VAALCO Energy Inc (EGY) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first-quarter 2013 earnings report. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time.

(Operator Instructions)

As a reminder today's call is being recorded.

I would now like to turn the conference over to CEO and Chairman of the Board, Robert Gerry. Please go ahead, sir.

Thank you, Gloria, and good morning, ladies and gentlemen, and welcome to VAALCO's first-quarter 2013 conference call. I am joined this morning by Russell Scheirman, our President and Chief Operating Officer, and Greg Hullinger, our Chief Financial Officer. Please bear with me while I read our 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 21A of the Securities 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 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. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond VAALCO's control. These and other risks are further described in VAALCO's annual report on form 10-K for the year ended December 31, 2012, and other reports filed with the SEC which can be reviewed at www.SEC.gov.

Before turning the meeting over to Russell and Greg, let me make a few comments. I fully expect that our shareholders are as frustrated as we are by the lack of drilling on our Angola block. We are frustrated and annoyed by the delays, especially when we are continually being told it will happen soon. This last Tuesday, Russell and myself met with the Oil Administer of Angola and his advisers, and we explained to him our frustration and bafflement at the lack of progress on what we perceive to be a simple transfer of the 40% working interest held by Sonangol to our new partner.

The Minister listened attentively we thought, to our discussion, and, upon our concluding remarks, he turned to his National Director of Petroleum, which was seated right next to him, and in effect said to him, look into this, from what VAALCO is telling us and get back to them quickly. He told us his ministry was designed to help on problems such as this and thanked us for bringing it to his attention. We will see what happens after this. This is the first time that certainly myself has been in contact with the Minister on a one-on-one basis, if you want. I think he understood our problem, and hopefully we shall get some results. I hope they are quick results, and this word shortly will vanish.

As you will hear from Russell, we are in a midst of a six well work over and exploration drilling program in Gabon. We are also inching ever closer to a conclusion with Gabon on our onshore discovery and the renewal of our onshore exploration acreage. We have also recently met with the Oil Minister of Equatorial Guinea to discuss VAALCO becoming the operator Block P, and we believe he is sympathetic to our cause and in favor of moving in that direction.

I will now turn it over to Greg for the financial report, and I think I will have some other comments at the conclusion of Russell's report. Greg?

Thank you, Bobby, and good morning, everyone. Thank you for joining our call. I might mention that Houston is under a severe thunderstorm alert, and we have got active and loud thunder occurring. Hopefully we don't have an interruption in our communication, but if it gets a little noisy, we are right next to the outside, and it looks like it is nighttime. With that, let me take you through our financials for the quarter. VAALCO reported net income of $7.2 million in the first quarter 2013, versus $9.0 million dollars in the first quarter of 2012. Earnings-per-share for the current quarter on a diluted basis were $0.12 per share versus $0.15 per share for the first quarter of last year. Revenues were very similar. We were down 3% at $44.1 million versus $45.3 million in the same period last year.

Here is the recap of the main drivers for the quarter. Liftings for the quarter were 8% higher at 397,000 net barrels versus 368,000 net barrels. Talk about production for a moment, production for the quarter averaged 16,600 barrels of oil per day on a gross basis. That compared to 21,100 BOPD on a gross basis in the year ago quarter. The decrease is partly attributable to the two Ebouri wells that were shut in in mid-2012 due to the discovery of hydrogen sulfide. In a few minutes Russell will talk about the crude sweetening project underway at the Ebouri field. Also impacting production was the fact that we have had the rig on the Avouma platform for the entire quarter, and the entire platform has been off-line several times during the quarter due to rig operations and also for some power generation issues. So despite the higher liftings for the quarter, the average crude oil price was down 10% at a little over $110 a barrel compared to $121.65 for the first quarter a year ago.

