VAALCO Energy, Inc. (EGY) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you, for standing by. And welcome to the VAALCO Energy’s Second Quarter 2013 Earnings Report. For the conference, all participant lines are in a listen-only mode. There will be an opportunity for your questions; instructions will be given at that time. As a reminder, today’s call is being recorded. I will turn the conference now over to the Chairman and CEO, Mr. Robert Gerry. Please go ahead, sir.

Thank you, John and good morning ladies and gentlemen and welcome to VAALCO Energy’s second quarter and six months earnings conference call. Joining me this morning are Russell Scheirman, VAALCO’s, President and Chief Operating Officer and Greg Hullinger, our Chief Financial Officer. Please bear with me for a moment here while I read our Safe Harbor statement. This conference call 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. Forward-looking statements are those concerning VAALCO’s plans, expectations, and objectives for future drilling, completion and other operations and activities. All statements included in this conference call that address activities, events or developments that VAALCO expects, believes or anticipates will or may occur in the future are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond VAALCO’s control. These and other risks are further described in VAALCO’s annual report on Form 10-K for the year ended December 31, 2012, its Form 10-Q for the second quarter filed on August 8, 2013, and other reports filed with the SEC which can be reviewed at www.sec.gov, or which can be received by contacting VAALCO Energy. Let me begin with a few comments, before I turn the meeting over to Greg and Russell. It has been a busy and exciting three months for your company while revenues were severely impacted due to plan shutdowns at producing wells while we installed down hole pumps, earnings per share remained equal through the first quarter. Some of the shut-in’s plus generator, we progress remained continued ended July, but appears most of the work is behind us and we believe production will ramp back up to the former revenues…

Thanks Bobby, and thanks for all of you joining us on the call this morning. Let me start with the balance sheet. Cash cost restricted cash of $91.3 million at June 30, 2013 compared to $142.3 million at the end of the 2012. As Bobby mentioned cash is down due the CapEx and workover expenses that we have been incurring in 2013 that figure right now is a little bit over $40 million. CapEx a loan for the current year is an excess of $34 in the major of CapEx expenditures include $20 million for the construction of two new platforms as Bobby mentioned that are being built in Houma, Louisiana that will head for offshore Gabon. Cost we spent $10.5 million on two development wells offshore Gabon and we had $2.5 million for the final expenditures of the exploratory well onshore Gabon that was our discovery well that we drilled, third drilling on fourth quarter of last year. And on top of that we’ve spend a nearly $6 million on our share of local expenses to replace the electrical submersible pumps on three of our offshore Gabon wells. Offsetting some of this cash decreases is our trade receivables which have you look that our balance sheet in those trade receivables represent our share proceeds from the crude liftings, trade receivables we nearly $20 million higher than the position at year end 2012, due to the timing of the liftings in the first half of June and by the way this cash has been received in July of this year. Current assets at $127 million are down 15% from the end of 2012 as you would expect the decrease in cash and less current assets is largely picked up in the property and equipment segment of the balance sheet. Property…

Thanks, Greg. I’ll start out talking about our activities on our Etame concession offshore Gabon. We are currently producing at about 17,000 barrels per day from that concession. We are on the final well of our six well drilling and workover program with the 350 jack-up rig the KCA Deutag Ben Rinnes. As we noted at the last conference call, we successfully drilled and completed the EAVOM-3H development well and we’re producing that well on electrical submersible pump at 2,000 barrels per day. It initially came on at 4,000 barrels a day, but it started making some waters so we put it on pump to stabilize over the last 45 days to 60 days at this 2,000 barrels a day rate. We also completed two pump replacements on the Avouma platform before moving the rig over to the Ebouri. During June and July, we’ve experienced some generator problems that have restricted us to producing only two of the four wells on the Avouma platform. We estimate this is costing us about 1,500 to 2,000 barrels per day until the generators can be repaired. We have all the repaired items in-country now and the technicians are out on location affecting the repairs and we expect them to be completed by the end of this month. After we completed the Avouma program we moved on to the exploration well at Ebouri in a new fault block west of the mandate accumulation. Unfortunately though the well was unsuccessful as Gamba and Dentale formations came in deeper than mapped and were water wet. We then did the Ebouri-2H workover successfully as of 3,500 barrels per day well that was down for about three weeks during the parts of June and July, but is now back on with two brand-new ASPs and producing [just fine].…

He thanks Russell. I think that you get an idea that everything is fairly active here in VAALCO. I’m sure some of you have some questions, so I’ll turn it back to you John to sue us questions we will answer.

Certainly. (Operator Instructions) And we have the line of Leo Mariani with RBC Capital Markets. Please go ahead.

Hey guys you talked about current production at 17,000 barrels a day here offshore Gabon, it sounds like it’s kind of still going up as you’re finishing off your work-over program. Where would you expect that to be when you’re done with all the work-overs and all your well are online?

Between 18 and 19, hopefully closer to 19.

Okay that’s helpful. And I guess additionally on the work-overs, how much of that do you expect to expense in the third quarter?

Now not much Leo, but most of it has already been record or accrued, paid or accrued.

