VAALCO Energy Inc (EGY) 2021 Q1 法說會逐字稿

Good morning, everyone, and welcome to the VAALCO Energy's First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Al Petrie, Investor Relations coordinator. Sir, please go ahead.

Thank you, Jamie. Good morning, everyone, and welcome to VAALCO Energy's First Quarter 2021 Conference Call. After I cover the forward-looking statements, George Maxwell, who was named CEO in April, will review key highlights along with operational results. Jason Doornik, our Chief Accounting Officer and Controller, will then provide a more in-depth financial review. George will then return for some closing comments before we take your questions.

(Operator Instructions)

I'd like to point out that we posted a Q1 2021 supplemental 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 filed with the SEC, including the Form 10-Q that was filed yesterday. Please note, the conference call is being recorded, and let me now turn the call over to George.

Thank you very much for the introduction. Good morning, everyone, and welcome to our first quarter 2021 earnings conference call. It's a pleasure for me to speak with you this morning as my first call as our new Chief Executive. Before I discuss our results, I'd like to take a few moments to thank Cary Bounds for his dedication and valued years of executive leadership at VAALCO. He was an integral part of our success, and we wish him well in his future endeavors. At this point, let me review a number of significant accomplishments he helped VAALCO achieve this past year that have placed us in an unenviable position to achieve meaningful and accretive long-term growth.

In early 2020, on the heels of a highly successful drilling campaign that included 3 development wells that exceeded expectations and 2 successful appraisal well bores, the world economy and the energy industry was severely impacted by COVID-19. We saw oil prices fall sharply due to the global pandemic as well as supply and demand imbalances.

Despite these difficulties, VAALCO continued to generate positive free cash flow throughout 2020, due in large part to our strong production increase. 2020 production was 40% higher year-over-year as a result of our drilling campaign success. We also had hedges in place through last June that provided us good protection when oil prices fell dramatically. We were able to overcome the challenges in 2020 while maintaining our strong balance sheet and financial flexibility.

This gave us the ability to capture through a very accretive acquisition opportunity that arose late in 2020. We closed the acquisition of Sasol's 27.8% working interest in Etame in February 2021, utilizing cash on hand. We believe the deal is very accretive to VAALCO, as it is improving our margins, significantly increasing our production and the price we paid per net barrel of oil was around $4.90 or sub $5 for 2P CPR reserves, which is excellent pricing. Since we already operate the asset, we expect minimal increase in G&A expense, and there is no integration needed, and we will fully -- I'm sorry, and we will immediately benefit from the acquisition. With the additional production that transaction brings us, along with the strong recovery in oil pricing, we are projected continued meaningful free cash flow generation going forward.

I'll now talk a little bit about the Q1 2021 results. Turning to our operational results, we had a very strong first quarter. We produced an average of 5,180 net barrels of oil per day, which was an increase of 11% over the fourth quarter of 2020, driven by the inclusion of 1 month of the increased NRI production due to the Sasol acquisition. Our second quarter 2021 production will include an entire quarter with the additional Sasol volumes. As such, the midpoint of second quarter production guidance is a 52% increase over our first quarter 2021 average production. With that said, we are continuing to comply with Gabonese OPEC production curtailment quotas, which we are now forecasting to continue into the second quarter. In the second quarter of 2021, our production is expected to average between 7,600 and 8,200 net barrels of oil per day. This is a bit lower than we estimated earlier this year for Q2 before we knew the extent of the OPEC curtailments.

The reduction is purely due to the production curtailments and not any unexpected steep declines. Production guidance for the remainder of 2021 includes the full production impact of the Sasol acquisition. During the second half of 2021, we are planning our annual 7-day maintenance turnaround, and we are not currently forecasting any material production uplift from the upcoming drilling campaign.

