ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
VAA
LCO ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except number of shares and par value amounts)
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,156
|
|
$
|
25,357
|
Restricted cash
|
|
|
796
|
|
|
1,048
|
Receivables:
|
|
|
|
|
|
|
Trade
|
|
|
5,423
|
|
|
5,353
|
Accounts with partners, net of allowance of
$7.6
million at December 31, 2015
|
|
|
23,139
|
|
|
27,856
|
Other
|
|
|
133
|
|
|
42
|
Crude oil inventory
|
|
|
920
|
|
|
639
|
Materials and supplies
|
|
|
174
|
|
|
194
|
Prepayments and other
|
|
|
3,578
|
|
|
3,253
|
Total current assets
|
|
|
58,319
|
|
|
63,742
|
Property and equipment - successful efforts method:
|
|
|
|
|
|
|
Wells, platforms and other production facilities
|
|
|
412,593
|
|
|
412,593
|
Undeveloped acreage
|
|
|
10,000
|
|
|
10,000
|
Equipment and other
|
|
|
10,726
|
|
|
10,948
|
|
|
|
433,319
|
|
|
433,541
|
Accumulated depreciation, depletion and amortization
|
|
|
(402,157)
|
|
|
(400,168)
|
Net property and equipment
|
|
|
31,162
|
|
|
33,373
|
Other noncurrent assets:
|
|
|
|
|
|
|
Restricted cash
|
|
|
15,830
|
|
|
15,830
|
Value added tax receivable, net of allowance of
$4.7
million and
$4.2
million
at March 31, 2016 and December 31, 2015
|
|
|
4,690
|
|
|
4,221
|
Deferred finance charge
|
|
|
1,552
|
|
|
1,655
|
Abandonment funding
|
|
|
5,137
|
|
|
5,137
|
Total assets
|
|
$
|
116,690
|
|
$
|
123,958
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
43,671
|
|
$
|
46,848
|
Foreign taxes payable
|
|
|
2,967
|
|
|
-
|
Accrued liabilities and other
|
|
|
19,803
|
|
|
19,868
|
Total current liabilities
|
|
|
66,441
|
|
|
66,716
|
Asset retirement obligations
|
|
|
16,418
|
|
|
16,166
|
Long term debt
|
|
|
15,000
|
|
|
15,000
|
Total liabilities
|
|
|
97,859
|
|
|
97,882
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
VAALCO Energy Inc. shareholders’ equity:
|
|
|
|
|
|
|
Preferred stock,
none
issued,
500,000
shares authorized,
$25
par value
|
|
|
-
|
|
|
-
|
Common stock,
66,041,338
and
66,041,338
shares issued,
$0.10 par value,
100,000,000
shares authorized
|
|
|
6,604
|
|
|
6,604
|
Additional paid-in capital
|
|
|
69,977
|
|
|
69,118
|
Less treasury stock,
7,545,977
and
7,514,169
shares at cost
|
|
|
(37,923)
|
|
|
(37,882)
|
Retained deficit
|
|
|
(19,827)
|
|
|
(11,764)
|
Total equity
|
|
|
18,831
|
|
|
26,076
|
Total liabilities and equity
|
|
$
|
116,690
|
|
$
|
123,958
|
See notes to condensed consolidated financial statements
.
VA
ALCO ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
Oil and natural gas sales
|
|
$
|
10,976
|
|
$
|
18,239
|
Operating costs and expenses:
|
|
|
|
|
|
|
Production expense
|
|
|
11,253
|
|
|
9,911
|
Exploration expense
|
|
|
1
|
|
|
27,459
|
Depreciation, depletion and amortization
|
|
|
2,241
|
|
|
5,935
|
General and administrative expense
|
|
|
2,984
|
|
|
4,873
|
Impairment of proved properties
|
|
|
-
|
|
|
5,399
|
Other operating expense
|
|
|
8,881
|
|
|
-
|
General and administrative related to shareholder matters
|
|
|
(453)
|
|
|
-
|
Bad debt expense (recovery) and other
|
|
|
(7,286)
|
|
|
280
|
Total operating costs and expenses
|
|
|
17,621
|
|
|
53,857
|
Other operating income (loss), net
|
|
|
(3)
|
|
|
340
|
Operating loss
|
|
|
(6,648)
|
|
|
(35,278)
|
Other income (expense):
|
|
|
|
|
|
|
Interest income
|
|
|
3,202
|
|
|
4
|
Interest expense
|
|
|
(489)
|
|
|
(310)
|
Other, net
|
|
|
524
|
|
|
(56)
|
Total other income (expense)
|
|
|
3,237
|
|
|
(362)
|
Loss before income taxes
|
|
|
(3,411)
|
|
|
(35,640)
|
Income tax expense
|
|
|
4,652
|
|
|
3,365
|
Net loss
|
|
$
|
(8,063)
|
|
$
|
(39,005)
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.14)
|
|
$
|
(0.67)
|
Diluted net loss per share
|
|
$
|
(0.14)
|
|
$
|
(0.67)
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
58,513
|
|
|
57,981
|
Diluted weighted average shares outstanding
|
|
|
58,513
|
|
|
57,981
|
See notes to condensed consolidated financial statements.
