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| EGY > SEC Filings for EGY > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
This report 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 ("Exchange Act"). All statements
other than statements of historical fact included in this report (and the
exhibits hereto), including without limitation, statements regarding the
Company's financial position and estimated quantities and net present values of
reserves, and statements proceed by, followed by or that otherwise include the
word "believes," "expects," "anticipates," "intends," "projects," "target,"
"goal," "objective," "should," or similar expressions or variations of such
expressions are forward looking statements. The Company can give no assurances
that the assumptions upon which such statements are based will prove to have
been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") include
volatility of oil and gas prices, future production costs, future production
quantities, operating hazards, weather, the credit and financial market crisis,
and statements set forth in the "Risk Factors" section included in the Company's
Forms 10-K. All subsequent written and oral forward looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified by the Cautionary Statements.
INTRODUCTION
The Company operates oil production sharing contracts in Gabon and Angola, and has interests in two blocks in the British North Sea. In addition, the Company has minor onshore and offshore domestic United States production in Texas and Louisiana. In Gabon, the Company operates the Etame Marin block, a 750,000 acre block offshore southern Gabon. Three fields on the Etame Marin block are under production, the Etame, Avouma and South Tchibala fields. During the nine months of 2008, these fields produced 5.9 million barrels of oil (1.4 million barrels net to the Company). The Company is also developing the Ebouri field on the Etame Marin block. Construction of the production platform was completed in April 2008 and the platform was successfully installed in Gabonese waters in August 2008. First production from the Ebouri field is expected in January 2009. In addition to developing the Ebouri field, the Company has plans to drill three exploration wells on the Etame Marin block beginning in November 2008.
Also in Gabon, the Company operates the Mutamba Iroru block, a 270,000 acre onshore license which the Company acquired in 2005. The Company anticipates drilling the first of two exploration wells on the block in December 2008. There is currently no production from the Mutamba Iroru block.
In Angola, the Company operates Block 5, a 1.4 million acre offshore license which the Company acquired in December 2006. The Company has leased 1,140 square kilometers of 3-D data over the block and has a commitment to drill two exploration wells prior to December 1, 2010. The Company expects to drill the first of the exploration wells during the second half of 2009. During September 2008, the Company shot 400 square kilometers of new 3-D seismic over a portion of Block 5 which will be interpreted over the next two quarters.
In the British North Sea, the Company in January 2008 signed a farm-in agreement for a 25% working interest in Block 48/25c located offshore in the Southern Gas Basin. An exploration well is expected to be drilled during the fourth quarter of 2008.
Impact of the Current Financial and Credit Markets
The financial markets are undergoing unprecedented disruptions. Many financial institutions have liquidity concerns prompting intervention from governments. The Company's exposure to the disruptions in the financial markets includes the Company's credit facility, ability to access the capital markets and investments exposure.
The Company's credit facility extends through 2009 and may be extended or converted into a term loan, at the Company's option. If the disruption in the financial markets continues for an extended period of time, replacement of the credit facility may be more expensive.
Current market conditions also elevate concerns with the Company's cash investments, which at September 30, 2008 totaled $103.5 million. With regard to the Company's cash investments, the Company invests in bankers acceptances and money market instruments primarily with JPMorgan Chase & Co. The Company's production in Gabon is purchased by Shell, which the Company believes to be a creditworthy purchaser.
CAPITAL RESOURCES AND LIQUIDITY
Cash Flows
Net cash provided by operating activities for the nine months ended September 30, 2008 was $65.5 million, as compared to $21.7 million for the nine months ended September 30, 2007. The increase in cash provided by operations for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 was primarily due to higher net income and more favorable changes in working capital other than cash used in operations of $0.6 million for the nine months ended September 30, 2008, compared to $14.1 million used in operations for the nine months ended September 30, 2007.