Taking into account natural decline as well, we expect the second half of 2021 to average between 7,200 and 8,000 barrels of oil net per day, which is a bit higher than our prior second half guidance of 7,100 to 7,800 barrels of oil per day. From an earnings perspective, we were very pleased with our net income of $9.9 million, which on a diluted share basis is just down $0.17 per share. For the first quarter of 2021, which compared very favorably with a net loss of $3.6 million in the fourth quarter of 2020 and a net loss of $52.8 million in the first quarter of 2020. The first quarter of 2021 reflected stronger revenue due to higher realized pricing and strong sales. I want to also point out that our first quarter 2021 earnings included a noncash bargain purchase gain. This is further evidence how attractive this acquisition was for VAALCO.

It's pretty rare to record a gain on an asset purchase, but ours was due to the lower oil price outlook used on the sale and purchase agreement was signed last November and compared to higher oil price outlook on the closing date at February 2025 -- sorry, February 25, 2021, where the fair value of the reserves associated with the acquisition were determined.

We also reported adjusted EBITDAX of $18 million in the first quarter, which was more than 5x our adjusted EBITDAX in the fourth quarter of 2020. Adjusted EBITDAX for the first quarter of 2021 was likewise significantly higher than the fourth quarter due to increased sales volume and improved realized prices. We are happy with the ongoing strength of oil price environment and with a significant increased production, we wanted to lock in a meaningful portion of our free cash flow and adjusted EBITDAX. With that in mind, over the past week, we have added additional -- we have added swaps at a dated Brent weighted average price of $66.51 per barrel for 672,533 barrels of oil from May 2021 through October 2021.

In total, VAALCO now has 70% of its production heads through October 2021 at a dated weighted average price of $62.27 per barrel. This will allow us to generate and build enough cash to fully fund all of our current capital commitments, including our 2021 and 2022 drilling campaign and any potential capital associated with the FSO conversion. In addition, we will still retain potential upside from higher oil prices this year since not all of our production is hedged, and the new contracts run for just the next 6 months.

Looking at our 2021/2022 drilling campaign. Turning your attention to the future, our strategic vision is built on accretive growth through organic drilling opportunities and through acquisitions. As you know, the success of our 2019/2020 drilling campaign has built a solid foundation for future drilling campaigns at Etame. With the Sasol acquisition closed, the acquisition of New 3D seismic over the Etame block complete and improved oil pricing, allowing us to lock in strong cash flow, we believe the time is right to execute another successful drilling campaign to continue adding reserves and production over the next several years at Etame.

We are planning to drill up to 4 wells, starting in the fourth quarter of 2021 and finishing in 2022. We are currently expecting to drill 2 development wells and 2 appraisal wells. There are continued -- there are opportunities for side track reentries that will reduce drilling costs and assess low-risk reserves and production. We also have appraisal locations that we believe could offer meaningful upside but is not currently reflected within our reserve reports. The final well locations will be determined in conjunction with our processing of the new 3D seismic data we acquired. Every 4-well program is (inaudible) the estimated increase in gross steel production is 7,000 to 8,000 barrels of oil per day or net 3,500 to 4,100 barrels of oil per day to VAALCO, when the drilling campaign is completed in 2022.

Planned in hand with the production increase will be margin expansion and per barrel cost reductions. About 90% of our production costs are fixed and as production increases, our per barrel cost will decrease dramatically. Every new barrel we bring online is more economic because of the low variable costs. So as we grow production, we're also growing our margin per barrel and reducing our cost per barrel.

From a capital standpoint, we estimate the cost of the program is between $115 million and $125 million gross or $73 million to $79 million net to VAALCO. The upcoming drilling campaign has the potential to generate significant additional free cash flow, especially when you combine sustained higher oil prices with our low-cost operating structure. Our strategy is to utilize the additional free cash flow to fund organic and potentially inorganic transformative growth opportunities in the future.

I'll now move on to talk about the recent announcement on the FSO. In line with our strategy to be a low-cost operator, we are constantly looking at ways to minimize costs and improve our margins. A number of weeks ago, we announced that we signed a nonbinding letter of intent with only offshore terminals to provide and operate an FSO unit at VAALCO Etame Marin field offshore Gabon for up to 11 years upon the expiration of the current FPSO contract with BW Offshore, which expires in September 2022. Currently, our total costs equate to around 40% of our total production expense. Then on the FSO proposal would reduce VAALCO's total operating cost by 15% to 25% when compared to the current FPSO contract during the term of the proposed agreement.