Okay. And I guess Greg you also talked about capitalizing some of your LOE in the second quarter. Is that a new policy for VAALCO and how much did you all capitalize?

It’s an existing policy Leo, if we go in we take a look at our share of inventory and because we can’t sell it, we valuate it lower cost to market. So it’s on our books for about $35 a barrel which includes operating cost DD&A and our valuation that is a little over $2 million I believe.

All right so you capitalize roughly $2 million in the second quarter?

That’s right.

Okay.

Which are the crude oil inventory in our books of 3$.3 million the reduction on the production expense side of it was about $2 million?

Okay. And I guess just on the Angola deal maybe you can help me explain a little bit better here, but if I'm understanding correctly you guys write a check for the 40% interest to the government and immediately farm it out and recruit that from your partners at the way that’s working?

Yeah, there is no check, under the join operating agreement if somebody is taken out for being in default, the other partners have the right to take up the interest, we have to kind of go around, around with Sonangol P&P which is the carried interest to get them to officially acknowledge in the document that they had no interest in taking up their percentage, they would have had in theory they could have taken one third of that interest but they would not have been carried on that one third, one third is a 40%. But basically what we have done is we’ve eliminated the need for our new partner that have to negotiate with Sonangol E&P which is the ministries for the government entity, they will get embarked down in that process. So we are just going to take the interest in the VAALCO and then walk in with a sign format agreement and say this is the way we want to go forward. And it should eliminate some of this red tape that’s been going on. This is the way we’ve been advised to do it by the number two guy at Sonangol, who said, yeah everybody was fine with the partner. Yeah, everybody was fine with what you were doing, but he got bogged down in negotiations between our new partner and the government and it was just better for us to take the interest, which we have the right to under to under the JOA then just present a, (inaudible) complete farm-out agreement.

All right, so it sounds like you guys have basically negotiated that farm-out for the most part with a new partner or do you guys feel comfortable of the major terms there?

Yep.

And Leo we’ve been talking about this one, but even when before them we thought we’re going to be going through the process where Sonangol would that interest. The farm-out agreement has the new partner coming in and reimbursing VAALCO for its excess cost that it has incurred especially back to 2009, you see our bad debt expense and we continue to write-off the portion above our 40% interest. To-date that’s $7 million and that’s the entry price for the new partner. If they come in and get us back to where we would have been, if we had a valid partner with us all the way through this process, and that $7 million, something that we get it and it still works that goes right to net income that conclude we’ve already taken the expense.

Okay, that’s really helpful. Thanks guys.

Our next question from Jamie Wilen with Wilen Management Company. Please go ahead.

So the way you are going to proceed in Angola, you do not need the approval of anyone to as appose to getting a new partner, you don’t need the approval, because it’s a partner to you as appose to the whole consortium?

Well we’ll need to get an approval, but we won’t – it won’t be a negotiation between our new partner and the government, it will be a negotiation with our new partner and us, which then needs to be blessed by the government, the government always has the right to make sure that a partner is a qualified entity and capable of doing business and all those kind of thing which this company is, so it should be simple, but it never is unfortunately.

Right it always should have been simple. The timing on this process, when were you?

The letter is in requesting the transfer of the interest of VAALCO, we did receive the letter from Sonangol P&P that said no we don’t want any of the interest so the entire 40% as per the JOA is entitled to come to VAALCO and we’ve just asked that they bless that.

Okay and once again, I realize that timing of this is really hard to predict, but when do you think they will say okay and then you can present the partner.

Well Jamie, what we have done is this is the process that Sonangol has advised us to follow, before we were trying to directly our new partner receive the 40% from the government, the government felt that that was too complex, so they suggested VAALCO will assign it to you and you form it out to your new partner who they know and so we have agreed to do that and how long that process will take, it should not take long, but everything has taken far too long. I would like to tell you we can do with it day after tomorrow, but I cannot tell you when it will finally be completed, we still hold, if it happens very rapidly to drill a well this year, if we get a rig.

Okay so you think this is a fourth quarter event, and you are hopeful that it’s realistically could be a fourth quarter event?

Realistically it could happen in the fourth quarter.

Okay. And Equatorial Guinea you’re dealing with the 300 foot oil column that was discovered half a dozen year ago. Why was that never drilled?

Because the company that was the operator [Devon] made a strategic decision to exist the entire international arena and they sold their Equatorial Guinean assets, the biggest piece of which was an interest in the Zafiro field which is like a one billion barrel field that Exxon Mobil operates. They sold that, it was preempted by the government and so the government end up picking up that interest. And with that interest came this interest in Block P and the government has just sat on it. And frankly, the reason that the ministry is supporting VAALCO becoming the operators, because nothing has been happening and they think that it’s again a private operating entity that knows how to operate in West Africa, the things will start to happen. So that’s what’s going on.

And how do they tax the proceeds of the profits from our wells there?

It’s actually as good a contractors we have in Etame, we have 75% cost recovery. There is a 25% income tax, but on balance its comparable to what we would receive from Etame. So during the early days, when you had the cost of capital from the development you would be receiving an excess of 70% of the revenues.

