VAALCO Energy Inc (EGY) 2019 Q1 法說會逐字稿

My name is Amy, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the VAALCO Energy First Quarter 2019 Earnings Conference Call.

(Operator Instructions) Thank you.

I would now like to turn the call over to Mr. Al Petrie, Investor Relations Coordinator.

Thank you, Amy.

Good morning, everyone, and welcome to VAALCO Energy's First Quarter 2019 Conference Call.

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

Liz Prochnow, our Chief Financial Officer will then provide a more in-depth financial review.

Cary will then return with some closing comments before we take your questions.

During our Q&A session, we ask you to limit your questions to one and a follow-up.

You can always re-enter the queue with additional questions.

I'd like to point out that we posted an updated investor deck on our website this morning that has additional financial analysis, comparisons and 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 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, the presentation posted on our website, and in the reports we file with the SEC, including the Form 10-Q that was filed yesterday.

Please note that this conference call is being recorded.

Let me now turn the call over to Cary.

Thank you, Al.

Good morning, everyone, and welcome to our first quarter 2019 earnings conference call.

I'm very pleased with our first quarter results and I would like to start by reviewing the agreement we have reached to finalize our exit from Angola.

In the first quarter of this year, VAALCO and Sonangol E.P signed a settlement agreement, which allows for the termination of VAALCO's rights, liabilities and all outstanding obligations for Block 5 in Angola.

The settlement agreement includes a payment of $4.5 million to Sonangol E.P and elimination of the receivable from Sonangol P&P.

The receivable is related to joint interest billings and was reflected as current assets from discontinued operations at year-end 2018.

The cash payment from VAALCO will become due within 15 days after the execution of an executive decree by the Ministry of Mineral Resources and Petroleum.

VAALCO had previously accrued a $15 million liability associated with the potential payment for relinquishing Block 5. As a result of the agreement, VAALCO adjusted this liability and recognized in net of tax non-cash benefit from discontinued operations of $5.7 million in the first quarter of 2019.

Combining the PSC extension at Etame with our exit from Angola, strengthens VAALCO's ability to grow from a solid foundation, which includes robust reserves and resources, a clean balance sheet with $46 million in cash on hand and an extended time horizon for continued production and reserve growth in Gabon.

Turning to operational results, production for the first quarter averaged 3,496 barrels of oil per day net, which was at the low end of our guidance range due to a work stoppage by non-VAALCO employees on the FPSO, that reduced production in the quarter by approximately 200 barrels of oil per day.

Without this unexpected third-party interruption, we would have been above the midpoint of our guidance range.

For the second quarter, we expect production to be in the range of 3,600 barrels of oil per day to 3,800 barrels of oil per day net.

As a reminder, the production impact from our 2019 Development Drilling Program will not boost production until late in the year, and thus, will have a significantly greater impact on 2020 production.

Our realized oil pricing declined slightly to $64.17 per barrel in the first quarter, but we continued to generate meaningful adjusted EBITDAX of $9.7 million in the quarter and expand our cash on hand to over $46 million at the end of the first quarter.

Now I would like to update you on our 2019 Development Drilling Program.

As part of the PSC extension in Gabon, we committed to drilling 2 development wells and 2 appraisal well bores by September 2020.

As previously announced, we plan to begin drilling up to 3 development wells and 2 appraisal well bores in 2019, funded from cash on hand and cash generated from operations.

We have secured a rig that will be available to begin drilling these wells in the third quarter of 2019, and we plan to continue drilling through the first quarter of 2020.

Our current plans are to bring the first well online in the fourth quarter of 2019, with the remaining wells online in the first half of 2020.

In our most recent presentation posted to the VAALCO website, we have included a detailed description of the 2019 Drilling Campaign, which will satisfy our work commitment under the PSC extension.

These development drilling locations are easily drilled off of our existing platforms with the jackup rig and the wells can be placed on production quickly with minimal increase in operating and overhead costs.

The appraisal well bores we're drilling, are to assess the Dentale potential in Etame and evaluate a Gamba step-out area in the southeast Etame.