Net cash used in investing activities for the nine months ended September 30, 2008 was $24.7 million, compared to net cash used in investing activities for the nine months ended September 30, 2007 of $9.7 million. For the nine months ended September 30, 2008, the Company invested $16.0 million in the Etame Marin block operations, primarily for development of the Ebouri field. Also, the Company incurred $6.2 million of dry hole costs for a North Sea well during the period.
For the nine months ended September 30, 2008, cash used in financing activities was $13.7 million, consisting primarily of distributions to a minority interest owner of $5.0 million and purchase of shares of $8.9 million. For the nine months ended September 30, 2007, cash used by financing activities of $2.7 million consisted of $3.0 million used for distributions to minority interest holders and $0.3 million in proceeds from the issuance of common stock.
Oil and gas prices have declined significantly since the end of the third quarter 2008. This will reduce the Company's cash flows from operations.
Capital Expenditures
During the nine months ended September 30, 2008, the Company incurred $16.9 million of capital expenditures (including amounts carried in accounts payable at September 30, 2008), primarily associated with the construction of the development platform in the Ebouri field. During the remainder of 2008, the Company anticipates commencing an exploration program with three exploration wells on the Etame Marin block, two exploration wells on the Mutamba block and one well in the British North Sea. The budget for the six exploration wells is approximately $35.0 million net to the Company. In addition, the Company will complete the installation and commissioning of the Ebouri platform and drill one or two development wells at a remaining cost of $16 million to $24 million net to the Company. The first development well will be drilled in the fourth quarter of 2008.
Liquidity
Historically, the Company's primary sources of capital have been cash flows from operations, private sales of equity, and debt. At September 30, 2008, the Company had cash of $103.5 million. The Company believes that this cash combined with cash flow from operations will be sufficient to fund the Company's remaining 2008 capital expenditure budget, required debt service payments and operational needs. The Company invests cash, not required for immediate operational and capital expenditure needs, in short-term bankers acceptance and money market instruments primarily with JPMorgan Chase & Co. The Company has no exposure to the asset-backed commercial paper market which has been subject to a liquidity crisis over the past year. As operator of the Etame Marin block and Block 5 in Angola, the Company enters into project related activities on behalf of its working interest partners. The Company generally obtains advances from it partners prior to significant funding commitments.
In June 2005, the Company executed a loan agreement with the IFC for a $30.0 million revolving credit facility which is secured by the assets of VAALCO Gabon (Etame), Inc., the subsidiary which owns the Company's interest in the Etame Marin block. The facility extends through October 2009 at which point it can be extended, or converted to a term loan. Under the revolving credit facility, the IFC holds a pledge of the Company's interest in the Etame Marin block, and a pledge of the shares of VAALCO Gabon (Etame), Inc. The IFC also has a security interest in any crude oil sales contract the Company enters into for the sale of crude oil from the Etame Marin block.
Substantially all of the Company's crude oil and gas is sold at the well head at posted or index prices under short-term contracts. In Gabon, the Company markets its crude oil under an agreement with Shell. The Company believes Shell to be a creditworthy purchaser. While the loss of Shell as a buyer might have a material adverse effect on the Company in the near term, management believes that the Company would be able to obtain other customers for its crude oil.
Domestically, the Company produces from wells in Brazos County Texas and offshore in the Gulf of Mexico, which contributed $192,000 to revenues in the nine months ended September 30, 2008. Domestic production is sold via separate contracts for oil and gas. The Company has access to several alternative buyers for oil and gas sales domestically.
Oil and Gas Exploration Costs
The Company uses the "successful efforts" method of accounting for its oil and gas exploration and development costs. All expenditures related to exploration, with the exception of costs of drilling exploratory wells, are charged as an expense when incurred. The costs of exploratory wells are capitalized pending determination of whether commercially producible oil and gas reserves have been discovered. If the determination is made that a well did not encounter potentially economic oil and gas quantities, the well costs are charged as an expense. During the nine months ended September 30, 2008, the Company spent $6.2 million on a well in the British North Sea which was suspended as a non-commercial oil discovery and $2.1 million on other exploration activities including 2-D seismic acquisition in Gabon.