Okay. Last two balance sheet question, your receivables went up, yet you really did not have any sort of major lifting at the end of June, why would – I would expect your receivables to go if you had a major…

We had, we had a million barrels that were lifted early in June, in two different date and the terms are that the payment comes in 30 days after lifting.

Okay.

So that’s why they stopped the receivable.

Okay. And lastly I just wanted to…

Part of it showed up on July 1st.

Okay, perfect. Now lastly I wanted – just wanted to commend you on the initiating and activating the share repurchase plan, I think it’s a great thing for the shareholders and if we get to hit or if we are successful in some of these wells the reduced share base will benefit us all. So thank you very much for that. And I'm done.

(Operator Instruction). And we will go over to Neil Nelson with DERS Group. Please go ahead.

Good morning. the first question is that in your Equatorial Guinea news release, yesterday you talked about tow wells in the first half of 2014, but Bobby mentioned one well perhaps in the fourth quarter of the this year and I'm assuming that requires a semi sub to do that effort. Is that correct?

That’s correct. We maybe ambitious in saying we would like to do it this year, one well obviously would have to explore that are 2015, but if we can get this whole thing resolved quickly.

2014.

What?

You said 2015, 2014.

2014, apologize. Its all matter of timing, if all of these paper work moves quickly forward, we could probably do it this year.

And you mentioned that the (inaudible) prospect in Etame does that not require a semi-sub to drill that well.

That’s does.

But you still think that that might occur this year.

Its close whether or not we can do whether or not, we are still waiting for partners to make up their minds whether they want to join VAALCO, I know one of them doesn’t and we are waiting for a second major partner really to make a decision about that, my guesses is that won’t be drilled this year, my guess it would probably drilled 2014.

And have you installed water knockout on a [drummers] and I know its been in the words for a long time, but is that in operation now?

Yes, it is but with the two wells that are down waiting on the generator repairs we don’t really need it, we are using it, were troubleshooting it, we are making sure that its all up in running. When we return these two well we obviously shut in our worst two wells, while we are waiting on the generator repairs and those wells make 70%, 80% water cut each make 1000 barrels a day when they are on, but there is 8000 barrels of water that we will need to knockout when we return those two wells back on, but yes, system is up and operational.

And given the reasons security issues in Gabon oil security issues and the absence of any Gabon maybe or coastguard what concerns do VAALCO have and how are they addressing them about security.

Yeah, I mean we are always concerned about that, to our knowledge other than over on the eastern coast of Africa in Somalia, in west Africa there has never been a Suezmax class sized tankers that’s been boarded by these pirates, we think about it, but we are not in a position to put armed guards or anything on our facilities. We’re not going to go that route. There is in fact a small Navy in Gabon and there have been some meetings about how the oil companies could keep an eye out for suspicious vessels and report that, and the Navy would go and investigate. How efficient that would be, I can’t tell you, but it’s certainly something that everybody is talking about and the government, I think it was a kind of a wake up call for the government; they’ll come as spar down as Gabon. So, they are thinking about some concrete steps of what they can do. They have recently been trying to eliminate poaching from fishing vessels and they’ve done a pretty good job of it, using the oil companies that report vessels that are fishing in and around the oil installations where they are not supposed to be and the Navy showed up and arrested the vessels and taken them in and put a pretty big damper on this kind of things, so you just have to help that if one of these groups gets out there, that they actually catch them that maybe that will provide the disincentive for them to come back.

And casts are pretty good too. The piracy is concerned with vessels that are moving, don’t forget don’t you have city in there, I mean the people would pick up oil probably have more of it concern about this than we do. Our [Fed pol] is going nowhere, it’s hard to imagine how they think they can transfer crude oil from our tanker into a bigger type tanker or something. But everybody is very well aware of it and so is Gabon we’re in communication with the other operators, everybody is on the lookout for it.

And could you give some color about liftings, when you have these four day back-to-back or to separate liftings, do you have to pay a mobilization fee twice?

No, no. It hasn’t affected U.S., because we have two vessels in here right now because of the drilling activities and we use one of those vessels, one of the tank to help, keep the tanker off of our vessel. But don’t know and to answer your question we would not separately mob and de-mob a vessel we just the standby tanker around for four more days. The cost of the demurrage for the tankers sitting around waiting to pick up the extra cargo is on the buyer and not on us.

And the last question I have is on Ovoka, what date was that well spud and what’s the current depth?

Current depth is around 1000 meters, I can’t recall off the to of my head the exact date, it was about 10 or 12 day ago. We’re currently running casing, we’re running our 1303 since casing and when we drill out from under that we’ve got 300 or 400 meter to go before we get to our first objective which is the Gamba, and then the ultimate total debt from the well will be about 2600 meters to 2800meters depending on where we find basement.

All right, that’s – thank you very much. I appreciate it.

And to the presenters on the call, there are no additional questions. Thank you.

Okay, well thank you all very much and report to our third quarter conference call. Thank you, John.

You’re welcome, and ladies and gentlemen that does conclude the conference for today. Thank you for your participation. You may now disconnect.