The fall in the drilling campaign completion in 2022, and when we bring on the new FSO, we will see a significant increase in production and our total costs should decrease substantially. This will dramatically improve our margin per barrel, and we will be able to deliver more free cash flow to fund our future growth opportunities. As a reminder, whether we decided to maintain the current FPSO beyond its existing contract or transition to a different option, either development approach would require substantial capital investment costs.

As part of the FSO development approach with Omni, we will need to make an estimated capital investment of between $25 million to $32 million net to VAALCO, which includes the required field reconfiguration. We're expecting that approximately 20% will be invested in the second half of 2021 and the balance in 2022. But given the high amount of cost savings, we expect a payback of less than 3 years on this investment. In the new field configuration, the FSO will store and offload the production and -- production and processing will be completed on our existing platforms. We are engaging in further discussions with the intent to finalize a definitive agreement soon.

I would now like to give you a quick update on activity in Equatorial Guinea. We have a substantial working interest in Block P, and we are evaluating several development step out and exploration opportunities in Block P. We have several attractive undeveloped discoveries on the block from prior operators. And given the current oil price outlook, we believe we can economically develop these discoveries. We remain excited about Equatorial Guinea, and we are working to profitably exploit the resource potential and plan to update you in the second quarter with more information.

So in closing, in this first statement, in summary, our outstanding employees continue to operate and execute on VAALCO's strategy of accretive growth and free cash flow generation through cost effectively maintaining core production. We have a strong balance sheet, and with our increased production base on new hedges, we have locked in sufficient cash flow to fund our entire upcoming capital obligations, thus maintaining upside.

Looking at the updated Q1 supplemental presentation on our website, you will see that at $65 realized oil price, which is about where we believe we are taking into account our hedges and current strip pricing, VAALCO will generate around $65 million in free cash flow this year, excluding before CapEx.

When you look at our current stock price, we're currently trading in a 2.5x our multiple of free cash flow for 2021 and in 2022. Assuming continued strong pricing with additional production coming online from the drilling campaign and the potential for significant cost reductions following the FSO change out, we should generate even more free cash flow. So with those notes, I would like to turn the call over to Jason to share more detail on our financial results. Thank you.

Jason?

Thank you, George, and good morning, everyone. We reported strong net income of $9.9 million or $0.17 per diluted share in the first quarter of 2021, which included a $7.7 million noncash bargain purchase gain, which was offset by a $6 million loss on derivative instruments. $4.2 million of the loss on derivative instruments was an unrealized loss. As George mentioned, the first quarter reflected significant increase in sales and realized pricing.

For comparison purposes, in the fourth quarter of 2020, we reported a net loss of $3.6 million or $0.06 per diluted share, which included the impact of $3.6 million in exploration expense related to the autonomous seismic program during the quarter and $2.2 million of expense related to stock-based compensation. For the first quarter of 2020, we reported a net loss of $52.8 million or $0.91 per diluted share, which included $30.6 million noncash impairment charge due to lower crude oil prices and noncash deferred income tax charge of $35.6 million.

Our adjusted net income for the first quarter of 2021 totaled $8.7 million or $0.15 per diluted share as compared to an adjusted net loss of $5.6 million or $0.10 per diluted share for the fourth quarter of 2020. The increase in earnings was mainly due to higher revenues as a result of higher oil prices, higher sales.

In the first quarter of 2020, VAALCO recorded a $6.9 million in adjusted net income or $0.12 per diluted share. Adjusted EBITDAX totaled $18 million in the first quarter of '21 compared with $3.5 million in the prior quarter and $6 million in the same period of 2020. Adjusted EBITDAX for the first quarter of 2021 was higher than both prior periods, primarily due to increased sales volumes and higher realized prices.

Production for the first quarter of 5,180 net barrels of oil per day increased 11% from 4,662 net barrels of oil per day in the fourth quarter of 2010, driven by the Sasol acquisition volumes being included in the company's results after the closing date of February 25, 2021. First quarter 2021 production was up 5% from the first quarter of 2020.

