quarter 2012 earnings report conference call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session and the instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host CEO, Mr. Robert Gerry. Please go ahead, sir.

Thank you, Lori and good morning, ladies and gentlemen, and welcome to VAALCO Energy's second-quarter investor conference call. Joining me today will be Russell Scheirman, our President and Chief Operating Officer and Greg Hullinger, our Chief Financial Officer.

Please bear with me while I read a brief Safe Harbor statement. This conference call 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 operations 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 reports filed with the SEC, which can be reviewed at www.sec.gov.

Before I turn the meeting over to Greg and Russell for their reports, let me make one quick comment. As you saw in our press release, which was released yesterday evening, we are pleased to confirm that the country of Angola has extended our lease on Block 5 in Angola for another two years until November of 2014. That is an important event for VAALCO. There had been some speculation I think, at least in conversations in the marketplace, that Angola might not renew VAALCO's concession there. We always felt fairly comfortable that they would, but it is good to have in place an official document that confirms that.

We now are pursuing with Sonangol, our prospective partner, on Block 5. Sonangol has already met with our proposed partner and we await word that agreement has been arrived at and that we can proceed in locating the rigs to begin our drilling program.

I also wanted to assure you we are not going to wait until 2014 to drill a well. Our prospective partner is in agreement with VAALCO that the first exploration well will be on our Loengo prospect and will be both a post-salt and a pre-salt test. The minute we can hear from Sonangol that they have accepted our partner, we will proceed with locating a rig and get high behind getting the wells drilled.

I will have some more comments towards the end of the meeting, but I will now turn the meeting over to Greg Hullinger for his update on our financial statements and then Russell Scheirman will update you on our operations. Greg?

Thank you, Bobby. Good morning, everyone. I am going to cover the financials for the second quarter 2012. We reported net income attributable to VAALCO of $10.4 million in the quarter, or $0.18 per diluted share. This compares to the same year-ago period of $11.8 million, or $0.20 per diluted share. Our revenues were very similar quarter-on-quarter, $58.8 million versus $58.5 million. I will go into a little detail on that here in just a minute.

Let me turn my attention over to the balance sheet and I will give you some of the highlights there. Cash and cash equivalents, we show a total of $138 million of unrestricted cash, but I can very quickly get that number up to about $160 million. Deeper in our balance sheet, we show restricted cash of about $11 million. The majority of that is associated with money that we have restricted for the obligation in Angola that Bobby was talking about just a few minutes ago. We have a $5 million per-well obligation on the two obligatory wells. So we've restricted cash to that tune.

Also, as you see on our balance sheet under receivables, we have trade receivables of nearly $20 million, which is higher than normal. But essentially what we had was a crude oil lifting on June 1 and payment for that came in on July 1, right on target and that was an additional $15 million. Normally, we always have one crude lifting receivable out there, but because the timing of that lifting was June 1, it shows up as a receivable instead of cash at the end of the quarter. We did have four liftings during the quarter. If you recall, in the first quarter, we had two, so we are back on track.

I might mention that our crude oil inventory at the FPSO was higher at the end of June 30 this year. We have 361,000 gross barrels. VAALCO owns about 28% of that amount. In the FPSO at the end of this quarter, we had 222,000 barrels in the FPSO at the same period at the end of last June.

Other items of notice on the balance sheet, we have got (inaudible) an account with partners. We put into play a new balancing arrangement. I am pleased to say that from a financial perspective. What that does is it causes the amounts that might be outstanding to be at a lower level consistently. This was an agreement that we had with our partners and that was a good move.

Crude oil inventory I mentioned. You can see on our balance sheet $1.4 million versus about $800,000 compared to the end-of-the-year position and that again reflects the higher crude that we have on board the FPSO at the end of the period.

Also I will mention, if you look at our asset retirement obligations -- of course, this is set up for our eventual obligations to abandon our facilities offshore Gabon -- we went through a process during the quarter of re-estimating the amount of money that it will take to abandon those facilities and we did that work really in concert with some work that we have been doing with the Republic of Gabon.

