VAALCO Energy Inc (EGY) 2018 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the VAALCO Energy Second Quarter 2018 Earnings Conference Call.

(Operator Instructions) Thank you.

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

Please go ahead, ma'am.

Thanks, operator.

And on behalf of the management team, I welcome all of you to today's conference call to review VAALCO's second quarter 2018 operating and financial performance.

After I cover the forward-looking statements, Cary Bounds, our Chief Executive Officer, will review key highlights of the second 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.

Investors are cautioned that forward-looking statements are not guarantees of future performance, and those actual results or development 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, the presentation posted on our website and in the reports we file with the Securities and Exchange Commission, including the Form 10-Q that was filed yesterday.

Please note that this conference call is being recorded.

Let me turn the call over to Cary.

Thank you, Liz, and good morning, everyone, and welcome to our second quarter 2018 earnings conference call.

I'm very pleased with our operational successes as well as our strong financial results that we delivered in the second quarter.

Production for the second quarter averaged 3,549 barrels of oil per day net, which was at the midpoint of our guidance range of 3,400 to 3,700 barrels of oil per day net.

While our realized Brent pricing rose to over $3 per barrel in the second quarter, we had 3 expenses that adversely impacted earnings by $7.5 million or $0.13 per share, which resulted in income from continuing operations of $887,000 or $0.02 per share.

The 3 specific expense items totaling $7.5 million were comprised of the $4.5 million charge for workovers that restored net production of 1,100 barrels of oil per day, a $2 million noncash charge related to the impact of the recent share price increase on employee stock appreciation rights and a $1 million noncash charge due to the quarterly mark-to-market impact associated with our crude oil swaps because of stronger Brent pricing at June 30.

Excluding these items totaling $7.5 million or $0.13 per share, second quarter income from continuing operations would have been $8.4 million, nearly as strong as the $8.7 million or $0.15 per diluted share reported in the first quarter of 2018.

Just as importantly, we've generated adjusted EBITDAX of $8.8 million for the second quarter, which brings the total adjusted EBITDAX for the first half of 2018 to $23.3 million.

Using the midpoint of our production and expense guidance and August 3, 2018 Brent strip pricing, we are forecasting adjusted EBITDAX for the second half of 2018 to be in the range of $27 million to $30 million, which would be an increase of approximately 23% from the first half of 2018.

Also during the quarter, we paid off the entire balance of our term loan with the International Finance Corporation, and VAALCO has no debt on the balance sheet for the first time since June 2014.

Now I'll spend the next few minutes reviewing our second quarter operational results and expand on recent and near-term operational events.

In the second quarter of 2018, we completed a workover program on our Avouma platform, and we were able to increase production by approximately 4,000 barrels of oil per day gross or 1,100 barrels of oil per day net above pre-workover levels.

The workovers included replacement of electric submersible pump systems, or ESPs, in the Avouma 2-H, the South Tchibala 1-HB and the South Tchibala 2-H wells.

The workover operations on the Avouma 2-H and South Tchibala 1-HB were conducted to replace failed ESP systems in these 2 temporarily shut-in wells.

In addition, the company took advantage of the hydraulic workover unit while it was on the platform to proactively upgrade the ESP system in the South Tchibala 2-H well.

This reduced the company's potential exposure to future mobilization and demobilization costs for the workover unit.

With these replacements, we have made changes to the design, installation and circuits operating systems of the ESPs, which we believe will reduce the likelihood of untimely failures in the future.

So far, the unexpected ESP failures have been isolated to the Avouma platform as the wells with ESPs on our other 3 platforms have operated without incident for up to 4 years.

The total net cost to VAALCO for the 3 workovers was approximately $4.5 million.

Taking into account natural production decline and the production increase resulting from our successful workover program, we expect our production to be in the range of 3,800 to 4,100 barrels of oil per day net for the third quarter of 2018.

We are maintaining our 2018 annual production guidance of 3,500 to 4,100 barrels of oil per day net.

Before I turn the call over to Phil to review our financial results in more detail, I would like to reiterate our vision and strategy for 2018 and beyond.

