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Executives

Robert L. Gerry - Chairman and Chief Executive Officer

Gregory Hullinger - Chief Financial Officer

Russell Scheirman – President and Chief Operating Officer

Analysts

Leo Mariani - RBC Capital Markets

Bill Dezellem - Titan Capital Management

Neil Nelson - DERS Group

VAALCO Energy, Inc. (EGY) Q4 2012 Earnings Call March 15, 2013 11:00 AM ET

Operator

Ladies and gentlemen, we'd like to thank you for standing by and welcome to the End of the Year 2012 Earnings Report Teleconference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session with instructions being given at that time. (Operator Instructions). As a reminder, today’s conference call is being recorded.

I would now like to turn the conference over to your host and your facilitator as well the Chairman of the Board and CEO, Mr. Robert L. Gerry. Please go ahead sir.

Robert L. Gerry

Thank you, Steven, and good morning ladies and gentlemen and welcome to VAALCO Energy's 2012 and the fourth quarter conference call. Joining me today is, Russell Scheirman, our President and Chief Operating Officer; and Gregory Hullinger, VAALCO's Chief Financial Officer.

Please bear with me for a minute while I read our Safe Harbor statement. This conference call 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.

Forward-looking statements are those concerning VAALCO's plans, expectations, and objectives for future drilling, completion and other operations and activities. All statements included in this presentation that address activities, events or developments that VAALCO expects, believes, or anticipates will or may occur in the future are forward-looking statements. These statements include expected capital expenditures, prospect evaluations, negotiations with governments and third parties, and reserve growth.

Investors are cautioned that forward-looking statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. These risks are further described in VAALCO's Annual Report on Form 10-K for the year ended December 31, 2012, and other reports filed with the SEC that could be reviewed at www.sec.gov.

A few comments before I turn the meeting over to Greg for his financial review and then Russell for the operational update. Our earnings per share somewhat masked quite a strong 2012. Operating cash flow was high at $95 million and we increased our reserves by over 24%. We drilled at a discovery well on-shore Gabon, and we've entered into a new country in West Africa, Equatorial Guinea. We crept closer to drilling our much anticipated exploration well in Angola and we'll talk a little bit about that later on.

I think since we are successful efforts reporting company, our drilling and lack of success in Montana necessitated steep write-offs against earnings during the year and nullified what actually was a good year for the rest of our operations. Most of those write-offs are now history as we've decided to exit our domestic conventional shale plays and concentrate on our African holdings. Towards that end, we have closed our Denver office and have commenced the six-well drilling program offshore Gabon, which Russell will discuss further in his report.

The ever elusive start of our drilling in Angola is truly creeping forward. In our third quarter conference call, I mentioned we found a partner and I can assure you, we still have that partner. Our work program has been approved by the Angolan government and the only missing piece of paper is the assignment of the 40% working interest to our new partner.

Earlier this week, we were told that everything was in order and we would be notified shortly. We believe that will happen, and since all long read materials are in our yard and the sites [are] completed, all that is needed is that piece of paper to get started. We are continually monitoring the rig market and are led to believe our rig will be available when we are ready. I will have a few more comments later after Greg's and Russell's report.

With that I'll turn [it over to] Greg for his financial review.

Gregory Hullinger

Thank you, Bobby, and good morning everybody. Thank you for joining us for the call. I am just going to take you through a series of numbers here essentially talking about the fourth quarter and the full year results. And after I finish, I'll turn it over to Russ for the operations' update.

To start out, net income attributable to VAALCO for the fourth quarter was a minus $18.9 million, and as we know from what Bobby just mentioned and what you've read that's attributable to our lack of success on our drilling in Montana.

For the quarter of 2011, we had $8.7 million positive net income. For the full year 2012, VAALCO reported $0.6 million, compared to $34.1 million for 2011. And then earnings per share diluted basis for the quarter, we've lost a $0.33 a share, compared to $0.15 in quarter four of 2011. Full year, we were up $0.01 for 2012 compared to $0.59 for 2011.