If the appraisal well bores prove up resources in these areas, there is the potential to add approximately 5 million net barrels of 2P oil reserves and access up to 6 additional well locations in future drilling campaigns.

Our vision is to repeat similar drilling programs multiple times over the next several years and continue adding reserves and production to help us achieve our Vision 2025 goals.

Again, and I can't emphasize this enough, we expect our estimated 2019 net capital investment budget of $20 million to $25 million, will be funded by cash on hand and cash flow from operations.

The investment community in the last 12 months has become increasingly focused on the ability of all E&P companies to generate free cash flow in an extended period of volatile oil prices like we have been experiencing.

Our management team has long understood the importance of generating free cash flow to sustain our company and ultimately allow us to grow.

We have a strong, stable production base with the team focused on minimizing costs and generating free cash flow and that has helped us build our cash balance.

Let me now provide a brief update on Equatorial Guinea.

As we discussed on our fourth quarter 2018 call, our 31% interest in Block P has been in suspension for several years.

However, in September 2018, the Equatorial Guinea Ministry of Mines and Hydrocarbons lifted the suspension.

As a reminder to everyone, GEPetrol is the state-owned oil company and one of our partners in Block P. GEPetrol was required to introduce a new investor or a joint venture owner to the Equatorial Guinea Ministry of Mines by March 28, 2019 and GEPetrol has fulfill this requirement.

Upon the Ministry of Mines approving the new joint owner, the contractor group has 1 year to begin drilling operations.

VAALCO intends to seek a new joint venture owner on a promoted basis that will cover all or substantially all of the cost to drill an exploratory well.

Failure to drill would result in the loss of our interest in the license and we would have to write down -- I'm sorry, we would have to write off $10 million on our books for the value of our undeveloped leasehold costs associated with the Block P license.

We are working with our joint venture owners to evaluate the timing and budgeting for development and exploration activities under a development and production area in the block, including the approval of a development and production plan.

Finally, I would like to discuss our process to dual list on the London Stock Exchange.

We recently initiated a process to pursue dual listing in Europe to better position VAALCO alongside our international peer group.

We think that this is the right time for VAALCO to seek a standard listing on the London Stock Exchange, which we believe will provide us access to a broader group of international institutional investors and a broader range of equity research analysts.

The process will progress over the next 4 months to 6 months.

Before I conclude my opening remarks, I would like to welcome Liz Prochnow as our Chief Financial Officer.

Liz, has been an integral leader for VAALCO over the past 4 years as our Chief Accounting Officer.

She is knowledgeable about our operations and has a strong financial background to help guide VAALCO into the future.

With that, I would like to turn the call over to Liz, to discuss our financial results.

Thank you for those kind words as an introduction, Cary.

Good morning, everyone.

Our financial results for the first quarter were once again strong.

We reported net income of $6.5 million or $0.10 per diluted share.

Several items impacted net income, including after-tax, non-cash income of $5.7 million or $0.09 per diluted share due to the settlement of the outstanding obligations in Angola.

A noncash mark-to-market charge of $3 million or $0.05 per diluted share related to our crude oil swaps and a non-cash deferred income tax expense of $1.8 million or $0.03 per diluted share, as well as a non-cash charge for employee stock appreciation rights or SARs of approximately $1.7 million or $0.03 per diluted share.

Adjusted net income for the first quarter of 2019 totaled $5.6 million or $0.09 per diluted share.

Adjusted EBITDAX totaled $9.7 million in the first quarter of 2019, compared with $14.5 million in the same period of $2018 and $16.9 million in the fourth quarter of 2018.

First quarter oil sales totaled 297,000 net barrels compared with 393,000 net barrels in the same period a year ago and 401,000 net barrels in the fourth quarter of 2018.

The fourth and first quarter of 2018 had increased oil sales due to additional lifting.

In the first quarter of 2018, there was the split lifting that carried over from 2017.

And in the fourth quarter of 2018 included multiple listings in the month of December.

Our realized oil price for the first quarter of 2019 averaged $64.17 per barrel, down minimally from $64.52 in the fourth quarter of 2018 and down 7% from $68.69 in the first quarter of 2018.

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

As of March 31 2019, there were 68,000 barrels of commodity price swaps remaining for 2019.