VA
ALCO ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,063)
|
|
$
|
(39,005)
|
Adjustments to reconcile net loss to net cash provided
by operating activities:
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
2,241
|
|
|
5,935
|
Amortization of debt issuance cost
|
|
|
103
|
|
|
160
|
Unrealized foreign exchange loss
|
|
|
(398)
|
|
|
-
|
Dry hole costs and impairment of unproved leasehold
|
|
|
-
|
|
|
27,222
|
Stock-based compensation
|
|
|
859
|
|
|
1,654
|
Bad debt expense
|
|
|
343
|
|
|
-
|
Other operating (income) loss, net
|
|
|
3
|
|
|
(340)
|
Impairment of proved properties
|
|
|
-
|
|
|
5,399
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
Trade receivables
|
|
|
(70)
|
|
|
318
|
Accounts with partners
|
|
|
4,717
|
|
|
(14,568)
|
Other receivables
|
|
|
(91)
|
|
|
(2,774)
|
Crude oil inventory
|
|
|
(281)
|
|
|
213
|
Materials and supplies
|
|
|
20
|
|
|
53
|
Value added tax receivable
|
|
|
(690)
|
|
|
-
|
Prepayments and other
|
|
|
(317)
|
|
|
655
|
Accounts payable
|
|
|
(2,754)
|
|
|
6,883
|
Accrued liabilities and other
|
|
|
1,231
|
|
|
7,594
|
Foreign taxes payable
|
|
|
2,967
|
|
|
-
|
Net cash used in operating activities
|
|
|
(180)
|
|
|
(601)
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
252
|
|
|
5,387
|
Property and equipment expenditures
|
|
|
(1,291)
|
|
|
(28,070)
|
Proceeds from sales of oil and gas properties
|
|
|
-
|
|
|
340
|
Other, net
|
|
|
18
|
|
|
-
|
Net cash used in investing activities
|
|
|
(1,021)
|
|
|
(22,343)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from the issuances of common stock
|
|
|
-
|
|
|
445
|
Net cash provided by financing activities
|
|
|
-
|
|
|
445
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(1,201)
|
|
|
(22,499)
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
25,357
|
|
|
69,051
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
24,156
|
|
$
|
46,552
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Interest paid, net of capitalized interest
|
|
$
|
489
|
|
$
|
310
|
Taxes paid
|
|
$
|
1,830
|
|
$
|
3,403
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
Property and equipment additions incurred but not
paid at period end
|
|
$
|
15,572
|
|
$
|
27,907
|
Asset retirement cost capitalized
|
|
$
|
42
|
|
$
|
203
|
Receivable from employees for stock option exercises
|
|
$
|
-
|
|
$
|
29
|
See notes to condensed consolidated financial statements.
VAALCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND ACCOUNTING
POLICIES
VAALCO Energy, Inc. and its consolidated subsidiaries (“VAALCO” or the “Company”) is a Houston-based independent energy company principally engaged in the acquisition, exploration, development and production of crude oil and natural gas. As operator, we have production operations in Gabon, West Africa and conduct exploration activities in Gabon and Angola,West Africa. We participate in exploration and development activities as a non-operator in Equatorial Guinea, West Africa. VAALCO is the operator of unconventional resource properties in the United States in North Texas and undeveloped leasehold in Montana. We also own some minor interests in conventional production activities as a non-operator in the United States.
Our consolidated subsidiaries are VAALCO Gabon (Etame), Inc., VAALCO Production (Gabon), Inc., VAALCO Angola (Kwanza), Inc., VAALCO UK (North Sea), Ltd., VAALCO International, Inc., VAALCO Energy (EG), Inc., VAALCO Energy Mauritius (EG) Limited and VAALCO Energy (USA), Inc.
These condensed consolidated financial statements are unaudited, but in the opinion of management, reflect all adjustments necessary for a fair presentation of results for the interim periods presented. All adjustments are of a normal recurring nature unless disclosed otherwise. Interim period results are not necessarily indicative of results to be expected for the full year.
These condensed consolidated financial statements have been prepared in accordance with rules of the Securities and Exchange Commission (“SEC”) and do not include all the information and disclosures required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. They should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015, which include a summary of the significant accounting policies.
Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These reclassifications did not affect our consolidated financial results.
Allowances for bad debts
–
Quarterly, we evaluate our accounts receivable balances to confirm collectability. When collectability is in doubt, we record an allowance against the accounts receivable and a corresponding income charge for bad debts, which appears in the Bad debt expense (recovery) and other line of the condensed statements of consolidated operations.
The majority of our accounts receivable balances are with our joint venture partners, purchasers of our production and the government of Gabon for reimbursable Value-Added Tax (“VAT”). Collection efforts, including remedies provided for in the contracts, are pursued to collect overdue amounts owed to us.
