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VAALCO Energy, Inc. (NYSE:EGY)

Q2 2012 Results Earnings Call

August 8, 2012 11:00 AM ET

Executives

Robert Gerry – Chief Executive Officer

Russell Scheirman – President and COO

Gregory Hullinger – Chief Financial Officer

Analysts

Kim Pacanovsky - MLV & Co.

Chris McDougall – Westlake Securities

Operator

Welcome to the Second Quarter 2012 Earnings Report Conference Call. At this time our participants will be in a listen-only mode. Later we will conduct a question-and-answer session and the instructions will be given at that time. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, CEO, Mr. Robert Gerry. Please go ahead sir

Robert Gerry

Thank you, Laurie and good morning ladies and gentlemen and welcome to VAALCO energy's second quarter investor conference call. Joining me today will be Russell Scheirman, our President and Chief Operating Officer; and Gregory Hullinger our Chief Financial Officer.

Please bear with me while I read a brief 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, 2008 and other reports filed with the SEC, which can be reviewed at www.sec.gov.

Before I turn the meeting over to Greg and Russell for their reports let me make one quick comment, as you saw in our press release which was released yesterday evening, we are pleased to confirm that the country of Angola has extended our lease on Block 5 in Angola for another two years until November of 2014. That's an important event for VAALCO. There has been some speculation I think, at least in conversations in the marketplace that Angola might not renew VAALCO's concession there. We always felt fairly comfortable that they would, but it's good to have in place an official document that confirms that.

We now are pursuing with Sonangol, our prospective partner on Block 5. Sonangol has already met with our proposed partner and when you raise [words] na agreement has been arrived at, and we can proceed in locating the rig and begin our drilling program. I also want to reassure you, we are not going to wait until 2014 to drill a well. Our prospective partners are in agreement with VAALCO that the first exploration well will be on our Luengo prospect and will be both a coastal and a (inaudible) pass. The minute we can hear from Sonangol that they have accepted our partner, we will proceed with locating a rig, and get high behind getting the well drilled

We will have some more comments towards the end of the meeting, but I will now turn the meeting over to Greg Hullinger, with his update on our financial statements and then Russell Scheirman will update you on our operations. Greg?

Greg Hullinger

Thank you, Bobby. Good morning everyone. I am going to cover the financials for the second quarter 2012. We reported net income attributable to VAALCO of $10.4 million in a quarter or $0.18 per diluted share. This compares to the same year ago period of $11.8 million or $0.20 per diluted share. Our revenues were very similar quarter-on-quarter $58 8 million versus $58.5 million, I will go into more detail in that here in just a minute.

Let me turn my attention over to the balance sheet and I will give you some of the highlights there. Cash and cash equivalents, they show a total of $138 million of unrestricted cash, but I can very quickly get that number up to about $160 million, deeper in our balance sheet, we show restricted cash of about $11 million, the majority of that is associated with money that we have restricted for the obligation in Angola, that Bobby was talking about just a few minutes ago.

We have a $5 million per well obligation on the two obligatory wells. So we have restricted cash to that too.

Also if you see on our balance sheet under receivables, we have trade receivables of nearly $20 million, which is higher than normal. But essentially what we had was a crude oil lifting on June 1st and payment for that came in on July 1st, right on Target and that was an additional $15 million.

Normally, we have always have one crude lifting receivable out there, because the timing of that lifting was June 1, it shows up as receivable instead of cash at the end of the quarter. We did have four lifting's during the quarter. If you recall, in the first quarter we had two so we are back on track. I might mention that our crude oil inventory at the FPSO was higher at the end of June 30 this year. We have 351,000 gross barrels, VAALCO owns about 28% of that amount in the FPSO. At the end of this quarter, we had 222,000 barrels in the FPSO at the same period at the end of last June.

Other items of note on the balance sheet, we have got, essentially with our [countless] partners we put into play a new balancing arrangement, I am pleased to say that from a financial perspective. What that does is it causes the amount that might be outstanding to be at a lower level consistently, this is an agreement we have with our partners and that was a good move.

Crude oil inventory, I mentioned you can see on our balance sheet, $1.4 million versus about $800,000 compared to the end of the year position, and that again reflects the higher crude that we have on board the FPSO at the end of the period.

