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| EGY > SEC Filings for EGY > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-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; political turmoil in the Republic of Gabon; weather conditions;
and statements set forth in the "Risk Factors" section included in this report
and in the Company's Form 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 non-active interests in two blocks in the British North Sea. In addition, the Company has minor onshore and offshore domestic United States production 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. Production from the first well in this field began in January 2009. A second development well began producing oil in April 2009. During the first six months of 2009, the Etame, Avouma, South Tchibala and Ebouri fields produced approximately 4.1 million bbls (1.0 million bbls net to the Company).
Beginning in November 2008, drilling began on the first of two exploration wells, both 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. Additional drilling prospects have been identified and planning is underway to conduct a multi-well drilling program. Dependent on equipment and rig availability, drilling is expected to commence in late 2009.
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 Mutamba Iroru block in 2006 and 2007, drilled two exploration wells on this 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 objectives and rig availability, the Company expects the first of two planned exploration wells to be drilled as early as first quarter 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 although there are recent measures of improvement in this area. 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 June 30, 2009 totaled $88.4 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 ("Total"), which the Company believes to be a creditworthy purchaser.
Oil and gas prices are also volatile as evidenced by the fluctuations seen in the past two years. In periods where commodity prices are relatively low, the Company's cash flows from operations will be negatively impacted.
CAPITAL RESOURCES AND LIQUIDITY
Cash Flows
Net cash provided by operating activities for the six months ended June 30, 2009 was $20.6 million, as compared to $55.3 million for the six months ended June 30, 2008. The decrease in cash used in operations for the six months ended June 30, 2009 compared to the six months ended June 30, 2008 was primarily due to lower net income due to lower oil prices and due to changes in working capital other than cash which used $9.8 million for the six months ended June 30, 2009, compared to an increase in working capital other than cash of $20.2 million for the six months ended June 30, 2008.
Net cash used in investing activities for the six months ended June 30, 2009 was $54.1 million, compared to net cash used in investing activities for the six months ended June 30, 2008 of $11.4 million. For the six months ended June 30, 2009, the Company incurred $32.0 million in dry hole costs and the remainder was primarily invested in the appraisal well and two development wells in the Ebouri field. For the six months ended June 30, 2008, the Company invested $5.0 million in the Etame Marin block operations for the development of the Ebouri field and completed the drilling of an unsuccessful well in the North Sea at a cost of $6.4 million for the period.
For the six months ended June 30, 2009, cash used in financing activities was $3.6 million, consisting of distributions to a noncontrolling interest owner of $3.0 million and repurchase of shares of $0.6 million. For the six months ended June 30, 2008, cash used by financing activities of $11.8 million consisted primarily of $3.0 million used for distributions to noncontrolling interest holders and repurchase of shares of $8.9 million. In addition, the Company received $0.1 million in proceeds from the issuance of common stock upon the exercise of stock options.
Capital Expenditures
During the six months ended June 30, 2009, the Company incurred $9.3 million of net property and equipment additions (including amounts carried in accounts payable at June 30, 2009), primarily associated with the drilling of the three wells in the Ebouri field (the appraisal well plus the two development wells drilled from the Ebouri platform) totaling $18.4 million. Partially offsetting these equipment additions was a realignment agreement with a joint venture partner that originally did not participate in an appraisal well and one of the development wells in the Ebouri field. Pursuant to the realignment agreement, the joint venture partner paid its proportionate share of capital expenditures for the wells, which reduced the Company's capital expenditures by $5.7 million. Also partially offsetting the net property and equipment additions were capitalized exploration well costs charged to expense totaling $3.0 million and an equipment reduction of $0.4 million. During the remainder of 2009 in the Etame Marin block, the Company anticipates drilling one exploration well at a cost of $4.5 million and expending an additional $2.0 million for equipment for the 2010 drilling program.
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 June 30, 2009, the Company had a cash balance of $88.4 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. 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 in the Gulf of Mexico, which contributed $43,000 to revenues in the six months ended June 30, 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.
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 six months ended June 30, 2009, the Company spent $32.0 million on unsuccessful exploration wells, including $20.2 million for two wells in onshore Gabon, $2.7 million for a well in offshore Gabon, and $9.1 million for a well in the British North Sea.
