Good day and welcome to the VAALCO Energy First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Al Petrie, Investor Relations Coordinator. Please go ahead, sir.

Thank you, Alison. Good morning, everyone, and welcome to VAALCO Energy’s first quarter 2020 conference call. After I cover the forward-looking statements, Cary Bounds, our Chief Executive Officer, will review key highlights along with operational results. Liz Prochnow, our Chief Financial Officer, will then provide a more in-depth financial review. Cary will then return for some closing comments before we take your questions. During our question-and-answer session, we ask you to limit your questions to one and a follow-up. You can always reenter the queue with additional questions. I'd like to point out that we posted an updated investor deck on our website this morning that has additional financial analysis, comparisons and guidance that should be helpful. With that, let me proceed with our forward-looking statement comments. During the course of this conference call, the Company will be making forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and those actual results or developments may differ materially from those projected in the forward-looking statements. VAALCO disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday's press release, the presentation we posted on our website and the reports we file with the SEC, including the Form 10-Q that was filed yesterday. Please note that this call is being recorded. Let me now turn the call over to Cary.

Thank you, Al. Good morning everyone, and welcome to our first quarter 2020 earnings conference call. Before I discuss our results, I would like to reflect on the extraordinary challenges that we are facing as an industry and how VAALCO is decisively responding to these challenges. Thus far, VAALCO's operations have not been materially disrupted by the global COVID-19 pandemic. We have managed through the logistical challenges that we have faced since the outbreak and continue to put the safety of our employees, contractors and local stakeholders first. Back in March, we implemented stay-at-home initiatives for all the critical staff and put into place social distancing measures. In addition, we actively screen and monitor employees and contractors that come on to our facilities in Gabon. In accordance with government guidelines, all our workers in Gabon must undergo a 14-day quarantine before going offshore. We are also engaging in regular Company-wide COVID-19 updates to keep employees informed of key developments. Finally, we have contingency plans in place in the event we are directly impacted. The combination of the worldwide shutdown due to COVID-19 and its impact on oil demand, coupled with the Saudi and Russian supply disagreement, have driven oil prices to historic lows. In response to the decline in Brent pricing, we are taking action to minimize capital expenditures and lower operating costs to preserve our balance sheet and maximize cash flow. We are working with our vendors and suppliers to implement cost cutting measures, and we're partnering with other operators to reduce costs by sharing services and equipment such as support vessels and helicopters. We have reduced compensation for our directors by 25%, executive compensation by 20% and non-executive employee compensation by an average of 8%. We released the Vantage rig in early April, following the completion of our…

Thank you, Cary, and good morning, everyone. First quarter 2020 results were significantly impacted by several non-cash charges as well as non-cash gains, totaling a net $59.7 million of charges that were to the sharp decrease in oil prices. As a result, we had a net loss of $52.8 million or $0.91 per diluted share for the quarter. The non-cash charges for the quarter included $30.6 million charge for impairment of our proved oil and gas property and deferred income tax expenses of $35.6 million. These charges were partially offset by unrealized mark-to-market gains of $6.6 million related to the Company's crude oil swaps. Excluding these items, we had adjusted net income for the quarter of $6.9 million. Adjusted EBITDAX of 6.0 million in the first quarter of 2020, which was lower than the same period a year ago, as well as the fourth quarter of 2019, primarily due to lower oil prices. Production for the first quarter of 450,000 net barrels was significantly higher than both, the first quarter of 2019 and the fourth quarter of 2019, due to the impact of the new wells coming on line in late 2019 and early 2020. First quarter 2020 oil sales of 294,000 net barrels, however, were lower than both, the first quarter of 2019 and the fourth quarter of 2019, as a lifting of 85,000 barrels that was scheduled for March 2020 was delayed until April 1st. This was not a result of any impact on operations associated with COVID-19, but rather it was due to poor weather conditions at the time of the lifting. We had only two liftings during the quarter, whereas we would typically have three liftings during the quarter, i.e., one per month. The delay in the scheduled March lifting also resulted in the average oil…