For the remainder of 2018, we will continue to build cash and further strengthen our balance sheet.

We are committed to maximizing margins and enhancing operational cash flow by minimizing costs and minimizing production declines.

We currently do not have any material capital obligations for 2018, and we plan to keep our balance sheet debt-free.

Building cash in 2018 will allow us to fund and execute a drilling program in 2019 at Etame, where we have identified multiple development well locations that will add production reserves and value to the company.

The 2019 drilling program is subject to government and working interest owner approvals.

Our presentation deck posted to our website this morning has a map with the location of these wells on Slides 9 through 12.

These development well locations can be easily drilled off our existing platforms with a jackup rig.

These wells can be placed on production quickly with minimal increase in operating and overhead costs.

We are planning to fund the entire capital outlay for these wells from our cash on hand and through cash generated from operations.

We continue to have regular discussions with the government of Gabon regarding our license extension, and we are encouraged with how they are progressing.

Beyond quickly adding immediate production, results from the 2019 drilling campaign will provide information that will lower the risk on drilling campaigns further out in the future.

Our technical team has identified numerous leads that could potentially add reserves and production at Etame for many years to come.

We are also reassessing our technical evaluation of the opportunities on Block P, our offshore Equatorial Guinea license.

Block P contains both development and exploration opportunities that could provide reserve and production growth in a few years.

The first step in Equatorial Guinea is to secure operatorship of the license, which we are actively pursuing with the government authorities.

Although there's nothing to report, we also have resources dedicated to sourcing acquisition opportunities.

The ideal acquisition candidate is a property with near-term cash flow where we can leverage our existing operational and technical expertise.

In Angola, we are in discussions to finalize our exit on reasonable terms, and we will update you when we have more information to share.

We believe that strengthening our balance sheet in 2018 is pivotal to our plans for reserve and production growth, and we are excited about the opportunities that lie ahead for VAALCO.

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

Thank you, Cary.

Good morning, everyone.

Our financial results for the second quarter were essentially as strong as those in the first quarter after adjusting for the workover operations, the primarily noncash employee stock appreciation rights charge and the noncash mark-to-market impact of our crude oil swaps.

VAALCO's income from continuing operations of $0.9 million or $0.02 per diluted share would have been $8.4 million or $0.14 per diluted share once adjusted from the $7.5 million associated with the 3 expenses.

Adjusted EBITDAX for the second quarter was $8.8 million and is $23.3 million for the year-to-date 2018.

As Cary detailed, we are forecasting an increase of more than 20% in adjusted EBITDAX for the second half of 2018 when compared to the first half actuals.

This forecast assumes the midpoint of production and expense guidance and utilizes Brent strip pricing on August 3, 2018, of approximately $74 per barrel for the remainder of 2018.

We currently estimate that for every $5 increase in realized oil price, our annual adjusted EBITDAX would increase by $6 million.

Second quarter oil sales totaled 319,000 net barrels compared with 414,000 net barrels in the same period a year ago and 393,000 net barrels in the first quarter of 2018.

Our realized oil price for the second quarter of 2018 averaged $74.36 per barrel, up 59% from $46.83 in the second quarter of 2017 and up 8% from $68.69 in the first quarter of 2018.

In the second quarter, VAALCO executed crude oil swaps at a dated Brent weighted average price of $74 per barrel for the period from and including June 2018 through June 2019 for a quantity of approximately 400,000 barrels.

These are the only commodity derivative contracts that the company currently has in place for 2018 and beyond.

Through our hedging program, we will continue to evaluate ways to mitigate risk, ensure future cash flows for development drilling and allow for upside to rising commodity prices.

Turning to expenses.

Total production expense excluding workovers for the 2018 second quarter was $8.3 million or $26.08 per barrel of oil sales compared with $9.7 million or $23.41 per barrel in the same quarter of 2017 and $10.7 million or $27.17 per barrel in the first quarter of 2018.

Costs per barrel for the second quarter were impacted by lower sales but were still below the low end of guidance.

For the third quarter of 2018, we expect production expense excluding workovers to be between $26 and $28 per barrel.

And we maintain our expectation for the full year of 2019 to average between $24 and $28 per barrel.