One item also of mention is, if you look at our asset retirement obligations, of course this is set up for our eventual obligations to abandon our facilities offshore Gabon. We went through a process during the quarter of reestimating the amount of money that it will take to abandon those facilities, and we did that work really in concert with some (inaudible) doing with the Republic of Gabon. If you are reading our Q, we've agreed to a pre funding arrangement where we will be paying our abandonment costs early into a fund, we get the cost to recover those funds that we put aside for that purpose.

But in the same sphere that we went through, we had a third party do a proper evaluation of what the abandonment cost will be, and with a change in a few assumptions such as reduced mobilization, demobilization costs, and then also, a slightly different approach on abandonment of some of the facilities, our estimates for retirement came in a lot lower than what we had originally estimated. So you can see on our balance sheet that our asset retirement obligation in the liability section is $9.4 million, and that compares to $14.5 million at the end of the year.

The offset to that is in our wells, platforms and other producing facilities, so by taking it out of there that's something we amortize. We will actually be incurring less amortization because of this. But all in all, our balance sheet grew by $15 million, and what that really reflects is again our sell of crude, plus continuing investments in our offshore – really not offshore facilities, but also on our onshore properties in Texas and Montana.

Moving to the revenue statement; again, I mentioned that oil and gas sales were fairly comparable for the three months ended June 30 this year versus the same period a year ago. $58.8 million versus $58.5 million. Inside of the $58.8 million, most of that attributable to Gabon, like we know $57.9 million of it in some of the sale of crude, during the quarter from our offshore production.

We did have four listings, for total of 538,000 barrels listed and the average cost – or average price per barrel was a $107.51. Just compared to a year ago second quarter where we listed 489,000 barrels at a price of $119.61. So we did have $12.10 price reduction quarter-on-quarter but (inaudible) with the heavy proportion of crude, we don't see a lot of the impact that some of the soft gas prices have with some of our competitors.

On a six-month basis, the revenues again were fairly comparable $104.1 million versus $105.3 million. Most of that again is (inaudible) $102.6 million of it. It shouldn't hold there. We lifted 906,000 barrels through the first six months of this year, that's six liftings at an average price of $113.25 is compared with the year-ago period where we also have six liftings 938,000 barrels at an average price of $112.18.

Other items of note is on the Statement of Consolidated Operations when we taken into the expenses. Production expenses you'll note are a bit higher in the three-month period ending June 30, 2012 compared to a year ago. And the reason for that really was a contract amendment that we did with the owners of the FPSO. It's actually good news.

We've extended the term of the FPSO out through 2020 and in association with that, we came in with a new cost structure. Essentially with the FPSO, we take three types of charges; one is a CapEx charge, one is an OpEx charge and one is a per barrel processing fee.

We agreed on new structures. Four of those -- of which two out of three went retroactive and we were recording additional $1.2 million associated with that extension and the new cost components. Exploration expense is a bit higher as well at $3.5 million versus $1.2 million and what's reflected in there is a $2.9 million write-off associated with our Poplar Dome exploration well. That's the well that was a science well for us. It was our first penetration and we took it deep.

We went through the Bakken/Three Forks and continued to test zone down below that. Although they were encouraging, in the end we didn't establish commercial quantities in the lower zones and as such, I've written of the cost associated with the well below the Bakken/Three Forks.

The well has been temporarily suspended. We can go back in and complete that as a producer in a later point. Russell will be getting an operations update and he'll be talking about a second well that we've got taking place right now at the Popular Dome. (Inaudible) that exploration expense $2.9 million of a write-off. We continued to capitalize $6 million for that well which is the big portion of a well through the Bakken/Three Forks.

G&A expenses slightly higher at $3 million versus $2.5 million. Last quarter we announced that we had opened up a small Denver office, we've got a few people up there and the higher G&A costs are primarily associated with our Denver office. [A good item] what I'd like to talk about here is bad debt expense. We've got -- there's a three-month period. We've recorded an additional $275,000 worth of bad debt expense. That is the amount above VAALCOS' 40% working interest in Angola, because we haven't had a solid partner to bear their fair share of the expenses, we have had to write those amounts off.

Essentially, since December of 2010, we've now written off a total of $5 million and we fully expect that once we get (inaudible) to give us our new partner, that the cost of admission for the new partner is to restitute VAALCOS back to its 40% share. So I'm hoping this year, ideally in third quarter, they will have the opportunity to put that money back in our books, it goes straight to net income. It's worth $0.10 per share. So I'm hoping that would become. So we continue to write it off but we're hopeful that this will stop very quickly.