RESULTS OF OPERATIONS
Three months ended September 30, 2008 compared to three months ended September 30, 2007
Revenues
Total revenues were $55.5 million for the three months ended September 30, 2008 compared to $34.8 million for the comparable period in 2007. The Company sold approximately 517,000 net barrels of oil equivalent at an average price of $107.48 per barrel in the three months ended September 30, 2008. In the three months ended September 30, 2007, the Company sold approximately 472,000 barrels of oil equivalent at an average price of $73.79 per barrel. Crude oil production from the Etame, Avouma and South Tchibala fields is averaging 21,000 barrels of oil per day ("BOPD") compared to approximately 20,000 BOPD in the three months ended September 30, 2007. Crude oil sales are a function of the number and size of crude oil liftings in each quarter from the FPSO and thus crude oil sales do not always coincide with volumes produced in any given quarter.
Operating Costs and Expenses
Total production expenses for the three months ended September 30, 2008 were $5.9 million compared to $3.8 million in the three months ended September 30, 2007. The Company matches production expenses with crude oil sales. Any production expenses associated with unsold crude oil inventory are capitalized. Production expenses in the three months ended September 30, 2008 were higher than in the three months ended September 30, 2007 due to increased volumes sold as well as higher boat rental costs, higher FPSO costs, higher helicopter costs and higher fuel costs.
Exploration expense was $0.3 million for the three months ended September 30, 2008 compared to $0.7 million in the comparable period in 2007. For the three months ended September 30, 2008, exploration expense consisted of seismic processing costs in Angola. Exploration expense for the three months ended September 30, 2007 consisted primarily of seismic processing costs in Gabon and acquiring 2-D seismic in Angola.
Depreciation, depletion and amortization expenses were $6.0 million in the three months ended September 30, 2008 compared to $4.8 million in the three months ended September 30, 2007. The higher depreciation, depletion and amortization expenses during the three months ended September 30, 2008 compared to the three months ended September 30, 2007 was due to higher volumes of oil sold.
General and administrative expenses for the three months ended September 30, 2008 and 2007 were $1.5 million and $1.8 million for each period, respectively. The lower general and administrative expenses were primarily attributable to lower stock based compensation expense of $0.2 million in the three months ended September 30, 2008 compared to $0.6 million in the three months ended September 30, 2008. In both of the three months ended September 30, 2008 and 2007, the Company benefited from overhead reimbursement associated with production and development operations on the Etame Marin block.
Other Income (Expense)
Interest income received on amounts on deposit was $0.6 million in the three months ended September 30, 2008 compared to $1.0 million in the three months ended September 30, 2007. The decrease in interest income received on amounts on deposit reflects lower interest rates in the three months ended September 30, 2008 as compared to the same period of 2007.
Income Taxes
Income taxes amounted to $17.4 million and $14.7 million for the three months ended September 30, 2008 and 2007, respectively. In the three months ended September 30, 2008 and in the three months ended September 30, 2007, the income taxes were all paid in Gabon. Income taxes in the three months ended September 30, 2008 were higher due to higher oil prices, which increased taxable revenues.
Minority Interest
The Company incurred $2.7 million and $1.2 million in minority interest charges in the three months ended September 30, 2008 and 2007, respectively. These minority interest charges were associated with VAALCO Energy (International), Inc., a subsidiary that is 90.01% owned by the Company.
Net Income
Net income for the three months ended September 30, 2008 was $22.3 million, compared to net income of $8.8 million for the same period in 2007. Higher oil prices and crude volumes sold, which were partially offset by higher operating costs, contributed to the higher net income in 2008.
Nine months ended September 30, 2008 compared to nine months ended September 30, 2007
Revenues
Total revenues were $153.1 million for the nine months ended September 30, 2008 compared to $88.1 million for the comparable period in 2007. The Company sold approximately 1,428,000 net barrels of oil equivalent at an average price of $107.21 per barrel in the nine months ended September 30, 2008. In the nine months ended September 30, 2007, the Company sold approximately 1,334,000 barrels of oil equivalent at an average price of $66.05 per barrel. Crude oil sales are a function of the number and size of crude oil liftings in each quarter from the FPSO and thus crude oil sales do not always coincide with volumes produced in any given quarter.
