Vaalco Energy Purchased An Additional 3.23% Participating Interest In Gabon From Sojiz

| About: VAALCO Energy, (EGY)

Summary

EGY purchased yesterday an additional 3.23% participating interest in the Etame Marin Permit located offshore of the Republic of Gabon from Sojitz Etame Ltd.

This acquisition is expected to boost VAALCO’s net production by nearly 11%, effective as of August 1, 2016. The purchase price is not known.

Production from the fields averaged about 19,000 barrels of oil per day in the second quarter of 2016. This is good news for the next 2Q'16 results.

I recommend EGY as a strong buy under 0.85.

This article updates my recent article on VAALCO Energy (NYSE:EGY) published on July 6, 2016.

VAALCO Energy was incorporated in 1985 and is headquartered in Houston, Texas. The company has 111 full-time employees (59 in Gabon).

Yesterday, August 2, 2016, VAALCO Energy announced the following:

It has signed a purchase and sale agreement to acquire an additional 3.23% participating interest in the Etame Marin Permit located offshore of the Republic of Gabon from Sojitz Etame Limited, which represents the full interest owned by Sojitz in the concession. The transaction has an effective date of August 1, 2016.

VAALCO is operator of and, prior to the acquisition, owned a 30.35% participating interest (28.1% working interest) in the fields in the Etame Marin block which encompasses approximately 28,700 gross acres in shallow water. There are four production platforms and nine wells currently producing in the concession, including three subsea well tiebacks. Production from the fields averaged about 19,000 barrels of oil per day in the second quarter of 2016 and over 93 million barrels of oil have been produced since production commenced in 2002. This acquisition is expected to boost VAALCO's net production by nearly 11%, effective as of August 1, 2016.

The transaction is expected to close within 90 days, subject to customary closing conditions. The Company intends to fund the acquisition with the additional $5 million loan capacity available under the new term loan agreement announced in early July with the International Finance Corporation (IFS), subject to their approval, and with cash on hand.

Producing assets in offshore Gabon

The company owns a 30.35% interest in the exploration offshore acreage within the Etame Marin block (the main field for the company).

It also owns a 28.1% interest in the development areas in and surrounding the Etame, Avouma, South Tchibala, and Ebouri fields.

With this new acquisition, effective August 1, 2016, EGY will own a 33.58% participating interests. I am not really sure if a 28.1% interest in the development areas in and surrounding the Etame, Avouma, South Tchibala, and Ebouri fields, will change.

The company estimates that the acquisition will boost production by 11%. The release indicates that the production for 2Q'16 is now 19K BOPD, which represents an increase of about 2,090 BOPD which is significant. However, with 19K BOPD total, EGY will show well over 5,000 BOPD this quarter.

Quick facts about EGY oil production in Gabon and revenue

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Oil and gas production details

1Q'16 4Q'15 3Q'15 2Q'15 1Q'15 4Q'14 3Q'14 2Q'14
Net oil sale Mbls 405 457 397 457 380 360 256 478
Net Gas MMCF 32 33 53 46 47 45 55 56
Net oil + Gas MBOE 411 463 406 465 388 367 265 488
Average daily BOED 4,516 4,876 4,796 4,002 4,309 3690 4,546 n/a
Oil price $ 28,54 39,18 43,97 59,16 48,65 63,5 94,67 108,24
Gas price $ 1,57 1,88 2,75 2,7 2,82 4,26 4,59 5,61
All-costs (incl. workovers) $ 42,69 56,81 49,07 58,45 54,54 49,61 58,10 30,70
Capex $ million 1,29 11,90 31,04 13,13 28,07 26,26 26,37 26,54
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Note: All-costs are the Production Expense including the workovers + DD & A + G & A.

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Conclusion

I believe this acquisition is an excellent move, because it will translate immediately to an increase in oil production, and therefore an immediate contribution to the revenue starting August 1.

The company estimates that the 3.23% acquired represents 11% in production increase. Based on 19,000 BOPD, it is an increase of 2,090 BOPD or a quarterly production at approximately 485K BO. Thus, this is a significant increase in revenue, especially considering a price of oil over or equal $40 a barrel.

On July 5, 2016, VAALCO announced that it agreed to pay to Transocean (NYSE:RIG), $5.1 million net to VAALCO's interest for unused rig days under the contract - The JU Transocean Constellation II, after the last workover well in North Tchibala.

The Gabon prospect has now 9 oil wells actually producing.

EGY also indicated its guidance for 2016 (Revised 1Q'16, May 6)

Guidance Year 2016
Production in BOEPD 3,700-4,500
Production expense $27.5-$32.5 million
Workovers ~$4.0 million
Total G & A $12 - $14 million
DD & A $5.80 - $6.50/BoE
CapEx $1.0 - $4.0 million
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I expect revenue to be about significantly higher quarter over quarter, due mainly to the price of oil equivalent that the company has received in 2Q'16 estimated at approximately $40 per barrel. (In 1Q'16, EGY received $28.54 per BOE.)

A quick calculation gives me $20-$21 million in 2Q'16, which is nearly an 85% increase quarter over quarter.

M. Steven P Guidry, CEO, said in the 1Q'16 conference call:

Assuming cash costs continue as they did in the first quarter at recent, at recent Brent pricing levels around $45 we're forecasting positive cash flow. Combined with the benefit of the cash payment we received from our Angola partner in March, we have good reason to feel more optimistic about the future.

Also, the company made a smart move by purchasing crude oil put contracts, to protect from an erratic oil price that may plummet again. This move gives EGY some downside protection, if Brent falls below $40:

We established a $40 floor on one-third of our forecasted production from June 2016 to February 2017, by purchasing crude oil put contracts.

Note: The actual price that EGY is receiving for its oil is discounted approximately $4 to $5 to the Brent.

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EGY is now trading in an oversold territory, and has reached an incredible 0.77 yesterday. I took the opportunity to add to my position.

The next 2Q'16 results will probably show a better and stronger balance sheet, and the production indicated in this release is extremely encouraging.

I recommend EGY as a buy, expecting a boost from the next earnings results.

Important note: Do not forget to become one of my followers with EGY and the oil industry. Thank you.

Disclosure: I am/we are long EGY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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