On the cash side, we're sitting incredibly solid as we typically are. We ended the year at $130.8 million of unrestricted cash that compare to $137.2 million in the prior year. Restricted cash at the end of this year, or 2012 was $12.1 million, essentially the same as in 2011 at $12.2 million. The majority of that restricted cash is a guarantee for drilling two wells in Angola. We hold those funds in a bank in the United States.

Moving to oil revenues in Gabon, fourth quarter 2012, our oil revenues were $52.9 million, compared to $67 million in the same quarter a year ago. For the entire year, we were up $192.5 million, 8% lower than our 2011 figure at $208.8 million.

I'll show a little bit U.S. information as well. Our U.S. oil revenues from our Granite Wash properties for the fourth quarter was $200,000, exactly the same as the same period a year ago, and for the entire year oil revenues were at $800,000, compared to $300,000 in 2011.

Gas revenues in the U.S., which is primarily again Granite Wash. For the quarter were at $0.04 million, slightly less than a year ago in the same quarter at $0.05 million. For the entire year, our gas revenues were $1.9 million. And for the prior year, $1.3 million, so slightly up.

Talking about volumes and prices, if we look at the oil in Gabon, we lifted 482,000 barrels in the fourth quarter of 2012 that [compare] to 604,000 barrels in the same period a year ago. For the entire year, we lifted 1.7 million barrels, 7% lower than our 2011 [year] of almost 1.9 million barrels.

On the oil side, and those are gross numbers by the way, on the oil side in the U.S., we sold 2,000 barrels in the Granite Wash in the fourth quarter, the same number in the same period a year ago. For the entire year, we sold 10,000 barrels of Granite Wash oil compared to 4,000 barrels in 2011.

On the pricing side, we had strong pricing in oil in both, for our Gabon oil and our U.S. In the fourth quarter 2012, our Gabon oil price was $109.80. In the same quarter a year ago it was just slightly over $111. And for the entire year, it's almost identical for 2012 $111.24 on average and in 2011, $111.98. Oil prices in the U.S. for the fourth quarter, just hundred $78 for the same period a year ago, where it was $85.60. For entire year, we sold our oil at $81.68 a barrel, and in 2011, $79.71.

Real quickly gas volume prices and this again is primarily with our Granite Wash properties in Texas. In the fourth quarter 2012, we sold 111 million cubic feet, compared to 100 million cubic feet in the same quarter a year ago. For the entire year, we sold 532 million cubic feet in 2012, 255 million in 2011.

On the gas prices and these gas prices include liquids. Our price in the fourth quarter was $3.73, which is again combined. It's a dry gas price plus valuable liquid gas. In the fourth quarter a year ago, it's $5.06, so fairly dramatic decrease, but not on huge volumes. For the entire year 2012, we were at $3.66 and that compared to $5.23 for 2011, big decrease and there were the fallout of natural gas liquid prices during the course of 2012.

Moving to just a couple of indices here and expenses, production expenses during the fourth quarter were $8.7 million that compare to $11.2 million in the same quarter a year ago. For the entire year, we were identical at $26.7 million for both, 2012 and 2011. On a per barrel basis, in the fourth quarter of this year, we were at $17.33 a barrel. That compare to $18.2 a barrels a year ago and for the full year, $14.50 per barrel, this year $13.99 for last year.

The uptick in the fourth quarter and how [it's] impact the entire year is we renegotiated the FPSO rates, where we've got the FPSO on contract for several years and those are bit of a rate increase associated with that. Russell could actually talk more to this, but actually have a very good deal with our FPSO.

Exploration expenses is the big item obviously for the quarter and the year. During the quarter, we had exploration expense of $36.0 million and that's primarily associated with five domestic dry holes. For the same period a year ago, we were at $2.1 million, minimal exploration expense. For the entire year, we were at $41 million for 2012 compared to $5.7 million in 2011.

Depletion per barrel as Bobby mentioned, this one because the indices changed quite a bit for the quarter, we were at $6.36 a barrel, compared to $12.62, almost double year ago, for the full year, $10.88 a barrel. And for the entire year of 2011, $13.39. The reductions in those are primarily associated with the reserve increases that that we received at the end of the year from our independent reserve analysts. We take those rates and we take them back to our fourth quarter, so the increase in our reserves, which I believe Bobby mentioned, 24% increase has the positive impact of lowering the depletion rate per barrel.

