Vaalco Energy Announces That It Mobilized A Hydraulic Workover Unit Onto The Avouma Platform

| About: VAALCO Energy, (EGY)


EGY has mobilized a hydraulic workover unit onto the Avouma platform offshore Gabon and work is underway.

EGY has closed on the purchase of an additional 3.23% participating interest from Sojitz Etame Limited.

I believe EGY is still undervalued and should be trading above 1.00. Accumulating for the long-term makes sense.

This article updates my recent article on VAALCO Energy (NYSE:EGY), published on Sept. 16, 2016 about The secondary electric submersible pump at the Avouma 2H well.

Source: VAALCO Energy.

To access information about ESP, here is an excellent article. [Click here]

On November 28, 2016, Vaalco Energy announced that:

[I] It has closed on the purchase of an additional 3.23% participating interest (2.98% working interest) in the Etame Marin Permit located offshore of the Republic of Gabon from Sojitz Etame Limited, which represented the full interest owned by Sojitz Etame Limited in the concession. The transaction had an effective date of August 1, 2016.

[II] VAALCO has also mobilized a hydraulic workover unit onto the Avouma platform offshore Gabon and work is underway to replace failed electric submersible pumps . The failed ESPs will be inspected by the original equipment manufacturer, who also installed the ESPs, to determine what caused the failures.

Cary Bounds, VAALCO's Chief Operating Officer and Interim CEO commented:

We are very pleased to have closed our transaction with Sojitz and increased our participating interest in our flagship producing asset in offshore Gabon to 33.58%. One of our key strategic goals is to seek opportunities to grow the Company in a cost-effective manner that enhances shareholder value. We believe this acquisition is an excellent example of the execution of that strategy. It immediately increases our production in a field we know extremely well and enhances our option value due to the significant upside potential remaining. At Etame, we have identified 21 low risk development and step-out drilling opportunities with about 65 million barrels of gross unrisked recoverable contingent resources. We are working with our partners on a schedule to develop these opportunities as soon as practical. We are also very pleased to have initiated the workover program at Avouma and hope to restore production at Avouma before year end.

On Thursday, Sept. 15, VAALCO Energy announced the following:

As previously disclosed, in late July the primary electrical submersible pump (ESP) failed in the Avouma 2-H well on the Avouma Platform offshore Gabon in the Etame Marin Permit. Prior to attempting to start the secondary ESP, VAALCO and the original equipment manufacturer which installed the ESP worked closely to re-design the start-up procedure and adjust the operating conditions in an effort to prevent another ESP failure. The lower pump was successfully started in August and remained operational for approximately 10 days. At the time of the secondary ESP failure, the well was producing approximately 1,850 barrels of oil per day (BOPD) gross or 450 BOPD net to the Company. VAALCO has attempted to restart the lower ESP without success and the well is temporarily shut-in pending a workover...

Earlier, On January 26, 2016, Vallco Energy indicated:

The Company's previously announced workover campaign at the Avouma Platform in the Etame Marin block offshore Gabon is complete. Three wells were included in the project consisting of the South Tchibala 2-H, Avouma 3-H and the Avouma 2-H. Production from the Avouma Platform, one of four currently installed in the Etame Marin block, is tied back to the Petroleo Nautipa FPSO.

The South Tchibala 2-H workover operation was completed successfully and restored approximately 1,700 gross barrels of oil per day (BOPD) (415 BOPD net to VAALCO) of production that had been offline since August of 2014 due to downhole equipment failure. The Avouma 2-H workover operation was also completed successfully and the well is flowing approximately 3,000 gross BOPD (730 BOPD net to VAALCO) following the workover. The Avouma 2-H post-workover rate represents an increase of approximately 500 gross BOPD (122 BOPD net to VAALCO) from the well which was on production prior to the workover. Finally, the Avouma 3-H workover operation was suspended and the well was secured for future use due to downhole equipment becoming lodged in the wellbore with efforts to remove it being unsuccessful. The Company will fully review the circumstances that caused this issue to determine if additional operations can be conducted on the Avouma 3-H at a future date. This well was not on production prior to the workover operation.

