VAALCO Energy Inc (EGY) 2017 Q3 法說會逐字稿

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the VAALCO Energy Third Quarter Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Liz Prochnow, Chief Accounting Officer. Ma'am, you may begin.

Thanks, operator. And on behalf of the management team, I welcome all of you to today's conference call to review VAALCO's third quarter 2017 operating and financial performance. After I cover the forward-looking statements, Cary Bounds, our Chief Executive Officer, will review key highlights of the third quarter, along with operating results. Phil Patman, our Chief Financial Officer, will then provide a more in-depth financial review. Cary will then return for some closing comments before we take your questions.

During our question session, we ask that you limit your questions to one and a follow-up. I would like to point out that we posted an updated investor deck on our website this morning that has additional financial analysis, comparisons and updated guidance that should be helpful. With that, let me proceed with our forward-looking statement comments.

During the course of this conference call, the company will be making forward-looking statements. We caution you that any statement that is not a statement of historical fact is a forward-looking statement. Forward-looking statements are those concerning VAALCO's plans, expectations, future drilling and completion activities, expected capital expenditures, sources of future capital funding and liquidity, future strategic alternatives, proposed evaluations, negotiations with governments and third parties, reserve growth and other operations.

Statements made during 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. These statements are based on assumptions made by VAALCO based on its experience, perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond VAALCO's control.

Investors are cautioned that forward-looking statements are not guarantees of future performance and those actual results or developments may differ materially from those projected in the forward-looking statements. VAALCO disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday's press release and in the reports we file with the Securities and Exchange Commission, including the third quarter Form 10-Q that was filed yesterday and the previously filed 2016 Form 10-K.

Please note that this conference call is being recorded. Let me turn the call over to Cary.

Thank you, Liz. Good morning, everyone, and welcome to our third quarter 2017 earnings conference call. During the third quarter of 2017, we overcame operational challenges and delivered solid financial results. Production for the quarter averaged 3,707 barrels of oil per day net, which was at the high-end of our guidance range of 3,500 to 3,800 barrels of oil per day net. We reported a small loss from continuing operations of $148,000, which included a loss of $0.9 million related to the puts during the third quarter of 2017, which was comprised of $1.1 million of noncash mark-to-market loss, and a $0.2 million realized settlement gain. More importantly, we generated operating income of $3.7 million and adjusted EBITDAX of $5.7 million.

Our third quarter 2017 results were down from the second quarter of 2017, primarily due to lower sales volumes and higher costs associated with the Etame plant maintenance turnaround in July and unexpected downtime at the Avouma platform. I will spend the next few minutes reviewing our third quarter operational results and expand on recent and near-term operational events, and then in a few minutes Bill will go into more detail regarding our financial results.

VAALCO's total production decreased 15% from 4,363 barrels of oil per day in the second quarter of 2017 to 3,707 barrels of oil per day in the third quarter of 2017. This was primarily due to the 6-day planned maintenance turnaround in July, the ESP failure in the Avouma field and natural decline.

In July, we undertook our planned annual Etame coal field shutdown for maintenance and inspection of our FPSO and 4 platforms at Etame. The entire field was offline for 6 days, while the work was completed with no adverse environmental or safety incidents. The results of the maintenance and inspection work confirmed that our facilities are in good working order and our asset integrity programs continue to be effective. We will continue to focus on our asset integrity programs to help maximize production by minimizing unplanned downtime.

As we mentioned in our last call, the electric submersible pump, or ESP, in the South Tchibala 2-H well on the Avouma platform failed, resulting in the well being temporally shut-in. The well was producing approximately 1,300 barrels of oil per day gross or 350 barrels of oil per day net to the company prior to being shut-in. VAALCO mobilized the hydraulic workover unit that moved on to the Avouma platform in October to begin workover operations and replace the ESP system in the South Tchibala 2-H well as well as the South Tchibala 1-HB, which was also temporally shut-in after experiencing an ESP failure in mid-2016.

Prior to the ESP failure, the 1-HB well was producing 900 barrels of oil per day gross or 245 barrels of oil per day net to the company. The workover on the South Tchibala 1-HB well was completed successfully and the well was producing an approximately 1,100 barrels of oil per day gross. This is an improvement of approximately 200 barrels of oil per day gross versus the production rate prior to the ESP failure. Operations are underway to replace the ESP system and restore production in the South Tchibala 2-H well prior to year-end.