Speaking of reserves real quickly, our proved reserves went up. Meanwhile, I pull the information here. So, we were up 24% of proved reserves up to little over $7.4 million barrels. Sorry.

And I moved from there, Bobby again mentioned that majority of the dry hole costs are behind us; we did have a [Pit Well] that we drilled. This was in South Dakota, which was unsuccessful. We have $2.8 million of that that we will recognize in the first quarter of 2013. The well was actually spudded in January of this year, and so majority of the cost associated with that well are 2013.

Lastly, I'll just mention that you probably saw that we had a acquisition of a non-controlling interests on the offshore. Etame block, the $26.2 million purchase is a little bit confusing, I can tell from some of the comments I have gotten. Our working interest does not change at all. We have a 28% working interest in the block, but that 28% working interest in the past was owned by an entity that VAALCO owned 90%, we had an opportunity to purchase the remaining 10% from another company that happen to have been a more of our partners but that really doesn’t matter, but we pick up that acquisition of that 10% for $26.2 million. And, so when you look at our financials and you see references to non-controlling interest in terms of revenue or distributions that ceased with the end of the third quarter of last year. If there's more questions on that, I'll be glad to take those on.

With that I'll turn it over to Russ to kind of take you through the operations' aspect.

Russell Scheirman

Thanks, Greg. I’ll go through our offshore Gabon, Etame, drilling plans and expansion plans and talk a little bit about the onshore discovery, introduce you to Equatorial Guinea and what we've done there and wrap up with a discussion on Angola.

But before I do that, I might, some of you may be aware that there is a nationwide strike by the oil union ongoing in Gabon. This came about as a result of a strike against Schlumberger that started around New Year. Schlumberger responded with releasing some employees and it's been a long strike against Schlumberger. It has not impacted our drilling operations. They've been providing services using expat personnel, which of course the union is not happy about, so they decided to attempt to make this a nationwide strike against all the service companies and all the producers. The strike has been going on for eight days now. Our production has not been affected. Our employees have chosen not to participate in the strike.

We have personnel that work for Tinworth, which operates the FPSO that we produce our oil into. They have union members. Those union members have chosen to participate in the strike in the form of providing quota" minimal services" in the form of reduced meals and reduced logorrhea and in some things that are, so they can at least report back to the national union that they are participating, so our production has not been affected to-date. Don’t know how much longer this is going to go on. It's a pretty recluse situation and it’s over the usual issues of expat workers no better wages and particularly over this issue of this Schlumberger strike, in fact that Schlumberger eliminated some employees in association with that strike. So, right now, we're producing in excess of 17,000 barrels a day and we hope to make it through and hopefully this thing will get settled in days not weeks.

So going into what we're doing at Etame, we start our drilling program with the 350-foot jack-up rig, the KCA Deutag Ben Rinnes at the beginning of this year. Our first well is a development well, the Avouma 3H well and we have successfully drilled that well to the target zone. As I mentioned at the last conference call, we had reprocessed seismic and we had identified our new area within the Avouma field that we thought was potential.

This new well found the Gamba five meters high to the Avouma 2H, which is the main producing well in the Avouma field or about 15 meters higher than what we had originally mapped that area, so we were successful in proving up new reserves in that area. The well is currently being completed with gravel-pack screens and next week, we'll be running in the submersible pump so that we can put the well on production later this month or early in April.

We estimate that the success of this well will increase the ultimate recovery of the Avouma field by 1.5 million to 2 million barrels. After we finish with that well, we've got two workovers Avouma move on tap. The first will be the return to South Tchibala 1H well production. That well has been down for a number of months because of both, pumps in the well failed. We'll replace those pumps and get that well back on production.

The second workover will be to replaced both pumps in the Avouma 2H well. In that well, one of the pumps failed. The other one is still working, so we are still producing that well, but we have a policy of income. We have a rig around and we have a failed pump. We are going to go ahead and replace go home, so that we have redundancy.