RESULTS OF OPERATIONS
Three months ended June 30, 2009 compared to three months ended June 30, 2008
Revenues
Total revenues were $32.1 million for the three months ended June 30, 2009 compared to $55.4 million for the comparable period in 2008. The Company sold approximately 544,000 net barrels of oil equivalent at an average price of $59.10 per barrel in the three months ended June 30, 2009. In the three months ended June 30, 2008, the Company sold approximately 464,000 barrels of oil equivalent at an average price of $119.18 per barrel. Crude oil production from the Etame, Avouma, South Tchibala and Ebouri fields averaged 24,000 BOPD compared to approximately 21,500 BOPD in the three months ended June 30, 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 June 30, 2009 and June 30, 2008 were $4.5 million. 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 June 30, 2009 were in aggregate the same as in the three months ended June 30, 2008, primarily due to lower fuel costs offset by the increase in oil sales volumes.
Exploration expense was $13.5 million for the three months ended June 30, 2009 compared to $1.3 million in the comparable period in 2008. For the three months ended June 30, 2009, exploration expense consisted primarily of dry hole costs totaling $12.1 million. The dry hole costs included $6.7 million for a well in the British North Sea, $5.0 million for two wells in onshore Gabon and $0.3 million for a well in offshore Gabon. Exploration expense for the three months ended June 30, 2008 consisted of 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.
Depreciation, depletion and amortization expenses were $5.6 million in the three months ended June 30, 2009 compared to $5.2 million in the three months ended June 30, 2008. The higher depreciation, depletion and amortization expenses during the three months ended June 30, 2009 compared to the three months ended June 30, 2008 are due to higher oil sales volumes.
General and administrative expenses for the three months ended June 30, 2009 and June 30, 2008 were $3.9 million and $3.6 million, for each period, respectively. Included in the general and administrative expenses for the three months ended June 30, 2009 was an expense for retirement benefits of $1.2 million. Included in the general and administrative expenses for the three months ended June 30, 2008 were non-recurring legal and solicitation costs associated with the Company's annual meeting. Also during the three months ended June 30, 2009 and June 30, 2008, the Company incurred stock based compensation expense of $0.4 million and $0.2 million, respectively. In both of the three months ended June 30, 2009 and June 30, 2008, the Company benefited from overhead reimbursement associated with production and development operations on the Etame Marin block.
Other operating income for the period ended June 30, 2009 was $2.0 million attributable to receipt of proceeds from a joint venture partner that originally elected to not participate in two wells drilled in the Ebouri field, offshore Gabon. The partner later elected to participate and paid for their proportionate share of the capital expenditures for the wells. The $2.0 million payment represents a portion of the Company's share of an agreed risk premium benefiting the other joint venture partners that originally participated in those two wells. The remaining proceeds of $4.5 million are expected to be received and recognized as other operating income in the third quarter of 2009.
Other Income (Expense)
Other income for the three months ended June 30, 2009 and June 30, 2008 were $0.7 million and $0.8 million for each period, respectively. Included in other income for the three months ended June 30, 2009 was a foreign exchange gain of $0.6 million. Interest income received on amounts on deposit was $0.3 million in the three months ended June 30, 2009 compared to $0.8 million in the three months ended June 30, 2008. The decrease in interest income received on amounts on deposit reflects lower interest rates and amounts invested in 2009. Interest expense and financing charges for the IFC loan was $0.1 million for the three months ended June 30, 2009 compared to $0.1 million for the three months ended June 30, 2008, reflecting interest on amounts borrowed on the IFC loan, net of capitalized interest expense.
Income Taxes
Income tax expense amounted to $7.3 million and $26.5 million for the three months ended June 30, 2009 and June 30, 2008, respectively. In the three months ended June 30, 2009 and in the three months ended June 30, 2008, the income taxes were all paid in Gabon. Income taxes in the three months ended June 30, 2009 were lower due to lower oil prices and a lower percentage of oil allocated as profit oil versus cost oil which decreased taxable revenues.
Net Income (Loss)
Net loss for the three months ended June 30, 2009 was $39,000, compared to net income of $15.0 million for the same period in 2008. Lower oil prices partially offset by a higher oil sales volume and the exploration costs incurred for dry hole write-offs contributed to the lower net income in the second quarter of 2009. Net income allocated to noncontrolling interest was $1.6 million and $2.0 million in the three months ended June 30, 2009 and 2008, respectively The noncontrolling interest is associated with VAALCO Energy (International), Inc., a subsidiary that is 90.01% owned by the Company.