In the three months ended March 31, 2016, we increased the allowance for VAT due from Gabon by
$0.5
million. With respect to accounts with partners, in March 2016, Sonangol P&P paid its past-due balances plus interest, and we fully reversed the allowance of
$7.6
million to reflect the recovery. There were no changes in the allowance for bad debts during the three months ended March 31, 2015. We are currently working with the government of Gabon to finalize a payment schedule for the reimbursement of past due VAT.
General and administrative related to shareholder matters
–
During the third quarter of 2015, a shareholder group consisting of
Group 42, Inc., Bradley L. Radoff and certain other participants (collectively, the "Group 42-BLR Group") attempted to gain control of our Board of Directors. In December 2015, we reached an agreement with the Group 42-BLR Group that included changes to the composition of the Board of Directors and other actions. In connection with this agreement, we reimbursed the Group 42-BLR Group for
$350,000
of its legal expenses. Related shareholder litigation filed in Delaware was ongoing at March 31, 2016 and was dismissed by the Delaware Chancery Court on April 20, 2016. See Note 6 for further discussion of the litigation.
2. LIQUIDITY AND GOING CONCERN
Our revenues, cash flow, profitability, oil and natural gas reserves value and future rate of growth are substantially dependent upon prevailing prices for oil and natural gas. Our ability to borrow funds and to obtain additional capital on attractive terms is also substantially dependent on oil and natural gas prices. Historically, world-wide oil and natural gas prices and markets have been volatile, and may continue to be volatile in the future. In particular, the prices of oil and natural gas declined dramatically in the second half of 2014 and remained low, decreasing further in 2015 and early 2016. As a result, our revenues have decreased from $18.2 million in the first quarter of 2015 to $11.0 million in the first quarter of 2016, primarily due to price declines.
The operation of the terms of our existing revolving credit loan agreement with the International Finance Corporation (“IFC”) may also adversely impact our liquidity. As discussed in Note 5, we currently have very limited, if any, borrowing capacity under our revolving credit facility (the “IFC credit facility”). A continuation of prevailing low price levels for oil and natural gas may cause the IFC to make further reductions in the borrowing base under the credit facility. Currently
,
we are working with the IFC to restructure the credit facility.
If we fail to satisfy our obligations with respect to our indebtedness or trade payables, or fail to comply with the financial and other restrictive covenants contained in the loan agreement governing our revolving credit facility, an event of default could result, which would permit acceleration of such debt and which could result in an event of default under the facility and acceleration of other indebtedness, and could permit our secured lender to foreclose on any of our assets securing that debt. Any accelerated debt would become immediately due and payable.
Continued depressed oil and natural gas prices or further declines in oil and natural gas prices for 2016 and thereafter would have a material adverse effect on our liquidity, financial condition, results of operations and on the carrying value of our proved reserves.
If oil and natural gas prices continue to remain at depressed levels, we expect that for 2016 we will not generate adequate revenue to cover our operating expenses, we will generate losses from operations, and our cash flows will not be sufficient to cover our operating expenses. To meet our capital needs, we are considering multiple alternatives, including, but not limited to, additional debt or equity financing, a sale or farm-downs of assets, delay of the discretionary portion of our capital spending to future periods and/or operating cost reductions. There can be no guarantee of future capital acquisition or fundraising success. Our current cash position and our ability to access additional capital may limit our available opportunities, or not provide sufficient cash available for our operations which raises substantial doubt about our ability to continue as a going concern.
Our financial statements for the quarter ended March 31, 2016, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
3. NEW ACCOUNTING STANDARDS
Not yet adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which amended the accounting standards for leases. The accounting standards update retains a distinction between finance leases and operating leases. The primary change is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases on the balance sheet. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous guidance. Certain aspects of lease accounting have been simplified. Additional qualitative and quantitative disclosures are required along with specific quantitative disclosures required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early application permitted. We are currently evaluating the provisions of this update and assessing the impact on our consolidated financial statements.
Adopted
In April 2015, the FASB issued guidance that will require the presentation of debt issuance costs in financial statements as a direct reduction of the related debt liabilities with amortization of debt issuance costs reported as interest expense. Under current GAAP, debt issuance costs are reported as deferred charges (i.e., as an asset). This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and is to be applied retrospectively upon adoption. Early adoption is permitted, including adoption in an interim period for financial statements that have not been previously issued. The standards update does not specifically address line-of-credit revolving credit agreements such as ours; therefore, no change has been made to the presentation of our financial position.
In January 2015, the FASB amended GAAP to eliminate the concept of extraordinary items. Items meeting the criteria for extraordinary classification will no longer be segregated from the results of ordinary operations and shown as a separate line in the income statement. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and is to be applied prospectively. Application of this guidance did not have a significant impact on our financial position, results of operations or cash flows.
4. OIL AND NATURAL GAS PROPERTIES AND EQUIPMENT
We review our oil and natural gas producing properties for impairment whenever events or changes in circumstances indicate that the carrying amount of such properties may not be recoverable. When it is determined that an oil and natural gas property’s estimated future net cash flows will not be sufficient to recover its carrying amount, an impairment charge is recorded to reduce the carrying amount of the asset to its estimated fair value.