When we finish at Avouma, we'll then move over to the Ebouri platform. I think for the last two quarters, I talked about an exploration well there. It’s within the within the development area, so it's not officially an exploration well, but it is in a new default block. We'll be drilling that well. It has the potential to add 7 million barrels gross, which should be about 1.7 million barrels net to VAALCO. If it's successful, it's also deeper objectives in the Dentale. That could add another 1 million barrels or so if it is successful.

If that well works, we will complete that well as a producer. If it's in a fault block, it's markets south and deeper than the existing Ebouri field. You may recall that we had a couple of wells that started producing H2S back in July that we had shut in those wells or even northern end of the field and shallower, so we don’t anticipate any issues with H2S in this new test. We then got our remaining well in Ebouri the 2H well. It’s got one pump. It’s down, so we will only go ahead change out both pumps in that, so that we'll have fresh pumps in there that hopefully should last for two, three, four years. It's the run rate that we get.

Once we finish with the platform work, we have an exploration well that has now been approved by the consortium. It's a 38 million barrel on the prospect. It also has deeper potential in Lucina which is below the Gamba. It's a turbidite formation. We'll drill that well probably in the July-August timeframe depending on how the campaign goes on the platforms.

We're then going to turn the rig over to another operator in Gabon and they have a two-well program that they will use the rig for and we’ve negotiated for an additional two slots beyond the six that I have just discussed. They are optional, but during the time that we're finishing our drilling program and the rig is with this other operator in country, we will be able to complete the depth processing on our shallow water seismic. We have three leads in that area that will firm up one way or the other, so I would anticipate when they finish with the rig, we'll take it back and either drill one or two exploration wells which would occur sometime late third or early fourth quarter of 2013.

During the fourth quarter last year, we got final investment decision on the two new platforms that we're going to be putting into the Etame area. We have also obtained government approval last month for those platforms. These platforms have been awarded for fabrication to go violent in Houma, Louisiana and construction is underway.

One of these platforms will be installed in the Etame fields at infill wells to replace for example some of the wells that have gone down, because they don’t have artificial lift and the water cut has come up and they can no longer produce. We anticipate three to five wells over the life of the Etame platform.

The second platform will develop the Southeast Etame discovery as well as we're going to try to develop the North Tchibala field which is a Dentale field. The Dentale is below the Gamba. There were several penetrations in this field back in the 80s and tests of 2,500 barrels a day from some of these zones, so they can produce. They are probably not as prolific as the Gamba, but it’s a large accumulation over 100 million barrels of oil in place, so we're going to see how we fare in the Dentale.

The North Tchibala field also has a gas resource and we need that gas down the road when we run short on gas to run our generators or ESPs, so we will be developing that resource off of that platforms as well. These platforms are scheduled for installation 2014. Each platform is a $32 million $36 million investment for VAALCO, plus the cost of wells. Each well is around $7.5 million net to VAALCO, so it’s a fairly major campaign. The good news is though that with this cost oil that we have, literally the platforms will have paid out when we complete the installation of the platforms, because this whole time we were able to recover the cost of building and installing the platforms at the cost of oil.

The goal of this project obviously is to get production up. We expect that we will be able to maintain production near or above 20,000 barrels per day through 2016 by the combination of the both program that we have going now and the installation of these two platforms in 2014.

With that, I'll move to the onshore area. At Mutamba, the N'Gongui discovery that we announced last quarter, we have filed for an exploitation area over that field, and as a result of that we will be required to file the development plan which we plan to do this year in conjunction with our partner, Total. We envision tying this field back to a field called the Atora field, which is about five miles away from our discovery. This is a field that's operated by Total, so they are obviously okay with us tying into them since they are our 50% partner, and we would like to commence the development of this field in 2014.

I'd like to talk next about Equatorial Guinea. In November of last year, we closed on an acquisition of a 31% interest. We brought from Petronas Carigali in a development area called Block P, which is offshore Equatorial Guinea. The block is operated by GEPetrol, which is a national oil company which has 58% interest and then there are two other partners with about 5% each.