If you read in our Q, we have agreed to a pre-funding arrangement where we will be paying our abandonment costs early into a fund. We get to cost recover those funds that we put aside for that purpose, but in that same spirit, we went through and we had a third-party do a proper evaluation of what the abandonment costs will be and with a change in a few assumptions such as reduced mobilization and demobilization costs and then also a slightly different approach on abandonment of some of the facilities, our estimate before the retirement came in a lot lower than what we had originally estimated.

So you can see on our balance sheet that our after-retirement obligations in the liability section is $9.4 million and that compared to $14.5 million at the end of the year. The offset to that is in our wells, platforms and other producing facilities. So by taking it out of there, that is something that we amortize. We will actually be incurring less amortization because of this.

But all in all, our balance sheet grew by $15 million and what that really reflects is again our sale of crude plus continuing investment in our offshore, primarily in our offshore facilities, but also on our onshore properties in Texas and Montana.

Moving to the revenue statement, again, I mentioned that oil and gas sales were fairly comparable for the three months ended June 30 this year versus the same period a year ago, $58.8 million versus $58.5 million. Inside of the $58.8 million, most of that is attributable to Gabon like we know. $57.9 million of it is from the sale of crude during the quarter from our offshore production.

We did have four liftings for a total of 538,000 barrels lifted and the average cost or average price per barrel was $107.51. This compared to a year ago second quarter where we lifted 489,000 barrels at a price of $119.61. So we did have a $12.10 price reduction quarter on quarter, but again VAALCO with the heavy proportion of crude, we don't see a lot of the impact that some of the soft gas prices have with some of our competitors.

On a six-month basis, the revenues again were fairly comparable, $104.1 million versus $105.3 million. Most of that again is Gabon, $102.6 million of it is attributable there. We lifted 906,000 barrels through the first six months of this year. That is six liftings at an average price of $113.25 and this compares to the year-ago period where we also had six liftings, 938,000 barrels at an average price of $112.18.

Other items of note on the condensed statement of consolidated operations, let me take you into the expenses. Production expenses you will note are a bit higher in the three-month period ending June 30, 2012 compared to a year ago and the reason for that really was a contract amendment that we did with the owners of the FPSO. It is actually good news. We have extended the term of the FPSO out through 2020 and in association with that, we came in with a new cost structure. Essentially with the FPSO, we paid three types of charges. One is a CapEx charge; one is an OpEx charge; and one is a per-barrel processing fee. We agreed on new structures for those of which two of the three went retroactive and we recorded an additional $1.2 million associated with that extension and the new cost component.

Exploration expense is a bit higher as well at $3.5 million versus $1.2 million and what is reflected in there is a $2.9 million write-off associated with our Poplar Dome exploration well. That is the well that was a science well for us. It was our first penetration and we took it deep. We went through the Bakken Three Forks and continued to test zones down below that. Although they were encouraging, in the end, we didn't establish commercial quantities in the lower zones and as such, I have written off the costs associated with the well below the Bakken Three Forks. The well has been temporarily suspended. We can go back in and complete that as a producer at a later point. Russell will be giving you an operations update and he will be talking about a second well that we have got taking place right now at Poplar Dome.

So inside that exploration expense, $2.9 million of a write-off. We continue to capitalize $6 million for that well, which is a good portion of the well through the Bakken Three Forks.

G&A expenses are slightly higher at $3 million versus $2.5 million. Last quarter, we announced that we had opened a small Denver office. We have got a few people up there and the higher G&A costs are primarily associated with our Denver office.

A good item that I like to talk about here is bad debt expense. We have got -- during the three-month period, we recorded an additional $275,000 worth of bad debt expense. That is the amount above VAALCO's 40% working interest in Angola. Because we haven't had a solid partner to bear their fair share of the expenses, we have had to write those amounts off essentially since December of 2010. We have now written off a total of $5 million and we fully expect that, once we get Sonangol to give us our new partner, that the cost of admission for the new partner is to restitute VAALCO back to its 40% share.