Declining forecasted oil prices and other factors caused us to perform impairment reviews of our proved properties in the first quarters of 2015 and 2016 for all fields in the Etame Marin block offshore Gabon and the Hefley field in North Texas.
The impairment evaluations in each quarter used the most recently prepared independent reserve report adjusted as necessary for reserve revisions based on drilling and production results and for the forward price curves near each quarter end. The discounted cash flow
measurement model relies primarily on Level 3 inputs.
No
impairment was required for the quarter ended March 31, 2016. As a result of a decline in forecasted oil prices and higher costs for planned development wells, for the quarter ended March 31, 2015, we recorded an aggregate impairment of $5.4 million to reduce the carrying value of the Southeast Etame and North Tchibala to
zero
, which was their fair value at March 31, 2015.
Beginning in the third quarter of 2014, the prices for oil and natural gas began a dramatic decline which continued through 2015 and into 2016. Current prices are significantly less than they were in the several years prior to 2015.
As this period of sustained reduced oil prices continues, further non-cash impairments of proved properties could be necessary in future periods, as a result of further declines in prices, higher than expected capital and production costs, lower production rates or other factors.
5. DEBT
We have a loan agreement with the IFC for a
$65.0
million
revolving credit facility, which is secured by the assets of our Gabon subsidiary,
VAALCO Gabon (Etame), Inc.
The borrowing base under the IFC credit facility is based upon our proved reserves and risk adjusted probable reserves and is re-determined semi-annually by the IFC as of June 30 and December 31. In addition, the borrowing base may be adjusted pursuant to certain non-scheduled redeterminations. The borrowing base was re-determined effective December 31, 2015 at
$20.1
million, with $15.0 million drawn at December 31, 2015 and March 31, 2016. In addition, the IFC communicated to us that if we were to seek additional drawdowns before the next redetermination date (as of June 30, 2016), the IFC could elect, under the terms of the loan agreement, to conduct an interim redetermination, which it believes could result in a borrowing base of less than $20.1 million if commodity prices are lower than they were at December 31, 2015. Therefore, we currently have very limited borrowing capacity under our IFC credit facility.
Under the IFC credit facility, we are required to maintain a ratio of our net debt to EBITDAX (as defined in the credit agreement) of not more than
3.0
to 1.0.
Forecasting our compliance with the financial covenant in future periods is inherently uncertain. Factors that could impact our net debt to EBITDAX in future periods include future realized prices for sales of oil and natural gas, estimated future production, returns generated by our capital program, and future interest costs, among others. We are in compliance with all financial covenants as of March 31, 2016. However, based upon the current covenant calculations, we would not be able to draw up to the $20.1 million and remain in compliance.
Under the debt agreement the senior tranche decreases by
$6.25
million and the subordinated tranche decreases by
$1.88
million every six months beginning June 30, 2016 through December 2019.
The borrowed amounts approximate fair value because the interest approximates current market rates for similar instruments.
Interest is paid quarterly at a rate of LIBOR plus a spread of
3.75%
and
5.75%
for the
senior tranche and
subordinated tranche
, respectively
. We pay commitment fees on the undrawn portion of the total commitments. Commitment fees for the lenders are equal to
1.5%
of the unused balance of the senior tranche of
$50.0
million and
2.3%
of the unused balance of the subordinated tranche of
$15.0
million when a commitment is available for utilization.
The interest rate on outstanding borrowings, excluding commitment fees,
was
4.36%
and
4.32
% in the quarters
ended March 31
¸ 2016 and 2015. Interest
expense incurred, including commitment fees on the available balance, was
$0.5
million and
$0.5
million for the quarters
ended March 31
¸ 2016 and 2015
.
We capitalize interest and commitment fees related to expenditures made in connection with exploration and development projects that are not subject to current depletion. Interest and commitment fees are capitalized only for the period that activities are in progress to bring these projects to their intended use.
No
interest expense was capitalized for the quarter ended March 31, 2016. For the
quarter
ended March 31¸ 2015,
$0.2
million of interest expense was capitalized.
6. COMMITMENTS AND CONTINGENCIES
Litigation
On December 7, 2015, Plaintiff Vladimir Gusinsky Living Trust filed a stockholder class action lawsuit in the Court of Chancery of the State of Delaware (the “Court”) against the Company and all of its directors alleging that certain provisions of the Company’s Restated Charter and Second Amended and Restated Bylaws that restricted the removal of its directors to removal for cause only (the “director removal provisions”) were invalid as a matter of Delaware law. Plaintiff George Shapiro also filed a similar stockholder class action lawsuit in the Court on December 7, 2015. Thereafter, the plaintiffs agreed to the consolidation of their cases (the “Consolidated Case”).
After a hearing on the Consolidated Case on December 21, 2015, Vice Chancellor Laster issued an opinion in
In re VAALCO Energy, Inc. Stockholder Litigation
, Consol. C.A. No. 11775-VCL holding that, in the absence of a classified board or cumulative voting, the director removal provisions conflicted with Section 141(k) of the Delaware General Corporation Law and are therefore invalid.
