VAALCO Energy Inc (EGY) 2017 Q4 法說會逐字稿

Good morning.

My name is Garcia, and I will be the conference operator today.

At this time, I would like to welcome everyone to the VAALCO Energy Fourth Quarter 2017 Earnings Conference Call.

(Operator Instructions) At this time, I would like to turn the conference over to Liz Prochnow, Chief Accounting Officer.

Please go ahead, ma'am.

Thank you, operator.

And on behalf of the management team, I welcome all of you to today's conference call to review VAALCO's fourth quarter and full year 2017 operating and financial performance.

After I cover the forward-looking statements, Cary Bounds, our Chief Executive Officer, will review key highlights of the fourth quarter, along with operational 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.

(Operator Instructions)

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, prospect 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 filed with the Securities and Exchange Commission, including the Form 10-K that was filed yesterday.

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 fourth quarter 2017 earnings conference call.

Throughout 2017, we delivered strong financial results in a volatile oil price environment by optimizing production and minimizing cost.

We reported income from continuing operations of $3.5 million or $0.06 per share for the fourth quarter and $10.3 million or $0.17 per share for full year 2017.

Just as importantly, we generated adjusted EBITDAX of $3.9 million for the fourth quarter and $28.5 million for full year 2017.

Production for the fourth quarter averaged 3,957 barrels of oil per day net, which was slightly below our guidance range of 4,000 to 4,300 barrels of oil per day net, primarily due to ESP failures on 2 wells on the Avouma platform.

Phil will go into more details regarding our financial results, but we have been able to pay down debt, weathered the commodity price fluctuations, and we are now poised to generate strong free cash flow.

I will spend the next few minutes reviewing our fourth quarter and full year 2017 operational results and expand on recent and near-term operational events.

After Phil reviews the financials, I will lay out how we plan to enhance our operations and add shareholder value in 2018 and beyond.

VAALCO's total production increased 7% from 3,707 barrels of oil per day in the third quarter of 2017 to 3,957 barrels of oil per day in the fourth quarter of 2017.

For the full year of 2017, production averaged 4,159 barrels of oil per day net, which is only down 1% from 2016 despite no development drilling and minimum CapEx in 2017.

As we previously announced, we conducted a workover campaign on the Avouma platform in November.

During the campaign, we successfully replaced the ESP in the South Tchibala 2-H well and this well continues to produce today.

We also replaced the ESP in the South Tchibala 1-HB well with the new ESP failed within a couple of weeks and the South Tchibala 1-HB is temporarily shut-in.

Following completion of the workover campaign, the ESP in the Avouma 2-H well failed after operating for a year.

So far, the unexpected ESP failures have been isolated to the Avouma platform as the ESPs operating on our other 3 platforms have not experienced an ESP failure in over 2 years, including 1 ESP that has run for over 4 years.

I'm confident that the combined efforts of the VAALCO engineering team, third-party industry experts, independent labs and Schlumberger artificial lift team will lead to significant improvements in run times per ESPs on the Avouma platform.

The detailed investigations conducted by our experts have revealed that the ESP failures in 2017 are different type of failure than those experienced in 2016.

Our investigations have also revealed that there are multiple factors that could possibly lead to the different types of ESP failures we have experienced.

As a result of these studies, the team has identified a number of new actions that we will take to mitigate against future ESP failures.

These actions include modifications to the design of the downhole ESP equipment, improvements in the installation procedures and upgrades to the power generation system on the platform.

Pending partner approval, VAALCO plans to mobilize a hydraulic workover unit in April to begin workover operations and replace the ESP systems in the South Tchibala 1-HB well and Avouma 2-H well.

Prior to both wells being shut-in, the combined production was approximately 2,825 barrels of oil per day gross or 765 barrels of oil per day net.

We plan to have both wells back on production during the second quarter of this year.

Now I will spend a few minutes talking about production guidance for the first quarter of 2018 and the full year.

Taking into account natural production declines and the timing of restoring production from the South Tchibala 1-HB and Avouma 2-H wells, for the first quarter 2018, we expect our production to be in the range of 3,400 to 3,600 barrels of oil per day net.

Our full year 2018 guidance will be in the range of 3,500 to 4,100 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 outstanding year-end 2017 reserve results.

Our reserves at year-end 2017 rose to 3 million barrels of oil, up 15% from 2.6 million barrels of oil at year-end 2016.

VAALCO's 2017 crude reserve additions of 1.9 million barrels of oil resulted in a reserve replacement ratio of 127%.