These two offsetting metrics is reason why revenues were very similar in both of the comparative quarters. Operating income of $21.5 million was down from the first quarter 2012 number at $30.1 million due to a combination of higher production and exploration expenses incurred during the first quarter of 2013. Production expense was impacted by the cost incurred during the quarter on well rig completions where we are replacing the electric submersible pumps on two wells on our Avouma platform. The Avouma 2H well has been completed, although we are not putting it back on production, I think, until after the rig moves off the platform. The second rig completion is currently underway on the south Tchibala 1H well. Of course, earlier in the quarter we drove the new development well, the Avouma 3H well, and those costs have been capitalized. Also impacting our production expense in the quarter were an increase in our FPSO cost. This was for the floating tanker. They were higher during the quarter primarily due to contract rate escalations, our annual escalators that come into play on the contracts, and the majority of the increase is actually associated with higher compensation costs for the FPSO workers.

And higher compensation costs are a result of the effort of the oil workers' union where they are endeavoring to raise the wage scales across the sector. We have been impacted somewhat over the past couple of years on this same initiative, although in the first quarter we didn't see much of an impact. Moving to exploration expense; exploration expense was $6.1 million, and this was primarily the result of unsuccessful exploration wells in Montana and South Dakota, and these were [eyes] that we have already talked about during our 10-K back in March. In that 10-K we indicated that the South Dakota well that we drilled was unsuccessful. That's the well that we drilled in the first quarter of 2013. So we wrote off $2.8 million in the first quarter associated with that effort, and then we have additional dry hole costs of $1.7 million that we incurred during the quarter with our final operations on the two exploration wells drilled last year on our Salt Lake property in Montana.

And then the majority of the remainder of exploration expense is associated with seismic reprocessing and surveys in Gabon. Due to the expenditures associated with the drilling rig, again where we used it for the Avouma 3H development well, the two well re-completions there were underway during the quarter, and in addition the construction costs of the two new platforms that are being built in Louisiana for offshore Gabon. The cost account was considerably higher in the first quarter of 2013 compared to 2012. As such, income tax of $14.2 million was 28% lower when compared to the first quarter of 2012 where we had income tax of $19.8 million. I will just point out that with several more wells to be drilled with the current program this year, and with the platforms being constructed, we expect to have lower income taxes for the duration of 2013.

Cash remains strong, and our balance sheet is debt-free. Cash plus restricted cash of $115.6 million at the end of the first quarter of 2013 compares to cash and restricted cash of $142 million at the end of last year. The decrease is somewhat masked by the timing of the liftings during the quarter. If you look at our balance sheet, and you will see our trade receivables show $24.5 million as of March 31, and the majority of that amount was paid timely during the first week of April 2013. By comparison our trade receivable at the end of the December 2012 was $16.5 million lower at approximately $8 million. So when you take that impact into account, cash is still very strong. With that, that is the key drivers, and I will be glad to answer any questions regarding the financials during the Q&A segment of the call.

And at this point, let me turn it over to Russell Scheirman to give you an operational update.

Thank you, Greg. We were all -- a lot of you were on the call seven or eight weeks ago when we reported our year results and so, not a lot has changed. So for those of you who are on that call, you may hear some of the same things again. But I would like to spend the next few minutes updating you on the ongoing offshore Gabon drilling program, on the two new platforms that we are constructing for Etome and southeast Etome, a little bit about our onshore project in Gabon, the Equatorial Guinea project and Angola.

Offshore Gabon, we're currently producing about 15,000 barrels per day with two wells shut in on the Avouma platform for work over. Those represent between 3,000 and 4,000 barrels a day of production that we have off-line. We should have them back on line in week or so. We are underway with our drilling program. We successfully drilled the Avouma 3H development well. We have encountered the Gamba formation about five meters high to the Avouma 2H well making it the highest well in the field. It expanded the size of the Avouma field by approximately 1.5 million to 2 million barrels, so we're very pleased with that well, and it is currently producing on submersible pump.

After the 3H well we got on the south Tchibala 1H well. This is a well that had both pumps failed. We found that we had a casing restriction probably caused by salt intrusion that caused us to have to rethink how we are going to complete that well. So we suspended that well and moved over to the Avouma 2H well. That well was still producing but had one failed pump, and we pulled both pumps and put two brand-new pumps in, and that well is standing by ready to be started up when we finish the south Tchibala 1H work over. We are back on the south Tchibala 1H well. We determined that the casing restriction will not cause us a problem in terms of any kind of a leak. We have been able to test that so we are running the two ESPs in that well and should have that work over done in a few days at which point we are going to be in a position to move the rig off and restart both the south Tchibala 1H well and the Avouma 2H well.

