VAALCO Energy Inc (EGY) 2019 Q4 法說會逐字稿

Good day, and welcome to the VAALCO Energy, Inc.

Fourth Quarter and Year-end 2019 Earnings Conference Call.

(Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to your host today, Al Petrie, Investor Relations Coordinator.

Please go ahead, sir.

Thank you, Keith.

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

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

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

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

During our question-and-answer session, we ask you to limit your questions to one and a follow-up.

You can always reenter 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 we posted on our website this morning and in the reports we file with the SEC, including the 10-K that was filed yesterday.

Please note that this conference call is being recorded.

Let me turn it over to Cary.

Thank you, Al.

Good morning, everyone, and welcome to our fourth quarter and year-end 2019 earnings conference call.

Before I discuss our results, I would like to reflect on a number of significant accomplishments we achieved over the past several years.

In 2018, we were able to pay off all of our outstanding debt and start building our cash position to fund the drilling program.

Also in 2018, we were able to negotiate a PSC extension of up to 20 years that provided VAALCO the runway to maximize value, grow reserves and increase production from our world-class Etame asset offshore Gabon.

In the first half of 2019, we were able to remove financial risk and uncertainty by completing a settlement agreement with Sonangol to exit Angola with no outstanding liabilities and obligations for VAALCO.

On September 26, 2019, we began trading on the London Stock Exchange, which complements our listing on the New York Stock Exchange by providing us the opportunity to diversify our shareholder base, attract additional research coverage and provide VAALCO with access to additional sources of capital to help fund our growth objectives.

Also in September of last year, we kicked off our 2019-2020 drilling campaign by drilling the Etame 9P appraisal wellbore.

This was the first step in the drilling program, which has, thus far, resulted in 2 successful appraisal wells, 2 development wells that are exceeding production expectations and another development well that should be adding production when it is completed and brought online later this month.

As a result of our operational excellence, we have increased production meaningfully since the third quarter of 2019, and we expect 2020 production to be approximately 35% higher than our actual 2019 average production rate.

I would like to thank all of our employees and contractors for their hard work and contribution to these critical milestones.

With that said, these past few days have seen prices decline below $40 per barrel for Brent crude as a result of macro concerns on both the supply and demand side.

This is a cyclical business, and we are well positioned to manage through this downturn by focusing on both operating expenses as well as capital expenditures.

As Liz will discuss in more detail, we estimate our 2020 operational breakeven cost to be approximately $31 per barrel based on 2020 production guidance, and cash at year-end was $45.9 million.

VAALCO will continue to evaluate all uses of cash and whether to pursue further growth opportunities in light of the dynamic commodity price environment right now.

Turning to operational results.

In the fourth quarter of 2019, we produced an average of 3,664 net barrels of oil per day which was above the high end of our guidance range of 3,100 to 3,500 net barrels of oil per day as a result of strong production from the Etame 9H well.

For the full year, production averaged 3,476 net barrels of oil per day.

We announced in our release yesterday that we expect production in the first quarter of 2020 to be in the range of 4,700 to 5,000 net barrels of oil per day.

For the full year 2020, we expect net production to be in the range of 4,400 to 5,000 barrels of oil per day.

The significant increase in 2020 production is driven by our successful drilling campaign.

This increase in volumes should help generate solid EBITDAX even in a lower price environment.

In the fourth quarter, we reported strong adjusted EBITDAX of $10.4 million.

And for the full year 2019, we generated $37.5 million in adjusted EBITDAX.

Our unit operating cost declined in the fourth quarter due to the fact that approximately 90% of our costs are fixed, and we can add production with minimal increase in cost, which significantly improves overall margins.

Now I'd like to give you additional details on the many achievements we have made during our 2019-2020 drilling campaign that we are in the process of completing now.

All of the accomplishments through mid-2019 that I highlighted earlier, paved the way for our drilling campaign that began in September of last year.

The most important accomplishment was the PSC Extension in Gabon.

As part of that extension, we committed to drilling at least 2 development wells and 2 appraisal wellbores by September 2020.

As previously announced, the Etame 9P appraisal wellbore was drilled successfully and encountered both the Gamba and Dentale reservoirs.