During the second quarter, we incurred workover expense totalling $4.5 million associated with the Avouma platform workovers, and we expect no material additional workover spending in 2018.

DD&A for the second quarter of 2018 was $1.0 million or $3.28 per barrel of oil.

This compares to $2.0 million or $4.76 per barrel in the 2017 second quarter and $1.1 million or $2.86 per barrel in the first quarter of 2018.

DD&A per barrel decreased from 2017 due to the increase in proved reserves at December 31, 2017.

For the third quarter and full year 2018, we continue to expect our DD&A rate to be in the range of $3 to $4 per barrel reflecting the reserves increase.

General and administrative expense for the second quarter of 2018 was $5.0 million or $15.70 per barrel of oil compared to $3.0 million or $7.36 per barrel recorded in the same period 1 year ago and $2.6 million or $6.62 per barrel in the first quarter of 2018.

These G&A costs include stock-based compensation expense totaling $2.4 million in the second quarter of 2018, $0.6 million in the same quarter in 2017 and $0.3 million in the first quarter of 2018.

Second quarter 2018 stock-based compensation included $2.0 million related to stock appreciation rights, or SARs, which are adjusted to fair value each period and which value is related to VAALCO's stock price.

There is also a portion of the SARs that is settled on a cash basis each quarter, which, for the second quarter, was approximately $100,000 of the $2.0 million.

As VAALCO's stock appreciates, so does the fair value of the SARs, and there will be an expense booked associated with the mark-to-market of the updated valuation.

During the second quarter, the VAALCO stock price rose by approximately 217%, which costs $1.8 million of the $2.0 million increase to the stock-based compensation expense.

For the full year 2018, we are reducing the high end of our cash G&A guidance with the new range being from $9 million to $10 million.

We now estimate our stock-based G&A to be $5 million to $6 million, which includes the SARs charges forecasted through year-end at the current VAALCO share price level of approximately $3 per share.

Income tax expense for the second quarter of 2018 was $3.6 million compared to $3.1 million for the same period in 2017 and $4.0 million in the first quarter of 2018.

Beginning with the first quarter of 2018, the government of Gabon elected to lift its share of oil, which we report as foreign taxes payable, separately from the Etame joint interest owners.

As a result, Gabon income taxes will be settled when the government of Gabon lifts its share of production.

These settlements are expected to occur once or twice per year, depending on production levels.

At June 30, 2018, VAALCO had $5.4 million of foreign taxes payable attributable to such taxes.

While these taxes have been charged against earnings during the first 6 months of 2018, the cash payment has not occurred and instead it is anticipated that the government of Gabon will elect to take its lifting of oil in September for the amount due.

This will reduce VAALCO's and the other Etame owners' shares of cash flows from oil sales in the period in which the government lifting occurs.

As detailed on Slide 7 in our presentation deck posted this morning on our website, we currently estimate that our operational breakeven price in 2018 is approximately $35 per barrel of oil sales.

And our free cash flow breakeven price in 2018 is approximately $45 per barrel of oil sales, both figures including workover expenses.

In the second quarter, our realized price was slightly above $74, and we were able to generate significant free cash flow.

As you can see on Slide 7, at $75 realized prices, we realized $33.70 per barrel in operational margin and $25.40 per barrel in free cash flow.

In general terms, we estimate that each $5 increase in realized oil prices increases our annual adjusted EBITDAX by $6 million and our free cash flow by more than $4 million, which clearly shows our strong leverage to higher oil prices.

Turning now to the balance sheet.

During the second quarter, VAALCO paid off the outstanding balance on its amended term loan agreement with the International Finance Corporation.

The total pay-off amount for the principal and accrued interest was approximately $7.2 million.

VAALCO now has no debt on the balance sheet for the first time since June of 2014.

Cash and cash equivalents totaled $40.5 million as of June 30, 2018.

This balance includes $9.8 million of cash attributable to nonoperating joint venture owner advances.

As you can see, VAALCO has built a strong financial foundation, with no debt, and continues to build cash for future development opportunities.

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

Thanks, Phil.

