What You Need To Know About Vaalco Energy's Q2 2016 Results

| About: VAALCO Energy, (EGY)

Summary

VAALCO Energy released its 2Q'16 results on May 5, 2016. Revenues were very encouraging at $18.847 million, up from $10.976 million in 1Q'16.

EGY oil sales volume totaled 436,000 barrels, which is up 14% from 381,000 in the first quarter.

EGY indicated that the company encountered a triple ESP failure in the Avouma Plateform. Production for 3Q'16 will be 20% lower than Q2'16.

I recommend to accumulate EGY on any weakness.

This article updates my recent article on VAALCO Energy (NYSE:EGY) published on March 9, 2016 about the first quarter results.

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

From VAALCO's Presentation.

VAALCO's last conference call transcript here.

Q2 2016 Results Snapshot.

2Q'16 1Q'16 Q4'15 Q3'15 Q2'15 Q1'15 Q4'14

Revenue

in $ million

18.847 10.976 17.253 17.546 27.137 18.239 23.037

Operating costs and expenses

in $ million

14.274 17.621 89.30 49.67 28.23 53.86 117.31

Net income

in $ million

(0.261) (8.063) (80.78) (33.67) (5.204) (39.01) (98.34)

Adj. Net income

in $ million

1.196 1.289 - (6.454) 0.617 - -

EPS in $

Adj. EPS in $

(0.00)

0.02

(0.14)

0.02

(1.38)

-

(0.58)

(0.11)

(0.09)

0.01

(0.67)

-

0.04

-

G&A

in $ million

4.043 2.984 3.32 3.80 2.829 4.87 3.51

Cash on hand

in $ million

13.681 24.16 25.36 40.70 61.05 46.55 69.05

Restricted cash

in $ million

0.783 0.796 1.048 1.072 1.194 1.197 1.584

Long-term debt

in $ million

14.344 15 15 15 15 15 15

Non-cash impairment

in $ million

0 0 52.11 17.99 5.82 5.40 98.34

Adj. EBITDAX

in million

7.681 (3.133) 1.20 8.20 16.32 6.47 9.59

Basic share Outstanding

in million

58.464 58.513 58.47 58.392 58.302 57.981 57.79
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Oil and Gas Production Details (Graphs).

Our production volumes of 4,796 BOE per day exceeded the high end of our production guidance.

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2Q'16 1Q'16 4Q'15 3Q'15 2Q'15 1Q'15 4Q'14 3Q'14 2Q'14
Net oil sale Mbls 431 405 457 397 457 380 360 256 478
Net Gas MMCF 35 32 33 53 46 47 45 55 56
Net oil + Gas MBOE 436 411 463 406 465 388 367 265 488
Average daily BOED 4,796 4,516 4,876 4,796 4,002 4,309 3690 4,546 n/a
Oil price $ 42,13 28,54 39,18 43,97 59,16 48,65 63,5 94,67 108,24
Gas price $ 1,64 1,57 1,88 2,75 2,7 2,82 4,26 4,59 5,61
$/boe 42,64 28,28 38,85 43,37 58,45 48,01 62,70 92,35 106.81
All-costs (incl. workovers) $ 31,71 42,61 56,81 49,07 45,17 54,54 49,61 58,10 30,71
Capex $ million 11,378 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.

VAALCO's total production increased 6% from 4,516 barrels of oil equivalent per day in the first quarter of 2016, to 4,796 barrels of oil equivalent per day in the second quarter of 2016. The production increase was due to minimal, unplanned downtime, continued strong performance from the wells added in the recent Etame development program, and there were no planned shutdowns as we had in the first quarter of 2016.

EGY also indicated its guidance for 2016 (Revised 2Q'16, August 8).

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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Our 2016 full year guidance for G&A expense remains unchanged. Said Liz Prochnow in the conference call.

Commentary:

VAALCO Energy released its 2Q'16 results on May 5, 2016. Revenues were very encouraging at $18.847 million, up from $10.976 million in 1Q'16.

In short, it was a good quarter, and I am surprised at first glance that the stock was still trading under $1. However, it was the negative news that I explain below that may be the reason.

Q2'16 Q1'16 Q4'15 Q3'15 Q2'15 Q1'15 Q4'14
Adjusted EBITDA $ million 7,68 −3,13 1,20 8,20 16,32 6,47 9,59
All-costs $ million 31,71 42,61 56,81 49,07 58,45 54,01 49,61
Price of oil $ 42,13 28,54 38,85 43,97 59,16 48,65 63,50
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M. Steve Guidry, CEO, who announced recently that he will retire soon and will be replaced by M. Cary Bounds (interim), said it in a few words:

These numbers reflect the significant positive impact even a modest improvement in pricing to $42.13 per barrel can have on our results, since we took the actions over the last 18 months to better position the company for the current downturn.

One significant event that I covered recently is the purchase of an additional 3.23% participating interest in the Etame Marin Permit located offshore of the Republic of Gabon from Sojitz Etame Ltd. On August 2, 2016.

This acquisition is expected to boost VAALCO's net production by nearly 11%, effective as of August 1, 2016.

A quick calculation based on what has been indicated in the press release will boost production per day for EGY from actually 4,800 BOPD to approximately 5,920 BOPD, with a working interest ("WI") over 31% from 28.41%.

the acquisition will not require any new staffing for us to assimilate that increased interest into VAALCO. We believe this transaction fits perfectly with our goal of enhancing shareholder value, with targeted opportunistic acquisitions.

We do not know the acquisition price and M. Guidry said:

And as far as the price is concerned, we are honoring the request of the counterparty, and not publishing the acquisition costs. Not the exact number.

Vaalco also converted the $15 million outstanding balance on their ISC credit facility to a fixed period loan "with attractive rates and terms," and requested up to $5 million of an additional loan available through the end of 2016.

The new agreement provides for quarterly payments of principal and interest payments through June 30, 2019, including interest at a rate of LIBOR plus 5.75%. The loan is secured by our offshore Gabon assets and related inventory.

On the negative side, M. Cary Bounds indicated that the company encountered a triple ESP failure in the Avouma Platform. This is a significant loss in production for 3Q'16. However, due to good production from other wells, such as the Southeast Etame 2H, the loss will be minimized.

Including the South Tchibala 1HB well, which went down in the first quarter, we now have three wells with ESP failures on the Avouma platform... We anticipate completing this work early in the fourth quarter of this year.

The daily production for 3Q'16 is estimated at 3,700 BOPD to 4,000 BOPD which is quite a record low compared to the last 8 quarters. It is nearly 20% lower compared with 2Q'16.

For the third quarter, we estimate our production will be between 3,700 and 4,000 barrels of oil equivalent per day. Despite the lower third quarter guidance, we believe that our strong first half production performance and the plan to workover volume uplift in the fourth quarter, will allow us to meet our full year production guidance, even without any incremental volumes associated with the Sojitz acquisition.

I believe this the stock has not increased significantly after the release of the 2Q'16 results.

Overall, the company is not planning any more drilling this year in Gabon, Angola or EG:

We do not plan to have any drilling rigs active for the balance of 2016 in Gabon. There are also no plans to move forward with development or exploratory drilling in Equatorial Guinea or Angola this year.

Conclusion:

EGY is a little company with large potential. It is difficult to see it now with the oil prices at depressed levels, but the company will probably rally strongly if the oil prices can reach for the $55 per barrel that I expect at the end of 2016. I believe EGY will be trading above $2 or eventually higher.

The company seems an ideal candidate for a takeover by 2017.

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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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