In May 2019, VAALCO executed a crude oil swap at a Dated Brent weighted average price of $66.70 per barrel for the period from and including July 2019 through June 2020 for a quantity of 500,000 barrels.

These are the only derivative contracts that the company currently has in place.

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

In the first quarter, we recorded a non-cash mark-to-market charge related to our crude oil swaps of $3 million.

However, we realized $1.1 million cash gain on the swaps which settled during the first quarter.

As of March 31, 2019, the estimated mark-to-market value of the remaining commodity price swaps of 68,000 barrels in 2019 was an asset of $0.5 million which is recorded in prepayments and other line on the condensed consolidated balance sheet.

Turning to expenses.

Total production expense, excluding workovers for the first quarter of 2019 was $8.1 million or $27.3 per barrel of oil sales compared with $10.7 million or $27.17 per barrel in the same quarter of 2018 and $9.6 million or $23.84 per barrel in the fourth quarter of 2018.

For the first quarter of 2019, our per barrel costs were below the midpoint of guidance as we continue to manage our controllable expenses.

For the second quarter of 2019, we expect production expense, excluding workovers to be between 9 and $10.5 million or $27 to $31 per barrel and annual guidance remains the same at $26 to $30 per barrel.

DD&A for the first quarter of 2019 was $1.6 million or $5.23 per barrel of oil.

This compares to $1.1 million or $2.86 per barrel in the 2018 first quarter and $2.3 million or $5.75 per barrel in the fourth quarter of 2018.

The year-over-year increase in DD&A per barrel of oil reflects an increase in depletable costs associated with the PSC extension, partly offset by favorable impact of the upward revisions to reserves at December 31, 2018.

We expect our full-year DD&A range to remain unchanged at $5.5 to $6.5 per barrel of sales.

General and administrative expense for the first quarter of 2019, excluding non-cash compensation was $2.7 million or $9.15 per barrel of oil as compared to $2.3 million or $5.82 (sic) [$6.14] per barrel of oil in the first quarter of 2018 and $2.5 million or $6.14 (sic) [$5.82] per barrel of oil in the fourth quarter of 2018.

We expect our full-year G&A excluding non-cash compensation to remain unchanged between 9 and $10 million .

Non-cash stock-based compensation expense related to stock appreciation rights or SARs was an expense of $1.7 million during the 3 months ended March 31, 2019 as compared to an expense of $0.2 million in the comparable 2018 period and a credit of $1.5 million in the fourth quarter of 2018.

SARs are revalued quarterly based on the closing stock price at the end of the quarter, which was $2.24 at the end of the first quarter of 2019 versus $1.47 per share on December 31, 2018.

Stock price variability greatly impacts the fair value of the SARs and there will be an expense or credit booked every quarter associated with the mark-to-market value of the SARS.

Income tax expense attributable to continuing operations for the first quarter of 2019 was $2.8 million compared to $4.0 million in the same period in 2018 and an expense of $11.3 million in the fourth quarter of 2018.

Income tax expense for the first quarter of 2019 included $1.8 million non-cash deferred tax expense whereas the fourth quarter of 2018 included $9.3 million of non-cash deferred tax expense.

There was no deferred tax expense in the first quarter of 2018.

Beginning in the second quarter of 2018, the government of Gabon elected to lift its share of profit oil, which we report as income taxes.

As a result, Gabon income taxes are being settled when the government of Gabon lifted its share of production.

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

The government of Gabon took its first lifting of oil since its election in September of 2018.

At March 31, 2019, VAALCO had $4.5 million in foreign taxes payable, which was settled in April 2019, when the Gabon took an oil lifting.

We do not anticipate any further liftings by Gabon in 2019.

As detailed on slide 20 in the presentation deck posted this morning on our website, we currently estimate that VAALCO's operational breakeven in 2019 is approximately $37 per barrel of oil sales, and our free cash flow breakeven price in 2019 is approximately $47 per barrel of oil sales, with both amounts including workover expense.

In general terms, we estimate that each $5 increase in realized oil price, increases our annual adjusted EBITDAX by $6 million.

This clearly shows our strong leverage to higher oil prices.