Now I will spend a few minutes talking about production guidance for the fourth quarter and full year. Taking into account natural production decline and the timing of restoring production from the South Tchibala 2-H well and the recently restored South Tchibala 1-HB well, for the fourth quarter of 2017, we expect our production to be in the range of 4,000 to 4,300 barrels of oil per day net. Given the strong overall production we had in the first 9 months of 2017 and taking into account the remaining quarter, we are narrowing our full year 2017 guidance towards the high-end of our range at 4,100 to 4,200 barrels of oil per day from our previous guidance of 3,900 to 4,200 barrels of oil per day. Later in the call, I will discuss our near-term growth objectives, which includes potential development opportunities at Etame that we believe can add production, reserves and value to the company.

Now let me review our production expenses. Total production expense excluding workover costs increased to $10.2 million in the third quarter of 2017, up from $9.7 million in the second quarter of 2017. The increase in production expense was primarily due to additional costs related to the planned maintenance turnaround and asset integrity initiatives. Coupled with the increase in absolute costs, our production declines have contributed to an increase in unit cost per BOE of sales from $23.41 per BOE in the second quarter of 2017 to $30.39 per BOE in the third quarter of 2017. Our capital expectations for 2017 remain at approximately $1 million that is earmarked for small operational and enhancement projects. Our continuing commitment to capturing savings in every aspect of our business remains a key goal and we are dedicated to enhancing operational cash flow by minimizing costs.

With that, I will turn the call over to Phil to discuss our financial results.

Thank you, Cary. Good morning, everyone. Our third quarter 2017 loss from continuing operations was $0.1 million. Adjusted EBITDAX totaled $5.7 million and operating income was $3.7 million. Our Q3 2017 loss included a loss of $0.9 million net of -- other net, related to the puts during the third quarter of 2017, which was comprised of a $1.1 million noncash mark-to-market loss and a $0.2 million realized settlement gain. For the third quarter of 2016, the company reported income from continuing operations of $1.0 million, and in the second quarter of 2017 income from continuing operations was $2.5 million. The main driver of the reduced earnings quarter-over-quarter, besides the noncash derivatives loss, was decreased revenue, primarily due to lower sales volume caused by the planned maintenance turnaround and the ESP failure in the Avouma field as well as higher production expense also related to the planned maintenance turnaround.

Third quarter oil sales totaled 336,000 net barrels compared with 344,000 net barrels in the same period a year ago and 414,000 net barrels in the second quarter of 2017. Our realized oil price for the third quarter of 2017 averaged $51.10 per barrel, up 28% from $40.00 in the third quarter of 2016 and up 9% from $46.83 in the second quarter of 2017.

Beginning with our third quarter of 2016 earnings, the operating results of our Angola segment have been classified as discontinued operations in our financial statements. This was the result of our decision in September 2016 to discontinue operations in Angola and withdraw from our production sharing agreement. Our loss from discontinued operations in the third quarter of 2017 totaled $174,000. In order to limit VAALCO's commodity price risk, in 2016 the company hedged its oil sales by purchasing oil puts. As of September 30, 2017, VAALCO had unexpired crude oil put contracts covering 180,000 barrels of anticipated sale volumes for the period from October 2017 through December 31, 2017, at a weighted average price of $50.00.

The company recorded a loss of $0.9 million related to the puts during the third quarter of 2017, which was comprised of a $1.1 million noncash mark-to-market loss and a $0.2 million realized settlement gain. The loss on our derivatives is included in other net in the condensed consolidated statements of operations. The company has not entered into additional derivative contracts since December 2016. However, we will continue to actively evaluate the desirability of increasing and extending the protection provided by hedges.

Turning to expenses. Total production expense, excluding workovers, for the 2017 third quarter was $10.2 million with $30.39 per BOE of sales compared with $7.3 million or $21.04 per BOE in the same quarter of 2016 and $9.7 million or $23.41 per BOE in the second quarter of 2017.