Based on the information we gathered in the Etame 9P appraisal wellbore, the Gamba oil column was thicker than predrill expectations, which was a positive indicator for both the Etame 9H and Etame 11H development wells targeting the Gamba reservoir.

In addition, preliminary analysis indicated that the Etame 9P appraisal wellbore encountered at least 45 feet of good quality Dentale oil sands with estimated gross recoverable oil resources of 5 million to 6 million barrels of oil in the Dentale reservoir.

These Dentale resources could be the target of future drilling campaigns.

Following the 9P appraisal well, we remained on the same platform and drilled 2 development wells, the Etame 9H and Etame 11H, both wells exceeded production expectations and have helped boost our production significantly since the fourth quarter of last year.

The Etame 9H was brought online at 5,500 barrels of oil per day gross or 1,500 barrels of oil per day net to VAALCO in December.

And the Etame 11H was brought online in January at 5,200 barrels of oil per day gross or 1,400 barrels of oil per day net to VAALCO.

After completion of the Etame 11H development well, the rig remained on the Etame platform to perform a planned workover on the Etame 10H well.

This was done to optimize workover costs by using the drilling rig to replace an electric submersible pump that had failed during 2019.

We were successful with that workover and brought the well back online in January 2020.

It is currently producing at a rate of 730 barrels of oil per day gross or 200 barrels of oil per day net to VAALCO.

At around the same time in late 2019, we also restored production from the Etame 4H well by repairing the subsea wellhead.

The well was brought online in December 2019 and is currently flowing at a rate of approximately 700 barrels of oil per day gross or 190 barrels of oil per day net to VAALCO.

Following the successful workover of the Etame 10H well, we moved the rig to the South East Etame North Tchibala platform to drill the South East Etame 4P appraisal wellbore to evaluate a Gamba step-out area in South East Etame.

The South East Etame 4P appraisal wellbore verified the presence of good quality Gamba oil sands in the step-out area.

We then drilled the South East Etame 4H development well and encountered approximately 750 feet of good quality Gamba reservoir in the horizontal section.

We have now fully satisfied our drilling commitment as part of the PSC extension that we signed in 2018.

Once we complete the South East Etame 4H well, we plan to conduct 2 workovers and likely release the rig in April.

While we had some initial cost overruns, primarily in the Etame 9P appraisal wellbore, we have been able to make those costs up with efficient drilling and completion operations.

We now believe that our total capital cost will be $29 million, which is within the original forecast of $25 million to $30 million net to VAALCO for all 3 development wells and both appraisal wellbores.

Additionally, I'm very proud to say that there have been no environmental or safety incidents during the 2019-2020 drilling campaign.

And we have not encountered H2S in either the Gamba or Dentale reservoirs in this drilling campaign.

As you can see, the program was very successful, and we remain excited about the long-term opportunities at Etame.

Our vision is to repeat similar drilling programs and continue adding reserves and production over the next several years at Etame.

After the completion of the South East Etame 4H well, we plan to perform at least 2 more preemptive workovers to replace ESPs.

On March 7, the South East Etame 2H well stopped producing due to an ESP failure.

The well was originally brought online in July 2015, and the ESP has lasted through its design life of 5 years, and the failure was not premature.

The drilling rig is on the SEENT platform now and was already scheduled to replace the ESP in the 2H well after finishing the South East Etame 4H well.

The impact of the ESP failure is estimated to be 10 days of deferred production for the South East Etame 2H well, and the well was producing 2,400 barrels of oil per day gross or 650 barrels of oil per day net when the ESP failed.

After this workover, we will perform at least 1 additional workover to preemptively replace ESPs that are still operating, but near the end of their design life.

Next, I would like to spend a few minutes talking about our year-end reserves.

As a result of our drilling program, we added 1.1 million barrels of net SEC proved reserves through a combination of converting probable reserves to proved developed reserves, plus other performance additions that were offset by downward revision of 0.2 million barrels of oil, net, due to lower average crude oil prices.

VAALCO's SEC reserves at December 31, 2019, were 5 million barrels of oil, net.

The PV-10 value of these proved SEC reserves at year-end 2019 decreased to $70.4 million from $80.1 million at December 31, 2018.

The 2019 SEC pricing used in the PV-10 calculation was $63.60 per barrel of crude oil, which is the average of monthly Brent prices on the first day of each month for calendar year 2019 adjusted for price differentials.