After completing the Avouma program, we are moving over to Ebouri, where, as I have mentioned before, the first thing we will be drilling is an exploration well in a new fault lock on the southern portion of the Ebouri structure. We think it is about a 7 million barrel structure if it works which would be about 1.7 million barrels net to VAALCO if it's successful. There is also some deeper Dentale on the order of one million to two million barrels that we'll test if we find oil in the Gamba. If the well is found to be oil bearing, we have everything we need to pull back and drill a horizontal lateral into the Gamba and go ahead and complete the well as another Ebouri producer. We then have plans to replace the pumps in the Ebouri 2H well, which is the sole remaining well that is producing in Ebouri. It is a good well. It's a 3000 barrel a day well. It has one failed pump, and we would like to get the second pump in there so that we will have the backup of two pumps [at the end] of the event, we should have a failure down the road.

All in all we have had very good run life with our pumps. Avouma came on in 2006, and we have only had one well where both pumps failed. And Ebouri came on in 2007, and we have just had one pump fail in the 2H well, but we have been able to keep the well on production with the second pump. So we're pretty pleased with the run life that we have been seeing on our ESPs. After we finished the platform drilling and work over campaign, we will then move to a prospect called the Mu Prospect. I think it is being renamed the avocado prospect. I can't remember the Gabonese word for avocado.

[ovaca]

[Ovaca] is what we will be calling it going forward. This is a 38 million barrel Gamba prospect. It also has deeper potential within the [ruccina] turbidite formation. It will probably be the deepest well we have drilled in Gabon today. We are planning on taking it to about 2,600 meters which is close to basement.

The rig then leaves, goes on a two well program for another operator, and we have the option for them to re-deliver us the rig at the end of their two well program for two more wells. We have been working with our partners to mature a couple other exploration opportunities, and I am pretty confident that we will drill at least one exploration well and maybe two during the fourth quarter of 2013. On the facility side, we have commenced the fabrication of the two new platforms at Gulf Island in Houma, Louisiana. As I have described before, one platform will be installed at the Etome field to add infill wells to more fully develop that field, and we anticipate somewhere between three and five additional wells off the Etome platform to complete the development of that field. The second platform will develop the southeast Etome discovery that we made in 2011, as well as an old discovery that was made by Gulf and Total back in the '80s called the North Tchibala field.

The North Tchibala field also has a gas resource which would be useful later in the field life when we run short of gas. So, at some point down the line we would drill a gas well to top off our gas supply for running the FPSO. These platforms are scheduled for installation and drilling in 2014. Each platform represents about a $35 million investment for VAALCO plus the cost of the wells which run about $7.5 million net to VAALCO a piece. It is about a $500 million overall project for both platforms and the wells that we are stewarding here, so it is a major exercise for our Company. We fully expect that when these two projects are up and running we ought to be able to keep our production near to or above 20,000 barrels per day through 2016.

Additionally Greg mentioned the two sour wells that we had to shut in at Ebouri. We had let a contract for front-end engineering design for a facility to sweeten the Ebouri field. That project we expect to reach final investment decision later this year with the facilities in place by 2016. Basically what it involves is another platform that we would set next to the Ebouri platform, hopefully with a bridge interconnecting the two, where we could then have the facilities that we need to clean up the H2S and send clean oil to the FPSO.

That is it for offshore Gabon. On shore on the Mutamba, we have an exploitation authorization on file with the government. We are waiting for approval on that. Once we get approval on that, we can move forward with the development plan for the discovery in conjunction with our partner Total. We would like to commence development activity in 2014 next year. We just have to get this [AE] pushed through, which we are working on.

We are also negotiating an extension on the exploration area. We have a deal in principle for an initial three-year exploration extension that we are discussing with Total to make sure they are on board and then decide whether or not to go forward. But we expect that we will. In Equatorial Guinea we mentioned last meeting that we have a 31% interest in Block P. We signed the amendment to the production sharing contract at a meeting last month which officially made VAALCO a party to the production sharing contract. We also met with them about drilling two wells there later this year.