Third quarter 2017 production expense, excluding workovers, increased quarter-over-quarter, primarily due to costs related to the planned maintenance turnaround. For the fourth quarter of 2017, we expect our production costs, excluding workovers, to be approximately $21 to $23 per BOE. This reflects the timing of resuming production associated with the Avouma wells that had the ESP failures. For the full year, we now expect production costs, excluding workovers, to average $23 to $25 per BOE. While we have not incurred any material workover expenses through the first 9 months of 2017, we now expect workover costs in the fourth quarter to total $3.5 million to $4.0 million associated with the 2 Avouma platform workovers that Cary discussed.

DD&A for the third quarter of 2017 was $1.7 million or $5.06 per BOE. This compares to $1.6 million or $4.60 per BOE in the 2016 third quarter and $2.0 million or $4.76 per BOE in the second quarter of 2017. We continue to believe DD&A will be in the range of $4 to $5 per BOE for the full year 2017.

General and administrative expenses for the third quarter of 2017 were $2.5 million or $7.33 per BOE compared to $1.6 million or $4.55 per BOE recorded in the same period one year ago, and $3.0 million or $7.36 per BOE in the second quarter of 2017.

These G&A costs include noncash compensation expense totaling $0.2 million in the third quarter of 2017, a credit of $1.3 million in the same quarter in 2016 and an expense of $0.6 million in the second quarter of this year. We have made strides in reducing our overall G&A rate in 2017 and continue to believe our lower full year G&A guidance of $11 million to $13 million, of which $1 million to $2 million will be noncash, is still a good estimate.

Income tax expense for the third quarter of 2017 was $2.7 million compared to $2.2 million for the same period in 2016 and $3.1 million in the second quarter of 2017. Our income tax expense is determined based on our revenue in Gabon.

Turning to the balance sheet. Cash and cash equivalents totaled $18.9 million as of September 30, 2017. At September 30, debt net of deferred financing costs totaled $11.0 million, of which $7.5 million was current. This reflects $2.1 million in principal payments since June 30, 2017, as provided under the repayment terms of the amended term loan agreement executed with the IFC, International Finance Corporation, in June of 2016. With this, I will now turn the call back over to Cary.

Thanks, Phil. As we look to the future, we are encouraged by the strengthening in oil prices, particularly Brent, which is trading at multiyear highs. We remain confident in our premier Etame asset and believe that we can add strong, sustainable value through development drilling. One of our primary goals, which is key to unlocking the potential in our offshore Gabon Etame asset, is to secure an extension on our existing license in Gabon. While the current Etame license expires in June 2021, we believe that with the recovery in oil prices and the potential for additional development drilling, the block could produce for many years beyond 2021. We continue to have constructive discussions and working sessions with decision makers within the Gabonese government on these matters and are encouraged by the progress we are making.

We are evaluating several near-term economic development drilling opportunities that would utilize our current offshore infrastructure and extend the economic life and reserves at Etame. As we manage our balance sheet, and with the increase in oil pricing adding to our cash flow, we will seriously evaluate over the coming months when the appropriate time might be to begin our next drilling program. The additional Etame development drilling opportunities combined with the license extension will establish a solid foundation of value creation for 2018 and beyond. Another key strategic step we are looking to progress forward is the full and final exit from Angola. We continue to have productive meetings with Angolan officials to resolve the question of any potential cost that could be assessed for not drilling the remaining commitment wells.

We would like to settle this issue quickly so that we can focus on development opportunities in Gabon and we are targeting the last quarter of 2017 or early 2018 to come to an agreement that will allow us to remove the $15 million liability from our balance sheet. This would strengthen our balance sheet and could potentially lead to an increase in our borrowing capacity. VAALCO continues to execute on its strategy and remains poised to add significant value to our shareholders in 2017 and beyond.

Thank you, and with that, operator, we are ready to take questions.

(Operator Instructions) And our first question comes from the line of Bill Dezellem with Tieton Capital.

I have a group of questions. First of all, the higher production on the 1H well, is that simply a function of it having been shut-in and pressure rebuilt? Or is there something different about the equipment that's leading to the higher production?

Bill, thanks for the question. Your first assumption is correct. It's really more about reservoir performance, not about equipment changes. And so as the well was shut-in for an extended period, pressure did build up and so we are seeing slightly higher volumes today than we saw in the past. That is correct.

And then on the equipment front, since you did have some failures and there was a -- an analysis taking place, what additional information do you have about that and the implications for the remaining wells?