On April 20, 2016, the Court approved a Stipulation and Order of Dismissal entered into by the parties in the Consolidated Case. We agreed to settle plaintiffs’ application for an award of attorneys’ fees and expenses due to the costs of defense of that application and litigation risk associated therewith.
Rig commitment
In 2014, we entered into a long-term contract for a jackup drilling rig for the multi-well development drilling campaign offshore Gabon. The campaign included the drilling of development wells and workovers of existing wells in the Etame Marin block.
We began demobilization in January and released the drilling rig in February, prior to the July 2016 contract termination date, because we no longer intend to drill any wells in 2016 on our Etame Marin block offshore Gabon. An estimate of the maximum expense associated with day rate for the period from demobilization through contract expiration, plus normal and customary demobilization costs has been accrued in the first quarter of 2016, with a net to VAALCO liability of
$8.9
million. The related expense is
i
n the Other operating expense line of the statement of consolidated operations. We are currently in negotiations with the rig operator to settle the remaining amount due on the contract.
Gabon
Offshore
Abandonment
We have an agreed cash funding arrangement for the eventual abandonment of all offshore wells, platforms and facilities on the Etame Marin Block. Based upon the abandonment study completed in January 2016, t
he abandonment cost estimate used for this purpose is approximately
$61.1
million (
$17.3
million net to VAALCO) on an undiscounted basis. The obligation for abandonment of the Gabon offshore facilities is included in the Asset retirement obligation line on our condensed consolidated balance sheet. Through December 31, 2015,
$18.3
million (
$5.1
million net to VAALCO) on an undiscounted basis has been funded, with the next funding of
$2.6
million net to VAALCO expected to be required in 2016. This cash funding is reflected under Other noncurrent assets as Abandonment funding on our condensed consolidated balance sheet. Future changes to the abandonment costs estimate could change not only our asset retirement obligation, but the amount of future abandonment funding payments.
Audits
In October 2014, we received a provisional audit report related to the Etame Marin block operations from the Gabon Taxation Department as part of a special industry-wide audit of business practices and financial transactions in the Republic of Gabon. In November 2014, we responded to the Gabon Taxation Department requesting joint meetings to advance the resolution of this matter and later provided a formal reply to the provisional audit report in February 2015. A tentative agreement was reached with the Gabon Taxation Department in April 2015, and we are working with the Gabon Taxation Department to finalize the audit.
During 2015, we accrued an estimated settlement of
$0.3
million based upon preliminary negotiations. The ultimate outcome of the claim and impact cannot be predicted, and an adverse result of the audit could result in a material liability and adversely affect our financial condition.
Angola
Offshore
Partner receivable
In November 2006, we signed a production sharing contract for Block 5 offshore Angola. The
four
year primary term, with an optional
three
year extension, awarded us exploration rights to
1.4
million acres offshore central Angola, with a commitment to drill
two
exploratory wells. Our working interest is
40% and
we
carry the Angolan national oil company, Sonangol P&P, for
10%
of the work program. The government-assigned working interest partner was delinquent in paying their share of the costs several times in 2009 and was removed from the production sharing contract in 2010 by a governmental decree. The available 40% working interest in Block 5, offshore Angola was assigned to Sonangol P&P effective on January 1, 2014. We invoiced Sonangol P&P for the unpaid amounts from the defaulted partner plus the amounts incurred on the partner’s behalf during the period prior to assignment of the working interest totaling
$7.6
million plus interest in April 2014. Due to the uncertainty of collection, we recorded a full allowance
for that amount.
Because this amount was not paid and Sonangol P&P was slow in paying monthly cash call invoices since their assignment, we placed Sonangol P&P in default in the first quarter of 2015.
On March 14, 2016, we received from Sonangol P&P payment for the full amount owed us, including the previously written off receivable, as of December 31, 2015. The
$7.6
million recovery is reflected in the Bad debt expense (recovery) and other line of the condensed statement of consolidated operations. Default interest of
$3.2
million was received and is shown in the Interest income line of the condensed statement of consolidated operations. As of March 14, 2016, Sonangol P&P was no longer in default.
Exploration well commitment
Under the current agreement with the Republic of Angola, we and our working interest partner, Sonangol P&P are obligated to perform certain exploration activities by November 30, 2017. In the first quarter of 2015, we drilled an unsuccessful exploratory well on the Kindele prospect, which satisfied one of the well commitments. The agreement requires us to drill or commence drilling three additional exploration wells by the expiration date.
A
$10.0
million assessment ($
5.0
million net to VAALCO) applies to each of the
three
remaining exploratory well commitments, if any, that have not been spud at the end of the exploration period in November 2017.
Due to the current outlook for oil prices and the uncertainties about the timing for our partner to pay its share of future costs, there may be delays in drilling the remaining three wells.
We have continued to classify the $15.0 million commitment for drilling these wells as long term restricted cash on our balance sheet. We are seeking to extend the term of the exploration license and hence the well commitment deadline.