And with that, that's kind of a highlight from the balance sheet and revenue section and I'll go ahead and I'll turn it over to Russ.

Russell Scheirman

Thanks, Greg. I'll take the next few minutes to update you on our off-shore development projects and drilling plans, our on-shore development drilling plans as well as bringing you up-to-date on current activity at the Popular Dome and Salt Lake Bakken/Three Forks projects that we have in Montana.

At a time, we're currently producing about 19,500 barrels per day. As we noted in a recent press release, the time production was affected by the appearance of hydrogen sulfide in two of our wells at Ebouri and wells have been shut in pending an investigation of the source of the H-2S and resulted in the loss of approximately 2,000 barrels per day of oil production from those specific wells. However, we've been able to mitigate this loss, somewhat by increasing production from other wells at time Avouma, so the net effect has been something less than 1000 barrels per day.

The wells were that we opened up at a time in Avouma we're cut back due to our fluid limitations at the FPSO, and when we were shut in these Ebouri wells, had opened up additional space so we were able to put more fluids through the FPSO, and thereby get back some of the production.

We've recently completed electrical upgrades and at Avouma accommodations upgrades, to prepare the Ebouri and Avouma platforms for our upcoming drillings campaigns. Later this month we'll be installing a produced water separation system on the Avouma South Tchibala platform and that will reduce the amount of water currently being sent to the FPSO, which will allow us to further open up some wells core additional or production once that (inaudible) in place.

Our oil well development doing programme off shore developing schedule now that commenced November the rig, is the (inaudible) been in the Venus, which is a 350 foot jack up is currently been refurbished in south Africa and is expecting to start heading our way in October to arrive in November.

Because of the ongoing investigation of the [H2S] at Ebouri, we now planned to start a drilling program at South Tchibala and Avouma we're planning two work-overs and a development well on the Avouma, pulp block to improve recovery from that portion of the field.

We've recently completed a mapping project on newly reprocessed 3D seismic data, which shows a potential expansion on the eastern side of the Avouma structure. We plan to investigate this with the pilot hole during our drilling before drilling a horizontal rig in the development well and the results of that pilot hole will determine the optimum location for the development drain. There is a possibility that it could also lead to a second development well at Avouma in fact expanded area proves to impact dealer from the pilot hole.

After completing the Avouma program we'll then move up to Ebouri, we have a prospect, an exploration prospect in a different fault block from the main (inaudible) accumulation it has the potential to add 7 gross million barrels in the most likely scenario which should be something less than $2 million net to VAALCO, there's also some deeper objective that we will test if the (inaudible) portion of the prospect is successful and that could add another one to two gross million barrels or something between a quarter and a half million barrels of net to VAALCO.

So if that pilot exploration pilot hole in Ebouri is successful we will go ahead and complete one new horizontal well in the pilot area. We had plans to put a second well in the main accumulation that we are suspending those plan pending the results of being the H2S investigation.

In addition to those four developments slots we have two optional slots for the rig, there's a possibility that the additional workover in the event of an ESP failures, as well we have the shallow water seismic program that we started November and it will be processed at middle of next year and we do have a prospect we call the which on time data is still looking quite good on the new seismic and when we get the (inaudible) migration finish if the prospects remains viable, we plan to drill at the end of the program in 2013.

Our future development plans we completed studies for this new platform in Etame that I mentioned last quarter and we are in detailed engineering design work underway, McDermott is our contractor the platform is scheduled for installation, in late 2013, early 2014 and we would anticipate three to five new wells of this platform over it's 8 to 10 year life. We've also finalized our recommendation for a fourth platform this will also be in the southern Etame area at the south east Etame discovery that we made last year. It will also allow us to develop the north Tchibala field which is (inaudible) field, and that field has a gas resource that will be valuable or it's for fuel in later life of the Etame complex.

So we are going to build in two platforms side by side. Each one of those represents about a $32 million net investment for VAALCO, for the platforms in the installation at any 12 we drill and we anticipate drilling three at each of the outset is about a $7.5 million net investment for VAALCO for each of those six wells. The goal of these two platforms is to keep our production at or above 20,000 barrels per day well into 2016.

The final investment decision approval with our partners we scheduled in early November, but the parties have all agreed to ordering a long lead time items, so we've gone out for these long lead time items strategically in project on a best track.