We added 1.3 million barrels of oil reserves through reservoir performance additions and 0.6 million barrels of oil reserves through positive pricing revisions.

We have used the same third-party independent reserve consultant, Netherland Sewell & Associates, to fully engineer our year-end reserves for over 15 years.

As a reminder, our reserves are 100% oil and all are located in Gabon.

Utilizing SEC pricing of $54.42 per barrel of oil, which was the average of monthly prices on the first half each month for calendar year 2017, the present value of our crude reserves discounted at 10% for PV-10 value more than doubled to $22.5 million at year-end 2017 from $9.4 million at December 31, 2016.

The PV-10 value would have been $39.3 million utilizing forward strip pricing at year-end 2017 of approximately $65 for 2018, $62 for 2019, $59 for 2020 and $58 for 2021 per barrel of oil.

The pricing VAALCO receives for its crude is directly correlated to Brent oil prices.

Now let me review our production expenses.

Total production expense excluding workover cost decreased to $8.2 million in the fourth quarter of 2017, down from $10.2 million in the third quarter of 2017.

The decrease in production expense was primarily due to lower costs from lower sales volumes at higher third quarter costs related to the planned maintenance turnaround and asset integrity initiatives.

On a per barrel of sales basis, our fourth quarter unit operating expense was $29.12 per barrel, which was slightly lower than the $30.39 per barrel in the third quarter of 2017.

Our capital expenditures for the fourth quarter of 2017 were minimal at approximately $0.5 million on a cash basis and only $1.8 million for the full year.

Capital spending in 2017 was primarily for routine equipment replacement.

Our continuing commitment to capturing savings in every aspect of our business remains a key goal and we're dedicated to enhancing operational cash flow by minimizing costs in 2018.

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

Thank you, Carrie.

Good morning, everyone.

Our financial results for the fourth quarter were very strong.

We reported income from continuing operations of $3.5 million or $0.06 per share.

And for the full year 2017, we reported $10.3 million or $0.17 cents per share.

Adjusted EBITDAX for the fourth quarter totaled $3.9 million and the full year was $28.5 million.

Our operating income for the fourth quarter 2017 and full year 2017 were $2.5 million and $20.0 million, respectively.

Despite these strong numbers, our Q4 2017 sales were down due to a split lifting that occurred at year-end.

Normal monthly sales lifting from the floating production facility that stores oil produced in the Etame block was not able to be completed by December 31 due to adverse sea and weather conditions.

As a result, the December lifting took place during the period December 31, 2017 to January 1, 2018 with 53,300 net barrels of oils sold in December, and the balance of 95,500 net barrels of oil sold in January 2018.

The company will benefit financially from this split lifting.

VAALCO's December 2017 pricing was $63.67 per barrel of oil sales, while January is estimated to be approximately $68.

Fourth quarter oil sales totaled 280,000 net barrels compared with 326,000 net barrels in the same period a year ago and 336,000 net barrels in the third quarter of 2017.

Our realized oil price for the fourth quarter of 2017 averaged $59.89 per barrel, up 43% from $41.88 in the fourth quarter of 2016 and up 17% from $51.10 from the third quarter of 2017.

Beginning with our third quarter 2016 earnings, the operating results of our Angola segment has been classified in our financial statements as discontinued operations.

This was the result of our decision in September 2016 to discontinue operations in Angola and withdraw from our production sharing agreement in that country.

Our loss from discontinued operations in the fourth quarter of 2017 totaled $103,000.

And in the full year 2017, totaled $621,000.

In order to limit VAALCO's commodity price risk, in 2016, the company purchased crude oil puts for part of its 2017 volume.

As of December 31, 2017, VAALCO's crude oil put contracts expired.

The expired puts covered 180,000 barrels of anticipated sales volumes for the period from October 2017 through December 31, 2017 at a weighted average price of $50.

The company recorded a noncash mark-to-market loss of $0.1 million related to the puts during the fourth quarter of 2017.

The derivative loss was included in other net in the consolidated statements of operations.

The company currently has no derivative contacts -- contracts for 2018 and beyond.

Turning to expenses.

Total production expense, excluding workovers for the fourth quarter of 2017 was $8.2 million or $29.12 per barrel of oil of sales compared with $8.4 million or $25.60 per barrel of oil in the same quarter of 2016 and $10.2 million or $30.39 per barrel of oil in the third quarter 2017.

Fourth quarter 2017 production expense, excluding workovers, decreased quarter-over-quarter, primarily due to third quarter costs related to the planned maintenance turnaround.