The 2018 SEC pricing was $70.83 per barrel of crude oil.

Our year-end 2019 2P CPR estimate of proven plus probable reserves is 10.6 million barrels of oil to VAALCO's working interest.

The PV-10 of VAALCO's 2P CPR reserves at year-end 2019 is $109 million.

The 2P CPR estimate of proven and probable reserves was prepared in accordance with PRMS standards using internal assumptions at year-end for future Brent escalated crude oil pricing and operating costs.

Our year-end 2019 reserves were fully engineered by VAALCO's third-party independent reserve consultant, Netherland Sewell & Associates.

They are very familiar with our assets and have provided annual independent estimates of VAALCO's year-end reserves for over 15 years.

I would now like to give you a quick update on our activity in Equatorial Guinea.

As a reminder, VAALCO has a 31% working interest in Block P offshore Equatorial Guinea.

On November 12, 2019, the Equatorial Guinea Ministry of Mines and Hydrocarbons approved VAALCO's appointment as operator for Block P. We are currently waiting on an amendment to our production sharing contract to finalize our appointment as operator and begin activities in Block P. We have also entered into commercial discussions with Levene Hydrocarbon Limited to potentially cover all, or substantially all of VAALCO's cost to drill an exploratory well in exchange for an assignment of a portion of VAALCO's working interest in Block P to Levene.

VAALCO would also serve as a nonoperator -- I'm sorry, as a nonowner operator under a service agreement with Levene on Blocks 3, 4 and 19 in Equatorial Guinea.

We have executed a nonbinding memorandum of understanding with Levene regarding the commercial discussions.

However, we do not have binding agreements in place, and government approval of the agreements between VAALCO and Levene must be obtained prior to completing the transaction.

In summary, we remain committed to operational excellence while generating strong financial results.

I believe that VAALCO is well positioned to succeed for many years to come.

We have a strong debt-free balance sheet, significant cash balance at year-end 2019 and a stable production base, all of which provide flexibility for the future.

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

Thank you, and good morning, everyone.

As Cary mentioned, we have accomplished many things over the past 18 months with strong operational results from our 2019/2020 drilling campaign that should support our 2020 financial results.

In the fourth quarter of 2019, we reported net income of $1 million or $0.02 per diluted share.

This included the impact from a noncash charge of $3.1 million or $0.05 per diluted share for a mark-to-market loss related to our crude oil swaps, a noncash expense for stock-based compensation of $0.7 million or $0.01 per diluted share, and a $1.7 million or $0.03 per diluted share tax benefit related to the decrease in the valuation allowance on deferred tax assets.

Adjusted net income for the fourth quarter of 2019 totaled $5.5 million or $0.09 per diluted share after adding back the $3.1 million in noncash mark-to-market losses related to the swaps and noncash deferred income tax expense of $1.8 million, and excluding a small gain of $0.4 million.

For the full year of 2019, net income was $2.6 million or $0.04 per diluted share.

This was primarily impacted by a noncash expense of $14.5 million or $0.24 per diluted share related to deferred income tax expense, a $4.4 million or $0.07 per diluted share charge related to the resolution of a legacy issue related to Etame joint venture owners' audit findings for the period from 2007 through 2016 and a noncash expense of $2.9 million or $0.05 per diluted share related to unrealized losses on crude oil swaps.

These were partially offset by a $5.4 million gain or $0.09 per diluted share, net of tax, related to discontinued operations.

Excluding the net impact of these items as well as a small gain, which total $16.0 million, adjusted net income for the full year 2019 was $18.6 million or $0.31 per diluted share.

Adjusted EBITDAX grew to $10.4 million in the fourth quarter of 2019, which was improved over the third quarter due to increased sales volumes and slightly higher pricing.

For the full year of 2019, we generated $37.5 million of adjusted EBITDAX, which has helped us fund our capital program and remain free cash flow positive for the year.

Fourth quarter 2019 oil sales totaled 318,000 net barrels compared with 401,000 net barrels in the same period a year ago and 279,000 net barrels in the third quarter of 2019.

Third quarter 2019 sales volumes were impacted primarily by lower production volumes during the quarter, which was the result of the planned full field maintenance shutdown that occurred in August 2019.