Thanks, Liz. Over the past several years, we've worked diligently to build a solid foundation for the future and to strengthen our financial position. Even in the challenging environment we face today, we remain focused on operational excellence. VAALCO has a stable producing asset with significant upside in Gabon. We have taken actions to drive down our operational costs and improve our margins, which will allow us to generate cash flow to fund future drilling campaigns. While we have deferred capital expenditures including drilling until the global oil pricing environment improves, we remain confident in the long-term viability of our inventory of drilling opportunities. We continue to plan for the future where we hope to repeat the successful 2019-2020 drilling campaign with similar drilling campaigns and continue adding reserves and production through the life of our PSC at Etame. With the debt-free balance sheet, approximately $61 million in cash on hand at March 31st and strong production from our recently completed drilling program, we have positioned VAALCO to weather the near-term uncertainties. We expect that 2020 will be a challenging year for our industry, but we will continue to carefully manage our business with a focus on protecting our balance sheet and optimizing cash flow. Thank you. And with that, operator, we are ready to take questions.

Thank you. [Operator Instructions] Our first question today will come from Charlie Sharp of Canaccord. Please go ahead.

Yes. Good morning, everybody. Thank you very much for the detailed update, much appreciated. I had sort of two questions in one, really, if I may. Obviously you had a very successful drilling campaign in 2019 and 2020, which you talked about in the presentation. Perhaps you could just outline a little bit more in detail what is this that you've learned from that and how much more confident you may be in the potential of the Etame license? And then, the follow-on is what has to happen with the COVID virus and oil prices for you to turn what you would like to do next in terms of operations into concrete plans for new drilling? Thank you.

Thank you, Charlie. I'm happy to talk about what we've learned or what we learned from the drilling campaign we just executed. I guess, first and foremost, it was the successful appraisal wellbores which identified oil in place and resources in areas where we were not completely confident. There was oil in place before we drilled the appraisal wellbores. And so, that was of course the Dentale reservoir underneath the Gamba at Etame, I should say underneath the Gamba reservoir at the Etame field. So, in the future, we have confidence in pursuing some Dentale development wells. And then, over at South East Etame of course, we have a successful appraisal wellbore and actually completed a development well in that new reservoir. And as we watch the new well produced, we may -- we might -- we may learn that there's space for development well there. So, I think those were the two key things we learned that will impact future drilling campaigns. And then, also on the operational side, I think that we learned a whole lot. We hadn't had a drilling rig at Etame in five years. We restarted the drilling campaign in September of last year, as everyone knows. There were some -- as you’ll recall, there were -- there was a little bit of a cost overrun in the beginning, but we learned very quickly on how to manage those problems and we ended up saving some money towards the latter part of the campaign. And so, I think operationally, what we learned is, get the right people in country early, and we wouldn't have sort of suffered through those learnings at the beginning. But again, we overcame those in our entire drilling campaign -- or the entirety of the drilling campaign came in on budget.…

Yes. That’s very helpful. Thank you.

Our next question today will come from Bill Dezellem of Tieton Capital. Please go ahead.

Great. Thank you. A couple of questions. I'd like to start with your $35 free cash flow number. And I think of the difference between free cash flow breakeven and operational breakeven as being CapEx. So, I guess, the first question, is there something more besides CapEx? And if that is the difference, what CapEx are you using with your assumption of that difference between $27 and $35 breakeven?

Yes. The main difference between the two is G&A and then also the asset retirement obligations. So, in the operational breakeven, that's limited to OpEx, tax and workovers. And then, when you get to the free cash flow, it's the OpEx, cash, G&A, workovers and asset retirement obligations. We haven’t included CapEx for the wells because that fluctuates particularly based on whether you have a drilling program in place or not. And so, it kind of distorts the overall numbers. And so, we felt like it was more informative to have something excluding well costs.

Great. Thank you, Liz. And then, secondarily, the Q1 production expense, when you exclude workover and add back the 85,000 barrels that were delayed from the weather. So, those really should have been in Q1. I end up with production expense of $18.34. So, taking the initial production expense of $9.7 million, subtracting off the $2.8 million of workover brings to $6.9 million of production expense. And then, taking the 294,000 barrels of sales, adding in the 85,000 that were delayed a day because of the weather, that's where I get the $18.34. And your guidance is $20 to $24 a barrel. And so, what's the difference and why is your guidance for production expense, so much higher than what you would have experienced in Q1, had you not had that daily weather delay?