This is a block that has a 2007 discovery that Devon made known as the Venus discovery. It encountered a 300-foot oil column in a channel sand, and there are other channels on the block that are larger than this one. So we plan a two well program to test two more channels to see if we can't come up with some additional reserves and right size whatever facilities we need in order to develop Venus and hopefully some of the other channels that we see on the block. We have a couple opportunities for a drilling rig. One is with another operator who is a partner of ours at Gabon, is active in Nigeria and they need a two well slot to kind of catch up on their equipment lead time items. Another one is a rig that is actually working in Equatorial Guinea for another operator will be coming off in the -- late in the third quarter or early in the fourth quarter.

So basically, as Bobby said, we are attempting to sort out with GEPetrol, the national oil company, VAALCO becoming the technical operator. We have met with the Oil Minister. He is in support of that. We have -- they have elections coming up in about two weeks, so, everything is kind of on hold while they get through their elections -- their legislative elections, not presidential elections. So, they are due to be over on May 26, and a couple of weeks after that we will probably be over there to sit down with the Ministry and GEPetrol and see what we can work out.

Finally, in Angola, our current term on our exploration license runs through November 30, 2014. Bobby mentioned we met with the Oil Minister this week while they were here for OTC to express our frustration. We just don't understand it. The partner that we recommended is already an operator in Angola. Maybe there is some baggage with that, but we don't understand. If they are already an approved operator in Angola why there would be any issue for them becoming our partner. So we will see if the Oil Minister does us any good. But the plan there will be to drill a sub-salt prospect in about 400 feet of water and then to acquire seismic out in the deeper part of our block where on 2D seismic we see some things that look very similar to what Cobalt recently drilled in the Kwanza basin.

So with that, Bobby, I'm going to turn it back to you.

Thank you, gentlemen. I think, Gloria, we probably should open up for questions now. I think we have covered most of the subject that we have had on our minds. So I will turn it back to you.

Yes, sir.

(Operator Instructions)

Leo Mariani, RBC.

You talked about being around 15,000 barrels of oil right now with a couple of wells off line which would add 2,000 or 3,000 barrels a day. I know you've got some other drilling. You guys also made a comment that you'd hope to be at or above 20,000 barrels a day in 2016. Where do you guys think you will be on production, kind of the end of the year, once the drilling program in '13 is done here?

Well, I guess the $64 question is going to be what happens on Ebouri. If Ebouri does not work, I would anticipate we go out the year in the 17,000 to 18,000 barrel a day range, probably closer to 17,000. If Ebouri works, we would be up in the 19,000 to 20,000 barrel a day range.

Okay. That is helpful, for sure. I guess in terms of CapEx this year, is there any change to your CapEx budget? Given that it sounds like some of the drilling in EG may be slipping. I don't know if you had anything budgeted for Angola, but obviously sounds like that may be getting pushed back as well.

Well, we had an either or situation budgeted. We were pretty sure we were not going to get them both drilled this year. We still think there is a good chance we can get something done in EG if we can sort things out with GEPetrol and the Ministry on the operator shift. But no major change to the budget other than the potential for slippage in the exploration wells. The platforms are moving along pretty much on schedule, and then our drilling program, our six well program with perhaps one or two additional wells is moving right along. No huge cost overruns. We had a cost overrun on the Tchibala 1H well when we encountered this casing restriction, but it is $1 million or something. It is not anything huge.

All right. That's helpful. I guess on LOE, Greg, you talked about this a little bit. Your LOE has been going up for the last few quarters. I know there is some work over costs in there. I'm trying to get a sense of what that run rate LOE could be, like on a dollar per barrel basis once your work over program is finished as begins the second half of '13.

I don't have a projection for the year, Leo. I can come back to you with a projection on that. It will be somewhat higher because of the FPSO cost. And, like you said, once we get rid of the re-completion costs, we will see that ratchet down.

I see that it could be lower than the first quarter number here of $20?