With Brent continuing to trade near multiyear highs and production restored from the workovers, we anticipate continued growth in our cash position.

We have executed crude oil swaps at Brent pricing of $74 per barrel through June 2019 on a portion of our production to ensure that we can fund the potential 2019 development drilling program at Etame.

Already in 2018, we have paid off all of our outstanding debt, successfully completed 3 workovers on the Avouma platform and generated $23.3 million in adjusted EBITDAX.

We are projecting an increase in adjusted EBITDAX for the second half of the year of more than 20% to between $27 million and $30 million.

As we continue to deliver on our guidance and strengthen our balance sheet, we remain confident in the drilling opportunities on our Etame asset.

We are actively engaged in dialogue with the government of Gabon to extend the Etame license on terms that are beneficial to all parties.

We will continue to execute on our strategy, and I am optimistic that we will create substantial value for our shareholders by enhancing our balance sheet in 2018 and executing on projects that add reserves and production.

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.

Given that you haven't had a great number of questions on past calls, I'm going to break the rule of one question with one follow-up, if I may, please.

I'd like to start with the charges in the quarter and just to make sure that we understand each of those 3 correctly or extra expenses.

The workovers, those are now complete, and those -- that was a cash expense, correct?

Correct, Bill.

You are correct.

The workover expense was a cash expense, yes.

Whereas the SAR expense, all but the $100,000 that Phil had referenced, all of that was noncash.

And is it correct that if the stock price is lower at the end of the third quarter than where it started the third quarter, that you would then have a benefit to earnings?

Or does it not work that way?

No, you're correct.

That is how it works.

We would adjust the calculation for the share price at the end of the quarter.

So part of the calculation would be favorable to earnings in the event our share price is less than what -- where we closed at the second quarter.

And I guess, another way to think about it is that the $0.03 impact from the SARs that you had this quarter, unless the share price went up by a commensurate amount in the third quarter, that impact would be less than the $0.03 and, as you just pointed out, could actually be a benefit to earnings if the share price were down.

That's correct.

There's 2 components there, Bill.

And so let me be clear about this.

There's a value of the shares of the SARs, I'm sorry, that have already vested, and those are adjusted every quarter.

And then there's a value and an increase -- or a charge, I should say, for SARs vested during the quarter.

So there will be SARs that vest during the third quarter, and there will be a charge for those SARs.

And then there will be an adjustment for the SARs that had already vested prior to the quarter, depending on the direction of the stock price.

Great.

And then the crude oil swap expense that you realized in the quarter, that was noncash.

That's just simply a mark-to-market adjustment, correct?

Correct.

And today is -- do we understand that your hedges are currently slightly below where Brent pricing is, and as a result, that would lead to an additional charge?

Or is it the case which is really relative to the end of the second quarter?

What's the correct way to be thinking about the future impact of that?

The correct way is that they move every day.

And as dated Brent moves above $74 on any particular day, there would be a charge associated with the hedges.

As Brent moves below 70 -- dated Brent moves below $74, there would be a gain associated with the hedges.

Each month, as the hedges roll off, there will be a cash impact.

And then relative to the government lifting this quarter, what impact does that have on net income?

You've mentioned that it had a -- the impact on cash flow, but what about net income?

There will be no net income effect when the government lifts its share of crude oil.

There will be a cash impact when the government lifts its share of crude oil.

And that's essentially because each month or quarter, you are allocating or expensing taxes and you simply don't have those barrels to sell when the government takes their portion of the lifting.

And so that's why it would impact the cash.

That's absolutely correct.

The way you should look at it is that the foreign taxes payable liability is settled as the government lifts its share of crude oil.

That's helpful.

And then the conversations with the government and the kind of probability of getting this wrapped up, does it appear as though it will be happening in the near term?

Or are they not showing a propensity to have a sense of urgency?

Well, Bill, we are -- as you can appreciate, we are in the middle of discussions with the government -- negotiations with government officials.

Those meetings continue to occur routinely.

We've had them very recently.

And I -- at this point, I'm not ready to share publicly any of the details of the negotiations because they are so sensitive.

But I -- what I can say is that we are in very intense negotiations.