Right. I’m going to let…

Yes…

Yes. I'll let Liz cover some details here, but you're right, Bill. I mean, in general, we're finding ways to reduce costs. And so, that unit operating expense is coming down. Unfortunately, the calculation to adjust for the 85,000 barrels, you're right, that should have been in the first quarter calculation that we had -- didn't have the weather problems. The adjustment for -- to unit operating costs is a little more complicated than just adding the barrels back in. And it's because there's an inventory line on the operating expense -- built into operating expense that would changed as well. The inventory line accommodates for barrels that have been produced, but have not been sold. And so, based on the calculation, actually it’s -- the number that we're reporting for first quarter does account for the 85,000 barrels, even though it was not sold in the first quarter. But Liz, do you have anything…?

That's exactly right. Bill, what will happen is, we’ll have -- we have some costs that are capitalized on our balance sheet related to the 85,000 barrels, plus additional barrels that were expected to be in inventory at the end of the quarter. And those costs will be reflected in the second quarter results. So, what you're going to see is -- you should see the average cost per barrel aligned between the two quarters.

That’s helpful. Thank you. And I can either step back in queue or hit you with a couple of other quick questions. Your choice.

Why don't you ahead and ask your question, Bill? We'll try to answer them quickly.

Okay. That’s just fine. Thank you. The bad debt expense of $810,000, what -- how did that come about?

Yes. I'm happy to take that one. So, that has to do with our receivable for that in Gabon. And so, we -- our payments that we're getting for recover that which is fully recoverable or somewhat intermittent, and what we found is that because of additional stress on the Gabonese economy, and also the lack of receiving any kind of payments in the first quarter, we believe that it was prudent to increase the valuation allowance against that receivable.

And that's essentially a refund from the Gabonese government?

Correct.

Great. Thank you. And the South Tchibala 2H mechanical issue. Would you talk to what you think is going on there, please?

Well, first, the electric submersible pump in the well did not fail. And so, I want to make that very clear. It was installed in 2018 and it was still running just fine. What we saw was rate dropped significantly for no apparent reason. And so, until we pulled the tubing and the ESP or the electric submersible pump and go down in the well listen tools, we don't know confidently why production slowed down. But, what we think is there -- like I said, there's a downhole mechanical failure that could be something related to the casing having a problem, something broken loose and is obstructing flow, we just -- we don't know. And so, like I said, we need the drilling rig to come back, so we can pull the tubing, pull the ESP and go in with some tools and diagnose what the problem is and repair the problem. And it's something downhole that has broken loose or collapsed, we just don't know.

Our next question today will come from Jamie Wilen with Wilen Management. Please go ahead.

With Levene and Equatorial Guinea, is the memorandum of understanding non-binding because its negotiations with the government that has to be concluded to extend the timeline? Is that the majority of the hold-up at this point?

Well, a couple of things, Jamie. In terms of finalizing the agreements, yes, we will need some time with the government -- to work with the government to approve the agreements. We're not quite -- we're not at that stage yet. We're still negotiating agreements with Levene. And, unfortunately, the COVID-19 restrictions have slowed us down. And so, we're working as fast as we can. But, typically, we would have either -- we would have met in person for maybe a day or two and finalized the negotiations. That option is not available. And so, we're trying to work through teleconferences and video conferences. It's just taking a while for VAALCO and Levene to come to final terms. It's not the government, it's delaying things right now. So, just want to be clear about that.

Okay. The 12-month timeframe has not started, the clock hasn't started ticking on that yet, I assume.

Well, what we have in place in the government right now is the government has confirmed that we have until December 31, 2021 to either drill a well or relinquish the license. And so, there's no penalty if we relinquish the license. But, we do remove the $10 -- I'm sorry, $10 million of value we have on our books for Equatorial Guinea. But, there's no cash impact. So, what we've done is, we've gone back to the Equatorial Guinea government and we've asked for an extension, let's say out to December 31, 2023 to drill the well. And we're fairly confident that we will get that extension. But, otherwise, the deadline is December 31, 2021.

On your balance sheet, why do your partners in Gabon give you a $10 million advance to sit with?

Yes. That really just has to do with the timing of cash call. So, what ends up happening is we cash call or joint owners for the coming month’s expenditures. So, we're doing an estimate. The cash calls are not due until the first day of that month. But, in the number of cases, we get the cash a day before or maybe two days before. And so, you end up with cash on your balance sheet that is really going to be used for the next month’s expenditures. So, it's more of a timing issue than everything else. We like to point out how much that is because we don't want -- we want to make sure people understand that a portion of that cash is going to be used to settle the joint owner obligations, rather than our own.