The block contains the 2007 Devon discovery. It's known as the Venus discovery which found a 300 foot oil column in channel sand. It’s in about 800 feet of water depth and there are numerous other channels on the block to explore and so the plan is to commence a two-well drilling program to explore some of these channels to see if we can expand the resource based there. We're in the process of negotiating to become the technical operator on behalf of GEPetrol. GEPetrol is really not set up to drill wells and run platforms etcetera, so we are attempting to work out an arrangement where we would become a vendor technical operator. They would remain the administrative operator. What that really means we become the de facto operator, we'd be in charge not only of the technical side, but the money matters as well and then they would be the administrative officer in terms of dealing with the government etcetera.

We have located a rig for these two wells. It is currently operating in Nigeria, which is just to the north of Equatorial Guinea. The operator who has that rig has it under long-term contract and they need to lay off two-well slot off sometime in the third or fourth quarter to allow them to sort of consolidate some of their valuations on their current drilling program, so if we can work out the arrangement with GEPetrol, we would hope to be drilling in Equatorial Guinea this year.

With that, I guess, I’ll just Angola. It's the kind of the same story, but we think we are making progress finally. We have a two year extension until the November 30 of 2014, on our acreage. Some of the Gulf has approved the partner, and they have sent a letter to the minister of petroleum approving the new partner, so now we are dealing with the petroleum ministry to get the final approval which is in the form of a publication that they have to publish that this new partner has been assigned the interest and we think that is imminent. Once we get that publication, we're good to go. And Bobby mentioned, we’ve got the prospect of their part that we want to drill the partner wants to drill it. We also want to acquire some additional seismic out into deeper water, where we're on 2-D. We see some structures comparable to what Cobalt drilled when they made their Kwanza Basin discovery.

So, with that Bobby, I am going to turn it back to you.

Robert L. Gerry

Thank you, gentlemen, and just a few added comments before I open it up for questions. I think it’s important to recognize the reason for some of the decline in our production last year was because we shut in two wells in the Ebouri field due to the presence of H2S, and thus some decline there.

I think also that what Russell mentioned is important to note that this new well that we are completing the Avouma field, that could add about 3,000 barrels a day to our current production and that's where which he mentioned will get close to 20,000 barrels a day, up from 17 that we currently are producing.

About the strike in Gabon, these strikes are normally settled fairly quickly. Obviously, the government wants them settled quickly, because it hurts the revenues of the country of Gabon, so we'll see what happens there. The problem we've described for VAALCO has delayed our negotiations with the government. As Russell mentioned again, on the renewal of our concession onshore in Mutamba, I know a number of you are curious about the size of our reserves that we have there. We really can’t go into that, because the negotiations we're in with the government, but suffice to say, it’s a commercial discovery and that would give some indication that we can make some money out of it, but I am going to have to leave it there until there is some clarity from the government on the settlement of the strike and our success in negotiating an extension for the Mutamba concession.

There's other things that we can go into, but I think I’ll open it now, Steven, to questions from the outside, so I'll turn it back to you.

Question-and-Answer Session

Operator

Ladies and gentlemen, we'll now begin the question-and-answer session of today’s conference. (Operator Instructions).

Our first question will come from the line of Leo Mariani of RBC Capital Markets. Please go ahead.

Leo Mariani - RBC Capital Markets

Hey, guys. Obviously, you are all thinking that you will get immanent kind of final government approval on your partner. What do you think the process is after that? To drill a well, would you have to go out to rig tender? You have something that you are kind already [eying]? Just trying to get a sense of when a rig could show up that potentially drills us first prospect?

Robert L. Gerry

We have been in sort of constant communication with the rig market to understand what’s available and what’s not. We will have to make an official tender under the rules that we operate under in Angola, so you know we'll have to go through that process. We've actually already been through the process of tendering for casing, tubular, wellhead etcetera. And we purchased a long lead time items and warehouse and we could use those anywhere. We could use those in Equatorial Guinea or Angola or whatever, so we went ahead and got the long lead time items in stock.

So, it will take a few months to go through the process. It’s a little more arduous in Angola than it is in Gabon in terms of what we have to go through to get the official approvals, but we would just march on down the road and try and get it done. There are several rigs out there that can do this work that are available in the fourth quarter this year first quarter next year as we speak. Obviously, the longer this thing goes on you know there’s a chance somebody could take one of those off, but there are some rigs available right now.