So I am hoping this year, ideally in third quarter, that we will have the opportunity to put that money back in our books. It goes straight to net income. It is worth $0.10 per share. So I am hoping that will come. So we continue to write it off, but we are hopeful that this will stop very quickly.

And with that, that is kind of the highlights of the balance sheet and our revenue section and I will go ahead and I will turn it over to Russ.

Thanks, Greg. I will take the next few minutes to update you on our offshore Gabon projects and drilling plans, our onshore Gabon drilling plans, as well as bring you up-to-date on current activity at the Poplar Dome and Salt Lake Bakken Three Forks projects that we have in Montana.

At a time we are currently producing about 19,500 barrels per day, as we noted in a recent press release, the Etame production was affected by the appearance of hydrogen sulfide at two of our wells at Ebouri. The wells have been shut in pending an investigation of the source of the H2S and resulted in a loss of approximately 2000 barrels per day of oil production from those specific wells. However, we have been able to mitigate this loss somewhat by increasing production from other wells at Etame and Avouma, so the net effect has been something less than 1000 barrels per day.

The wells that we opened up at Etame and Avouma were cut back due to our fluid limitations at the FPSO and when we shut in these Ebouri wells, that opened up additional space, so we were able to put more fluid through the FPSO and thereby get back some of the production.

We have recently completed electrical upgrades, and an Avouma accommodations upgrade to prepare the Ebouri and Avouma platforms for our upcoming drilling campaign. Later this month, we will be installing a produced water separation system on the Avouma South Tchibala platform and that will reduce the amount of water currently being sent to the FPSO, which will allow us to further open up some wells for additional oil production once that facility is in place.

Our four-well development drilling program offshore Gabon is scheduled now to commence in November. The rig is the KCA Deutag Ben Rinnes, which is a 350-foot jackup. It is currently being refurbished in South Africa and is expected to start heading our way in October to arrive in November.

Because of the ongoing investigation of the H2S at Ebouri, we now plan to start our drilling program at South Tchibala and Avouma. We are planning two workovers in a development well on the Avouma fault block to improve recovery from that portion of the field. We have recently completed a mapping project on newly reprocessed 3D seismic data, which shows a potential expansion on the eastern side of the Avouma structure. We plan to investigate this with a pilot hole during our drilling before drilling our horizontal leg in the development well. And the results of that pilot hole will determine the optimum location for the development drain.

There is a possibility that it could also lead to a second development well at Avouma if the expanded area proves to, in fact, be there from the pilot hole. After completing the Avouma program, we will then move up to Ebouri. We have a prospect, an exploration prospect in a different fault block from the main Ebouri accumulation. It has the potential to add 7 gross million barrels in the most likely scenario, which would be something less than 2 million barrels net to VAALCO.

There is also some deeper objectives that we would test if the Gamba portion of the prospect is successful and that could add another 1 million to 2 million gross barrels or something between 0.25 million and 0.5 million barrels net to VAALCO.

So if that exploration pilot hole at Ebouri is successful, we would go ahead and complete one new horizontal well in the pilot area. We had plans to put a second well in the main accumulation, but we are suspending those plans pending the results of the H2S investigation.

In addition to those four development slots, we have two optional slots for the rig. There is a possibility of additional workover in the event of any ESP failures. As well, we have the shallow water seismic program that we shot last November and it will be processed by the middle of next year and we do have a prospect that we call the [N lead], which on time data is still looking quite good on the new seismic and when we get the pre-stack depth migration finished, if the prospect remains viable, we plan to drill it at the end of the program in 2013.

As for future development plans, we have completed studies for this new platform at Etame that I mentioned last quarter and we are in detailed engineering design work underway. McDermott is our contractor. The platform is scheduled for installation late 2013, early 2014 and we would anticipate three to five new wells off this platform over its 8 to 10-year life.

We have also finalized our recommendation for a fourth platform. This will also be in the southern Etame area at the southeast Etame discovery that we made last year. It will also allow us to develop the North Tchibala field, which is a Dentale field and that field has a gas resource that will be valuable for us for fuel in later life of the Etame complex.

