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| EGY > SEC Filings for EGY > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
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 preceded 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 the
volatility of oil and natural gas prices; future production costs; future
production quantities; the uncertainty of estimates of oil and natural gas
reserves; the impact of competition; the availability and cost of seismic,
drilling and other equipment; operating hazards inherent in the exploration for
and production of oil and natural gas; difficulties encountered during the
exploration for and production of oil and natural gas; difficulties encountered
in delivering oil to commercial markets; general economic conditions, including
the current economic and financial market crisis; changes in customer demand and
producers' supply; the uncertainty of the Company's ability to attract capital;
compliance with, or the effect of changes in, the foreign governmental
regulations regarding the Company's exploration and production, including those
related to climate change; action of operators of the Company's oil and natural
gas properties; weather conditions; 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 offshore Louisiana in the Gulf of Mexico.
The Company's primary source of revenue is from the Etame Production Sharing Contract related to the Etame Marin block located offshore the Republic of Gabon. The Company produces from the Etame, Avouma, South Tchibala and Ebouri fields on the block. Oil production commenced from the Etame field in September 2002 and from the Avouma and South Tchibala fields in January 2007. Most recently, the Company developed the Ebouri field, which was discovered in 2004. A platform was installed in August 2008, and the first development well was drilled in late 2008. First production from this well began in January 2009. A second development well was drilled in early 2009, with production commencing from that well in April 2009. During the first three months of 2009, the Etame, Avouma, South Tchibala and Ebouri fields produced approximately 1.9 million bbls (0.45 million bbls net to the Company).
Beginning in November 2008, drilling began on the first of three planned exploration wells, all of which are located within the Etame Marin block. The first of these wells, the North Ebouri, encountered substantial oil-filled Gamba sandstone, proving-up significant additional reserves north of the originally mapped field development outline. The second well, the North Etame prospect, encountered water bearing sands and has been abandoned. The timing for drilling the third prospect, the South East Etame, is dependent on consortium agreement.
Onshore Gabon, the Company has a 100% working interest in the Mutamba Iroru block located near the coast in central Gabon. The Mutamba Iroru block contains approximately 270,000 acres for exploration. The Company acquired aeromagnetic gravity data in 2008 and, together with seismic data acquired from previous operators over the block in 2006 and 2007, drilled two exploration wells on the block in 2009. Both wells encountered water bearing sands and were abandoned. Future plans for this block are being evaluated.
In November 2006, the Company signed a production sharing contract for a 40% working interest in Block 5 offshore Angola. The seven-year contract awards the Company exploration rights to approximately 1.4 million acres along the central coast of Angola. The Company has acquired approximately 1,700 square kilometers of seismic data over a portion of the Block 5 and has been interpreting the seismic data. Assuming consortium agreement on the well objective and rig availability, the Company expects the first exploration well to be drilled in late-2009/ early-2010.
In January 2008, the Company signed a farm-in agreement for a 25% working interest in Block 48/25c located in the Southern Gas Basin offshore in the British North Sea. The Company was obligated to pay its share of the drilling of one exploratory well on the block, the drilling of which took place in the first quarter of 2009. A substantial gas column was present but with low permeability and porosity. The well was deemed to be non-commercial and was abandoned.
Impact of the Current Financial and Credit Markets
The financial markets continue to undergo 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 October 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 March 31, 2009 totaled $88.0 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 Total Oil Trading SA, which the Company believes to be a creditworthy purchaser.
Oil and gas prices are also volatile as evidenced by the recent significant decline. Continued lower commodity prices will reduce the Company's cash flows from operations.
CAPITAL RESOURCES AND LIQUIDITY
Cash Flows
Net cash provided by operating activities for the three months ended March 31, 2009 was $2.8 million, as compared to $14.3 million for the three months ended March 31, 2008. The decrease in cash provided by operations for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 was due primarily to a decrease in working capital other than cash of $11.2 million for the three months ended March 31, 2009, compared to a use of cash for working capital other than cash of $0.2 million for the three months ended March 31, 2008.
