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| EGY > SEC Filings for EGY > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
This report includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended ("Exchange Act"). All statements
other than statements of historical fact included in this report (and the
exhibits hereto), including without limitation, statements regarding the
Company's financial position and estimated quantities and net present values of
reserves, and statements preceded by, followed by or that otherwise include the
word "believes," "expects," "anticipates," "intends," "projects," "target,"
"goal," "objective," "should," or similar expressions or variations of such
expressions are forward looking statements. The Company can give no assurances
that the assumptions upon which such statements are based will prove to have
been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") include the
volatility of oil and natural gas prices; future production costs; future
production quantities; the uncertainty of estimates of oil and natural gas
reserves; the impact of competition; the availability and cost of seismic,
drilling and other equipment; operating hazards inherent in the exploration for
and production of oil and natural gas; difficulties encountered during the
exploration for and production of oil and natural gas; difficulties encountered
in delivering oil to commercial markets; general economic conditions, including
the current economic and financial market crisis; changes in customer demand and
producers' supply; the uncertainty of the Company's ability to attract capital;
compliance with, or the effect of changes in, the foreign governmental
regulations regarding the Company's exploration and production, including those
related to climate change; action of operators of the Company's oil and natural
gas properties; political turmoil in the Republic of Gabon; weather conditions;
and statements set forth in the "Risk Factors" section included in this report
and in the Company's Form 10-K. All subsequent written and oral forward looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified by the Cautionary Statements.
INTRODUCTION
The Company operates oil production sharing contracts in Gabon and Angola, and has non-active interests in two blocks in the British North Sea. In addition, the Company has minor onshore and offshore domestic United States production in the Gulf of Mexico.
The Company's primary source of revenue is from the Etame Production Sharing Contract related to the Etame Marin block located offshore the Republic of Gabon. The Company has a 30.35% interest (28.1% net interest after the government back-in) in the block and produces from the Etame, Avouma, South Tchibala and Ebouri fields on the block. Oil production commenced from the Etame field in September 2002 and from the Avouma and South Tchibala fields in January 2007. Most recently, the Company developed the Ebouri field. Production from the first well in this field began in January 2009. A second development well began producing oil in April 2009. During the first nine months of 2009, the Etame, Avouma, South Tchibala and Ebouri fields produced approximately 6.2 million barrels (1.5 million barrels net to the Company).
Beginning in November 2008, drilling began on the first of two exploration wells, both of which are located within the Etame Marin block. The first of these wells, the North Ebouri, encountered substantial oil-filled Gamba sandstone, proving-up significant additional reserves north of the originally mapped field development outline. The second well, the North Etame prospect, encountered water bearing sands and has been abandoned. Additional drilling prospects have been identified and planning is underway to conduct a multi-well drilling program which is expected to commence in December 2009.
Onshore Gabon, the Company has a 100% working interest in the Mutamba Iroru block located near the coast in central Gabon. The Mutamba Iroru block contains approximately 270,000 acres for exploration. The Company acquired aeromagnetic gravity data in 2008 and, together with seismic data acquired from previous operators over the Mutamba Iroru block in 2006 and 2007, drilled two exploration wells on this block in 2009. Both wells encountered water bearing sands and were abandoned. Future plans for this block are being evaluated.
In November 2006, the Company signed a production sharing contract for a 40% working interest in Block 5 offshore Angola. The seven-year contract awards the Company exploration rights to approximately 1.4 million acres along the central coast of Angola. The Company has acquired approximately 1,700 square kilometers of seismic data over a portion of the Block 5 and has been interpreting the seismic data. Assuming consortium agreement on the well objectives and rig availability, the Company expects to begin drilling the two exploration wells in the second half of 2010.
In January 2008, the Company signed a farm-in agreement for a 25% working interest in Block 48/25c located in the Southern Gas Basin offshore in the British North Sea. The Company was obligated to pay its share of the drilling of one exploratory well on the block, the drilling of which took place in the first quarter of 2009. A substantial gas column was present but with low permeability and porosity. The well was deemed to be non-commercial and was abandoned.
