Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
EGY > SEC Filings for EGY > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for VAALCO ENERGY INC /DE/

Form 10-Q for VAALCO ENERGY INC /DE/


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, which are intended to be covered by the safe harbors created by those laws. The Company has based these forward-looking statements on its current expectations and projections about future events. These forward-looking statements include information about possible or assumed future results of the Company's operations. All statements, other than statements of historical facts, included in this Report that address activities, events or developments that the Company expects or anticipates may occur in the future, including without limitation, statements regarding the Company's financial position, operating performance and results, reserve quantities and net present values, market prices, business strategy, derivative activities, the amount and nature of capital expenditures, plans and objectives of the Company's management for future operations are forward-looking statements. When the Company uses words such as "anticipate," "believe," "estimate," "expect," "intend," "forecast," "outlook," "aim," "will," "could," "should," "may," "likely," "plan," "probably" or similar expressions, the Company is making forward-looking statements. Many risks and uncertainties that could affect the Company's future results and could cause results to differ materially from those expressed in the Company's forward-looking statements include, but are not limited to: the volatility of oil and natural gas prices; 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; discovery, acquisition, development and replacement of oil and gas reserves; timing and amount of future production of oil and gas; hedging decisions, including whether or not to enter into derivative financial instruments; our ability to effectively integrate companies and properties that we acquire; general economic conditions, including any future economic downturn, disruption in financial markets and the availability of credit; changes in customer demand and producers' supply; future capital requirements and the Company's ability to attract capital; currency exchange rates; actions by the governments and events occurring in the countries in which we operate; actions by our venture partners; compliance with, or the effect of changes in, governmental regulations regarding the Company's exploration and production, including those related to climate change; actions of operators of the Company's oil and gas properties; weather conditions; and statements set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Although the Company believes that the assumptions underlying its forward-looking statements are reasonable, any of these assumptions and therefore also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements which are included in this Report, the Company's inclusion of this information is not a representation by the Company or any other person that the Company's objectives and plans will be achieved.


Table of Contents

VAALCO ENERGY, INC. AND SUBSIDIARIES

The Company's forward-looking statements speak only as of the date made and the Company will not update these forward-looking statements unless the securities laws require the Company to do so. The Company's forward-looking statements are expressly qualified in their entirety by this cautionary statement. In light of these risks, uncertainties and assumptions, any forward-looking events discussed in this Report may not occur.

INTRODUCTION

The Company operates oil production sharing contracts in Gabon and Angola. In the United States the Company operates properties in the Granite Wash formation in Texas, the Bakken/Three Forks formation in Montana and the Red River formation in South Dakota. Additionally, the Company has minor interests in Brazos County, Texas producing from the Buda/Georgetown formations. The Company also owns certain minor non-operated interests in the Ship Shoal area of the Gulf of Mexico and in Pickens County, Alabama.

In July 2012, the Company signed a definitive agreement for the purchase of a 31% working interest in Block P, located offshore Equatorial Guinea at a cost of $10.0 million. The acquisition was completed on November 1, 2012.

Offshore Gabon

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. VAALCO operates the Etame Marin block on behalf of a consortium of companies. VAALCO owns a 30.35% interest in the exploration acreage within the Etame Marin block. The Company owns a 28.1% interest in the development areas in and surrounding the Etame, Avouma, South Tchibala and Ebouri fields, each of which is located on the Etame Marin block. The development areas were subject to a 7.5% back-in by the Government of Gabon, which occurred for these fields after their successful development.

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, from the Avouma and South Tchibala fields in January 2007, and from the Ebouri field in January 2009. During the three months and nine months ended September 30, 2012, the Etame, Avouma, South Tchibala and Ebouri fields produced, approximately 1.7 million Bbls (0.4 million Bbls net to the Company), and 5.5 million Bbls (1.3 million Bbls net to the Company), respectively.