Slides 21 and 22 illustrates the further strengthening of our financial position and the continued build of cash to fund our development drilling program.

At the end of the first quarter, we had an unrestricted cash balance of $46.2 million, which included $4.4 million of cash attributable to non-operating joint venture owner advances.

This does not include an additional $0.8 million in restricted cash, primarily related to deposits in Gabon, which is classified as current assets or the additional $0.9 million of restricted cash, which is classified as long-term assets.

At the end of first quarter, VAALCO had working capital from continuing operations, excluding lease liabilities of $33.8 million.

With the first quarter 2019 financial results, we have adopted the new lease accounting rules.

Under these rules, we recognize long-term right of use assets at $36.6 million, along with short-term lease liabilities at $10.3 million and long-term lease liabilities at $26.3 million.

A significant portion of the amount attributable to our right of use assets is related to our FPSO.

These amounts are higher than one would expect as they include both our share and our joint owners' share of the lease costs.

Recording of the gross cost is required and is a leasing standard, because VAALCO is the operator and the party to the underlying lease contracts.

The impact of recording the short-term portion of the lease liabilities resulted in a decrease in working capital of $10.3 million.

The new leasing standard has no impact on our income statement.

VAALCO's cash position remains very strong and we continue to expect that our 2019 capital expenditures will be funded by cash on hand and cash flow from operations.

The current estimated net capital expenditure range for 2019, which is primarily associated with the drilling program, is $20 million to $25 million.

The drilling program will include up to 3 development wells and 2 appraisal well bores and we anticipate that it will be completed in the first quarter of 2020.

In the first quarter of 2019, VAALCO invested approximately $0.8 million in capital expenditures and for the second quarter of 2019, VAALCO expects to spend minimal capital expenditures on some long-term lead items in maintenance capital with the majority of our capital expenditures to occur in the second half of 2019.

We have carried our strong operational execution into 2019 and remain focused on continuing to build cash to fund our 2019 development opportunities.

With $46 million in cash on hand, the Angola settlement agreement, and no debt on our balance sheet, we are in one of the best financial positions in the company's recent history.

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

Thanks, Liz.

We have positioned VAALCO financially and operationally to succeed in the near term and long term.

With Angola agreement, we have a clean balance sheet with no debt and ample working capital.

With the PSC extension in place, we have the runway to build a robust future from a world-class producing asset.

Our foundation is solid, with a high performing team, capacity for growth and a strong track record of operating responsibly.

I'm optimistic that we will create substantial value for our shareholders by executing on our drilling program at a time where we see significant upside, which we have highlighted in our investment presentation on slides 11 through 13.

We are striving to become a premier African operator with a more diversified portfolio, and with our Vision 2025, we are targeting 5x growth in production and reserves to create value for our shareholders.

We have a team with a clearly differentiated African expertise, a strong producing asset with significant upside and we are pursuing M&A opportunities where we can utilize our operational expertise to maximize value creation.

Our focus is on profitable and accretive growth that will add value for our shareholders.

The outlook for VAALCO is promising and we are very excited about the opportunities that lie ahead.

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

(Operator Instructions) Stephane Foucaud, GMP Securities.

Could you fish out the [VAALCO's] milestones that will lead to the London listing please?

And do we need to see an announcement in terms of -- what needs to be done effectively to start trading in the UK?

Thank you.

What effectively needs to be done to start drilling, I'm sorry, to start trading in the UK Stephane, and thank you for the question.

We are going through the steps now and it's really drilling out the applications and forms required by the London Stock Exchange and the regulator.

We've started that process and we're working through that now.

We expect, like I mentioned, to finish that process and have approval to start trading within 4 months to 6 months.

Jamie Wilen, Wilen Management.

On Equatorial Guinea, you say you've got 12 months to find a partner.

Could you tell us what you or where you are in the process and...

Where we are in the process?

Yes.

Absolutely.

In Equatorial Guinea, where we are in the process is we are working with GEPetrol to have their working or participating interest transferred over to a new partner.

Once that occurs and we expect that to occur imminently, we are looking for a partner to take part of our interest and we will promote them and they will carry, like I said, a substantial portion of our cost to drill an exploratory well.