Sales volumes in the first quarter of 2021 was up 113% from the fourth quarter and up 111% compared to the same period in 2020. The increase in volumes in the first quarter of 2021 is primarily due to additional interest acquired and thus higher sales following the closing of the Sasol acquisition, as well as 3 liftings in Q1 2021 versus 2 liftings in both the first and fourth quarter of 2020. Our crude oil price realization increased 46% to $61.31 per barrel in the first quarter of 2021 versus $42.07 per barrel in the fourth quarter of 2020 and was up 3% compared to $59.54 per barrel in the first quarter of 2020.

In January, we entered into new crude oil commodity swap agreements for a total of 709,262 barrels at a dated Brent weighted average price of $53.10 per barrel for the period from and including February 2021 through January 2022. These swaps settle on a monthly basis. Additionally, in May, we added more crude oil swaps of 672,533 barrels at a dated Brent weighted average price of $66.51 per barrel for the period from and including May 2021 through October 2021.

As George mentioned, we hedge a significant portion of our production volumes to lock in strong cash flows, which will enable VAALCO to fund our 2021/2022 drilling program, FSO capital program, any potential future stock buyback program and still allow for some additional upside. We took similar transactions in 2019 before we began our 2019/2020 program and will continue to assess our needs to mitigate price risk and protect cash flow in the future as we consider any additional future derivative contracts.

Turning to expenses. Production expense, excluding workovers for the first quarter of 2021 was $16 million, which was higher than the $6.6 million in the fourth quarter of 2020 and $6.9 million in the first quarter of 2020, primarily due to higher sales and increased working interest associated with the Sasol acquisition. The per unit production expense, excluding workovers of $26.06 per barrel in the first quarter of 2021, increased as compared to $22.26 per barrel in the fourth quarter of 2020 and $23.39 in Q1 2020. The per unit production expense, excluding workovers increase was primarily due to higher crude oil inventory costs as a result of the Sasol acquisition and FPSO charter costs. Included in total production expense, our COVID-19-related costs incurred to protect the health and safety of the company's employees, which totaled approximately $0.6 million in the first quarter of 2020 compared to $0.4 million in the fourth quarter of 2020.

Production expense for the second quarter of 2021 is projected to be between $15 million and $17 million or $24.50 to $27 per barrel of oil sales. Keep in mind that all of the guidance we are providing today includes the positive impact from the additional volumes we acquired from the Sasol effective on the day we closed February 25, 2021. So the second quarter of 2021 will include all 3 months of financial results with Sasol's interest included. Our production expense guidance excludes any potential future impacts from the COVID-19 pandemic, not currently being experienced.

DD&A for the first quarter was $4.1 million or $6.70 per net barrel of oil sales compared with $1.3 million or $4.37 per barrel in the fourth quarter of 2020 and $3.1 million or $10.55 per barrel in the first quarter of 2020. DD&A was higher comparable to the fourth quarter of 2020 due to higher depletable costs associated with the Sasol acquisition and increased sales. The Q1 2020 DD&A rate was lower in the first quarter of 2020 due to the added costs associated with the 2019/2020 drilling campaign being included in the depletable base in 2020.

General and administrative expense for the first quarter of 2021, excluding stock-based compensation expense was $3 million compared with $2.5 million in the fourth quarter of 2020 and $3.4 million in the first quarter of 2020. The increase in Q1 2021 compared to Q4 2020 were results of increased employer taxes and increased 401 contributions due to larger employee contributions in their 401(k), increased salaries, increased legal fees and higher accounting and audit-related fees.

The per unit G&A rate, excluding stock-based compensation expense in the first quarter of 2021 was $4.83 per barrel of oil sales was significantly lower than both the fourth quarter and the first quarter of 2020 due to increased sales volumes. For the second quarter, we are forecasting G&A, excluding stock-based compensation, to be between $3.5 million and $4.5 million or $5.60 to $7.20 per barrel.