Okay. And lastly, as far as -- you've reduced the cost obviously, your operational breakeven is much lower. Is that an estimate for the full year, have all those costs already been achieved? Is there more to come? And what would be your ultimate operational breakeven be if there are other costs to be taken out?

Well, we are looking for to take out other costs every day. And I trust, I can't guarantee, but I trust that our team will find more cost reductions. But, in terms of is this -- well, it is a forecast. So, the -- when we gave guidance for the full year, it is a forecast. Something could go wrong or circumstances could change and operating expense could go up higher, could increase above our forecast. But, that's why we give a range. And so, we're very confident in the range we've given today. And there's obviously a high end and the low end. And the high end takes into account some -- maybe some unforeseen circumstances. But, I do want to be clear though that right now, we haven't seen any impacts on our operations from the pandemic. But, there may be impacts that we can't predict that would drive our operating costs up. And so, we can't really build that kind of forecast into our outlook. And so, that's an unknown that's out there. But, anyway, Jamie, did that answer your question?

Yes, it did. Once again, congrats on the successful drilling program and the wonderful balance sheet you have with basically the stock price all in cash and no debt. It's a wonderful place to be situated during this tough time.

All right. Thank you. Thank you, Jamie.

[Operator Instructions] Our next question is from Ricky Fairchild with RBC. Please go ahead.

Hi. Thanks. Could you all give a little more color and insight into the rationale between suspending -- or with regards to suspending the share repurchase program? It just seems like net of the cash advances that are on the balance sheet, taken those out that the stock price is right around the cash on the balance sheet. So, it seems like, even if you're not active in the share repurchase program that you would at least keep it open during times like this.

Right. Well, the share repurchase program was set to expire midyear. And so, the Board's terminated the program a bit early. But going back to your question, we do have significant cash on our balance sheet that can be used for a variety of things. And the Board made the decision to preserve our cash on our balance sheet to -- for other opportunities, I would say and to make sure that we can rather weather the storm. But at any time, the Board can reinstate the share repurchase program. Does that answer your question, Ricky?

It does. And so, as far as reauthorizing the share repurchase program, can that only be done at a formal Board meeting or an impromptu meeting or what are the mechanics of that?

Well, it can be done -- we can call an impromptu Board meeting at any time. We'd like to give all of the Board 48 hours notice. And it could be a teleconference. And otherwise, we could we could even agree over email, as long as it's unanimous to reinstating the program. So, there's a lot of flexibility. We can move very quickly.

And we have a final question today, a follow-up from Bill Dezellem with Tieton Capital. Please go ahead with your follow-up.

Thank you. I'd actually like to play off your answer to the last question. You referenced keeping cash for other opportunities. So, presumably, acquisitions maybe part of that. Would you -- I guess, I'll make the question two part. Would you discuss kind of what those other opportunities are that you were referring to, and the answer to that question? And secondarily, what is the update relative to acquisitions? And how do you think about them in this oil price environment?

Right. Well, these -- Bill, good questions. And let me talk to M&A and our activity. We are keeping our eyes open for acquisitions that are strategic fit. But, we have nothing to announce today. Our focus right now is really on delivering -- or increasing our margins, and so, making sure we deliver production at the lowest possible cost. I think, that's our first priority. And then, we're watching and we're aware of acquisition opportunities, like I said, nothing to announce. But, in terms of keeping the cash on our balance sheet to preserve our liquidity, not only for M&A, but if there's -- things turn around quickly and we want to restart a drilling program we can do that. Maybe we want to shoot seismic in Etame to help future drilling programs. We'd have the cash to do that ahead of the drilling program. So, we're really looking 18 to 24 months out what the opportunities are and making sure that we have enough cash on hand to deliver our strategy.

And then, one additional question. Gabon, I believe is part of OPEC. Is there any indication that you may in the future need to need to reduce your production as a result?

So far, we have not been notified we will -- we have not been notified and we've not been asked to reduce our production as a result of the OPEC cuts. You're correct. Gabon is a member of OPEC and we have not received notification that we will be required to curtail our production.

Great. Thank you again.

Yes. Thank you, Bill.

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Cary Bounds for any closing remarks.

Sure. Thank you, operator. Well, I appreciate everybody joining our call today. And we look forward to our next call after the close of the second quarter. Goodbye.

The conference has now concluded. We thank you for attending today's presentation. And you may now disconnect your lines.