We have already started the marketing process to find a partner.

Now we will not finalize that process until we know who GEPetrol will ultimately assign their interest to.

So the first step is for Ministry approval for GEPetrol to assign their interest, and then we will continue and finalize our process and bring in a partner that will take part of our interest.

So you have 12 months from a date that has not yet been determined.

Is that correct?

That is correct, and then the deadline -- just to be clear, the deadline in 12 months is to begin drilling.

Okay.

And as far as the drilling in Gabon, when do you expect that to begin?

I know you said in the back half of the year, but could you be a little bit more specific?

At late third quarter.

Late third quarter, early fourth quarter.

But I think late third quarter.

Okay.

And you will be drilling 3 wells this year, or is it carrying over into next year (inaudible) ?

It's carrying over into -- yes, it's carrying over into next year.

Okay.

So do this year and one early next year at this point?

And...

Well, right, (inaudible).

Well, yes, let me clarify, Jamie.

We expect to bring 1 well online this year and 2 wells online by the middle of next year, the first half of next year.

Okay.

And then balance sheet wise, of that $46 million, some of that goes to -- we have already paid the -- in Angola and some of that is our joint venture partners money as well.

We have not made the cash payment to Angola yet.

The process in Angola is for a Ministry degree to be filed.

Once the Ministry decree is filed, we have 15 days to make the payments.

So we have not made the $4.5 million cash payment in Angola yet.

And yes, we are holding a portion of our cash is our partners cash that we will use to pay our invoices.

Yes, it's just the normal monthly bill.

So depending on the timing of when they fund their cash calls and we ended up with $4.4 million at the end of the quarter.

Okay and -- I see.

And as far as your hedging program, as you look out each year, would we assume you're going to be hedging a third or 40% of your oil well ahead in advance just to limit the risk and secure the cash flow for the year?

That is exactly right, Jamie.

Yes.

Bill Dezellem, Tieton Capital.

Would you please repeat what you said towards the very end of your remarks Cary, relative to something about 5x?

I thought it was a 5x increase.

Right.

What we are targeting Bill, is by 2025 and this is a commitment of our management team.

Our management team got together and we discussed what is our vision for VAALCO by 2025, and we said we'd like to be 5x larger.

And to define 5x larger, that could mean 5x production or 5x reserves or 5x market cap.

But regardless, we will be 5x larger, but we're not going to do it at the sake of shareholder value.

And so we have, we've constrained ourselves and we have said, we will grow by 5x in 1 or all of those areas, but along the way, we will be top quartile in total shareholder return.

And so the growth target is a combination of total shareholder return or growing value for our shareholders combined with a meaningful growth in size of the company.

And you said the 3 areas that you were looking at that could qualify, would be reserves, production and/or market value?

Correct, correct.

Well, I hope you are -- hope you're successful and beat your target on all 3 accounts.

Right.

Thank you, Bill.

If I may continue with additional questions, Equatorial Guinea, once the -- GEPetrol has found their partner and you are assigned their interest, it sounds like since you already have your -- are we reading you correctly?

You already have your partner lined up assuming that GEPetrol does not surprise you in some way?

You have someone who is ready to take a part of your position.

No, we do not have someone lined up at the moment.

We are marketing our interest.

We've begun that process and so there are several candidates, and we have not decided which partner we would -- we will engage with yet, but that's -- engaging a partner to take on VAALCO's interest is still is not finalized.

I'm sorry.

Bill, I didn't mean to mislead you, but we are marketing and we're marketing in parallel with GEPetrol marketing.

Their interest, once we know who takes over GEPetrol's interest, that will give us the final information we need to go out and finish our marketing process.

So, I guess what I'm really trying to get my arms around is, how tight is that one-year timeline once the clock starts ticking?

Is that very doable, or is that really pushing a bit?

In my opinion, it's doable.

And I know I'm going past by 2 questions.

May I continue?

Or would you prefer I was back in queue?

Sure.

No, no, that's fine.

That's fine.

And then the fewer liftings that you had in the first quarter or maybe the other way said is the increased number of liftings in the Q4 that led to less in Q1.