Moving onshore to our Mutamba block, we will receive the rig on September 1st and along with our partner, Total, we will drill an exploration well on that block. It's a 10 million to 20 million barrel Omangou prospect and we have about a 50 – we have a 50% working interest in the prospect. And we've been successful in the vicinity of an existing Total field called the Atora field and we can tie well back and subsequent well back to that field to ensure early production because they have excess capacity in their system.

Bobby talked to you about Angola. I will say that we are in discussions with the couple of operators who have semisubmersible rigs that are (inaudible) drilling in the 400 feet of water that we need for our subsalt prospect. And we are keeping the lines open so that if we get this approval, we can go to a point where we can get bids and secure drilling rig.

We also are looking at plants to acquire seismic in some of the deeper water area in portion of our block in Angola. We can see structure similar to the types of structure – to the type of structure that was drilled by Cobalt that led to their Kwanza Basin discovery. So we would like to evaluate the same type of structures that we have on the west side of our block.

Moving to domestic, at Poplar Dome in Montana, Greg mentioned we drilled the vertical sides well. We drilled through (inaudible) successfully the Bakken/Three Forks and then we drilled the Nisku, Red River and Winnipeg formations. We tested corporations in each of the Winnipeg, Red River and Nisku formations without recovery of any significant hydrocarbons. So we've gone ahead and suspended the well in a fashion where we could reenter and drill a horizontal Bakken/Three Forks lateral in the future and we expect the 229 million for the lower portion of the hole.

We've also recently completed the second well in the Poplar Dome area in the Bakken/Three Forks. We drilled a 4,400 put lateral which we completed with 4.5-inch casing and it's a waiting frac treatment later this month. We plan to use the plug and perf method and are currently evaluating the location and the number of fracs which will probably be around 15-inch stages.

The rig has just rigged up in Salt Lake area in Montana in Sheridan County on what we are calling [Bose Number 1] well. We are planning to drill two wells in the Bakken/Three Forks there and these wells are being drilled adjacent to successful well drilled by another operator in the area and they should be completed in 3 to 4 months.

Once we finish the two wells in the Salt Lake area, we plan to return to Poplar Dome. We need to drill a third well to earn our 65% interest in the Poplar Dome and we are planning on a Bakken/Three Forks well pending the outcome of the frac that we do on the well that we've already drilled there.

I will mention that in Texas, our Granite Wash wells, they are currently producing about 3 million cubic feet per day and about 70 barrels a day of oil condensate. There was a fire at gas plant that we sell our gas to in the second quarter and we lost about 2 tons of production in the second quarter. So really we lost about 230 of production from the Granite Wash, but they've gotten that also (inaudible) since returning to normal and the wells are doing just fine.

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

Robert Gerry

Thank you. Welcome Greg. Before I open our conference to questions from the listeners, let me mention one other say in the press release that we issued about 10 days ago, VAALCO mentioned that we had entered into additional country and applicant where VAALCO previously had not explored. I don't want to go into a great deal of detail on that until we have confirmation from the government of that country, but suffice to say that we have a fairly large position.

We bought it from another concession there that we felt that they want to concentrate in their real area which is not an Africa, but it is a tremendous opportunity for VAALCO if we are confirmed into the concession. More than likely, we would drill a couple of exploration wells next year on the block. Each one of these exploration wells are of the capacity where we could add 50 to 100 million barrels each of the exploration wells from VAALCO. So we are keeping our previous cost that will get approved in this country and certainly we will let you know when we will see word from that country.

So with that, I think I will open it up Laurie to questions that the audience may have. So I refer it back to you.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from the line of Kim Pacanovsky with MLV & Co. Please go ahead.

Kim Pacanovsky - MLV & Co.

Hi, good morning, everybody.

Robert Gerry

Good morning, Kim.

Kim Pacanovsky - MLV & Co.

The first question is on Angola. And were the terms of the license renewal changed within the renewal, did they increase the royalty on you or is there something else that they got out of renewing it for you?

Robert Gerry

No, the terms remained exactly the same as they were previously. They are obligated to drill two wells which we always have been obligated to do. And so now it's a big deal and Angola is well aware that VAALCO is (inaudible) at the bed if you want to just this well drill. So we think finally things are moving in the affirmative way with them.

Kim Pacanovsky - MLV & Co.

Okay. And then the second question on Angola is what is the government looking for in the partner? I mean obviously they approved the partner previously that has huge financial capitalization issues, is there any reason you could see why this wouldn't be approved?