The year-over-year difference was primarily due to crude oil inventory timing.

Revenues for the fourth quarter of 2018 benefited from higher sales volumes due to higher beginning crude oil inventory that was drawn down to normal levels during that quarter.

For the first quarter of 2020, we expect sales to increase to between 350,000 and 400,000 net barrels as a result of higher estimated production from the new development wells, the Etame 9H and the Etame 11H, which came online in December and January, respectively.

Our realized oil price for the fourth quarter of 2019 averaged $65.80 per barrel, up $0.07 (sic -- see press release, "7%") from $61.26 in the third quarter of 2019 and slightly higher by 2% compared to $64.52 in the fourth quarter of 2018.

For the full year 2019, realized crude oil sales price was $65.20 per barrel or $0.07 lower -- 7% lower than the $70.32 per barrel that was realized for the full year 2018.

In the fourth quarter, we recorded noncash mark-to-market unrealized loss related to our crude oil swaps at $3.1 million, while we realized a cash gain of $0.4 million on the swaps, which settled during the quarter.

These swap agreements are at Dated Brent weighted average price of $66.70 per barrel.

As of December 31, 2019, there were swaps outstanding for 275,000 barrels for the period from and including January through June 2020, and protect approximately 1/3 of our production for that period.

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

Turning to expenses.

Total production expense, excluding workovers, for the fourth quarter of 2019 was $9.8 million or $30.70 per barrel of oil sales, at the low end of the previous guidance at $30 to $36 per barrel.

Fourth quarter costs per net barrel decreased compared with $34.01 per barrel in the third quarter of 2019, but was higher than the $23.84 per barrel in the fourth quarter of 2018, primarily due to the higher sales volumes in the fourth quarter of 2018.

For the first quarter of 2020, we expect production expense, excluding workovers, to be between $9 million and $11 million or $21.50 per net barrel to $24.50.

Production expense per barrel for the quarter is expected to decline significantly due to higher sales volumes from our successful 2019/2020 drilling campaign.

As a reminder, given that approximately 90% of our production costs are fixed, every incremental barrel of production and sales significantly improves our per barrel metrics.

For the full year 2019, total production expense declined to $37.7 million compared to $40 million -- $40.4 million in 2018, with the decrease primarily due to lower workover and personnel-related costs, partially offset by higher transportation and customs costs.

On a per net barrel basis, 2019 was $30.13 compared to $28.03 in 2018 due to lower sales volumes.

For the full year 2020, we expect our total production expense, excluding workovers, to be approximately $37 million to $42 million and the per net barrel range of $21 to $25.

We also expect our workover expenses to be between $6 million and $8 million for the year.

We performed 1 workover in the first quarter and will perform 2 workovers upon completion of the South East Etame 4H development well that is currently being completed.

Therefore, we expect most of our workover expense in 2020 will be incurred in the first and second quarters.

DD&A for the fourth quarter of 2019 was $2.1 million or $6.64 per net barrel of oil.

This compares to $2.3 million or $5.75 per net barrel in the 2018 fourth quarter and $1.5 million or $5.41 per net barrel in the third quarter of 2019.

The increase in the fourth quarter of 2019 reflects the additional costs associated with the new Etame 9P appraisal wellbore and Etame 9H well.

For 2020, we expect additional costs associated with the 2019 and 2020 drilling campaign to drive the DD&A rate higher, and we expect the range to be between $8 and $10 per net barrel of sales.

General and administrative expense for the fourth quarter of 2019, excluding noncash stock compensation, was $2.2 million or $6.96 per net barrel of oil as compared to $2.3 million or $5.78 per net barrel of oil in the fourth quarter of 2018, and $3.6 million or $12.86 per net barrel of oil in the third quarter of 2019.

The expense for the third quarter was higher due to the increased professional fees associated with our listing on the London Stock Exchange as well as our growth initiatives.

We expect our first quarter 2020 G&A, excluding noncash compensation, to be between $2.5 million and $4 million.

For the full year 2019, G&A, excluding noncash compensation, was $11.3 million, an increase of 26% compared with full year 2018 G&A, excluding noncash compensation of $9 million.