Impact of the Current Financial and Credit Markets
The financial markets continue to undergo unprecedented disruptions although there are recent measures of improvement in this area. Many financial institutions have had liquidity concerns prompting intervention from governments. The Company's exposure to the disruptions in the financial markets includes the Company's ability to access the capital markets and investments exposure.
Because of limited use, the Company's credit facility with the International Finance Corporation ("IFC") was terminated in October 2009 and the outstanding loan balance was repaid in mid-October 2009. The Company does not believe that it is necessary to replace the facility at this time. However, if the disruption in the financial markets continues for an extended period of time, replacement of the credit facility may be more expensive.
Current market conditions also elevate concerns with the Company's cash investments, which at September 30, 2009 totaled $100.8 million including funds in escrow. With regard to the Company's cash investments, the Company invests in bankers acceptances and money market instruments primarily with JPMorgan Chase & Co. The Company's production in Gabon is purchased by Total Oil Trading SA ("Total"), which the Company believes to be a creditworthy purchaser.
Oil and gas prices are also volatile as evidenced by the fluctuations seen in the past two years. In periods where commodity prices are relatively low, the Company's cash flows from operations will be negatively impacted.
CAPITAL RESOURCES AND LIQUIDITY
Cash Flows
Net cash provided by operating activities for the nine months ended September 30, 2009 was $19.6 million, as compared to $65.5 million for the nine months ended September 30, 2008. The decrease in net cash provided by operations for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 was primarily due to lower net income and changes in working capital other than cash which used $22.7 million for the nine months ended September 30, 2009, compared to $0.6 million used for the nine months ended September 30, 2008.
Net cash used in investing activities for the nine months ended September 30, 2009 was $49.1 million, compared to net cash used in investing activities for the nine months ended September 30, 2008 of $24.7 million. For the nine months ended September 30, 2009, the Company incurred $32.6 million in dry hole costs and the remaining cash used in investing activities was primarily invested in an appraisal well and two development wells in the Ebouri field. For the nine months ended September 30, 2008, the Company invested $16.0 million in the Etame Marin block operations, primarily for development of the Ebouri field and incurred $6.2 million of dry hole costs for a British North Sea well.
For the nine months ended September 30, 2009, cash used in financing activities was $11.6 million, consisting primarily of distributions to a noncontrolling interest holder of $4.5 million and purchase of treasury shares worth $7.2 million. For the nine months ended September 30, 2008, cash used in financing activities was $13.7 million consisting of $5.0 million used for distributions to a noncontrolling interest holder and $8.9 million for the purchase of treasury shares.
Capital Expenditures
During the nine months ended September 30, 2009, the Company invested $20.9 million in net property and equipment additions (including amounts carried in accounts payable at September 30, 2009 and excluding exploration dry hole costs), primarily associated with the drilling of the three wells in the Ebouri field (the appraisal well plus the two development wells drilled from the Ebouri
platform) totaling $19.9 million. Partially offsetting these equipment additions was a realignment agreement with a joint venture partner that originally did not participate in an appraisal well and one of the development wells in the Ebouri field. Pursuant to the realignment agreement, the joint venture partner paid its proportionate share of capital expenditures for the wells, which reduced the Company's property and equipment by $5.7 million. Also partially offsetting the net property and equipment additions were 2008 capitalized exploration well costs that were subsequently charged to expense in 2009 totaling $3.0 million. During the remainder of 2009, the Company anticipates drilling one exploration well in the Etame Marin block at a cost of $4.4 million and expending an additional $2.0 million for equipment for the 2010 drilling program.
Liquidity
Historically, the Company's primary sources of capital have been cash flows from operations, private sales of equity, and debt. At September 30, 2009, the Company had cash of $100.8 million including amounts in escrow. The Company believes that this cash combined with cash flow from operations will be sufficient to fund the Company's remaining 2009 and 2010 capital expenditure budgets, and operational needs. The Company invests cash, not required for immediate operational and capital expenditure needs, in short-term bankers acceptance and money market instruments primarily with JPMorgan Chase & Co. As operator of the Etame Marin block and Block 5 in Angola, the Company enters into project related activities on behalf of its working interest partners. The Company generally obtains advances from it partners prior to significant funding commitments.
