Source: VAALCO Energy.
Vaalco Energy (NYSE:EGY) is a small O&G producer, which owns and develops the Etame prospect offshore Gabon (please see map below). The company revenues depend essentially on these two simple elements:
- Production of O&G from the offshore Gabon prospect. Calculated using a percentage called working interest.
- The prices of oil and gas.
The business model is quite simple, and the investment thesis is consequently simple as well. Anything that affects one of the two elements indicated above, or both, will have a direct effect on the stock price.
Today's news has a positive effect on production and we will try to evaluate the impact in oil production from the Tchibala 2-H well and the Avouma 2-H well that have been worked over.
On December 21, 2016, Vaalco Energy announced the following:
[...] The South Tchibala 2-H well is back on production after utilizing a hydraulic workover unit to replace a failed Electrical Submersible Pump (NYSEMKT:ESP) system. The well is currently producing at a stabilized rate of 1,600 barrels of oil per day (BOPD) gross, or 430 BOPD net to VAALCO.
As previously announced, the ESP system failed in both the South Tchibala 2-H and the Avouma 2-H wells this past summer. Prior to temporarily shutting in the well after the ESP system failed, the South Tchibala 2-H well was producing approximately 1,700 gross BOPD or 460 BOPD net to VAALCO.
Separately, work is proceeding as planned to replace the failed ESP system in the Avouma 2-H well and the Company expects to return the well to production prior to year end. A detailed inspection of the failed ESPs is underway to determine the cause of the failures and results from the inspections are expected in the first quarter of 2017.
On January 26, 2016, Vaalco Energy indicated the following:
[...] 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.
On Thursday, September 15, 2016, VAALCO Energy announced the following:
[...] As previously disclosed, in late July the primary electrical submersible pump failed in the Avouma 2-H well on the Avouma Platform offshore Gabon in the Etame Marin Permit [...] 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.
A few comments regarding this news.
First, the workover and the pump replacement at the Tchilaba 2-H is working well, so far. Prior to the pump failure, production was 1,700 BOPD and it is now 1,600 BOPD which is good.
Cary Bounds, VAALCO's Chief Operating Officer and Interim CEO commented on November 28, 2016:
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%.
The closing of the acquisition of the full interest owned by Sojitz Etame Limited in the concession had an effective date of August 1, 2016.
Vaalco should have now a Working interest of 31.08%, however, when we calculate the percentage from the recent press release we get only 26.88% from an initial amount before the acquisition of 24.4%? I assume the Avouma 2-H well will be similar and we can apply 26.88% for both wells.
The company indicated that production for the Avouma 2-H well will resume before end of 2016.
Production combined South Tchilaba 2-H and Avouma 2-H should be around 3,400 BOPD (914 BOPD for Vaalco), starting 1Q'17. This represents an increase for 1Q'17 of 82.3 KBOPD.
A quick look at production until 3Q'16:
Below is indicated the quarterly oil production since 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 kBOE||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|
|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|
The 4Q'16 production will be really depressed due to the wells aforementioned and I have estimated a total production for the 4Q'16 of around 325k BOE which will increase again in 1Q'17 to approximately 440k BOE with the Sojitz acquisition effect.
This news will be followed soon by the production of the Avouma 2-H well -- hopefully -- which is a definitive positive for the company, but I do not think it will trigger any upside from here?
The stock has already factored in the positive effect of this future increase production input. Consequently, we are experiencing some selling today that we can qualify of "buy on rumor and sell on the news".
I see a potential re-test of the $1 (SMA 200) probably triggered by the dismal production numbers for the next 4Q'16. Resistance is now at $1.28, at which point I recommend to take profit off the table again.
On a final note, one word about today's new about Harvest Natural Resources (NYSE:HNR).
HNR announced it sold 66.667% interest in the Dussafu production sharing contract to BW Energy Gabon Pte. For a Net proceeds of around $32 million in cash ($29.7 million nets to HNR).
It is a disappointment because I believe EGY management should have acquired the 66.667% in the Dussafu project -- especially at this discounted price -- which appeared to be a perfect extension of the Etame prospect.
I understand that due to cut back on production and depressed oil prices, EGY was probably not in the measure to secure a financing. Oh well...
Important note: Do not forget to forget to follow me on EGY. 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.
Additional disclosure: I have sold recently a significant part of my holding.
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.