The increase year-over-year is primarily due to accounting and audit fees, legal and other professional service costs associated with VAALCO's London Stock Exchange listing as well as our growth initiatives.

For the full year 2020, we forecast our cash G&A to be between $10 million and $12 million.

Noncash stock-based compensation was $0.7 million during the 3 months ended December 31, 2019, as compared to a credit of $1.3 million in the comparable 2018 period and 1.6 -- $1.2 million expense in the third quarter 2019.

Noncash stock-based compensation expense for the years ended December 31, 2019, and December 31, 2018, were $3.5 million and $2.4 million, respectively.

For 2020, we expect our full year noncash stock-based compensation expense to be between $2 million and $4.5 million.

Income tax expense for the fourth quarter of 2019 was $4.2 million, comprised of $1.8 million of deferred tax expense and a current tax provision of $2.4 million.

In the same period, in 2018, income tax expense was $11.3 million, which included $9.3 million of deferred tax expense and $2.0 million in current tax.

The large decrease in the deferred tax expense between the fourth quarter of 2019 and the fourth quarter of 2018 is primarily attributable to Gabon income taxes which were impacted by the decrease in revenue as well as a $1.7 million benefit related to a change in valuation allowance on deferred tax assets.

In the third quarter of 2019, tax expense totaled $7.7 million and was comprised of $5.1 million of deferred tax expense and a current tax provision of $2.6 million.

As detailed on Slide 25 of the investor presentation deck posted this morning on our website, we currently estimate that VAALCO's operational breakeven price in 2020 is approximately $31 per net barrel of oil sales, and our free cash flow breakeven price in 2020 is approximately $38.50 per net barrel of oil sales, with both amounts, excluding workover expense -- including workover expense, but excluding CapEx.

As we have added new production on existing platforms with minimal additional costs, we are projecting a strong increase in our margin, thus driving down our breakeven price.

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

This clearly shows our strong leverage to higher oil prices.

At the end of 2019, we had an unrestricted cash balance of $45.9 million.

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

In addition, VAALCO has $11.4 million of restricted cash for the future abandonment cost of the Etame field classified as a noncurrent asset.

Working capital from continuing operations at December 31, 2019, totaled $18.3 million.

Since inception of the stock repurchase program authorized by the Board of Directors in June 2019 through December 31, 2019, we have purchased nearly 2.1 million shares of our common stock at an average price of $1.81, representing a total investment of approximately $3.7 million.

This represents 3.5% of the 59.8 million shares of common stock outstanding as of June 30, 2019.

Despite the weakness in oil prices, VAALCO's cash position remains very strong.

We have fully funded our 2019/2020 drilling program at Etame from cash on hand and cash flow from operations.

In 2019, we invested about $10.3 million on a cash basis [and] $22.2 million on an accrual basis with the capital expenditures, primarily for the drilling program.

For the first quarter of 2020, VAALCO expects net capital expenditures to be in the range of $10 million to $12 million, nearly all of which is related to the 2019/2020 drilling campaign.

As Cary mentioned, the total cost for the 2019/2020 drilling campaign has been able to offset some higher costs at the beginning of the program, and is now estimated approximately $29 million, within the original estimate of $25 million to $30 million.

The full 2019/2020 drilling program includes 3 development wells and 2 appraisal wellbores.

We anticipate that the drilling and completion portion of the program will be completed in mid-March.

Given the current uncertainty in the macro pricing environment, we are evaluating our capital expenditures for the balance of 2020.

We will continue to manage all uses of cash in light of the ongoing economic conditions.

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

Thanks, Liz.

Over the past several years, we have worked diligently to strengthen our financial position and create opportunities for growth.

In 2019, we made considerable progress towards our strategic objectives and have built a solid foundation for the future.

VAALCO has a strong producing asset with significant upside in Gabon.

We expect to generate solid operational cash flow in 2020, with the additional production from our successful drilling program.

We will continue to make efforts to repeat similar drilling programs and continue adding reserves and production over the next several years.

Our 2020 production guidance is 35% higher than our 2019 full year production average.

This should help drive the increased sales; and, with our low variable costs, should lead to increasing margins.

With a clean balance sheet that is debt-free and over $45 million in cash on hand at year-end, we have flexibility for the future.

We will continue to carefully manage the aspects of our business that impact our ability to generate cash flow.