Net cash used in investing activities for the three months ended March 31, 2009 was $38.7 million, compared to net cash used in investing activities for the three months ended March 31, 2008 of $8.2 million. For the three months ended March 31, 2009, the Company invested $16.9 million associated with the development of the Ebouri field. In addition, four unsuccessful exploration wells were charged to exploration expense in the three months ended March 31, 2009 totaling $19.8 million. For the three months ended March 31, 2008, the Company invested $4.0 million in the Etame Marin block operations for the development of the Ebouri field and completed the drilling of a dry well in the North Sea at a cost of $6.4 million for the quarter.
For the three months ended March 31, 2009, cash used in financing activities was $1.5 million consisting primarily of distributions to a minority interest. For the three months ended March 31, 2008, cash used by financing activities of $2.8 million consisted primarily of distributions to a minority interest owner of $1.5 million and purchase of treasury shares of $1.3 million.
Capital Expenditures
During the three months ended March 31, 2009, the Company incurred $12.6 million of net property and equipment additions, primarily associated with the platform and drilling of the three wells in the Ebouri field (the appraisal well plus the two development wells drilled from the Ebouri platform) totaling $16.9 million. Partially offsetting this addition were capitalized exploration well costs charged to expense during the quarter totaling $3.0 million and an equipment reduction of $1.4 million. During the remainder of 2009 in the Etame Marin block, the Company anticipates drilling one development well at a remaining cost of $9.2 million and a contingent exploration well at an estimated cost of $16.0 million. Additionally, the locations and timing for drilling the two commitment wells in Block 5 Angola remain under evaluation by the consortium. Late-2009 is the earliest projected date for the first well to be drilled. Estimated cost to the Company for the first well is projected to be $18.0 million.
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 for drilling exploratory well, 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. For the three months ended March 31, 2009, exploration expense included dry hole costs associated with four unsuccessful exploration wells. The dry hole costs were comprised of $2.3 million associated with the Company's participation in a well in Block 48/25c in the British North Sea, $2.4 million for the North Etame well offshore Gabon and $15.1 million for the two wells drilled in the Mutamba Iroru block onshore Gabon. Exploration expense for the three months ended March 31, 2008 included $6.4 million of dry hole costs associated with an unsuccessful well in Block 9/28d in the British North Sea.
Liquidity
Historically, the Company's primary sources of capital have been cash flows from operations, private sales of equity, borrowings and purchase money debt. At March 31, 2009, the Company had cash of $88.0 million. The Company believes that this cash combined with cash flow from operations will be sufficient to fund the Company's remaining 2009 capital expenditure budget, required debt service payments and additional investments in working capital resulting from potential growth. 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 International Finance Corporation ("IFC") for a $30.0 million revolving credit facility which is secured by the assets of the Company's Gabon subsidiary. 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 subsidiary which owns the Company's interest in the Etame Marin block. 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 Total Oil Trading SA ("Total"). While the loss of Total 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 Louisiana in the Gulf of Mexico, which contributed $27,000 to revenues in the first quarter of 2009. 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.
RESULTS OF OPERATIONS
Three months ended March 31, 2009 compared to three months ended March 31, 2008
Revenues
Total revenues were $21.3 million for the three months ended March 31, 2009 compared to $42.2 million for the comparable period in 2008. The Company sold approximately 503,700 net barrels of oil equivalent at an average price of $42.15 in the three months ended March 31, 2009. In the three months ended March 31, 2008, the Company sold approximately 446,000 net barrels of oil equivalent at an average price of $94.44 per barrel. Crude oil production from the Etame, Avouma, South Tchibala and Ebouri fields averaged 21,300 barrels oil per day ("BOPD") in the three months ended March 31, 2009 compared to approximately 22,500 BOPD in the three months ended March 31, 2008. 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 March 31, 2009 were $5.7 million compared to $4.4 million in the three months ended March 31, 2008. The Company matches production expenses with crude oil sales. Any production expenses associated with unsold crude oil inventory are capitalized. Expenses in the three months ended March 31, 2009 were higher than in the three months ended March 31, 2008 due to increased sales volumes as well as higher FPSO, boat and helicopter costs.