In July 2012, the Company shut-in two of its three producing wells in the Ebouri field as a precaution after detecting the presence of hydrogen sulfide (H2S) on the Ebouri platform. The contamination is isolated to two wells in the Ebouri field and the Company continues to maintain production from the rest of the Etame complex including one well at Ebouri at approximately 19,000 barrels per day. Investigations are underway to ascertain the root cause of the H2S and develop a plan to produce the remaining reserves in a timely manner. Although the investigative work and recommendations were not complete by the end of the third quarter of 2012, it appears that additional capital investment will be required to produce the impacted reserves. The additional capital investment required may include re-working the wells with upgraded metallurgy, including wellhead replacement, and installing H2S processing equipment on the platform. The amount of such investment is not estimable at this time.


Table of Contents

VAALCO ENERGY, INC. AND SUBSIDIARIES

The Company and its partners are proceeding with the plans to build two new platforms, one to be located in the Etame field and the other in the Southeast Etame/North Tchibala area. These platforms will provide the capacity to drill multiple wells in the Etame field, Southeast Etame discovery area, and the North Tchibala field. Installation of the platforms is expected to occur in the first half of 2014.

In November 2009, The Company entered into the sixth exploration period for the Etame block, which expires in July 2014. During the sixth exploration period, the Company is obligated to drill two exploration wells. In 2010, the Company fulfilled one of the two required exploration well obligations with the drilling of the Omangou well, an unsuccessful effort. The remaining commitment in the exploration period is the drilling of one additional exploration well, expected to be drilled in 2013.

As part of securing the second ten year production license with the government of Gabon, in January 2012 the Company agreed to a cash funding arrangement for the eventual abandonment of the offshore wells, platforms and facilities. The agreement calls for annual funding for the next seven years at 12.14% of the total abandonment estimate per year and 5.0% per year for the last three years of the production license. The amounts paid will be reimbursed through the cost account. The funding is expected to begin in the fourth quarter of 2012, after the final details are agreed with the government of Gabon. The abandonment costs for this purpose are estimated to be approximately $9.6 million net to the Company on a discounted basis. The obligation for abandonment expenses related to the Gabon offshore facilities is included in the asset retirement obligation shown on the Company's balance sheet. The Company also agreed to a fixed royalty rate of 13% effective July 17, 2011, replacing the sliding scale royalty provided for in the production sharing contract.

Onshore Gabon

The Company executed a farm-out agreement in August 2010 with Total Gabon on the Mutamba Iroru block located onshore near the coast in central Gabon. In October 2010, the Company signed a second exploration period extension for the Mutamba Iroru block which was to expire in May 2012. The Company was obligated to reprocess 400 square kilometers of 2D seismic and drill one exploration well. An agreement with Total Gabon ("Total") was completed in August 2010, which established a joint operation on the block whereby Total acquired a 50% working interest in the block effective November 1, 2010. The terms of the agreement provided for Total paying 75% of the seismic reprocessing costs and the exploration well drilling costs. The seismic reprocessing has been completed. The Company commenced drilling of the exploration well in late September 2012, which satisfies the drilling obligation.

In April 2012, the Company signed a third exploration period extension for the Mutamba Iroru block, which expires at the end of February 2013. In addition, the latest extension requires the Company to reprocess an additional 350 kilometers of 2-D seismic by the end of February 2013. The additional seismic reprocessing required by the third extension is underway and expected to be completed in the fourth quarter of 2012 with the cost being equally split between the Company and Total.


Table of Contents

VAALCO ENERGY, INC. AND SUBSIDIARIES

Offshore Angola

In November 2006, the Company signed a production sharing contract for Block 5 offshore Angola. The four year primary term with an optional three year extension awarded the Company exploration rights to 1.4 million acres offshore central Angola. The Company's working interest is 40%. Additionally, the Company is required to carry the Angolan national oil company, Sonangol P&P, for 10% of the work program. During the first four years of the contract the Company was required to acquire and process 1,000 square kilometers of 3-D seismic data, drill two exploration wells and expend a minimum of $29.5 million ($14.8 million net to the Company). The Company fulfilled its seismic obligation when it acquired 1,175 square kilometers of 3-D seismic data at a cost of $7.5 million ($3.75 million net to the Company) in January 2007 and 524 square kilometers of 3-D seismic data during the fourth quarter of 2008 at a cost of $6.0 million ($3.0 million net to the Company).