7.
COMPENSATION
Stock options
Stock options are granted under our long-term incentive plan and have an exercise price that may not be less than the fair market value of the underlying shares on the date of grant. Stock options granted to participants will become exercisable over a period determined by the Compensation Committee of our Board of Directors, which in the past has been a
five
year life, with the options vesting over a
service period of up to
five
years. In addition, stock options will become exercisable upon a change in control, unless provided otherwise by the Compensation Committee of our Board of Directors. A portion of the stock options granted in the three months ended March 31, 2016 and 2015 were vested immediately with the remainder vesting over a
two
year period.
Stock option activity for the three months ended March 31, 2016 is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Number of
|
|
Weighted
|
|
Average
|
|
|
Shares
|
|
Average
|
|
Remaining
|
|
|
Underlying
|
|
Exercise Price
|
|
Contractual
|
|
|
Options
|
|
Per Share
|
|
Term
|
|
|
(in thousands)
|
|
|
|
|
(in years)
|
Outstanding at January 1, 2016
|
|
4,144
|
|
|
6.41
|
|
2.68
|
Granted
|
|
1,519
|
|
|
1.16
|
|
3.95
|
Forfeited/expired
|
|
(574)
|
|
|
6.57
|
|
1.20
|
Outstanding at March 31, 2016
|
|
5,089
|
|
|
4.82
|
|
3.03
|
Restricted shares
Shares of restricted stock may be granted under our long-term incentive plan and related compensation expense is recorded using the fair market value of the underlying shares on the date of grant. Restricted stock granted to employees will vest over a period determined by the Compensation Committee which is generally a
three
year period, vesting in three equal parts on the first three anniversaries of the date of the grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Restricted
|
|
Average
|
|
|
Stock
|
|
Grant Price
|
Non-vested shares outstanding at January 1, 2016
|
|
419,888
|
|
|
3.83
|
Awards vested
|
|
(97,412)
|
|
|
5.49
|
Non-vested shares outstanding at March 31, 2016
|
|
322,476
|
|
|
3.33
|
In the three months ended March 31, 2016,
31,808
shares
were added to treasury due to tax withholding on vesting restricted shares.
Stock appreciation rights (“SARs”)
Stock appreciation rights (“SARs”) are granted under the “VAALCO Energy, Inc. 2016 Stock Appreciation Rights Plan”. A SAR is the right to receive a cash amount equal to the (“Spread”) with respect to a share of common stock upon the exercise of the SAR.
The
Spread is the difference between the SAR price per share specified in a SAR award on the date of grant (which may not be less than the fair market value of our common stock on the date of grant) and the fair market value per share on the date of exercise of the SAR. SARs granted to participants will become exercisable over a period determined by the Compensation Committee of our Board of Directors. In addition, SARs will become exercisable upon a change in control, unless provided otherwise by the Compensation Committee of our Board of Directors. The
815,355
SARs
granted in the three months ended March 31, 2016 vest over a
three
year period with a life of
5
years and have a maximum Spread of
300%
of the
$1.04
SAR
price per share specified in a SAR award on the date of grant.
Compensation expense
We record non-cash compensation expense related to stock-based incentive compensation as general and administrative expense. For the
three months ended March 31, 2016 and 2015
, non-cash compensation expense was $0.9 million and $1.7 million, related to stock options, common stock, restricted stock and SARs. Because we do not pay significant United States federal income taxes,
no
amounts were recorded for tax benefits.
8. INCOME TAXES
VAALCO and its domestic subsidiaries file a consolidated United States income tax return. Certain subsidiaries’ operations are also subject to foreign income taxes.
As discussed further in the Notes to the consolidated financial statements in our Form 10-K for December 31, 2015, we have deferred tax assets related to foreign tax credits, alternative minimum tax credits, and domestic and foreign net operating losses (“NOLs”). Management assesses the available positive and negative evidence to estimate if existing deferred tax assets will be utilized. We do not anticipate utilization of the foreign tax credits prior to expiration nor do we expect to generate sufficient taxable income to utilize other deferred tax assets. On the basis of this evaluation, full valuation allowances have been recorded as of March 31, 2016.
NOLs for our Gabon and Angola subsidiaries are included in the respective subsidiaries’ cost oil accounts which will be offset against future taxable revenues. In Angola, these NOLs are not available to offset financial gains which include foreign exchange gains and interest income. During the three months ended March 31, 2016, we recorded
$3.0
million for income taxes in Angola on financial gains related to foreign exchange gains as well as the interest income paid by Sonangol P&P on their past due joint interest account balance. The remaining income taxes for the three months ended March 31, 2016 and all of the income taxes for March 31, 2015 are attributable to foreign taxes payable in Gabon.
9.
EARNINGS PER SHARE
Basic earnings per share (“EPS”) is calculated using the average number of shares of common stock outstanding during each period. For the calculation of diluted shares, we assume that restricted stock is outstanding on the date of grant, and we assume the issuance of shares from
the exercise of stock options using the treasury stock method.