Workover expense during the fourth quarter totaled $3.4 million.

For the fourth quarter of 2017, our per barrel of oil cost was slightly over guidance due to nonrecurring FPSO and customs costs.

For the first quarter of 2018, we expect production cost, excluding workovers to be between $24 and $26 per barrel of oil.

And the full year 2018 guidance is expected to average $24 to $28 per barrel of oil.

We expect workover costs in the first half of 2018 to total $3.5 million to $4.5 million associated with the 2 Avouma platform workovers that Cary discussed before.

DD&A for the fourth quarter of 2017 was $0.9 million or $3.28 per barrel of oil.

This compares to $1.1 million or $3.45 per barrel of oil in the 2016 fourth quarter and $1.7 million or $5.06 per barrel of oil in the third quarter of 2017.

We are forecasting full year 2018 DD&A to be in the range $3 to $4 per barrel of oil.

General and administrative expenses for the fourth quarter of 2017 were $1.7 million or $6.15 per barrel of oil compared to $1.7 million or $5.22 per barrel of oil recorded in the same period one year ago, and $2.5 million or $7.33 per barrel of oil in the third quarter of 2017.

These G&A costs include noncash compensation expense totaling $0.2 million in the fourth quarter of 2017, $0.1 million in the same quarter in 2016 and $0.2 million in the third quarter of 2017.

We made strides in reducing our overall G&A expenses in 2017 and are forecasting those reductions to continue for the full year, G&A guidance for 2018 of $10 million to $13 million, of which $1 million to $2 million will be noncash.

Income tax expense for the fourth quarter of 2017 was $1.3 million compared to $2.4 million for the same period in 2016 and $2.7 million in the third quarter in 2017.

Due to the Tax Cuts and Jobs Act enacted in December 2017, a $1.3 million income tax benefit associated with the reversal of the valuation allowance related to alternative minimum tax credits was recorded during the fourth quarter of 2017.

The decrease in income tax expense is, partially offset by the $0.2 million increase in Gabon income tax expense resulting from a 12% increase in revenue in fourth quarter 2017 compared to the same period in 2016.

As detailed on Slide 9 in our presentation desk posted this morning on our website, we currently estimate that our operational breakeven price in 2018 is approximately $30 per barrel of oil sales and our free cash flow breakeven price in 2018 is approximately $40 per barrel of oil sales.

Based on our forward guidance, we will generate significant free cash flow in 2018, if we continue to see prices for oil at today's levels or higher.

At $60 realized oil prices, we realize $24.90 per barrel in operational margin and $16.20 per barrel in free cash flow.

At $70 realized oil prices, we realize $33.30 per barrel in operational margin and $24.70 per barrel in free cash flow.

In general terms, we estimate that each $5 increase in realized oil price, increases our annual cash flow by $6 million, which clearly shows our strong leverage to higher oil prices.

Turning to the balance sheet.

Cash and cash equivalents totaled $19.7 million as of December 31, 2017.

With our strong sales and oil pricing in the first quarter, we have grown our unrestricted cash balance meaningfully to greater than $26 million at February 28, 2018.

This balance excludes our nonoperating partner's advance of $6.6 million for its share of March 2018 joint operating agreement expenditures.

At December 31, 2017, debt, net of deferred financing costs, totaled $9.0 million of which $6.7 million was current.

This reflects $10 million in principal payments made during 2017 as provided under the repayment terms of the amended term loan agreement executed with the International Finance Corporation in June 2016.

We currently plan to pay down the majority of our outstanding debt by the end of this year.

With this, I will now turn the call back over to Cary.

Thanks, Phil.

As we look to the future, we are poised to deliver strong free cash flow with Brent trading near multi-year highs.

We remain confident in our premier Etame asset and believe that we can add strong sustainable value through development drilling.

Our sub-surface team has identified several drilling opportunities at Etame that we may consider drilling later this year or early next year depending on approvals from the Gabon government and our partners.

As we manage our balance sheet, we will seriously evaluate over the coming months, when the appropriate time will be to begin our next drilling program.

Another key strategic step we are working to progress is the full and final exit from Angola.

We continue to have productive discussions with officials from Sonangol in anticipation of reaching a fair and equitable agreement that allows VAALCO to exit Block 5 at a reasonable cost.

We would like to settle this issue quickly, which will allow us to remove the $15 million liability from our balance sheet.

With our realized pricing correlated to Brent, no hedges in place for 2018 and a forecasted free cash flow breakeven price in 2018 of approximately $40 per barrel of oil sales, we are well positioned to add to our cash position.