Right, right, well as I've mentioned in the past, the cause of the ESP failures on the Avouma platform was corrosion. We're still trying to determine whether the cause of the corrosion was a manufacturing defect or due to the operating environment. And so we're working with the equipment -- the original equipment manufacturer to make that determination. But regardless of the cause of the corrosion, we have taken steps to ensure the corrosion will not happen again. And we're using different materials when we manufacture certain components that will mitigate the corrosion. And also we're working closely with Schlumberger to improve the reliability of all of our ESP systems and reduce costs going forward. We're taking steps and putting measures in place not only to increase reliability but also reduce costs.

And our next question comes from the line of Joe Pratt with Stifel. And there is no response from that line, and we do have another question from Bill Dezellem with Tieton Capital.

So let's jump if we could to the onshore conversations -- onshore Gabon conversations that you might be having. Are those progressing at all? Or are oil prices still too low, and your focus really is on extending the offshore production sharing agreement?

Well, first, our focus is on extending the offshore -- the Etame offshore production sharing contract, but you mentioned the onshore opportunity in Gabon and we also have the development in Equatorial Guinea. And so we are doing the technical work to determine if those projects are viable at current pricing. Right now, we're not making a commitment to those projects. Like you said, we're -- our focus is on offshore Gabon, but we are evaluating and we will move those projects forward at the right time. Now is not the right time, they're still under technical evaluation. But -- anyway, we do recognize there will come a point when those projects might make sense.

And so you are doing the same thing in Equatorial Guinea also, as you said, not just Gabon?

Yes, that is correct.

And which of those 2 do you see further progressed, so that we focus our attention in the right area?

I would say that Equatorial Guinea is further progressed, and -- but still, we still have quite a bit of technical work to do, and -- but it is the -- it's the opportunity that's further progressed.

Great. Thank you. And then you had mentioned here on the call the acquisition opportunities or just that whole arena. Would you talk about that scope and the degree to which clearing up the potential liability in Angola is part of that process and the degree to which your counterparties are more or less willing with oil prices changed to have conversations?

Right, and so let me start with Angola. We are in -- we've had multiple conversations with Sonangol. There's reasons on both sides where it makes sense to reduce the penalty and Sonangol sees that, and so we're trying to work through that. And so separate from that, you've mentioned acquisitions, and I'll say that we have nothing to announce right now, but we are looking -- we have looked at a variety of opportunities and we're really focused on opportunities that we can bring in without increasing our overhead. Where we can use our -- the technical team that we have already, so it's -- development opportunities that would look similar to Etame and where we can also utilize our infrastructure in Gabon or in West Africa. We've got a great operating team over there. So we're looking at things that we can, again, bring in without increasing overhead. And those conversations are confidential right now, and all I can say is I have nothing to discuss. Or I'm sorry, I have nothing to announce today, and as soon as we do, we will issue a press release. But we're looking at multiple opportunities, Bill.

And I wanted to relate the Angola conversations to those conversations you might be having. Is that appropriate to link them, meaning that you would want to have that additional financial flexibility, or really rather independent to the conversation?

They are really rather independent. I -- resolving the Angola issue clearly improves our liquidity and which opens up multiple opportunities, whether it's acquisitions or potentially drilling development wells next year. Improving our liquidity would help on many fronts, I'll put it that way. So I would not really link the Angola resolution to opening up acquisition opportunities. We're moving forward on both fronts.

And lastly, what would you like to say about drilling opportunities offshore Gabon at this point, given that you're still in conversations with them about extending that agreement?

I would say the -- I've said in the past, that the drilling opportunities are really linked in some way to the extension. We would like a longer horizon to see a return on our investment and the Gabonese are aware of that and they understand our issues. And again, we're moving -- we're progressing very well with the extension and I hope we have something to announce in the near future, but there are wells that clearly make sense at today's pricing. So we -- what we want to do is make sure that we have a time horizon where we can capture value for the shareholders from those investments.

And we have no further questions in queue at this time, and I would like to turn the conference back over to our presenters.

All right. Well, if there are no more questions, we appreciate everybody participating in the call today and look forward to our next call next quarter. Bye.

Thank you for your participation. This does conclude today's conference call and you may now disconnect.