A reconciliation from basic to diluted shares follows:
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
Basic weighted average shares outstanding
|
|
58,512,657
|
|
57,981,347
|
Effect of dilutive securities
|
|
-
|
|
-
|
Diluted weighted average shares outstanding
|
|
58,512,657
|
|
57,981,347
|
|
|
|
|
|
Stock options excluded from dilutive calculation because they would be anti-dilutive
|
|
4,283,707
|
|
5,772,271
|
|
|
|
|
|
Because we recognized net losses for the three months ended March 31
, 2016 and 2015
, there were no dilutive securities for those periods
.
10. SEGMENT INFORMATION
Our operations are based in Gabon, Angola, Equatorial Guinea and the United States (“U.S.”).
Each of our
four
reportable operating segments is organized and managed based upon geographic location. Our Chief Executive Officer, who is the chief operating decision maker, along with management
review and evaluate the operation of each geographic segment separately primarily based on Operating income (loss). The operations of all segments include exploration for and production of hydrocarbons where commercial reserves have been found and developed. Revenues are based on the location of hydrocarbon production.
Corporate and other is primarily corporate and operations support not allocated to the reportable operating segments.
Segment activity for the three months ended March 31, 2016 and 2015 and segment assets at March 31, 2016 and December 31, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
Equatorial
|
|
|
|
|
Corporate
|
|
|
|
(in thousands)
|
|
Gabon
|
|
Angola
|
|
Guinea
|
|
U.S.
|
|
and Other
|
|
Total
|
Revenues-oil and gas sales
|
|
$
|
10,908
|
|
$
|
-
|
|
$
|
-
|
|
$
|
68
|
|
$
|
-
|
|
$
|
10,976
|
Depreciation, depletion and amortization
|
|
|
2,143
|
|
|
3
|
|
|
-
|
|
|
21
|
|
|
74
|
|
|
2,241
|
Impairment of proved properties
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Bad debt expense (recovery) and other
|
|
|
343
|
|
|
(7,629)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,286)
|
Operating income (loss)
|
|
|
(11,956)
|
|
|
7,306
|
|
|
(48)
|
|
|
(3)
|
|
|
(1,947)
|
|
|
(6,648)
|
Interest income (expense), net
|
|
|
(488)
|
|
|
3,201
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,713
|
Income tax expense
|
|
|
1,685
|
|
|
2,967
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,652
|
Additions to property and equipment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
|
|
|
Equatorial
|
|
|
|
|
Corporate
|
|
|
|
(in thousands)
|
|
Gabon
|
|
Angola
|
|
Guinea
|
|
U.S.
|
|
and Other
|
|
Total
|
Revenues-oil and gas sales
|
|
$
|
18,100
|
|
$
|
-
|
|
$
|
-
|
|
$
|
139
|
|
$
|
-
|
|
$
|
18,239
|
Depreciation, depletion and amortization
|
|
|
5,706
|
|
|
3
|
|
|
-
|
|
|
170
|
|
|
56
|
|
|
5,935
|
Impairment of proved properties
|
|
|
5,399
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,399
|
Bad debt expense (recovery) and other
|
|
|
280
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
280
|
Operating income (loss)
|
|
|
(4,545)
|
|
|
(27,866)
|
|
|
(239)
|
|
|
248
|
|
|
(2,876)
|
|
|
(35,278)
|
Interest income (expense), net
|
|
|
(307)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
(306)
|
Income tax expense
|
|
|
3,365
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,365
|
Additions to property and equipment
|
|
|
30,561
|
|
|
583
|
|
|
-
|
|
|
65
|
|
|
-
|
|
|
31,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equatorial
|
|
|
|
|
Corporate
|
|
|
|
(in thousands)
|
|
Gabon
|
|
Angola
|
|
Guinea
|
|
U.S.