Russell Scheirman

Leo, I just chime in. You didn't ask, but another consequence of getting the new partner assigned to us from Angola is our ability to go to that partner for the cost attribute for the 40% since when the former partner departed, so we've got $6 million that we provided for as an allowance on our book that we expect that will come back to net income once we get that new partner assigned to us. The $6 millions is actually principle and in the agreement of $6 million plus interest, so that's a positive impact to our 2013 financials once that event occurs.

Robert L. Gerry

Okay. And, while we are on improvements to our financials, Russell stop me if I’m wrong, but I believe with the pickup of this 9.99% interest for partners of ours, we estimate that should add close to $5 million of income to our earnings during 2013. $5 million to $6 million.

Russell Scheirman

It actually does. In last three years, net income attributable to that 10% was $16 million and we also made cash distributions during that same three-year period of almost $19 million, so we feel that that pickup was really good, especially with all the positive things that we're going to be investing in, in the country.

Robert L. Gerry

So, gentleman, that's over $10 million, close to $12 million of additional income you can look forward to in 2013 if everything goes according to oil.

Leo Mariani - RBC Capital Markets

All right that's helpful, and I guess, in terms of your new partner there in Angola. I know you guys are yet to kind of reveal the identity. It sounds like you've already been in discussions with them already about your plans here. Do you guys sort of kind of think that you're both kind of singing the same tune and both want to get out there and get aggressive with the drill bit kind of sooner than later. Do you guys feel like you’re interests are really in line with this new partner?

Robert L. Gerry

Yes. That's the whole point. I mean they've bought into the well we want to drill and they are agreeable to acquire the deepwater seismic, so and they have agreed. They know about the monies and arrears that are wrote to us and they understand all better. We think willing to go forward with that also. It’s a good partner. We get along very well, and so it ought to be a good partnership and they are bigger than us, so there’s no issue of them coming with issues.

Leo Mariani - RBC Capital Markets

Okay. That's helpful. And I guess. And I guess, you talked about Mutamba, Russell, in terms of starting developing in 2014. If all goes according to plan, when do you think we will get first oil potentially there?

Russell Scheirman

In 2014.

Leo Mariani - RBC Capital Markets

Okay. And you think that would be kind of later in the year? Is it more back half way, or how should we think about that?

Russell Scheirman

Yes. I think it'd probably be later in the year. It’s going to be a multi-well development. And as we mentioned, there is gas on top of the oil, so we'll have to ease our way into that, but it should work out just fine.

Leo Mariani - RBC Capital Markets

Okay, and just a couple of questions around some of the expenses here. So, you guys did address the DD&A rate, which I guess got cut into half this quarter roughly speaking. You talked about reserves going up 24%. If you make an awfully big move, I mean are we going to really be expecting kind of $6 a barrel on change going forward or is this more anything here that maybe a [non-realistic] in the quarter?

Robert L. Gerry

Leo, those rates should be representative of what we're going to see in the time coming up. Sorry, earlier I couldn’t find my piece of paper on the reserve picture, but we end up last year 2011 at little over 6 million barrels proved reserves. We have production 1.7, which takes away from that number, but the revision of our previous estimates was a solid 2.2 million, so this was reevaluation.

Russ talked about kind of going out on the Avouma and testing a new flank that, that were to bring well in on and we’ve got a fairly significant increase from our independent reserve analysts with regard to our existing structure. And then on top of that, we had extensions and discoveries of almost 1 million barrels added our proved reserve base and that was with the forward of the movement on the development of our Southeast Etame prospect, so we ended up the year at 7.5 million proved reserves.

Leo Mariani - RBC Capital Markets

Okay. That's helpful. I guess in terms of your lease operating expense that was sort of up this quarter versus the past few quarters. I am just noticing kind of pattern, where you guys seem to had higher fourth-quarter operating expense than sort of the prior quarters and the year. Just trying to get sense how we should expect that in 2013 now that going to drop back down a little bit or should we be thinking this $17.33 is kind the go forward number here?