Noncash stock-based compensation expense was impacted by the change in the SARs liability as a result of changes in the company's stock price during the quarter. For the first quarter of 2021, stock-based compensation expense related to SARs was an expense of $1.2 million compared to a benefit of $2.7 million for the first quarter of 2020. For the fourth quarter of 2020, there was an expense of $1.9 million related to SARs.

Turning now to taxes. Income tax expense for the 3 months ended March 31, 2021, was $3.1 million. This is comprised of $0.3 million of deferred tax benefit and a current tax provision of $3.4 million. The deferred income tax expense for the 3 months ended March 31, 2021, included a $2.2 million income tax benefit associated with the Sasol acquisition. Income tax expense for the fourth quarter of 2020 included a $2.8 million deferred tax benefit and a current tax provision of $2 million. Income tax expense for the first quarter of 2020 included a $35.7 million of deferred tax expense and a current tax benefit of $2.2 million.

Since March of 2020, VAALCO's overall effective tax rate was impacted by nondeductible items associated with operations and deducting foreign taxes rather than crediting them for U.S. tax purposes. At March 31, 2021, we had an unrestricted cash balance of $19.3 million, which included $1.7 million in net joint owner advances. Working capital at March 31, 2020, was a negative $15.8 million compared with a positive $11.4 million at December 31, 2020, while adjusted working capital at March 31, 2021, totaled a negative $2.7 million compared with a positive $24.3 million at December 31, 2020. For the first quarter of 2020, net capital expenditures, excluding acquisitions, totaled $1.2 million on a cash basis and $2.5 million on an accrual basis.

These expenditures were primarily related to equipment enhancements as well as early costs associated with the next drilling program. As has been the case since the second quarter of 2018, we are carrying no debt. With this, I will now turn the call back over to George.

Thank you, Jason, and thank you for that. I'll just do some closing comments. As we look at 2021 and beyond, this is a very exciting time for VAALCO. I believe it is paramount that businesses are sustainable in order to provide benefits to all stakeholders with a focus on growth and investor returns. This is one of my guiding principles I successfully applied in my previous executive roles, and I am energized to build a successful foundation and lead the existing teams to grow VAALCO to the next level. Our Board has empowered our management team to create a working environment that assures our success as a trusted operator, a generous partner to the communities where we operate and a good steward to the environment.

We are enhancing our presence in the U.K. and international markets and move that we believe will support VAALCO's accretive growth strategy and maximize shareholder returns. We have a strong asset base at Etame that is generating meaningful free cash flow in the current pricing environment, which was evident in our Q1 2021 results.

Sustained operational excellence and robust financial performance at Etame serves as a foundation for growing VAALCO through the organic drilling and future accretive acquisition opportunities in line with our strategy. As an example of our commitment to sustained operational excellence, we have signed an LOI for a new FSO unit that will reduce our operating cost by 15% to 25%, and provide us additional operational flexibility moving forward. In April of this year, we also purchased a hydraulic workover unit that we have used in the past for less than $2 million out for total consideration. This unit is in Gabon and ready to be deployed at a moment's notice. It will allow us to respond to any well downtime issue quickly, which will save us significant time, production and [cash flow] should an ESP unit go down.

Additionally, it will allow us to be proactive in changing out ESPs and performing workovers, which will further improve our operational uptime at Etame. But we are not simply looking to maintain production in Gabon and EG. There are meaningful development opportunities on our blocks in both countries that can enhance our business and provide a strong platform for organic growth and increased cash flow.

As we continue to increase cash flows, we will also evaluate ways to return some of that free cash flow to a [ship] VAALCO has developed shareholder -- share repurchase programs in the past, and we will consider similar programs in the future as well as potential dividends to complement our growth strategy. As you can see, we are executing our strategic vision and profitability growing VAALCO. Later this year, we will begin another drilling campaign at Etame. And with our recent additional hedges, we have locked in sufficient cash flow generation from operations to fully fund this program regardless of the oil price environment. We believe that VAALCO has a bright future, and we remain committed to sustainably growing VAALCO through accretive acquisitions and successful drilling campaigns at Etame.