Operating Costs and Expenses
Total production expenses for the nine months ended September 30, 2008 were $14.9 million compared to $11.1 million in the nine months ended September 30, 2007. The Company matches production expenses with crude oil sales. Any production expenses associated with unsold crude oil inventory are capitalized. Production expenses in the nine months ended September 30, 2008 were higher than in the nine months ended September 30, 2007 due to higher insurance costs, higher costs of boat and helicopter rentals, higher fuel costs and higher FPSO costs.
Exploration expense was $8.3 million for the nine months ended September 30, 2008 compared to $6.1 million in the comparable period in 2007. Exploration expense for the nine months ended September 30, 2008 included $6.2 million of dry hole costs associated with a well drilled by the Company in the North Sea. Also included in exploration expense were aeromagnetic gravity data acquired over the Mutamba Iroru block, onshore Gabon, seismic acquisition and processing costs associated with the Company's Etame Marin block and seismic processing costs in Angola. Exploration expense for the nine months ended September 30, 2007 included $3.9 million associated with licensing 1,175 square kilometers of 3-D seismic data for Block 5 in Angola and $1.3 million for the acquisition and processing of 400 square kilometers of offshore Gabon 3-D seismic.
Depreciation, depletion and amortization expenses were $16.2 million in the nine months ended September 30, 2008 compared to $13.5 million in the nine months ended September 30, 2007. The higher depreciation, depletion and amortization expenses during the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 was due to higher volumes of oil sold and increasing percentages of total production coming from the Avouma and South Tchibala fields, which have higher depletion rates than production from the Etame field.
General and administrative expenses for the nine months ended September 30, 2008 and 2007 were $7.1 million and $6.1 million for each period, respectively. The higher general and administrative costs in the nine months ended September 30, 2008 as compared to the same period of 2007 were due in part to non-recurring legal and solicitation costs associated with the Company's annual meeting. The Company also incurred $0.4 million of general and administrative costs related to the operation of the Company office in Angola in the nine months ended September 30, 2008. This office opened in Angola in September 2007. During the nine months ended September 30, 2008, the Company incurred $0.7 million of stock based compensation compared to $1.7 million incurred in the nine months ended September 30, 2007.
Other Income (Expense)
Interest income received on amounts on deposit was $2.0 million in the nine months ended September 30, 2008 compared to $2.9 million in the nine months ended September 30, 2007. The decrease in interest income received on amounts on deposit reflects lower interest rates in the nine months ended September 30, 2008 as compared to the same period of 2007. Interest expense and financing charges were $0.5 million for the nine months ended September 30, 2008 compared to $0.9 million for the nine months ended September 30, 2007, all of which was associated with the Company's IFC loan.
Income Taxes
Income taxes amounted to $65.2 million and $33.3 million for the nine months ended September 30, 2008 and 2007, respectively. In the nine months ended September 30, 2008 and 2007, the income taxes were all paid in Gabon. The higher income taxes paid in Gabon in nine months ended September 30, 2007 were due to higher oil prices and crude volumes sold.
Discontinued Operations
Expense from discontinued operations in the Philippines in the nine months ended September 30, 2007 was $0.1 million. The Philippines offices were closed in 2007 and no costs related to this office were incurred in 2008.
Minority Interest
The Company incurred $5.7 million and $3.0 million in minority interest charges in the nine months ended September 30, 2008 and 2007, respectively. These minority interest charges were associated with VAALCO Energy (International), Inc., a subsidiary that is 90.01% owned by the Company.
Net Income
Net income for the nine months ended September 30, 2008 was $37.2 million, compared to net income of $17.1 million for the same period in 2007. Higher oil prices and crude volumes sold, which was partially offset by higher operating costs, contributed to the higher net income in 2008.
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