Russell Scheirman

Probably, Leo, due to us eliminating a lot of our U.S. onshore activities that should decrease somewhat and we had some catch up.

Robert L. Gerry

Associated with signing an amendment to the FPSO contract. The FPSO has now been extended to 2022 from 2022 one-year option to 2022. Basically, return for that we had up the CapEx rate it’s a stair step over three years and that CapEx rate is then for them to make whatever repairs are necessary to keep that thing out there for another 10 years and that's in the form of repairs as a whole, some redoing the generator that we use out there to produce all our steam and power, a number of things that they have to address but that's in their bailiwick. The risk is on them, not on us as long as we pay that increased CapEx rate and it was retroactive to January 1, so there was kind of a catch up to that.

Robert L. Gerry

I'll just add, I think if you just want to get the numbers, probably fourth quarter would be higher than what we would expect in 2013, but if you look at the overall 14.16 for all of 2012, will probably be higher than that. Keep in mind that these workovers that we're going to be doing will hit operating expense. They are up. The OpEx workovers are not capital workover, so those workovers are roughly $8 million apiece to gross, so that's going to be something around 2.5 to 3 VAALCO, so you are going to see a big chunk of OpEx for those workovers hitting in 2013, so ought to keep that in mind.

Leo Mariani - RBC Capital Markets

Okay. And, I guess in terms of your U.S. assets, are you guys pretty much done there? You've kind of written everything off. Should we not expect really activity going forward? How should we think about that? Would you guys move to maybe sell those or?

Russell Scheirman

While we're talking about that, Leo, what's the best way to complete an exit strategy, say, or what is a possibility? We’ve got 22,000 acres on Poplar Dome or contiguous all held by production, and I read the other day in upstream magazine your article on Fort Peck Indian Reservation. That's where we are. That's where Poplar Dome is.

Impress me from in that article they say that there’s 450 million barrels of Bakken oil underneath Poplar Dome. Maybe somebody else has a better key at getting it out than we did, but it's good hear United States government at least thinks that. Of course, we all know that's government never wrong, so we'll see what happens, but the thought at the moment is such packages altogether that someone get out of here and get back to West Africa.

I would mention that we remain with a lot cash for a small company like VAALCO. Since we bought that 9.9% interest for 26-some odd million dollars, we still [have] little over $130 million in cash in our balance sheet. Our capital projections this year is around $83 million to $85 million. I mentioned that our operating cash flow was $95 million last year, so we're still projecting of operating within our cash flow.

Now, if we drill one more exploration well in either Angola or perhaps Equatorial Guinea, that will add to our capital budget by $15 million, $16 million, so we might need to get a little bit of our cash back from J.P. Morgan. But financially, we still in great shape and are searching our neighboring countries if you want in West Africa for additional opportunities and we hope to be able to report within the year that we’ve been successful in finding additional opportunities.

Leo Mariani - RBC Capital Markets

That's really helpful guys. Thanks.

Operator

Our next question will come from the line of Bill Dezellem of Titan Capital Management. Please go ahead.

Bill Dezellem - Titan Capital Management

Thank you. I'd like to circle back to your expectations for 2013 production. If you do not get the wells that been shut-in due to the H2S, back on line, how do you believe your production will compare in '13 versus '12?

Russell Scheirman

Just by the one well that we are going to put on line in Angola that we are drilling. That will add. We've got some natural decline, so it looks like we're going to be pretty much even or slightly ahead in 2013 than 2012.

Bill Dezellem - Titan Capital Management

Thank you. And your prospect for actually getting those H2S wells back online. You mentioned that you were going to be doing some activities there that was going to require some CapEx. How when you really look at that objectively are you feeling both from a timing standpoint and from the perspective of realistically, whether you are going to be able to get those wells back on at any point.

Robert L. Gerry

Well, we've come up with a solution. We hired a firm that would look through the engineering of how we can clean up the H2S from those wells. It’s basically, we're going to have to build small platform adjacent to Ebouri platform, put a lot of heat on there to heat the oil to drive up the H2S and then you cascade the oil down our column with welcoming in the top and sweet gas coming in the bottom and that gas basically absorbs the balance of the H2S and you end up with clean oil.