With that, I would like to thank you and pass it back to the operator for [us] ready to take questions.

(Operator Instructions) And our first question today comes from John White from ROTH Capital.

George, let me offer my congratulations on your appointment as CEO of VAALCO.

Thank you, John.

My first question is regarding the switch -- the potential switch from the FPSO to the FSO. You've talked in detail about reduction in operating costs. I believe you touched on capacity, but could you talk a little bit more about capacity and the ability of the new FSO to handle higher production in future years?

Yes, of course, I can do that. The proposed FSO that we're -- we signed the letter of intent on is a storage max capacity with a storage of in excess of 1 million barrels. So it has the capability for us to discharge larger parcel sizes for our crude oil sales. And it avoids the risk of us ever coming to tank tops, which is one of the issues that occasionally impacts operations and operators with smaller storage capabilities, such as the current FPSO that we have at the moment. It's also a much younger vessel than the one that's currently in the field by at least 20 years. And we have, obviously, the benefits and the technology of a younger vessel that come with that.

So when we look at the economics, it clearly is the vast reduction in the lease cost, both charter and an O&M position that's giving us the initial drive OpEx that we announced in the RNS few weeks ago. But there is the added potential there to start looking at larger cargo sizes, which will give us an efficiency of oil price when we look at the sales balance. Hopefully, that's answered your question.

Yes. Thank you for that detail. With production, about 70% hedged for most of the year, is there any consideration to start the new drilling program sooner? Or do you still need some time to work on the new seismic that was shot latter part of 2020 in early '20 or '21?

Yes. No, that's a good question. Whenever you're embarking on these types of campaigns, there are 3 key elements that you have to consider before you make a commitment on timing. The first and most obvious key consideration is financial. So have you put yourself in a position where you can commit to the campaign without putting the company in any sort of financial stress, and we've done that.

The second point that you touched on is, are we comfortable with the surface and subsurface location targets for both the step out wells and the appraisals with relation to the processing that's currently underway. And for the timing of the wells, we're very comfortable with that position right now. And the probability of success on these wells will not change in any substantive form based on the reprocessing. We may move the subsurface target by a meter or 2, but nothing more than that.

But the third and most important thing to consider when you're looking to execute a program such as ours is making sure that you have all the assets in place at the right time. And those assets are available to you and ready and able to execute the program when you're ready to commit to it. And currently, we're looking at assets that fit into that time horizon that we're considering. It would really be a little bit of a stretch to move that forward. So that's really the pacing item for us with regard to the timing of the program right now is asset availability.

And when you talk about asset availability, you're talking about a drilling rig that meets your requirements?

Absolutely. Looking at -- I mean, of course, globally, there are lots of drilling rigs available, but we try to optimize both with drilling rig capability and geographical location that can reduce the mob and demob cost. So that's really what the pacing item for us.

Our next question comes from Stephane Foucaud from Auctus Advisers.

It's Stephane Foucaud. I got 2. The first one is around the FSO LOI, what would you expect to firm up that LOI in something committed? And why is it just an LOI rather than -- what is it a nonbinding rather than binding? Is it that you expect something potentially more attractive? And my second question is a quick one. It's around accounting. I was -- I think I read the press release earlier that the -- I think the payment for -- the final payment for the acquisition was $29.6 million, but the account on the cash flow only shows $18 million. So I was wondering whether you could comment on that whether [no] payment coming or whether you just -- that I misunderstood something.

Thank you, Stephane. I'll deal with the first question, and I'll pass the other one to Jason with regard to the accounting on the acquisition. With relation to your first question, on the -- why the LOI, why nonbinding and do we expect any changes. Well, we look at -- it's very similar to John's question on drilling rigs.

When we looked at the opportunity to move from an FPSO to an FSO, we did a very detailed scanning of the market to what fits our requirements, where we could see particularly in-field enhancements, both in capacity for storage and operational positions and capabilities that a new FSO could provide us. When we started to narrow down that particular skill set and asset availability, very quickly came to a position where there weren't many assets available that met this criteria that we were looking for.