So if I can, I'll just leave it at that.

And by those comments, Cary, I'm going to presume that the people that you are negotiating with, that they have been in place for some time and you have not had personnel changes.

No, that's correct.

There have -- we have not seen the personnel changes that we saw earlier this year and last year.

So...

Great.

And one additional question.

The H2S wells, with oil prices now going up and having risen, are you thinking differently about those and bringing them back online?

Are the economics still not looking favorable?

What we're doing, Bill -- I'm glad you asked that question.

What we're doing is we're reassessing the technical evaluation of the H2S stripping systems, reassessing their costs and running our economics and looking at what those economics, how those economics compare to other opportunities we have in our portfolio.

And based on the work we've done so far, the economics of drilling development wells in 2019 is a better use of our cash.

But certainly, we are always -- we're evaluating the opportunity to install H2S stripping equipment.

And then it just depends on the economics.

But right now, the -- drilling the development wells seems to be a better use of our cash.

The next question will come from Jamie Wilen with Wilen Management.

Just to follow up on a couple of Bill's questions.

Just on the -- for the theme of taxes.

Basically, on our income statement, we will accrue the taxes paid.

So we will really -- on an income statement basis, it will have no impact on anything that we do.

That is correct.

And if you'll look at our current income -- current balance sheet, rather, you'll see that we had $5.4 million of foreign taxes payable on June 30 of '18.

Each time we lift, this number increases, and when the government lifts, the share of revenues that we would have received will flow through to this.

This will be the credit as the taxes are paid.

Perfect.

So as I look at the first half of the year, basically, you earn $0.15 a share fully taxed in the first and second quarter.

And you're looking at increased volumes in the third and the fourth quarter, and in aggregate, a higher EBITDAX with a higher overall pricing at current market.

So it looks to me like the third and fourth quarters should exceed that $0.15 number.

And in fact.

I don't want to put words in your mouth but possibly head toward the $0.20 level in each quarter.

Yes, we're not forecasting net income, but we did forecast adjusted EBITDAX and feel very good about a range of $27 million to $30 million for the rest of the year.

Okay, which means in excess of the $0.15 per quarter we earned in each of the first and second quarters if we get those numbers...

We forecasted adjusted EBITDAX for the rest of the year of $27 million to $30 million.

We are not forecasting the net income impact of that amount.

Got you.

I don't know if you're aware what the stock price is today, but amazingly, it is significantly lower for some reason.

Maybe people didn't understand the additional onetime expenses that went into the second quarter numbers.

But given how significantly low it is and given your cash level now, would you consider a large-scale repurchase at these levels?

It would seem to make a lot of sense, given how great our cash flow is and how secure our outlook is looking forward.

Right, right.

We -- that's a board decision, and it's a discussion that happens routinely with the board.

And obviously, the board has not had the opportunity to consider a buyback, given the -- where our share price is at the moment.

So that's a topic of conversation that happens routinely.

And I will say that so far, we thought that we create more value by investing in development wells rather than share buybacks.

But we'll reassess as we watch our share price.

Okay.

And lastly, I think it was a great move to lock in 1/3 of the production at $74.

It certainly reduces our risk, and that is indeed what hedging is indeed meant to do.

So I applaud that.

Congratulations on the workovers and the outlook for the business.

You guys have done a very nice job.

(Operator Instructions) The next question will come from [Bob Choi] with RLS Financial.

I wanted to start out by just confirming or asking you to please confirm, for the different producing wells, what the gross amount of barrels and the net amounts to VAALCO are.

They do seem to change from time to time, of course?

And I would just like to go through them now so at least, as of the end of the second quarter, I have the amounts as you know them.

Right.

And so you'll see that, as of the -- well, for the second quarter, production averaged 3,549 barrels of oil per day.

That's the net amount.

Let me -- so that's roughly, in gross terms, 13,100 barrels a day.

Right.

But I guess, what I'm asking is something different because I like to keep track of the individual wells as you do workovers and as you do other things.

So is it possible for you to break down both the gross and the net amounts by well as of current conditions, not even as of 6/30 but as of now since all the wells are up and running?