Exploration expense was $20.5 million for the three months ended March 31, 2009 compared to $6.7 million in the comparable period in 2008. For the three months ended March 31, 2009, exploration expense consisted primarily of dry hole costs associated with four unsuccessful exploration wells. The dry hole costs included $2.3 million associated with the Company's participation in a well in block 48/25c in the British North Sea, $2.4 million for the North Etame well offshore Gabon and $15.1 million for the two wells drilled in the Mutamba Iroru block onshore Gabon. Exploration expense for the three months ended March 31, 2008 consisted primarily of $6.4 million of dry hole costs associated with an unsuccessful well in Block 9/28d in the British North Sea and $0.3 million of other exploration costs.
Depreciation, depletion and amortization expenses were $5.7 million in the three months ended March 31, 2009 compared to $4.9 million in the three months ended March 31, 2008. The higher depreciation, depletion and amortization expenses during the three months ended March 31, 2009 compared to the three months ended March 31, 2008 are due to a higher average depletion rate following the commencement of production from the Ebouri field during the quarter.
General and administrative expenses for the three months ended March 31, 2009 and 2008 were ($0.1) million and $2.0 million for each period, respectively. The credit reported for the three months ended March 31, 2009 was partially attributable to a retroactive compensation adjustment that benefited the Company by charging the adjustment to the Gabon partners. During the three months ended March 31, 2009, the Company incurred stock based compensation expense of $0.7 million. In each of the three month periods ended March 31, 2009 and 2008, the Company benefited from overhead reimbursement associated with production and development operations on the Etame Marin block. During the three months ended March 31, 2008, the Company incurred stock based compensation expense of $0.2 million.
Other Income (Expense)
Interest income received on amounts on deposit was $0.4 million in the three months ended March 31, 2009 compared to $0.5 million in the three months ended March 31, 2008. The decrease in interest income received on amounts on deposit reflects lower interest rates in 2009. Interest expense and financing charges for the IFC loan was $15,000 for the three months ended March 31, 2009 compared to $0.4 million for the three months ended March 31, 2008, reflecting interest on amounts drawn on the IFC revolver. The majority of the interest paid in 2009 was eligible for capitalization, which reduced the amount of interest expense for the three months ended March 31, 2009.
Income Taxes
Income taxes amounted to $2.4 million and $21.4 million for the three months ended March 31, 2009 and 2008, respectively. In the three months ended March 31, 2009 and in the three months ended March 31, 2008, the income taxes were all paid in Gabon. Income taxes in the three months ended March 31, 2009 were significantly lower compared to the same period in 2008 because of a fifty percent reduction in the oil revenues and a higher percentage of oil production allocated as "cost oil" vs. "profit oil". The payment of income taxes the consortium pays the government of Gabon is an allocation of the remaining profit oil production from a contract area ranging from 50% to 60% of the oil remaining after deducting the royalty and the cost oil. Because of the capital expenditures incurred during the fourth quarter of 2008 and the first quarter of 2009, there was less production allocated as profit oil and thus a corresponding reduction in the amount of income tax paid by the Company.
Net Income (Loss)
Net loss for the three months ended March 31, 2009 was $12.0 million, compared to net income of $2.9 million for the same period in 2008. Higher exploration costs associated with dry hole write-offs and lower crude oil prices were the primary contributors to the net loss in 2009. Higher production costs and depreciation, depletion and amortization costs also contributed to the net loss for the quarter ended March 31, 2009. Net income allocated to noncontrolling interest was $0.6 million and $1.1 million in the three months ended March 31, 2009 and 2008, respectively The noncontrolling interest is associated with VAALCO Energy (International), Inc., a subsidiary that is 90.01% owned by the Company.
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