It should be, yes, that is heavily impacted by re-completion costs.

I guess any thoughts on first production at Mutambo? I know you guys are still working on the development plan there, but do still expect to have production there in the second half of '14 if all goes smoothly?

That is what we are trying for.

All right. Thanks guys.

Benjamin Cooper, CFA.

Good morning, gentlemen, I'm actually with Wells Capital. A couple of broad, general questions here. Can you tell us how much the installation of the ESPs hit the P&L in the quarter versus how much was capitalized?

The total cost of the ESP work is expense, and we had about $1.5 million reported in the first quarter.

Net to VAALCO.

And that equipment is capitalized?

No, it is all replacement. So it is totally an expense for re-completion.

Okay. Great. Then you characterized the Oil Minister's response pretty well and then you kind of touched on the identified partners as already operating in Angola, but can you characterize that partner a little bit better? Are they a world class operator?

No, I don't think we can get into that. It's a large company, and we are going to leave it at that.

I guess moving on to the two platforms that you discussed, $35 million each net to VAALCO, I believe, and $7 million net per well to VAALCO. And then you mentioned a $500 million total cost. Was that a gross number?

Yes, that's a gross number. Sorry, so our share -- our net share of that would be $140 million-ish.

Okay. Thank you.

So, the cost of the platform and then the cost of six wells -- six or seven wells are almost the same.

And I guess we're sitting here with some fairly depressed prices in the market. We've got a fair chunk of the total value of the Company just sitting in cash on the balance sheet, which it looks like you have some pretty good plans for. At what point does the Company's best risk adjusted investment be the Company's own stock rather than some of these arguably risky drilling programs? When you look at the capital allocation decision, where does that rank at this point?

We have a board meeting next month. On the agenda there will certainly be a discussion on potentially buying back some stock. I can't tell you how that will go. We've always had a fair amount of cash on the balance sheet. Once upon a time, I guess five, six years ago we did buyback some stock. So it is not out of the question that we won't do it again. And certainly our stock is depressed, and it may be a good time to re-examine the issue. I can't be, you know -- I will leave it there, too. But it is certainly in my opinion, not a bad idea. It is something the board should discuss, so we will see what happens.

That did you -- have you disclosed on the Equatorial Guinea wells how much each of those might cost?

Yes, we have. They are $30 million to $35 million wells, depending on which channel we drill.

Gross.

Gross, and we have 31% of that.

Probably $10 million to VAALCO.

Okay. Great. Thank you very much guys.

Jamie Wilen.

I just wanted to follow-up on the last person who asked about capital allocation and stock buyback. When you look back at the history of the Company and you look at how much we spent trying to find things in the North Sea, et cetera. If we could have used a good bit of that capital to buy back stock, we would be in a wonderful position right now. And the certainty of returns of buying back stock, even if we had to issue some low-cost debt to buy back stock to rearrange the capital structure, just spread the level of opportunity around fewer shares and make them all much more worthwhile if we are successful in what we are endeavoring to do in the future.

So, I would hope we would see a large scale, not token buyback program. And indeed, beyond that I wonder why the officers of the Company have not bought any stock back of recent vintage or in many years and given these low prices, why a good bit of our compensation is not being used to buy back stock by the officers.

I will take that on, Jamie. I can't speak for the other officers, but I can speak for myself. I own close to 5% already. Most of my net worth is tied up in VAALCO. I agree with you, I think that the prices are at a very low level. It would be the time to add some stock, but I am pretty fully committed with what my financial situation is.

I think on a more broader scope on your comment about buying back stock. We have always been in a position of not knowing when we are going to need the cash. Here we are again, I think we have been in Angola for five years, we have been trying to drill wells or five years. We always think it is going to happen the day after tomorrow and it doesn't. I could not agree with you more. It would have been wonderful to have bought back our stock, and we would still have some cash on the balance sheet.

What happens today is that we are looking forward to platforms that are now in progress of being built here -- there in Louisiana. We have a large scale drilling program scheduled for Equatorial Guinea and for Angola, when we are given the all clear signal to commence. It is frustrating probably for you, it is frustrating for us not knowing how to balance out all of our cash because both Angola and Equatorial Guinea could hit simultaneously.