Bildresultat för South Tchibala 2-H and Avouma 2-H

Vaalco has experienced several problems with the ESPs in recent months, seeing the Avouma 2-H and South Tchibala 2-H wells experiencing failed ESPs. Both wells produce from the Avouma platform in the Etame Marin permit, offshore West Africa.

This "incident" represents a large reduction of oil production (~25%), and it is very important that the company can resume production for the two wells as soon as possible and see if the third well can be reactivated?

The Avouma 2-H well and the South Tchibala 2-H well were producing approximately 870 BOPD net for EGY -- before the Sojitz effect -- which should be around 960 BOPD now. Assuming that the two wells start production after the ESPs are replaced. Unfortunately, the Avouma 3-H well may not be producing soon?

Following the removal of the ESPs, the company plans to immediately install a replacement ESP in the Avouma 2-H well and probably at the South Tchibila 2-H later.

Another important subject is the closing of the acquisition of the full interest owned by Sojitz Etame Limited in the concession. The transaction had an effective date of August 1, 2016.

Vaalco has now a participating interest of 33.58% (Working interest of 31.08%). The company indicated that the actual production of the field is 13,500 BOPD.

Based on the working interest production is now approximately 3,690 BOEPD/d, unless the new ESP installed in the Avouma 2-H well can produce in December. This is about 340K BOEP for 4Q'16.

M. Cary Bounds said in the recent conference call:

With all these factors taken into consideration, we estimate our fourth quarter production volumes will be in the range of 3,300 to 3,600 BOE per day. Despite the production challenges we face recently, we're still on track to meet our annual production guidance of 3,900 to 4,300 BOE per day.

Due to the uncertainty of the production impact associated with the workovers, our fourth quarter guidance is based on the assumption that neither well will produce significant volumes in the quarter.

Below is indicated the quarterly oil production since 2Q'14:

3Q'16 2Q'16 1Q'16 4Q'15 3Q'15 2Q'15 1Q'15 4Q'14 3Q'14 2Q'14
Net oil sale Mbls 348 431 405 457 397 457 380 360 256 478
Net Gas MMCF 32 35 32 33 53 46 47 45 55 56
Net oil + Gas MBOE 353 436 411 463 406 465 388 367 265 488
Average daily BOED 3,836 4,796 4,516 4,876 4,796 4,002 4,309 3690 4,546 n/a
Oil price $ 42,31 42,13 28,54 39,18 43,97 59,16 48,65 63,5 94,67 108,24
Gas price $ 2,37 1,64 1,57 1,88 2,75 2,7 2,82 4,26 4,59 5,61
$/boe 42,05 42,64 28,28 38,85 43,37 58,45 48,01 62,70 92,35 106.81
All-costs (incl. workovers) $ 32,05 31,71 42,61 56,81 49,07 45,17 54,54 49,61 58,10 30,71
Capex $ million 0 11,378 1,29 11,90 31,04 13,13 28,07 26,26 26,37 26,54
Click to enlarge

Click to enlarge

The cost of the workover has been estimated at $4 to $5 million which represents about $1.5 million to EGY based on the new working interest. Depending on the nature of the problem that crippled the ESPs I expect the company to get some compensation.

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

Guidance Year 2016
Production in BOEPD 3,900-4,300
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
Click to enlarge
On a final note, one recent intriguing news is regarding the investment by Kornitzer Capital Management, Inc. who owns 5.253 million shares or 8.96% in total.

Kornitzer bought 551,175 shares (~0.84) the past 60-day according to the last SG13D/A on November 28, 2016.


Click to enlarge

EGY is showing a perfect descending triangle formation with a recent breakout late October. The resistance is now at 0.80. I believe EGY is still undervalued and should be trading well above 1.00 which means that the resistance will be breached before the end of 2016, depending on the oil prices mainly.

If the company announces that the Avouma 2-H has been fixed and production has been resumed, it will help of course.

Important note: Do not forget to follow me on EGY and other oil companies. Thank you for your support.

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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.