Six months ended June 30, 2009 compared to six months ended June 30, 2008
Revenues
Total revenues were $53.4 million for the six months ended June 30, 2009 compared to $97.5 million for the comparable period in 2008. The Company sold approximately 1,047,000 net barrels of oil equivalent at an average price of $50.95 per barrel in the six months ended June 30, 2009. In the six months ended June 30, 2008, the Company sold approximately 910,000 barrels of oil equivalent at an average price of $107.06 per barrel. Crude oil production from the Etame, Avouma, South Tchibala and Ebouri fields averaged 22,700 BOPD compared to approximately 22,300 BOPD in the six months ended June 30, 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 six months ended June 30, 2009 were $10.2 million compared to $8.9 million in the six months ended June 30, 2008. The Company matches production expenses with crude oil sales. Any production expenses associated with unsold crude oil inventory are capitalized. Expenses in the six months ended June 30, 2009 were higher due to increased sales volumes as well as higher FPSO, boat and helicopter costs.
Exploration expense was $34.0 million for the six months ended June 30, 2009 compared to $8.0 million in the comparable period in 2008. Exploration expense for the six months ended June 30, 2009 included $32.0 million of dry hole costs. The dry hole costs included $9.1 million for a well in the British North Sea, $20.2 million for two wells in onshore Gabon and $2.7 million for a well in offshore Gabon. Exploration expense for the six months ended June 30, 2008 included $6.4 million of dry hole costs associated with a well drilled by the Company in the British North Sea. Also included in exploration expense were aeromagnetic gravity data acquired over the Mutamba Iroru block, onshore Gabon, and seismic costs associated with the Company's Etame Marin block and Angola.
Depreciation, depletion and amortization expenses were $11.3 million in the six months ended June 30, 2009 compared to $10.2 million in the six months ended June 30, 2008. The higher depreciation, depletion and amortization expenses during the six months ended June 30, 2009 compared to the six months ended June 30, 2008 was due to higher volumes of oil sold.
General and administrative expenses for the six months ended June 30, 2009 and June 30, 2008 were $3.9 million and $5.6 million for each period, respectively. Included in the general and administrative expenses for the six months ended June 30, 2009 was an expense for retirement benefits of $1.2 million which was partially offset by a retroactive compensation adjustment of $0.9 million that benefited the Company by charging the adjustment to the Gabon partners. Included in the general and administrative expenses for the six months ended June 30, 2008 were non-recurring legal and solicitation costs associated with the Company's annual meeting. During the six months ended June 30, 2009, the Company incurred $1.1 million of stock based compensation compared to $0.5 million incurred in the six months ended June 30, 2008. In both of the six months ended June 30, 2009 and June 30, 2008, the Company benefited from overhead reimbursement associated with production and development operations on the Etame Marin block.
Other operating income for the period ended June 30, 2009 was $2.0 million attributable to receipt of proceeds from a joint venture partner that originally elected to not participate in two wells drilled in the Ebouri field, offshore Gabon. The partner later elected to participate and paid for their proportionate share of the capital expenditures for the wells. The $2.0 million payment represents a portion of the Company's share of an agreed risk premium benefiting the other joint venture partners that originally participated in those two wells. The remaining proceeds of $4.5 million are expected to be received and recognized as other operating income in the third quarter of 2009.
Other Income (Expense)
Other income for the six months ended June 30, 2009 and June 30, 2008 were $1.5 million and $0.9 million for each period, respectively. The higher other income recorded in the six months ended June 30, 2009 compared to the same period in 2008 was primarily due to a foreign exchange gain of $1.0 million. Interest income received on amounts on deposit was $0.6 million in the six months ended June 30, 2009 compared to $1.4 million in the six months ended June 30, 2008. The decrease in interest income received on amounts on deposit reflects lower interest rates and amounts invested in 2009. Interest expense and financing charges was $0.1 million for the six months ended June 30, 2009 compared to $0.4 million for the six months ended June 30, 2008 all associated with the Company's IFC loan, net of capitalized interest expense.
Income Taxes
Income tax expense amounted to $9.7 million and $47.9 million for the six months ended June 30, 2009 and June 30, 2008, respectively. In the six months ended June 30, 2009 and 2008, the income taxes were all paid in Gabon. Income taxes in the six months ended June 30, 2009 were lower due to lower oil prices and a lower percentage of oil allocated as profit oil versus cost oil which decreased taxable revenues.
Net Income (Loss)
Net loss for the six months ended June 30, 2009 was $12.0 million, compared to net income of $17.8 million for the same period in 2008. Lower oil prices partially offset by a higher oil sales volume and the exploration costs incurred for dry hole write-offs contributed to the net loss in the six months ended June 30, 2009. Net income allocated to noncontrolling interest was $2.3 million and $3.0 million in the six months ended June 30, 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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