The government-assigned working interest partner was delinquent paying their share of the costs several times in 2009 and consequently was placed in a default position. By a governmental decree dated December 1, 2010, the former partner was removed from the production sharing contract, and a one year time extension was granted for drilling the two exploration commitment wells. Following the decree, the Company and the government of Angola have been working together to obtain a replacement partner. In early 2012, the Angolan government granted a further one year extension to November 30, 2012 for drilling the two exploration commitment wells in accordance with the production sharing contract. In July 2012, the Angolan government granted an additional two year extension until November 30, 2014 to drill the two exploration commitment wells.

In the first quarter of 2012, the Company provided the Angolan government with a written offer that would allow the Company to proceed with exploration activities without obtaining a new partner, subject to certain criteria including changes to the work commitment and working interest percentages. In the second quarter of 2012, the Company identified a potential partner to acquire the available 40% working interest and submitted the name of the interested party to the Angolan government for approval. In November 2012, the government advised the Company that it has entered into negotiations with the potential partner. The company is unable to estimate when or how the negotiations will conclude with the potential partner or determine what the Angolan government's response will be to our written offer.

The remaining obligation is a two well exploration commitment. Each well is subject to a $5.0 million penalty ($10.0 million in aggregate for both wells) if not drilled during the contract term. The $10.0 million is currently recorded as restricted cash and is held at a financial institution located in the United States.

Because of the continuing uncertainty with the Angolan government approving a replacement partner, the Company has recorded a full allowance totaling $5.4 million as of September 30, 2012, against the accounts receivable from partners for the amounts owed to the Company above its 40% working interest plus the 10% carried interest. The allowance recorded in the nine months ended September 30, 2012 totaled $1.0 million with the remainder having been recorded in 2011. The Company expects the allowance amounts will be paid to the Company if a new partner in the block is approved.


Table of Contents

VAALCO ENERGY, INC. AND SUBSIDIARIES

Offshore Equatorial Guinea

In November 2012, the Company acquired a 31% non-operated working interest, from PETRONAS CARIGALI OVERSEAS SDN BHD, in 57,000 gross acres in Block P at a cost of $10.0 million. Two exploration wells are expected to be drilled on the block in 2013.

International - Outside Operated

The Company's United Kingdom subsidiary was largely inactive during the nine months ended September 30, 2012.

United States - Texas

The Company acquired a 640 acre lease in the Granite Wash formation in North Texas in December 2010 and a 480 acre lease in the same formation in July 2011. The first well on the initial acreage began production in August 2011, but mechanical problems with the well exist and the Company recorded an impairment charge of $5.0 million on the well in the fourth quarter of 2011. In November 2011, the Company commenced drilling a second well on the initial Granite Wash formation lease. The well landed in the objective reservoir in February 2012 and was successfully completed and began production in March 2012. However, due to a combination of continued production declines and low natural gas prices, the Company recorded an additional impairment charge of $7.6 million on the combined assets in the third quarter of 2012 to reflect the fair value of the assets based on the latest reserve estimates from this field.

The acreage on the first Granite Wash lease the Company acquired is held by production. The expiration date of the primary term of the second Granite Wash lease is August 2014.

United States - Montana

In September 2011, the Company acquired a 65% working interest in approximately 22,000 gross acres (14,300 net acres) in the East Poplar Dome field in Roosevelt County, Montana. The primary objective for this field is the Bakken/Three Forks formation. Pursuant to the terms of the acquisition, the Company is required to drill three wells at its sole cost, one of which must have been drilled by June 1, 2012, with the remaining two wells by the end of 2012. In the second quarter of 2012, the Company completed the EPU-120 exploration well in the East Poplar Dome field in Roosevelt County, Montana at a total cost of $8.9 million. The vertical well discovered hydrocarbons shows in the Bakken/Three Forks formation, but did not initially find commercial quantities of hydrocarbons in the formations deeper than the Bakken/Three Forks formation, and has been temporarily suspended. The Company recorded dry hole expense of $2.9 million in the second quarter of 2012 for drilling costs associated with the deeper formations. The well may be re-entered at a later date to retest certain formations or to convert the well into a horizontal producing well.