Robert Gerry

No, I really don't see why it shouldn't be approved. Certainly, VAALCO is one of the largest acreage owners in the Kwanza Basin. The drawback that we have is we are a very small company compared to obviously the very large companies that are in Angola. And I think that we've gotten shuffle around a little bit in the higher [RT] of Sonangol, but I think was made enough noise here recently that paid attention to us on proposed partners, well known to Sonangol. And finally, we are bubbling into the surface if you want to. I think that will respond.

Kim Pacanovsky - MLV & Co.

So you've had one meeting with the government, your partner – proposed partner?

Greg Hullinger

I am sorry say that again.

Robert Gerry

Yes, correct

Kim Pacanovsky - MLV & Co.

They have had a single meeting already with the government.

Robert Gerry

They have.

Kim Pacanovsky - MLV & Co.

And so you would expect the decision to be made after the single meeting or is there anything else in the process that we need to wait for?

Robert Gerry

I think that we should hear shortly within the next couple of weeks.

Kim Pacanovsky - MLV & Co.

Great. And did I hear you correct that the first well is both a pre-salt and post-salt test?

Robert Gerry

Yes, it's really designed for the pre-salt.

Kim Pacanovsky - MLV & Co.

That's what I thought.

Robert Gerry

But the location is such we will be able to test a post-salt prospect also.

Kim Pacanovsky - MLV & Co.

Okay. Then just one more question on the new venture. I know you don't want to go into detail, but can you guesstimate how much CapEx you would be spending next year there on these couple of exploration wells?

Greg Hullinger

Probably some place between – around $40 million.

Kim Pacanovsky - MLV & Co.

Okay.

Greg Hullinger

That's of VAALCO.

Kim Pacanovsky - MLV & Co.

Okay. That 50 million to 100 million barrel target size is gross or net?

Greg Hullinger

Net.

Kim Pacanovsky - MLV & Co.

Net. Okay. All right terrific. I will turn it over to somebody else.

Operator

Our next question is from the line of Brad Heffern with RBC Capital Markets. Please go ahead.

Brad Heffern – RBC Capital Markets

Good morning guys. I was wondering if you could walk through this $42 million in second half CapEx, how much of that is (inaudible) and sort of how does it breakdown between the quarters?

Greg Hullinger

On our offshore Gabon drilling program, we expect that we will spend $14.6 million as we initiate those – the drilling of the well that Russ talked about at South Tchibala. Our onshore Gabon drilling, which we expect to start in September 1, that's $3.3 million. Our second well at Poplar Dome, we expect to spend $6.7 million for a total of $8 million on that well. We spent $1.3 million in the second quarter.

Our third well at Poplar Dome, that's the one that we will go to after we drilled the two at Salt Lake, that's an additional $8 million, and then for each of the Salt Lake wells, they are estimated to cost $7.7 million each, we have got a 70% working interest, so the combination of the two wells is 10.8. All those items total to $43.4 million for the second half of the year.

Brad Heffern – RBC Capital Markets

Okay, great. Then going back to the H2S, can you guys talk a little bit about – I understand you are doing an investigation right now, but what the options are, is this worth treating out, or are these wells that are all -- (inaudible) going to be shut in?

Robert Gerry

We don't know the answer. We have seen H2S in an outpost well that we had drilled back in 2010 I believe, 2009. We were surprised, that was the first time we had ever seen any H2S, that well is about 400 meters from these two wells that had gone sour on us. So we think that H2S is migrating through the reservoirs, that took 3.5 years, the next closest well is about a kilometer well, so that means it will take five years or six years to get to the next well, we don't know. There are ways to treat, but that would probably involve a new facility, and we will just have to look at the cost of that, whether it would be cost effective or not.

Brad Heffern – RBC Capital Markets

Then as far as G&A, obviously you guys said that you were up a little bit this quarter, just on that new office, but is there going to be sort of an increased strength going forward as you ramp up for the new Gabon drilling?

Robert Gerry

I wouldn't anticipate. We have got all the people on board that we need for that.

Brad Heffern – RBC Capital Markets

That's it for me. Thank you.

Operator

Thank you, and our next question is from the line of Sasha Kostadinov with Shaker Investments. Your line is open.

Sasha Kostadinov – Shaker Investments

Just a mundane question, can you give me some guidance on the tax rate going forward?