So we are going to be building two platforms side-by-side. Each one of those represents about a $32 million net investment for VAALCO for the platforms and the installation and then each well we drill and we anticipate drilling three on each at the outset is about a $7.5 million net investment for VAALCO for each of those six wells. The goal of these two platforms is to keep our production at or above 20,000 barrels per day well into 2016.

The final investment decision approval with our partners is scheduled in early November, but the parties have all agreed to ordering of long leadtime items, so we have gone out for these long leadtime items to keep the project on a fast track.

Moving onshore to our Mutamba block, we will receive the rig on September 1 and along with our partner, Total, will drill an exploration well on that block. It is a 10 million to 20 million barrel Gamba prospect and we have about a 50% working interest in the prospect and if it is successful, it is in the vicinity of an existing Total field called the Atora field and we could tie the well back and subsequent wells back to that field to ensure early production because they have excess capacity in their system.

Bobby talked to you about Angola. I will say that we are in discussions with a couple of operators who have semisubmersible rigs that are capable of drilling in the 400 feet of water that we need for our subsalt prospect and we are keeping the lines open so that if we get this approval, we can go to a point where we can get bids and secure a drilling rig.

We also are looking at plans to acquire seismic in some of the deeper water area portion of our block in Angola. We can see structures similar to the type of structure that was drilled by Cobalt that led to their Kwanza Basin discovery. So we would like to evaluate the same type structures that we have on the west side of our block.

Moving to domestic, at the Poplar Dome in Montana, Greg mentioned we drilled the vertical science well. We drilled through and cored successfully the Bakken Three Forks and then we drilled the Nisku, Red River and Winnipeg formations. We tested perforations in each of the Winnipeg, Red River and Nisku formations without recovery of any significant hydrocarbons, so we have gone ahead and suspended the well in a fashion where we can reenter and drill a horizontal Bakken Three Forks lateral in the future and we expensed the $2.9 million for the lower portion of the hole.

We have also recently completed a second well in the Poplar Dome area in the Bakken Three Forks. We drilled a 4400 foot lateral, which we completed with 4.5 inch casing and it is awaiting a frac treatment later this month. We plan to use the plug and perf method and are currently evaluating the location and the number of fracs, which will probably be around 15 stages.

The rig has just rigged up in Salt Lake area in Montana in Sheridan County on what we are calling our [Bozi] No. 1 well. We are planning to drill two wells in the Bakken Three Forks there and these wells are being drilled adjacent to successful wells drilled by another operator in the area and they should be completed in three to four months.

Once we finish the two wells in the Salt Lake area, we plan to return to Poplar Dome. We need to drill a third well to earn our 65% interest in the Poplar Dome and we are planning on a Bakken Three Forks well pending the outcome of the frac that we do on the well that we have already drilled there.

I will mention that, in Texas, our Granite Wash wells, they are currently producing about 3 million cubic feet per day and about 70 barrels a day of oil condensate. There was a fire at the gas plant that we sell our gas to in the second quarter and we lost about two months of production in the second quarter. So really we lost about [two-thirds] of our production from the Granite Wash. But they have gotten that all sorted out and all systems have since returned to normal and the wells are doing just fine. So with that, Bobby, I will turn it back to you.

Thank you, Russell and Greg. Before I open the conference to questions from the listeners, let me mention one other thing. In the press release that we issued about 10 days ago, VAALCO mentioned that we had entered into an additional country in Africa where VAALCO previously had not explored. I don't want to go into a great deal of detail on that until we have confirmation from the government of that country. But suffice it to say that we have a fairly large position. We bought it from another concessionaire that felt that they wanted to concentrate in their real area, which is not in Africa. But it is a tremendous opportunity for VAALCO if we are confirmed into the concession.

More than likely, we would drill a couple of exploration wells next year on the block. Each one of these exploration wells are of the capacity where we could add 50 million to 100 million barrels each of the exploration wells for VAALCO. So we are keeping our fingers crossed that we will get approved to enter this country and certainly we will let you know when we receive word from that country. So with that, I think I will open it up, Lori, to questions that the audience may have. So I will turn it back to you.

Kim Pacanovsky, LMV & Co.