What are the implications for the second quarter, particularly given the government did their lifting in April?

Right.

The implications for the second quarter are, there was inventory that carried over from the first quarter to the second quarter.

And so, if we can schedule our liftings on time, and -- or not on time, I shouldn't say that, but at the right time and lift the right volumes, we could have higher liftings in the second quarter.

Now, I can't promise that yet.

Again, it depends on availability of tankers, availability of support equipment that comes along when we do a lifting, but yes, the opportunity is there to increase liftings in the second quarter because there was inventory carried over from the first to the second quarter.

And I hope it goes without saying, it's always our goal to maximize our liftings and leave as little inventory as possible at the end of the quarter, and that's always what we try to do.

We weren't quite able to do that at the end of the first quarter, but we'll -- again we'll try to do that by the end of the second quarter.

And then from the April lifting that the government did for their taxes, so that would have a negative implication for your cash flow in the second quarter.

But do we understand correctly it has zero impact on earnings because you're actually accruing for that as you go along?

Yes, that is correct.

And then, I would like to shift if I could, to acquisitions, which really ties back to the five-fold increase that you were looking for at the business over time.

Can you talk about the acquisition pipeline and just a general update of what you are -- your evaluation process and what you're seeing out there?

And maybe -- well, I'll hold the next question.

Go ahead and answer that one.

Right.

Well, as I've said in the past, in terms of acquisitions, we restrained or confined ourselves to a geographic area, that's Africa, because Africa is what we know.

Ideally, an acquisition would be in Africa offshore oil.

Now I say in Africa, there are places where there is higher political risk and so we're looking at Africa where we can manage the political risk and then also where we have the technical expertise and operational expertise.

And so within those areas, yes, we are seeing a pipeline of opportunities and the opportunities tend to come from companies that are listed in London in fact, and so we spend a lot of time in London talking to other companies about their assets.

I don't -- there's nothing to announce today, but it is a very active process and we have a team dedicated to identifying and ultimately executing on an acquisition.

And Cary, you have been evaluating acquisitions there for some time, and so this next question is not intended to poke you in the eye, but really more to understand what you've been up against or working through.

So given that you have been evaluating acquisitions for some time, what has been the inhibitor so you have not announced an acquisition yet?

It's really -- there's been, I guess, not a single inhibitor.

It has been our -- we've had a focus up until late last year internally on first extending Gabon and then now finalizing Angola.

And so we've accomplished those challenges or those goals and objectives.

And so, now we have time to step back and apply more resources to acquisitions.

So I'll say part of it was, well, we were working in parallel on our internal portfolio of opportunities and looking outside.

And so -- and again, another opportunity we have is the drilling program coming up.

So it's been a balance of where we put resources to make sure that we're building -- we're building a strong foundation and that we are executing on our future.

That's been part of it.

Another part of it is, we're very, very picky, to be honest, when we don't want to go and execute a transaction for the sake of executing a transaction.

In my background, what that means is, we've got to look at a 100 opportunities to find one that might work and then that will take a fair bit -- a fair amount of time to even do due diligence and finalize something.

So these -- to do the right acquisition takes a long time.

If we had -- if we do something quickly, I want to be careful that we don't do it quickly and do the wrong deal.

So anyway, I hope that answers your question, Bill.

It does.

Sure.

Stephane Foucaud, GMP Securities.

First, you talked on the call about 6 follow-up wells in case of drilling success in Gabon in the current design program.

You talked about the upside.

To reach 2P of upside was related to the sanctioned drilling program.

But what would be the 2P upside for the 6 new wells?

That would be my first question.

And my second question is around the EG, and that's with regards to the portion that you're looking -- that you are looking to farm out.

What sort of data we -- would you be looking for?

Is that a ground floor transaction, is that -- would you be looking for some sort of (inaudible) historically investments?

What are we to carry, what are we talking about?

Thank you.

Right, Stephane.

No.

Great questions.

And first, I'll start with the 2P upside from the appraisal wells.

There's 2 appraisal wells like I mentioned earlier.

1 will test the Dentale, which is a deeper sand beneath the Etame field and the other appraisal well will test a Gamba structure that's adjacent to a producing Gamba structure at Southeast Etame.