Already in 2018, we have grown our unrestricted cash from $19.7 million at year-end 2017 to greater than $26 million on February 28, 2018.

We will continue to execute on our strategy, and I'm optimistic that we will create substantial value for our shareholders in 2018 by enhancing our operations and improving our balance sheet.

Before taking your questions, I would like to recognize John Myers and thank him for his 8 years of service to our board.

His investment community perspective and financial insight have been very valuable to all of us on the Board.

We wish him well in the future.

Thank you.

And with that operator, we are ready to take questions.

(Operator Instructions) The first question will come from Bill Dezellem with Tieton Capital Management.

I have a great question.

First of all, relative to the Avouma ESPs, you mentioned that the recent failures appear to have a recent root cause than the prior failures.

Would you go into some more detail about what you're seeing?

And how you have confidence that you have this [Rascal] dialed and are ready to put new ESPs on the platform?

Right.

Okay, good question, Bill.

The different types of failures, we -- are related to the 2016 failures versus the 2017 failures.

In 2016, I mentioned before that we saw some unusual corrosion of lead gaskets.

And so we've taken some steps and redesigned the downhole equipment so that we won't face that issue again.

Then in 2017, the failures we saw were corrosion on a different part of the pump.

And so the question is, what is causing that corrosion.

And we can't point to a single source that's causing the corrosion for either the lead gaskets or the type of corrosion we saw in 2017.

But we have taken a number of steps all the way from redesigning some downhole components, adjusting the way that we install the ESPs and changing the power generation system on the surface.

We believe that we will mitigate against future, the severe corrosion attacks that we're seeing.

We won't have those in the future.

Now we don't know exactly, which step is the key step, but we think that we've covered everything we can find or every issue -- we covered every issue that we've been able to see.

And the changing of the power generation system or the adjustments there, had you sensed that there was some dirty electricity that was being generated?

Were you able to identify that or instruments did not determine that?

Well, we have -- we hired some power generation experts.

They traveled onto the platform, did their inspections and what they came up with is that there are different levels of quality and power that are going to different wells and so we don't know that the power quality issue.

We don't know for sure that it was the root cause, but we do want clean power, the same clean power going to all of our wells.

So that is the step we have taken.

We've made some modifications to the power generation system so that we have clean power going to all of the wells.

That's quite helpful.

And then production expense in the Q4 at $29.12 a barrel was up from the Q4 of '16 at $25.60.

Would you talk about what led to that increase?

Well, there's a couple of things that lead to that increase.

And there are some one-time charges in the fourth quarter of 2017 that we did not have in the fourth quarter of 2016.

So those are, as Phil had mentioned, those are related to a custom settlement that we paid in Gabon.

And then also, the FPSO, there is some prior expenses that we had not accrued for and we accrued for those in the fourth quarter of 2017 and then also sales.

So it's operating expense -- it's unit operating expense per barrel of oil sales, and we did have to push 95,000 barrels of sales into the first quarter of 2018 and that also had an impact.

So it was a variety of what I think are one-time events, and we will be able to lower our unit operating costs going forward in 2018.

The next question will come from Don Cussen with RBC.

Most of my questions have been answered.

I jumped on the call little late, so I apologize if you covered this in your earlier comments, but do you have an estimated time when the well that is down is going to be back online and if so, what is it?

Sure.

I can give you that or answer that question.

So the Avouma wells that are down, we plan to mobilize the workover unit here late March early April and by mid-May, we should have those wells back online.

(Operator Instructions) There is a follow-up from Bill Dezellem with Tieton Capital.

What are you sensing about the contract renegotiations with Gabon versus where you are thinking about just say at the last quarterly call?

Well, I can't share any of the details, Bill, on those negotiations, but what I can say is that we've had multiple meetings even already this year, and we are making very good progress and like I said, these are sensitive negotiations.

I can't share any of the details, but I can say that again, we've already this year, we've had multiple meetings with the government, and I think we are making good progress.

Great.

Actually, if I am still live I do have follow-up to that.

Sure, Bill.

The negotiations those are for offshore Gabon and are unrelated or are they related to onshore Gabon?

The negotiations are for the offshore license and they're completely unrelated to the onshore license.

And are the people that would be involved with the onshore license, same people or different than the offshore license?

It's the same people.

There are no further questions.

All right.

Thank you, everyone, for listening to our conference call, and we look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for participating in today's conference call.

You may now disconnect.