So the reason we jumped in with a nonbinding LOI was initially to secure our position on this asset. There's very little point doing the level of detailed engineering that we have done to date and continuing to finalize that contractual position that we can't be sure this is the asset that we're actually going to place in the field. So that was the main driver for the nonbinding LOI. With regard to the cost structure, we're firming that up right now, but there's nothing that we've seen to date that would give us any indication that the indicative cost positions that we've declared are not going to be achieved. And Jason, if you want to step in with the question on the acquisition of accounting?

Thank you, George. So on the cash flow statement for the Sasol acquisition, I believe you see there's total cash out the door of roughly $17.9 million. And indeed, you're correct that this year, we paid $29.6 million to Sasol. But as part of the business combination, Stephane, we also got $11.8 million in restricted cash. And so if you take the $29.6 million that we pay Sasol and you subtract from that, the $11.8 million of funds that we received in this, you get to the $17.9 million, which is what's included in the cash flow statement.

Our next question comes from Bill Dezellem from Tieton Capital.

That's Tieton Capital. I have a group of questions, and I'd like to start also with the FSO and very specifically, what is the capacity relative to the current FSO on a daily production basis as opposed to the total storage basis, which I believe you gave earlier?

Okay. To answer your first question. Processing capacity is completely different from storage capacity as you've alluded to. Our processing capacity on the current FPSO is circa 25,000 barrels per day of liquids. That processing capacity will not change by the processing being moved to the platform, so we will maintain a 25,000 barrel per day of liquid processing capacity within the field. And when we look at the storage capacity, I think have increased by about 400,000 barrels with the FSO, if memory serves.

Great. Second question is relative to your production guidance, you raised the second half production guidance, as you noted in your opening remarks. What led to that increase?

The main cause or the main position behind that increase, Bill, is moving forward the workover from Q4 into Q3.

Great. And then lastly, would you please repeat the production impact from the drilling program? I think you were mentioning that in your opening remarks, and I just missed it.

Yes. The impact of the drilling would be between 7,000 and 8,000 barrels per day growth. And I think the NRI from VAALCO will be 3,800 to 4,100 barrels per day.

And just for perspective, that's on top of the guidance that you've given for the second half of 7,200 to 8,000 barrels per day, literally adding another 4,000 barrels a day on top of that or roughly a 50% increase.

Yes. That would be correct, less, obviously, the decline curve going forward from December through to when we have all those 4 wells on stream.

Our next question comes from Jamie Wilen from Wilen Management.

George, 3 different areas. First, on the FSO. Given the favorable economics that the new storage vessel will have. Are there any clauses in the existing contract that we could not terminate sooner, to take advantage of these sooner? Is there some termination fee that we'd have to pay if we decided to move quicker?

To answer your question, there would be termination fees within the FPSO if we look to shut down that contract earlier. However, that's not really -- even though sometimes the termination fee is an attractive option given the levels of OpEx that you would expect to save in the same period. However, that's not really available to us. We've got -- when you look at the project time line with Omni from the point of a contractual commitment, we take this vessel and she goes into dry dock for a period of months to basically get not just into class but get class certification for the next 5 years from on station, which is automatically enrolled for a further 5 years. So we're making sure this vessel is fit for function on station in the field from 2022 through to at least 2032. So there's not really a significant opportunity time window to accelerate that refurbishment process in dry dock and get that vessel into field and take advantage of that. That's the first issue.

The second issue is also we have some infield modifications to perform on the platforms and with some of the flow lines that will also be done during this time that the FSOs in dry dock. So we don't really have, from an engineering standpoint that window you were looking at where we could accelerate that OpEx saving.

Okay. And when this transition occurs, is there a shutdown time to be -- that we will have to endure in 2022 to accommodate the new vessel?

Yes, we will. We'll have a shutdown period. It may be as long as a week or 2. But what we look to do is coordinate that with our annual maintenance program, so we're not looking at an additional shutdown period during hookup.