In June 2005, the Company executed a loan agreement with the IFC for a $30.0 million revolving credit facility which is secured by the assets of VAALCO Gabon (Etame), Inc., the subsidiary which owns the Company's interest in the Etame Marin block. Because of limited use of the credit facility by the Company, the IFC elected not to offer an extension of the undrawn balance capacity. Although the loan balance could have been converted to a term loan, the Company, decided to repay the outstanding debt obligation of $5 million plus interest in mid-October 2009. Under the revolving credit facility, the IFC held a pledge of the Company's interest in the Etame Marin block, and a pledge of the shares of VAALCO Gabon (Etame), Inc. The IFC also had a security interest in any crude oil sales contract the Company entered into for the sale of crude oil from the Etame Marin block. The pledges are in the process of being released. The Company does not have plans to replace the credit facility at this time.
Substantially all of the Company's crude oil and gas is sold at the well head at posted or index prices under short-term contracts. In Gabon, the Company markets its crude oil under an agreement with Total. While the loss of Total as a buyer might have a material adverse effect on the Company in the near term, management believes that the Company would be able to obtain other customers for its crude oil.
Domestically, the Company produces from wells in Brazos County Texas and offshore in the Gulf of Mexico, which contributed $61,000 to revenues in the nine months ended September 30, 2009. Domestic production is sold via separate contracts for oil and gas. The Company has access to several alternative buyers for oil and gas sales domestically.
Oil and Gas Exploration Costs
The Company uses the "successful efforts" method of accounting for its oil and gas exploration and development costs. All expenditures related to exploration, with the exception of costs of drilling exploratory wells, are charged as an expense when incurred. The costs of exploratory wells are capitalized pending determination of whether commercially producible oil and gas reserves have been discovered. If the determination is made that a well did not encounter potentially economic oil and gas quantities, the well costs are charged as an expense. During the nine months ended September 30, 2009, the Company spent $32.6 million on unsuccessful exploration wells, including $20.7 million for two wells in onshore Gabon, $2.7 million for a well in offshore Gabon, and $9.2 million for a well in the British North Sea.
RESULTS OF OPERATIONS
Three months ended September 30, 2009 compared to three months ended September 30, 2008
Revenues
Total revenues were $29.3 million for the three months ended September 30, 2009 compared to $55.5 million for the comparable period in 2008. The Company sold approximately 436,000 net barrels of oil equivalent at an average price of $67.07 per barrel in the three months ended September 30, 2009. In the three months ended September 30, 2008, the Company sold approximately 517,000 barrels of oil equivalent at an average price of $107.48 per barrel. Crude oil production from the Etame, Avouma, South Tchibala and Ebouri fields averaged 23,300 barrels of oil per day ("BOPD") in the three months ended September 30, 2009 compared to approximately 20,800 BOPD in the three months ended September 30, 2008. Crude oil sales are a function of the number and size of crude oil liftings in each quarter from the FPSO and thus crude oil sales do not always coincide with volumes produced in any given quarter.
Operating Costs and Expenses
Total production expenses for the three months ended September 30, 2009 were $5.7 million compared to $5.9 million in the three months ended September 30, 2008. The Company matches production expenses with crude oil sales. Any production expenses associated with unsold crude oil inventory are capitalized. Production expenses in the three months ended September 30, 2009 were slightly lower than in the three months ended September 30, 2008 due to higher unsold crude oil inventory offset by higher FPSO costs.
Exploration expense was $0.9 million for the three months ended September 30, 2009 compared to $0.3 million in the comparable period in 2008. For the three months ended September 30, 2009, exploration expense consisted primarily of additional dry hole costs incurred on the two unsuccessful exploration wells in onshore Gabon of $0.5 million and $0.1 million for the unsuccessful exploration well in the British North Sea. Exploration expense for the three months ended September 30, 2008 consisted of seismic processing costs in Angola.