And so what we're giving out in terms of 2P upside is a range.

It's 2.8 million barrels to 5.8 million barrels that may be converted from either contingent or prospective resources.

There's different pools right now, but anyway, the combined contingent plus prospective resources that could be converted to 2P reserves are 2.8 million barrels to 5.8 million barrels.

Then your second question, on the deal structure that we are pursuing for Equatorial Guinea, it's a carry.

It's a simple carry.

We do not plan to cash out or sell our interest.

We want to maintain exposure to the upside in Equatorial Guinea.

So, ideally, it would be a carry.

And will there be some -- you talk about I think $10 million invested.

So the sort of carry we look at that the (inaudible) of net investments or that sometime we've seen [2 for 1, 3 for 1], do you have a sense of what would be acceptable?

Well, since we are trying to negotiate the final terms right now, I am hesitant to answer that question.

But we are taking into consideration some costs and prior costs, and you're right, we have $10 million of prior cost.

So that is a consideration when we're talking to the companies and so there is a multiple of -- you are right, it's 2 for 1, 3 to 1, some multiple that makes sense.

We believe there is significant upside in particular with the Southwest Grande exploration prospect.

So obviously, we're at the higher end of the multiple that we're seeking, but I really can't comment right now since we are in negotiations on what I think the final multiple might be.

And back on my first question.

So you talk about the range of 2P that will be targeted by the current program.

But my question was more around, you talk about 6 additional follow-on location, if that well is successful.

So what would be the upside associated to the follow-on locations rather that the upside associated with the current sanctioned program?

Okay.

Right.

I'm sorry, let me try to explain that again.

When we talk about the 6 wells that may be proved up based on the 2 appraisal well bores we are drilling.

So there's no 2P reserves associated with the appraisal well bores.

Once we complete those, they may define 6 locations and across the 6 locations, we're looking at anywhere from 2.8 million barrels to 5.8 million barrels of 2P reserves.

Okay.

I'll pursue.

Okay.

(Operator Instructions) Charlie Sharp, Canaccord.

I'd just like to explore a little bit further Stephane's question and try and tie that in, if possible, to your 5x growth targets over let's say the next 6 years.

I think you said this on at a time you expected that you will be able to repeat the 2019 program perhaps several times, this sort of cycle of investment resource to reserve production.

And I'm just wondering your wider vision for a term beyond the 2019 '20 program, how much organically do you think that, that asset can contribute to your 5x growth targets?

And therefore, that gives us some idea of what you need to achieve perhaps inorganically to deliver those targets?

Right, right.

What we see at a time in terms of remaining resources is 126 million.

Well, let's call it a 125 million barrels of growth.

So that's what we are -- that is what remains and what we're targeting.

We've booked 10 million barrels net right now, of those resources.

So let's -- let's say, there's -- of the 125 million, that's 35 million barrels net to VAALCO.

We've already booked 10 million of it.

There is another 25 million.

So that's 3x growth and so we need to -- for the other, to make it up to 5x, we've got to make up the difference with an acquisition.

Is that what you were driving at Charlie?

That is exactly what I was driving at.

So really, Etame can provide a big chunk of your growth.

So you don't need to be investing in, I'd say, lots of our assets.

It's perhaps 1 or 2 other assets in West Africa that would enable you to deliver that growth.

That is exactly right.

And that is exactly right and if I could, I'd like to add on to that, that those 1 or 2 assets are -- we can come in and we can take over and operate those with minimal increase in G&A cost.

And so that is exactly our strategy to achieve 5x growth mainly from Etame, accomplish the rest with 1 or 2 acquisitions without increasing G&A significantly.

And could I just as a short follow-up, ask whether you would be inclined more towards appraisal into production, development and production or some development, some production with some bolt-on potential?

I think -- no.

I think ideally it would be appraisal that would lead to more production.

But we are open to production with bolt-on exploration type potential, but I think it's a foregone conclusion that we need some production to support a new acquisition.

There are no further questions at this time.

All right.

I would like to thank everyone for participating in our call, and we look forward to our next call.

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