Greg Hullinger

Third quarter will probably be similar to second quarter, fourth quarter it will go down substantially, because we will be drilling, will be costs for covering a lot of the drilling costs. Same for first and second quarter of 2013, we will have a drilling regime in the area, probably until July-August of next year.

Sasha Kostadinov – Shaker Investments

Thank you.

Operator

(Operator Instructions.) We will go next to Chris McDougall with Westlake Securities.

Chris McDougall – Westlake Securities

Hi guys. Thanks for taking the question. On past calls, you have talked about converting a number of your rigs and other equipment to run off of the natural gas that you are producing, and I just wanted to get an idea of kind of the timing there, and how much impact, if significant, that might have on your operating cost?

Robert Gerry

Actually we burn gas on the FPSO to run all the power systems and heat (inaudible). We also run gas on our generators, on our Avouma platform to run all those facilities. At Ebouri we have low GOR, so we had diesel generators. The Tchibala field has a pretty significant gas source, and one of the things we have been wrestling with, was late in the life of the fields, when the production started to go down, was whether we would have sufficient gas to continue to run the FPSO with gas and the Avouma platform of gas. With the plan to accept this (inaudible) platform and develop, Southeast Etame and North Tchibala will be able to go after that gas source, and that will ensure that we have sufficient gas for all our needs.

We won't run our drilling rigs or anything with gas, those run with diesel and those are third party equipment anyway. But it's mainly making sure we can keep the FPSO running, that's our main use of fuel, keeping that ship going, and we fully expect to be able to do that with this gas source.

Actually, the North Tchibala well, East Etame are high GOR wells. So it will probably be several years before we will have to drill that gas, (inaudible) if at all. But we know we have got in our pocket, and that's nice to know, as opposed to having to haul 50,000 gallons of diesel around every day.

Chris McDougall – Westlake Securities

Sure, great. Then a different question, your kind of 2013 uses of capital on (inaudible), you have got a lot of exciting prospects and activities going on. How do you break those down between international and domestic for the uses of capital, going forward to 2013 and 2014?

Robert Gerry

It will be pretty heavy in international in 2013. If we drill a well in Angola, well or two in this new country and then our Gabon activity, you are looking at probably 75% of our cash flow going into international, and maybe 20%, 25% going into domestic. Maybe 80-20.

Chris McDougall – Westlake Securities

Is it a little too early to tell for 2014, depending on how various things go?

Robert Gerry

Well we know that in 2014, where we are setting a two $32 million platforms, net to VAALCO as well as starting to drill six wells at $7.5 million net to VAALCO. So again it will be heavy international. What we'd like to do, I think, is be drilling somewhere four to six wells domestically, if they start to work out like we hope they will, and you are seeing the cost of them of running $5 million to $7 million to $8 million a piece, so that's kind of what the domestic side would look like, as opposed to $90 million a year, we will be spending internationally in the next coming years.

Greg Hullinger

I think it's fair to say that VAALCO is going very cautiously on the domestic side with the balance sheet there. It is doubtful, but never say never that we will continue to search for domestic opportunities, until we prove up our two Bakken plays that we currently have. The reserve growth that we can undertake internationally for the price is superior to what we feel at the moment that we can find domestically in United States and you can see all the companies reporting impairments and whatever that they afford to take, maybe on gas properties. But we are going cautiously, and we need to have it proved to us that a lot of these plays in the domestic markets, unconventional plays, really have a rate of return that meets VAALCO's standards. So if Bakken does turn out to be, what we think it could be, it could be terrific. Bear in mind, we have 22,000 of [Bakken]. We have configured our first horizontal leg, and as Russ will mention, we will frac it here in another 30 days itself. But all 22,000 acres are held by one well. So we don't have the problem, that some of our peer groups will have continuous drilling to old acreage, it's already held actually by Shallow Production.

So it could be a real addition to our daily production if we ride on that, but we are going to make sure we are right, before we enter into any other domestic obligations. At least we haven't seen one yet, even though we are working, but we haven't seen one yet that meets our parameters.

Chris McDougall – Westlake Securities

Great. Thanks a lot guys.

Operator

Thank you. I will turn it back to our speakers for closing remarks.

Robert Gerry

Well, thank you all very much. Appreciate your attendance, and we will see you again next quarter. Thank you all.

Operator

Thank you. And ladies and gentlemen this will conclude our conference call for today. We thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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Source: VAALCO's Discusses Q2 2012 Results - Earnings Call Transcript
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