It’s nothing new. It’s been done in Gabon by Marathon on their [Chautauqua] platform, where they had several wells. It’s just we were into what call pre-feed pre-frontend engineering design that will take about six months at which point we would then award the engineering contract to design the facilities and hopefully start construction on them sometime next year or probably late next year with the idea that we would be out in the field a year later installing all this, so we do have a solution, but you know unfortunately it cost money, but there is a pretty good price there in the form of 7 million to 10 million barrels that we would not be able to get if we don’t go ahead and do something like this.

Bill Dezellem - Titan Capital Management

So, to make sure that I understand, from an economic standpoint return on investment, it absolutely will be economic to invest this money and get these wells back on line?

Russell Scheirman

I mean, you are talking about 7 million barrels or 10 million barrels, which is $702 million $1 billion and a small platform with these facilities is on the order of $100 million, so it’s definitely something we have to do. And third of that's VAALCO’s cost. Sorry, I am talking all in gross numbers.

Bill Dezellem - Titan Capital Management

And, yet if we also hurt you correctly, the construction will begin in the second half of next year, so this is really a 2015 phenomenon when the production would be expected to come back on line?

Russell Scheirman

Right. And, keep in mind that we're shutting about 2,000 barrels a day, but since we still have a producer in Ebouri and we’ve actually been able to kind of optimize that well and get maybe 500 barrels of that 2,000 back from the existing producer. And our model say that that well should not sour until 2016 or so, so hopefully we can get everything in place to bring all three wells back, plus we have a couple of infill opportunities once we get those facilities.

Bill Dezellem - Titan Capital Management

Great. Thank you, both.

Operator

Due to the time constraints, our last question will come from the line of Neil Nelson of DERS Group. Please go ahead.

Neil Nelson - DERS Group

(Inaudible).

Pardon me. Interruption, Mr. Nelson. We're having trouble with your line. It seems to be breaking up. Is this possible that you could pick up the handset?

Neil Nelson - DERS Group

I am on had set.

Operator

Okay. You are coming through clear now. Please proceed with your question, sir.

Neil Nelson - DERS Group

Are you acquiring any long lead items for drilling in Equatorial Guinea to cut the lead time on (Inaudible)?

Robert L. Gerry

Yes. We actually have the resets of long lead items that we had acquired for Angola, and we are in addition acquiring an additional long lead time items for potentially drilling in deeper water in Gabon. If that Gabon project is isn't approved, the situation is such that we can spin those things off, and we are not talking big dollars here. We're talking $.5 million, $2 million worth of kit that we are acquiring. And if we, for whatever reason decide to use that, there’s other people out there that are looking for the same kit, it's very low. We should have five-plus wells worth of long lead items in our universe, if you will, by the third and fourth quarter.

Bill Dezellem - Titan Capital Management

And have you considered any type of enhanced (Inaudible) water flood or other types of enhanced oil recovery in the Etame field as it declines?

Robert L. Gerry

We fully expect to get over 50% recovery from those reservoirs, which is pretty darn good and the water drive is so strong there that with these ESPs we will be dragging that oil out up to 90%, 95% water cut and all our platforms will have water knock-out on them, so that we won’t be overloading the FPSO with a bunch of water. All the platforms will be sending basically 90-plus percent oil to the FPSO, so we think we have a pretty good handle on the recoveries and we are not looking at any sort of CO2 floods or anything like that. We don’t think there is opportunity for that type of a thing.

Bill Dezellem - Titan Capital Management

Okay. Thank you very much.

Operator

I would like to turn the floor back over to today's pattern. Please go ahead, gentlemen.

Robert L. Gerry

Well, gentlemen, thank you very much for your attention and I hope we answered most of your questions and I look forward to seeing you in the first quarter. Thank you, all. Thank you, Steven.

Operator

You're welcome, sir. And, ladies and gentlemen, that does conclude our conference call for today. On behalf of today's panel, I'd like to thank you for your participation and thank you for using AT&T. Have a wonderful day. You may now disconnect.

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