Well, we historically do not give out individual well information for a variety of reasons, but let us take that into consideration.

And that's just something we've chosen historically not to do, but we will -- I appreciate the question, and we'll take it into consideration.

Okay.

So as of right now, you're saying 13,100 gross, which is 4,300 net to VAALCO, is that accurate?

No, no, no.

3,549 barrels a day net to VAALCO.

I thought with the South Tchibala 2-H coming back online, you indicated that production was now back up to 4,300 barrels per day?

Yes, Let me back up.

Our gross working interest is 31%.

Our net working interest is 27%.

And so when we calculate production, we take the gross amount, but we multiply by the net working interest.

The gross working interest applies to costs, 31%, then net 27% applies to production.

And so I think what we -- what I would ask you to do is keep those numbers in mind, and there's several -- you'll see in several places where we've reported production and volumes on our website on the presentation.

You could take a -- you can apply those -- the net percentage of 27%, for example, to the 4,100 barrels of oil per day increase at Avouma, which net is 1,100.

So you can do all that math.

I think we've got a lot of different numbers floating around, and I don't want to confuse people.

So I would encourage you to go to our website, look at our presentation and apply a net 27% to any gross production number you see.

Well, I've done that, sir.

And that's -- and I was prepared with that prior to the call.

And because there are so many different numbers, that's why I'm asking for clarification so that it can relieve any confusion that I have and possibly others'.

So for instance -- I mean, what I'm primarily concerned with are the numbers that -- understanding the numbers that go into the reporting, so the quarterly, the annual as well as the updates that you provide.

So for instance, the 4,300 now that was in the -- that came out with the earnings, is that actually what is being produced and, therefore, available for listings for sale?

Or is that a -- this other number that you were referring to?

Where are you pulling the 4,300 barrels a day from?

The 4,300 -- just bear with me a moment.

The 4,300 came from, I believe, I'm looking for the page in the -- here we are.

Cary Bounds, VAALCO Chief Executive Officer, commented, we're pleased to have restored 1,100 barrels BOPD net production, so forth and so on.

It says following completion of the Avouma workover program, total net production for VAALCO is currently averaging approximately 4,300 barrels per day.

Correct.

Okay, that's very helpful.

So by -- divide that by our 27% net interest, that 16,000 barrels a day gross, which is roughly what the field produced yesterday.

Right.

So is that the number -- aside from any potential shutdowns or issues or workovers, is that the number we should be looking at going forward for current production, which is unavailable to be lifted?

Right.

The guidance that we're giving for the year is net 3,500 to 4,100 barrels a day for 2018.

And so the guidance for third quarter is 3,800 to 4,100 barrels a day net.

Does that answer your question?

The lower number, the 3,800 to 4,100, is that allowing for potential reductions or potential off-time of some of the wells?

Or is that calculated differently than the 4,300?

I'm just trying to...

The 4,300 is where we are today.

And so we take where we are today and we look at what are all of the -- what can impact production.

And there's positive impacts.

We may see a well perform better than we expected.

What are negative impacts?

We might have a problem and have to shut in a well for a few days.

So it's a very detailed technical analysis where our engineers go and they analyze what are the -- again, what are the impacts that might drive production up or down and we come up with the guidance range.

We don't feel like we're going to miss the low end, and it's going to be difficult to produce above the high end, either in the third quarter or for the year.

Okay.

But the 3,800 to 4,100 and the 4,300, they are all based from the same number, which is what I was trying to confirm with you before because you had mentioned (inaudible) basis.

I just want to make sure that they're all based on the same gross number or whatever that number is at a given point in time, and now you've confirmed that.

We'll then move on to the other questions, which are much shorter.

The swaps itself, do the swaps function much like futures within the futures market, where, in effect with the swap, you're effectively short the 400,000 barrels of production at the price of $74?

Or is there an actual purchase price for the swap itself, plus the mark-to-market on an end-of-quarter basis?

The -- I'll take that.

The answer is that the hedges simply fixed the price at $74 for the 400,000 barrels that were hedged.

So hence, as the price rises above $74, there would be a reduction to income for the period.