A second well, EPU-133 was spudded in June 2012 and was completed as a horizontal well in the Bakken/Three Forks formation. The well was hydraulicly fractured, and may be equipped with electrical submersible pumps ("ESPs") in the fourth quarter of 2012 in an effort to establish production. Using ESPs to obtain production has been successfully utilized in other wells in the area. The Company will make a decision on this approach following a test of this process in either one or both wells recently drilled in the Salt Lake field in Sheridan County, Montana, as discussed below. The Company has capitalized $7.9 million associated with the costs attributable to the EPU-133 well. The Company plans to drill the third obligation well during the fourth quarter 2012.


Table of Contents

VAALCO ENERGY, INC. AND SUBSIDIARIES

In May 2011, the Company acquired a 70% working interest in approximately 5,200 acres (3,640 net acres) in the Salt Lake field in Sheridan County, Montana. During the third quarter of 2012, The Company drilled two wells in the Salt Lake Field located in Sheridan County, Montana. The Bolke 11-01H was drilled and hydraulically fractured whereas the Bolke 7-01H well was drilled, but is awaiting hydraulic fracturing scheduled for November 2012. Following the installation of electrical submersible pumps, the Bolke 11-01 well is undergoing a 30 day test to determine commerciality. The results of this test are expected in the fourth quarter of 2012 and, if successful, may be repeated in the Bolke 7-01H well and/or the EPU-133 well in the East Poplar Dome field. The Company has capitalized $4.6 million associated with the costs attributable to the Bolke 11-1H well and $2.7 million associated with the costs attributable to the Bolke 7-01H well.

United States - South Dakota

In September 2012, the Company acquired a 100% working interest in approximately 10,000 acres in Harding County, South Dakota. The primary objective for this property is the Red River formation. Pursuant to the terms of the acquisition, the Company is obligated to drill and complete a well, or reenter and complete an existing well within twelve months of the acquisition date. Once this obligation is met and within sixteen months of the acquisition date, the Company must elect to proceed or withdraw from the transaction. Should the Company elect to proceed, an additional payment of $3.6 million is required and the Company must commit to drill and complete an additional well, or reenter and complete another existing well within twelve months of the date the Company elects to proceed with the transaction. The Company expects to drill the initial well on this property in the fourth quarter of 2012.

Domestic - Outside Operated

The Company has minor interests in Brazos County, Texas producing from the Buda/Georgetown formations. The Company also owns certain minor non-operated interests in the Ship Shoal area of the Gulf of Mexico and in Pickens County, Alabama. No significant activity was undertaken on these properties during the nine months ended September 30, 2012.

CAPITAL RESOURCES AND LIQUIDITY

Cash Flows

Net cash provided by operating activities for the nine months ended September 30, 2012 was $44.8 million, as compared to $54.3 million for the nine months ended September 30, 2011. Net income for the nine months ended September 30, 2012 was $5.6 million lower than net income for the comparable period in 2011. Non-cash adjustments to net income were $29.8 million and $23.6 million for the nine months ended September 30, 2012 and 2011, respectively. Changes in working capital other than cash used was $9.3 million for the nine months ended September 30, 2012, compared to cash provided of $0.8 million for the nine months ended September 30, 2011.


Table of Contents

VAALCO ENERGY, INC. AND SUBSIDIARIES

Net cash used in investing activities for the nine months ended September 30, 2012 was $43.5 million, compared to net cash used in investing activities for the nine months ended September 30, 2011 of $19.0 million. For the nine months ended September 30, 2012, the Company paid $43.5 million for capital expenditures, which was partially offset by a $55 thousand release of restricted cash in Gabon. For the nine months ended September 30, 2011, the Company paid $23.0 million for capital expenditures, which was partially offset by the release of restricted cash in Gabon of $3.9 million.