Depreciation, depletion and amortization expenses were $4.4 million in the three months ended September 30, 2009 compared to $6.0 million in the three months ended September 30, 2008. The lower depreciation, depletion and amortization expenses during the three months ended September 30, 2009 compared to the three months ended September 30, 2008 was primarily due to lower volumes of oil sold.
General and administrative expenses for the three months ended September 30, 2009 and 2008 were $3.3 million and $1.5 million for each period, respectively. Included in the general and administrative expenses for the three months ended September 30, 2009 was an expense for retirement benefits of $0.3 million, and other employee related expenses of $0.4 million. During the three months ended September 30, 2009 and September 30, 2008, the Company incurred stock based compensation expense of $0.4 million and $0.2 million, respectively. In the three months ended September 30, 2009, the Company benefited from overhead reimbursement
associated with production and development operations on the Etame Marin block which reduced general and administrative expenses by $0.3 million compared to a $0.6 million reduction of general and administrative expenses in the three months ended September 30, 2008. Included in the general and administrative expenses for the three months ended September 30, 2008 were non-recurring legal and solicitation costs associated with the Company's annual meeting.
Other operating income for the period ended September 30, 2009 was $4.5 million attributable to receipt of proceeds from a joint venture partner that originally elected to not participate in two wells drilled in the Ebouri field, offshore Gabon. The partner later elected to participate and paid for their proportionate share of the capital expenditures for the wells. The $4.5 million payment received in the period ended September 30, 2009 plus the $2.0 million payment received in the period ended June 30, 2009 represents the Company's share of an agreed risk premium benefiting the other joint venture partners that originally participated in those two wells.
Other Income (Expense)
Other expense was $1.2 million in the three months ended September 30, 2009 compared to $0.6 million in other income in the three months ended September 30, 2008. The increase in other expense in the three months ended September 30, 2009 included foreign exchange losses of $0.8 million, an interest adjustment to interest accrued on an escrow account of $0.2 million and lower interest rates on deposits in the three months ended September 30, 2009 as compared to the same period of 2008.
Income Taxes
Income taxes amounted to $13.3 million and $17.4 million for the three months ended September 30, 2009 and 2008, respectively. In the three months ended September 30, 2009 and in the three months ended September 30, 2008, the income taxes were all paid in Gabon. Income taxes in the three months ended September 30, 2009 were lower due to lower oil prices and crude oil sales volumes, which decreased taxable revenues.
Net Income
Net income for the three months ended September 30, 2009 was $5.1 million, compared to net income of $25.0 million for the same period in 2008. Lower oil prices and lower crude volumes sold were the primary reasons for the lower net income in 2009. Net income allocated to noncontrolling interest was $0.9 million and $2.7 million in the three months ended September 30, 2009 and 2008, respectively. The noncontrolling interest is associated with VAALCO Energy (International), Inc., a subsidiary that is 90.01% owned by the Company.
Nine months ended September 30, 2009 compared to nine months ended September 30, 2008
Revenues
Total revenues were $82.7 million for the nine months ended September 30, 2009 compared to $153.1 million for the comparable period in 2008. The Company sold approximately 1,483,000 net barrels of oil equivalent at an average price of $55.69 per barrel in the nine months ended September 30, 2009. In the nine months ended September 30, 2008, the Company sold approximately 1,428,000 barrels of oil equivalent at an average price of $107.21 per barrel. Crude oil production from the Etame, Avouma, South Tchibala and Ebouri fields averaged 22,900 BOPD in the nine months ended September 30, 2009 compared to approximately 21,800 BOPD in the nine months ended September 30, 2008. Crude oil sales are a function of the number and size of crude oil liftings in each quarter from the FPSO and thus crude oil sales do not always coincide with volumes produced in any given quarter.
Operating Costs and Expenses
Total production expenses for the nine months ended September 30, 2009 were $15.9 million compared to $14.9 million in the nine months ended September 30, 2008. The Company matches production expenses with crude oil sales. Any production expenses associated with unsold crude oil inventory are capitalized. Production expenses in the nine months ended September 30, 2009 were higher than in the nine months ended September 30, 2008 primarily due to increased sales volumes and higher FPSO costs.