We haven't talked about some other exploration opportunities that we have in Gabon. We are certainly pushing hard on trying to drill a lily which is in deeper waters. That is probably a $50 million well also. So, we can consume a lot of cash, and hopefully we are going to be successful in some of these exploration undertakings. And the infrastructure we are going to have to put together to develop all of those is going to cost us a lot more money.

So, we are examining some financing at the current time to help support our platform construction. I think if that goes through, or if we pursue it, it will put us in an even better cash situation, and what you're suggesting, could very well occur about buying in stock.

But it is a nice time to be able to borrow money inexpensively and to adjust the capital structure which might be optimizing it more for current shareholders. Thanks, fellows.

Okay. Thank you. We agree with you, by the way, it is a good time to borrow money.

I will answer on your point about officers buying stock. One thing I would like to point out, as a small company, whenever we have exploration activities underway, which over the past two years has been fairly often, we are in blackout where we are not allowed to purchase stock, and certainly any time you get into the period when we are doing our financials, we put the entire Company on blackout again for that. If I looked over the last couple years probably 75% of the years we are not in a position to be able to purchase or sell stock.

In addition, being a small company, we're constantly evaluating opportunities for, with that cash we have had, possibly acquiring other entities. And as we have move forward on some of those, we have had to impose, self-impose limitations there because we have got knowledge that could be material to the market that is not disclosed. So, on the safety side, there is a large portion of the year where we are just not in a position where we can hit the market.

Fair enough. Well said.

Leo Mariani.

I wanted to further explore your comment about examining financing to help support your platform infrastructure. I guess it sounds like you might be looking to do some kind of debt based private financing on that. Can you give us any more color on that?

I think that is fair enough, Leo. We haven't basically taken it to market yet. We are still fine-tuning our needs for that money. But it would be debt financing.

Could you give us a little more color behind the thinking of that. Maybe have some hard assets there on the platforms and would prefer to keep your cash and use debt to fund it. Is that what you are thinking?

Yes, but in a fairly moderate fashion, maybe half or something of the total cost of that project, or something along those lines. We are not looking to way lever the thing up. If we get a loan from the right entity and get it approved by the Gabonese government, the interest is cost recoverable. There is just some good reasons to be looking at it right now.

Okay. Thanks guys.

[Bill Nelson].

Could you give us some color on the Mu Prospect and if successful, could it be developed with a subsea connection rather than a platform?

It could be, but I don't think we would. We have pretty much run the math that if we are going to have two wells or more, it makes more sense to go ahead and set a platform and tie it back. Believe it or not, the long lead time for flexible flow lines and subsea trees puts you in the same 18 to 2-year window as building and installing a platform. There is not a lot of time savings involved there.

So, Mu is close enough to the FPSO, I think it's seven or eight miles away, that it would make all the sense. It is in shallower water. It would be a pretty simple platform, and so I think that is the route we will most likely go.

And in Block T, wasn't there a second discovery by Devon in addition to the original discovery that was made there?

Yes, there was. I think they called it Europa. It was thin sands, so, it wasn't as exciting as this big blocky channel that they found with Venus. It would be one of those things where you would look at, if you could ever get the critical mass, of an Etome-like situation going and get your production started. It would be something you would look at tying in at a later date. But I think it was on the order of 4 million or 5 million barrels kind of thing. Just wasn't big enough, compared to Venus which is 18 million to 30 million, depending on who you talk to.

Okay. Thank you very much.

[David Nasper].

On the last call you mentioned a strike, I believe it was Schlumberger. It didn't really affect you in Gabon. What has happened with that, and did you ever have an effect?

Things remain quiet at the moment. Nobody is on strike to the best of our knowledge, and conceivably we will stay that way. I am not sure how Schlumberger resolved the issue, but it is not affecting us.

Thank you.

Sir, there are no additional questions at this time. Please continue.

We have nothing more here, and I thank you all for joining the conference call, and we will see you at the end of next quarter. Thank you all very much.

Thank you, ladies and gentleman. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service.