For the nine months ended September 30, 2012, cash used in financing activities was $2.2 million consisting of distributions to a noncontrolling interest of $5.6 million and the receipt of $3.4 million in proceeds from the issuance of common stock upon the exercise of stock options. For the nine months ended September 30, 2011, cash used in financing activities was $4.0 million consisting of distributions to a noncontrolling interest of $5.2 million and the receipt of $1.2 million in proceeds from the issuance of common stock upon the exercise of stock options.

Capital Expenditures

During the nine months ended September 30, 2012, the Company incurred $44.1 million of net property and equipment additions, primarily with $32.2 million spent in the United States ($13.9 million for two wells in the Montana East Poplar Dome unit, $9.6 million for the second Granite Wash formation well, $7.2 million for two wells in the Montana Salt Lake lease, and $1.5 million for a lease acquisition in the State of South Dakota), $11.1 million spent offshore Gabon for platform modifications and advance purchases for the upcoming drilling program, and $0.8 million advance purchases for the onshore drilling program in Gabon.

During the remainder of 2012, the Company anticipates its share of capital expenditures will approximate $32.0 million for the acquisition of a block in Equatorial Guinea, completion of wells underway in Montana, new wells in Montana and South Dakota, completion of the onshore Gabon well, offshore infrastructure projects in Gabon and the initial drilling costs of a multi-well program scheduled to begin late in the fourth quarter offshore Gabon.

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 exploration wells are charged as an expense when incurred. The costs of exploration 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 nine months ended September 30, 2012, exploration expense was $5.0 million, consisting primarily of a $2.9 million dry-hole charge to write-off the exploratory costs associated with drilling and testing of several intervals below the Bakken/Three Forks formation on the EPU-120 well drilled in the East Poplar Dome field in Montana. Additional exploratory costs incurred in the nine months ended September 30, 2012 were $0.7 million for North America, $0.4 million onshore Gabon, $0.6 million offshore Gabon, $0.2 million in Angola and $0.2 million in the United Kingdom. For the nine months ended September 30, 2011, exploration expense was $3.6 million, which was primarily comprised of $2.0 million spent in North America, $0.5 million offshore Gabon, $0.4 million onshore Gabon, $0.5 million in Angola and $0.3 million in the United Kingdom.


Table of Contents

VAALCO ENERGY, INC. AND SUBSIDIARIES

Liquidity

The Company's primary source of capital has been cash flows from operations. At September 30, 2012, the Company had unrestricted cash of $136.3 million. The Company believes that this cash combined with cash flow from operations will be sufficient to fund the Company's remaining 2012 capital expenditure budget and potential growth investments. As operator of the Etame Marin and Mutamba Iroru blocks in Gabon, Block 5 in Angola, and the two Middle Bakken formation properties in Montana, the Company enters into project related activities on behalf of its working interest partners. The Company generally obtains advances from its partners prior to significant funding commitments.

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 Mercuria Trading NV ("Mercuria"). While the loss of Mercuria 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 in Gabon.

Domestically, the Company markets its oil condensate and natural gas under arrangements with Sunoco Partners Marketing & Terminals L.P. ("Sunoco") (as of August 1, 2012) and Eagle Rock Field Services, LP ("Eagle Rock"), respectively. While the loss of Sunoco or Eagle Rock as buyers 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 oil condensate and natural gas in the United States. The Company has access to several alternative buyers for oil condensate and natural gas sales domestically.


Table of Contents

VAALCO ENERGY, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

Three months ended September 30, 2012 compared to three months ended September 30, 2011

Total Revenues

Total oil and natural gas revenues were $37.6 million for the three months ended September 30, 2012 compared to $37.4 million for the same period of 2011.

Oil Revenues

Gabon

Crude oil revenues for the three months ended September 30, 2012 were $37.0 million, as compared to revenues of $36.4 million for the same period 2011. In the three months ended September 30, 2012, the Company sold approximately 342,000 net barrels of oil from three liftings at an average price of . . .

  Add EGY to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for EGY - All Recent SEC Filings
Copyright © 2015 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.