Exploration expense was $34.8 million for the nine months ended September 30, 2009 compared to $8.3 million in the comparable period in 2008. Exploration expense for the nine months ended September 30, 2009 included $32.6 million of dry hole costs. The dry hole costs included $9.2 million for a well in the British North Sea, $20.7 million for two wells in onshore Gabon and $2.7 million for a well in offshore Gabon. Additionally, seismic processing costs in Angola totaled $0.8 million for the nine months ended September 30, 2009. Exploration expense for the nine months ended September 30, 2008 included $6.4 million of dry hole costs associated with a well drilled by the Company in the British North Sea. Also included in 2008 exploration expenses were aeromagnetic gravity data acquired over the Mutamba Iroru block, onshore Gabon, and seismic costs associated with the Company's Etame Marin block and Angola.
Depreciation, depletion and amortization expenses were $15.7 million in the nine months ended September 30, 2009 compared to $16.2 million in the nine months ended September 30, 2008. The lower depreciation, depletion and amortization expenses during the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 were due to lower depletion rates, primarily associated with the Avouma field. The lower depletion rates more than offset the slightly higher volumes of crude sold in the nine months ended September 30, 2009 compared to the same time period in 2008.
General and administrative expenses for the nine months ended September 30, 2009 and 2008 were $7.1 million for each period. Included in the general and administrative expenses for the nine months ended September 30, 2009 was an expense for retirement benefits of $1.5 million which was partially offset by a retroactive compensation adjustment of $0.9 million that benefited the Company by charging the adjustment to the Gabon partners. During the nine months ended September 30, 2009, the Company incurred $1.5 million of stock based compensation compared to $0.7 million incurred in the nine months ended September 30, 2008.
Included in the general and administrative expenses for the nine months ended September 30, 2008 were non-recurring legal and solicitation costs associated with the Company's annual meeting. In both of the nine months ended September 30, 2009 and September 30, 2008, the Company benefited from overhead reimbursement associated with production and development operations on the Etame Marin block.
Other operating income for the nine months ended September 30, 2009 was $6.5 million attributable to receipt of proceeds from a joint venture partner that originally elected to not participate in two wells drilled in the Ebouri field, offshore Gabon. The partner later elected to participate and paid for their proportionate share of the capital expenditures for the wells. The $4.5 million payment received in the period ended September 30, 2009 plus the $2.0 million payment received in the period ended June 30, 2009 represents the Company's share of an agreed risk premium benefiting the other joint venture partners that originally participated in those two wells.
Other Income (Expense)
Other income for the nine months ended September 30, 2009 and 2008 were $0.4 million and $1.6 million, respectively. Interest income received on amounts on deposit was $0.5 million in the nine months ended September 30, 2009 compared to $2.0 million in the nine months ended September 30, 2008. The decrease in interest income received on amounts on deposit reflects lower interest rates and amounts invested in 2009. Interest expense and financing charges was $0.5 million, net of capitalized interest expense in both the nine months ended September 30, 2009 and 2008, all associated with the Company's IFC loan.
Income Taxes
Income taxes amounted to $23.0 million and $65.2 million for the nine months ended September 30, 2009 and 2008, respectively. In the nine months ended September 30, 2009 and 2008, the income taxes were all paid in Gabon. The lower income taxes paid in Gabon in nine months ended September 30, 2009 were due to substantially lower oil prices, which decreased taxable revenues.
Net Income
Net loss for the nine months ended September 30, 2009 was $7.0 million, compared to net income of $42.9 million for the same period in 2008. A combination of exploration dry hole write-offs, and lower oil prices contributed to the lower net income in 2009. Net income allocated to noncontrolling interest was $3.1 million and $5.7 million in the nine months ended September 30, 2009 and 2008, respectively. The noncontrolling interest is associated with VAALCO Energy (International), Inc., a subsidiary that is 90.01% owned by the Company.
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