Hi, good morning, everybody. First question is on Angola. Were the terms of the license renewal changed within the renewal? Did they increase the royalty on you or is there something else that they got out of renewing it for you?

No, the terms remain exactly the same as they were previously.

Wow.

We are obligated to drill two wells, which we always have been obligated to do. And so, no, it's a good deal and Angola is well aware that VAALCO is chopping at the bit, if you want, to get these wells drilled. So we think finally things are moving in an affirmative way with them.

Okay, and then the second question on Angola is what is the government looking for in a partner? I mean obviously they approved a partner previously that had huge financial capitalization issues. Is there any reason you could see why this wouldn't be approved?

No, I really don't see why it shouldn't be approved. Certainly VAALCO is one of the largest acreage owners in the Kwanza Basin. The drawback that we have is we are a very small company compared to obviously the very large companies that are in Angola. And I think that we have got in trouble around a little bit in the hierarchy of Sonangol, but I think we have made enough noise here recently that they are paying attention to us. Our proposed partner is well-known to Sonangol and finally, we are bubbling to the surface, if you want here.

Okay. (multiple speakers). So they have had one meeting with government, your partner, proposed partner?

I'm sorry, say that again.

They have had a single meeting already with the government?

They have.

And so you would expect a decision to be made after the single meeting or is there anything else in the process that we need to wait for?

I think that we should hear shortly within the next couple of weeks.

Great. And did I hear you correct that the first well is both a pre-salt and post-salt test?

Yes, it is really designed for the pre-salt.

That's what I thought.

But the location is such we will be able to test a post-salt prospect also.

Okay. And then just one more question on the new venture. I know you don't want to go into detail, but can you guesstimate how much CapEx you would be spending next year there on these couple of exploration wells?

Probably someplace between -- around $40 million net to VAALCO.

Okay. And that 50 million to 100 million barrel target size is gross or net?

Net.

Net. Wow. Okay. All right, terrific. I will turn it over to somebody else.

Brad Heffern, RBC Capital Markets.

Good morning, guys.

Good morning.

I was wondering if you could walk through this $42 million in second-half CapEx. How much of that is at Etame and how sort of how does it break down between the quarters?

Go ahead, Greg.

Yes, Brad, on our offshore Gabon drilling program, we expect that we will spend $14.6 million as we initiate the drilling of the well that Russ talked about at South Tchibala; our onshore Gabon drilling, which we expect to start September 1, that $3.3 million. Our second well at Poplar Dome, we expect to spend $6.7 million for a total of $8 million on that well. We have spent $1.3 million in the second quarter.

Our third well at Poplar Dome, that is the one we will go to after we drill the two at Salt Lake, that is an additional $8 million and then for each of the Salt Lake wells, they are estimated to cost $7.7 million each. We have got a 70% working interest, so the combination of the two wells is $10.8 million. All those items total to $43.4 million for the second half of the year.

Okay, great. And then going back to the H2S, can you guys talk a little bit about -- I understand you're doing an investigation right now, but what the options are? Is this worth treating out or are these wells that are ultimately going to be shut in?

We don't know the answer. We had seen H2S in an outpost well that we had drilled back in 2010, I believe, 2009. We were surprised. That was the first time we had ever seen any H2S. That well is about 400 meters from these two wells that have gone sour on us. So we think maybe the H2S is migrating through the reservoir. That took 3.5 years. The next closest well is about a kilometer away. So does that mean it will take five years or six years to get to the next well? We don't know. There are ways to treat, but that would probably involve a new facility and we will just have to look at the cost of that and whether it would be cost effective or not.

Okay, got it. And then as far as G&A, obviously, you guys said that you were up a little bit this quarter just on that new office, but is there going to be sort of an increased ramp going forward as you ramp up for the new Gabon drilling?

I wouldn't anticipate it. We have got all the people onboard that we need for that.

Okay, great. That's it for me. Thank you.

Sasha Kostadinov, Shaker Investments.

Just mundane question, can you give me some guidance on the tax rate going forward?