As oil prices go below $74, the swap would protect us at the $74 level for those 400,000 barrels.

Okay.

So if I understand this correctly, then what's happening is, let's say, the price for the lifting at whatever point in time that is, is $75.

So effectively, you're showing a noncash charge for $1 times the 400,000.

But at the same time, you're booking, in effect, the full $75 times the barrels lifted.

Whereas, if for instance, the lifting price is $73, obviously, your gross is based on the $73 times the number for barrels lifted.

But then there is an offsetting gain, if you will, which is, I assume, mark-to-market but it's on a cash gain of the difference between $74 swap price and the $73 cash price, if you will, times the number of barrels.

Is my understanding correct?

Well, not entirely.

The revenues are the price at the time, whatever that price is.

The effect of the hedges shows up on the income statement as other net for the mark-to-market gain or loss associated with the hedges.

And that is mark-to-market each period and then realized as hedges roll off.

Right.

You confirmed what I was asking.

We might have been using different words.

But okay, great.

That's confirmed.

I'm trying to find out or figure out how and when the lifting prices are actually determined for the month.

Is it done on the actual Brent spot price on the day of the lifting?

Or are they set at the beginning of the month and then changed or not changed accordingly?

And is it tied to Brent futures at all?

Or is it a different calculation?

The price is set by our off-taker, and it's tied, of course, to date, Brent as we have disclosed in the past.

It is beyond the scope of the call to explain exactly how that is determined, except to say that it is a month-to-month issue.

Okay.

So yes, that part I understand.

But there is no way for an investor, let's say, to have some general awareness or understanding of where that price might be?

Or is there something I can look at, for instance, just to have a general idea of where the price is likely to be based on the lifting date?

I think, as an investor, what I would say is that you should take a very close look at where you believe Brent will go.

That is the biggest component of the -- of price that we receive for our oil.

There is a basis differential, which we have not disclosed and do not plan to at this time.

The next question is a follow-up question from Bill Dezellem with Tieton Capital.

I actually had 2 quick ones.

The 3,800 to 4,100 barrels guidance that you're providing, was that for the remainder of the year or the third quarter?

That was -- let me get back to the page, Bill.

That was -- 3,800 to 4,100 was for the third quarter.

And for the year, it's 3,500 to 4,100.

Right, okay.

And so from an outsider's perspective, given that you are running at 4,300 today and we're halfway almost through the quarter, it's a pretty good indication you will meet or exceed your even the high end of the guidance of the 4,100 per day, correct?

Or is there something -- a piece of that puzzle I'm missing?

I think it's fair to say that as of today, we would probably hit the high end of guidance.

But again, there's things that can happen that are beyond our control, and so that's why we have a range.

But where we are today, yes, we're pointed towards the high end.

But a lot of things can change over the remainder of the quarter.

Understood.

So your guidance is taking the unexpected into account?

Absolutely.

Exactly.

That's helpful, Cary.

And then on a completely different topic, you referenced in your opening remarks the evaluation of, I'll use my term, acquisition opportunities.

Would you please provide a little more perspective in terms of what it is that you're looking for?

And then, secondarily, how those activities are progressing?

Right.

Okay.

Well, what we're looking for is something that -- and I said this in my comments, that fits our existing technical and operational expertise.

And so ideally, we're looking for an acquisition opportunity that's in central -- offshore Central West Africa.

And -- well, we can use some more people that are already over in Africa.

We can use our people here.

So in other words, we don't want to start a new business where we have no experience and we have to go out and we have to hire a staff that has the experience necessary to operate a brand new type of asset in a different location, something like that.

So where we are is we have a team dedicated to pursuing those acquisitions.

We've looked at several opportunities.

There's nothing to report.

Again, as soon as we have something to report, I'll let you know.

But I guess, the message that I'm trying to get out there is we are actively looking for acquisitions that would be accretive to our share price.

And if people have ideas, please call us.

And so that's really my message for today.

Ladies and gentlemen, we've reached the end of the allotted time for the Q&A session.

Are there any closing remarks from management?

No.

I'd like to thank everybody for participating in the call, and have a great day.

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

You may now disconnect.