Thank you.

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

(Operator Instructions) And the first question comes from John White with ROTH Capital.

Maybe I missed the detail, but is there a common thread on -- sounds like there's been a number of ESP issues.

Is there an element in common among those?

No.

No, there is not.

We replaced an ESP that had failed in the Etame 10H workover that was back in December.

That ESP had run for 4.5 -- a little over 4.5 years.

That is the design life for the ESP.

So that was not unexpected.

And then yes, you picked up that we had an ESP fail over the weekend recently at South East Etame 2H.

Again, that ESP had run for over 4.5 years and that's the design life, so that was not unexpected.

In fact, we were planning already to replace the ESP.

It just failed a few days before the rig got there.

So none of this is alarming to us.

It's all part of our plans.

Okay.

Well, I'm glad you could reiterate that.

And it sounds like it's under control.

The 2020 production guidance looks impressive and your recent drilling activities.

Congratulations on those efforts.

Thank you, John.

And the next question comes from Bill Dezellem with Tieton Capital.

At the end of Liz' remarks you said that you are evaluating ways that you can reduce costs.

Would you talk about kind of what you see that you can do to cut costs in 2020 and can do, I guess, like you said from plan on doing.

And so talk more about what you think you likely would do?

And then final piece of this, what will be the implications to production this year and next year.

Right.

Bill, I want to be sure I understand your question.

And so I think your first question is in regards to looking at ways to manage our costs in 2020.

And certainly, in light of the recent drop in oil prices, that is a focus.

And then the second question was -- and what impact will that have on production.

Do I have your -- did I understand your questions correctly?

You did, and there actually was a -- there was a third question in there, really differentiating between what you can do to reduce cost and what you likely would do.

In fact, there may be some more draconian measures that you'll choose not to take this early in the year, depending on your conviction of OpEx -- the OpEx as mentioned and prices staying low for an extended period of time.

So trying to grasp that difference between could do and likely you will do?

Right, right.

Well, there -- I'll say there are -- when we look at our costs, we look at projects that are operational focused.

In other words, projects that are -- that we want to implement offshore in Gabon.

And so there are some nondiscretionary projects that we will undertake this year.

And it goes to one of your questions, these projects are nondiscretionary because they help us sustain production.

And so that's things like improving the control systems on our platforms offshore, for example.

And so we have $2 million to $3 million of costs related to projects that help us sustain production.

Now we've looked at other projects, where there are events where we're planning or preparing for the next drilling program.

Those projects are discretionary.

And so as we think about the timing of the next drilling program, we may defer those costs, and -- or those projects, I should say, and save those costs.

So anyway, we will not sacrifice production for the sake of lowering costs.

And our cost structure is very low already.

And so like I said, we have a few projects that we're going to do to ensure that we can sustain production.

But otherwise, we've got some discretionary projects that really go to supporting the next drilling campaign, we may push those out depending on what we decide on the timing of the next campaign.

Bill, does that answer your question?

It does.

And so if you were to do a follow up now, if you were to delay those discretionary costs in anticipation or preparation for the next drilling program, is that -- does that imply that the drilling program would be delayed just because there is a natural time line to these things?

Or would it potentially compress the time line if you chose at a later time to do the next drilling program as scheduled?

Right, right.

I think I understand your question.

And right now there's enough time between now and the next campaign, where we would just compress the preparation work.

And so we still have a lot of flexibility on when we start the next campaign.

Great.

And it'll be one final question and step back in queue.

How late or how long can you delay those discretionary costs in preparation for the next drilling campaign and still be able to do the next campaign on the original time line?

Oh, I would say 4 to 6 months, something like that.

And the next question comes from Charlie Sharp with Canaccord.

A couple of questions, if I may.

One is related to costs again.

And the other one is really related to reservoir performance and how you see that shaping up.

The cost question is actually related to the oil price and the FPSO charter.

And I think you have the FPSO on charter until late '22.

I just wonder given the -- where the oil price has gone to, is now an opportune time to start negotiations on an extension for the FPSO...

I'm sorry, Charlie, go ahead.

Sorry.

I wonder if now is a good time to start negotiations on an extension to the FPSO lease; given where the oil price is, that might be advantageous.