Third quarter will probably be similar to second quarter. Fourth quarter, it will go down substantially because we will be drilling and we will be cost recovering a lot of the drilling costs.

Okay.

Same for first and second quarter of 2013. We will have a drilling rig in the area probably until July, August of next year.

Okay. All right, thank you.

(Operator Instructions). Chris McDougall, Westlake Securities.

Hi, guys. Thanks for taking the question. On past calls, you have talked about converting a number of your rigs and other equipment to run off of the natural gas that you are producing. And I just want to get an idea of kind of the timing there and how much impact, if it is significant, that might have on your operating costs.

Actually we burn gas on the FPSO to run all the power systems and heat the crude to treat. We also run gas on our generators on our Avouma platform to run all those facilities. At Ebouri, we have low GOR, so we have diesel generators. The North Tchibala field has a pretty significant gas source and one of the things we have been wrestling with was late in the life of the fields when the production started to go down was whether we would have sufficient gas to continue to run the FPSO with gas and the Avouma platform with gas.

With the plans (inaudible) fourth platform and develop Southeast Etame and North Tchibala, we will be able to go after that gas source and that will ensure that we have sufficient gas for all our needs. We don't run our drilling rigs or anything with gas. Those run with diesel and those are third-party equipment anyway. But it is mainly making sure we can keep the FPSO running. That is our main use of fuel is keeping that ship going and we fully expect to be able to do that with this gas source.

And actually the North Tchibala wells, the (inaudible) wells are high GOR wells, so it will probably be several years before we will have to drill that gas source well, if at all. But we know we have got it in our pocket and that is nice to know as opposed to having to haul 50,000 gallons of diesel around every day.

Sure, great. And then a different question on your kind of 2013 uses of capital and such, you have got a lot of exciting prospects and activities going on. How do you break those down between international and domestic for the uses of capital going forward to 2013 and 2014?

It will be pretty heavy international in 2013. If we drill a well in Angola, a well or two in this new country and then our Gabon activity, our share of that, you are looking at probably 75% of our cash flow going into international or maybe 20%, 25% going into domestic. Maybe 80%/20%.

And is it a little too early to tell for 2014 depending on how various things go?

Well, we know that in 2014, we are going to be setting two $32 million platforms net to VAALCO, as well as starting to drill six wells at $7.5 million net to VAALCO each. So again, it will be pretty heavy international.

What we'd like to do I think is be drilling somewhere four to six wells domestically, if they start to work out like we hope they will and you are seeing the cost of them are running $5 million to $7 million, $8 million apiece. So that is kind of what the domestic side would look like as opposed to $60 million to $90 million a year that we will be spending internationally in the next couple years.

I think it is fair to say that VAALCO is going very cautiously on the domestic side of the balance sheet here. It is doubtful, but never say never that we will continue to search for domestic opportunities until we prove up our two Bakken plays that we currently have. The reserve growth that we can undertake internationally for the price is superior to what we feel at the moment that we can find domestically in the United States. And you can see all the other companies reporting impairments and whatever that the ports take mainly on gas properties, but we are going cautiously and we need to have it proved to us that a lot of these plays in the domestic market, unconventional plays, really have a rate of return that meets VAALCO's standards.

So if Poplar Dome turns out to be what we think it could be, it could be terrific. Bear in mind that we have 22,000 acres at Poplar Dome. We have completed our first horizontal leg and as Russell mentioned, we will frac it here in another 30 days or so. But all 22,000 acres are held by one well. So we don't have the problem that some of our peer groups do of continuous drilling to hold acreage. It is already held actually by shallow production. So it could be a real addition to our daily production if we are right on that. But we are going to make sure we are right before we enter into any other domestic obligations. At least we haven't seen one yet, even though we are looking, but we haven't seen one yet that meets our parameters.

Great. Thanks a lot, guys.

And I will turn it back to our speakers for closing remarks.

Well, thank you all very much. I appreciate your attendance and we will see you at the end of next quarter. Thank you all.

Thank you. Ladies and gentlemen, this will conclude our conference call for today. We thank you for your participation and for using AT&T executive teleconference service and you may now disconnect.