Okay. And George, on the drilling program, obviously, oil prices have been all over the map in the last 12 months. What are the current rig rates or what kind of daily rig rate would you expect to pay?

Indicatively, the rig -- I mean, we're in discussions just now. So I'm probably not going to mention what rate I would happily pay. It might [pressure] some of the discussions we're having. But what we're seeing indicatively right now, it's not out of the market from where the campaign was performed in 2019, 2020.

Okay. Excellent. And lastly, in the commentary, you mentioned that you would have free cash flow this year of $65 million. Yet you also mentioned that the free cash flow over the next 12 months would be sufficient to cover the FSO, the drilling campaign and any future buyback program. Now I calculate that number to be -- before the -- any buyback program, $98 million to $110 million over the next 12 months versus what you were projecting at $65 million free cash flow during 2021. Can you reconcile those differences in numbers?

Yes. I mean, the main difference is when we're quoting our free cash flow position for this year on existing production, we're taking the wells that are onstream right now. In order to get to a position where we're confident that we cover all of our CapEx expenditures, that's a success-based scenario taking wells onstream next year from the ['20] -- the upcoming drilling campaign and the increase in production. And that's what balances that particular delta.

So if you look at where we are with a $65 million position right now, and if you roll that forward into the end of -- potentially the end of the drilling campaign in April 2022 -- or April, May 2022, you could extrapolate that to about $85 million position, but that's going to be enhanced by the additional production coming on stream from these wells.

(Operator Instructions) Our next question comes from John White from ROTH Capital.

Yes. I noticed there is not a lifting for the month of April on your website. Is that to be posted shortly? Or is there a reason for that?

No, there's no reason for that. I mean the issue and all of these things, John, is that whenever we're doing liftings, they're a mixture of the lifting size and what we're producing. So we have liftings ongoing almost every month. But there are periodic times where our parcel size may be requested a size larger than we could accommodate a monthly position, and we obviously look to accommodate the buyers to satisfy that. So that sometimes gives us positions of not quite a monthly periodization.

Okay. So you'll be posting an April lifting?

We'll be posting a lifting in May, that's definite. Yes.

And our next question comes from Charlie Sharp from Canaccord.

It's another one about the FSO, if I may. And I just wonder you've outlined in some detail the advantages in terms of cost savings down the line of using the FSO. Is there some chance that there may be operating costs transferred onto the current producing facilities themselves once you introduce the FSO that are currently part of the FPSO? And then secondly, I just wondered if there are any particular engineering risks, given the diverse configuration of producing assets that you have, including subsea tieback wells that might cause some concern in the transfer to the FSO.

Thank you, Charlie. On your first question, no, there is no material transferring of production costs moving the production onto the existing platform capability. What we are doing is, obviously, we're enhancing on the CapEx side, the production capability with a couple of additional index on the Avouma platform. But there's not a significant OpEx position to include in that redirection of processing.

With regard to the cost savings or the engineering and the in-field activities. Yes, right now, you're correct that the 2 subsea wells tied back to the FPSO. We do have a redirection of those wells into the platform. Most of the infrastructure work, as I mentioned, relates to a couple of wing decks on Avouma, some flow redirection on existing lines and a new line moving towards the platform for the subsea line. So there's not -- there's no significant engineering technology or engineering activity, both topside or subsea that is not well within our capabilities or standard.

There are, as you've asked, potential operating savings from the moving configuration that we're planning for the FSO, which will basically being currently moved as a weather vane and that gives us potential savings on offload positions because we will have the vessel moving with the current as opposed to having to try and get tankers alongside the existing vessel, which is sometimes against the current. So there's no major engineering issues, and I think there are some environmental options for us that make the operation certainly a less risk environment.

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to management for any closing remarks.

Yes. I'd like to -- as my first call as your Chief Executive, I'd like to thank everyone for the questions. I think we are, as a company, very excited by the opportunities we have in front of us. We have an excellent producing asset, and we have some key upside assets in EG that have development potential. And I think given the turbulence that we saw in 2020, the 2021 and beyond into 2022 looks an exciting growth period for VAALCO certainly.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.