And then the second very quick point is -- or question -- is given that the 9H and 11H wells on Etame came in about twice what you were initially expecting in terms of production rate.

Has that changed your overall view of the future potential of well recovery and the number of wells that might be needed on a license to recover all the potential resources?

Right, right.

Thank you, Charlie.

So let me answer your first question on costs, and in particular, the FPSO.

And you are correct, we have the FPSO under contract through September 2022.

And we are in discussions with the owner-operator of the FPSO, which is BW Offshore on either extending that -- or potentially extending that contract, but even renegotiating the contract now because -- and it's driven -- you're correct.

It's driven by this is an opportune time; we agree.

But if we keep -- if we decide to keep the Nautipa FPSO, the FPSO we have today on station another 10 or 20 years, we need to start investing in life extension work.

And so that work needs to be done ahead of the contract expiration.

So that means we're actually renegotiating -- or I'm sorry, negotiating a new contract to extend the FPSO on station, like I said, for another 10 to 20 years.

Those conversations are going on now.

And so our options are extend the contract for the existing FPSO or replace the FPSO.

So we are also talking to other FPSO providers as well.

And then to your second question on reservoir performance.

Yes, the Etame 9H and Etame 11H wells are exceeding expectations.

Those wells were positioned at the top of the reservoir in the Etame field.

And I congratulate our subsurface team.

They picked fantastic locations for those wells.

But right now, we see that particular reservoir is fully developed.

And so the way I think about it is our team has demonstrated their ability to choose very prolific locations to drill wells.

And so that's what we're working on right now is looking at other areas on the license, where they can repeat that process.

But in that particular reservoir, we think that that is -- that reservoir is fully developed.

And so the team is focused -- the subsurface team is focused on other areas on the license like the South East Etame step-out area, and looking -- as soon as we have results from our new well, they'll plug those into their models and interpretations and hopefully find some fantastic locations to drill.

(Operator Instructions) And the next question comes from Jamie Wilen with Wilen Management.

Cary, following up on the FPSO.

With the increased volume that we have, are we coming up on any capacity constraints within that?

We have -- in terms of processing capacity, we have processing capacity up to 25,000 barrels a day.

I hope we hit that constraint.

We have not hit that constraint yet, but -- so we have plenty of processing capacity right now.

And on the storage, we have plenty of storage as well, and we're timing our lifting so that we don't run out of storage.

So right now, everything is operating effectively, and we do have plenty of capacity.

Okay.

On the South East Etame 2H workover, that's offline now and your -- the rig is there.

When would you expect that to be back online?

We -- toward the end of the month, Jamie, we expect the South East Etame 2H to be back online.

Okay.

And with Equatorial Guinea, you talked about you've got a memorandum of understanding, but not a full agreement.

Have you -- basically, have you negotiated the terms with Levene and then just awaiting the government's approval?

And that's one question.

But secondly, what's holding up the government's approval from allowing everyone to move forward since it's in their best interest to gain additional drilling and potential tax base?

Right, right.

So let me answer the first question on the agreements with Levene.

Yes, we have agreed to the terms, but we're finalizing the detailed agreements with Levene, and that work is in progress.

But in parallel, you're right, we're finalizing amendments to our PSC that would allow Levene to come into the Block P license and allow us to transfer some of our ownership to Levene.

Now in terms of the government approving the documents, I really can't speak to what's delaying the process.

I do know that we are in constant communication with the government.

And in fact, the Hydrocarbons Minister had planned to come to Houston, but unfortunately canceled his trip in light of the coronavirus.

But -- so that was unfortunate.

But anyway, we are in communication with them.

They are talking to us, we're setting up meetings.

And so I expect something to happen fairly soon.

Okay.

And then once again, congratulations on developing a very well-defined strategic plan, both operationally and financially and really executing it in a very fine manner.

We appreciate that as shareholders.

Thank you.

All right.

Thank you, Jamie.

And the next question is a follow-up with Bill Dezellem with Tieton Capital.

The last questioner covered it.

Okay.

Thank you, Bill.

Okay.

And this does conclude our question-and-answer session.

At this time, I would like to turn the conference to Cary Bounds, CEO, for any closing comments.

Yes, I would just like to thank everyone for joining us today, and enjoy the rest of your day.

Goodbye for now.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.