|
|
and Other
|
|
Total
|
Total assets as of March 31, 2016
|
|
$
|
82,582
|
|
$
|
20,789
|
|
$
|
10,186
|
|
$
|
1,299
|
|
$
|
1,834
|
|
$
|
116,690
|
Total assets as of December 31, 2015
|
|
|
98,858
|
|
|
10,304
|
|
|
10,200
|
|
|
1,470
|
|
|
3,126
|
|
|
123,958
|
11. SUBSEQUENT EVENTS
In
April 2016
, we entered into put contracts on
36,000
barrels of oil per month for the period from June 2016 through February 2017 at Dated Brent of
$40
per barrel. This volume represents approximately one-third of our total forecast sales volumes for the period. While these crude oil derivative contracts are intended to be an economic hedge, they do not qualify for hedge accounting. The contracts will be marked to market each period, with changes in value flowing through net income. The
$0.8
million cost of these puts will be recorded as a deferred asset and amortized to net income
in
the period
to which they relate
.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REG
A
RDING FORWARD-LOOKING STATEMENTS
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, (the “Exchange Act”) which are intended to be covered by the safe harbors created by those laws. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect or anticipate may occur in the future, including without limitation, statements regarding our 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
and
plans and objectives of management for future operations are forward-looking statements. When we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “forecast,” “outlook,” “aim,”
,
“
target”,
“will,” “could,” “should,” “may,” “likely
,”
“plan,” “probably” or similar expressions, we are making forward-looking statements. Many risks and uncertainties that could affect our future results and could cause results to differ materially from those expressed in our forward-looking statements include, but are not limited to:
|
·
|
|
our ability to continue as a going concern;
|
|
·
|
|
further declines, volatility of and weakness in oil and natural gas prices;
|
|
·
|
|
our ability to maintain liquidity in view of current oil and natural gas prices;
|
|
·
|
|
further reductions in the borrowing base and our ability to meet the financial covenants of our revolving credit facility;
|
|
·
|
|
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 measuring, transporting and delivering oil to commercial markets;
|
|
·
|
|
discovery, acquisition, development and replacement of oil and natural gas reserves;
|
|
·
|
|
timing and amount of future production of oil and natural 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 our ability to attract capital;
|
|
·
|
|
currency exchange rates;
|
|
·
|
|
actions by the governments of 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 our exploration, production, and well completion operations including those related to climate change;
|
|
·
|
|
the outcome of any governmental audit;
|
|
·
|
|
actions of operators of our oil and natural gas properties; and
|
The information contained in this report and the information set forth under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”) identifies additional factors that could cause our results or performance to differ materially from those we express in forward-looking statements. Although we believe that the assumptions underlying our 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 and the 2015 Form 10-K, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. When you consider our forward-looking statements, you should keep in mind these risk factors and the other cautionary statements in this report.
Our forward-looking statements speak only as of the date made, and we will not update these forward-looking statements unless the securities laws require us to do so. Our 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
VAALCO is a Houston-based independent energy company principally engaged in the acquisition, exploration, development and production of crude oil and natural gas. We own producing properties and conduct exploration activities as operator in Gabon, West Africa; we conduct exploration activities as an operator in Angola, West Africa, and we participate in exploration and development activities as a non-operator in Equatorial Guinea, West Africa. In the U.S., we operate unconventional resource properties in North Texas and hold undeveloped leasehold acreage in Montana. We also own minor interests in conventional production activities as a non-operator in the U.S.
A significant component of our results of operations is dependent upon the difference between prices received for our offshore Gabon oil production and the costs to find and produce such oil. Oil and natural gas prices have been and are expected in the future to be volatile and subject to fluctuations based on a number of factors beyond our control.
Beginning in the third quarter of 2014, the prices for oil and natural gas began a dramatic decline
which continued through 2015 and into 2016. C
urrent prices are significantly less than they
were in
the several years
prior to 2015
.
Sustained low oil and
natural
gas prices
or further decreases in oil and natural gas prices
could have a material adverse effect on our financial condition, the carrying value of our proved reserves
, our undeveloped leasehold interest
s
and the borrowing base under our
International Finance Corporation credit facility (“I
FC credit facility
”)
. As with prices received for oil production, the costs to find and produce oil and natural gas are largely not within our control.
CURRENT DEVELOPMENTS
In
2016
, prices for oil, natural gas and natural gas liquids
c
ontinued to remain
at
low
levels
. These low prices have affected our business in numerous ways, including
causing
:
|
·
|
|
a material reduction in our revenues
, c
ash flows
and liquidity
;
|
|
·
|
|
a reduction in the borrowing base of our
IFC credit facility
from $65 million to $20.1 million at December 31, 2015;
|
|
·
|
|
a decrease in the valuation of our proved reserves, additional impairments of our oil and natural gas properties and the possibility that some of our existing wells may become uneconomic;
|
|
·
|
|
the removal of proved
undeveloped reserves that
bec
a
m
e
uneconomic to drill and develop; and
|
|
·
|
|
an increase in the possibility that some of the purchasers of our oil and natural gas production, or some of the companies that provide us with services, may experience financial difficulties.
|
Price declines have also adversely affected the semi-annual determinations of the amounts we can borrow under our IFC credit facility, since that determination is based mainly on the value of our oil and natural gas reserves. These reductions have limited our ability to carry out our operations. In March 2016, we announced that the IFC had redetermined our borrowing base, reducing it from $65.0 million to $20.1 million effective as of December 31, 2015. In addition, the IFC communicated to us that if we were to seek additional drawdowns before the next redetermination date (as of June 30, 2016), the IFC could elect, under the terms of the loan agreement, to conduct an interim redetermination, which it believes could result in a borrowing base of less than $20.1 million.
In January 2016, our Board of Directors formed a strategic committee to oversee the evaluation of our strategic alternatives and engaged a financial advisor. The strategic alternatives process will explore options for our future including, but not limited to, securing additional investment to support existing projects and growth opportunities, joint ventures, asset sales or farm-outs, our potential sale or merger, or continuing to pursue our existing operating plan. We will continue to pursue ways to increase liquidity and increase activity within our asset base. However, we can give no assurances that any of these strategic alternatives can be completed, and if so, on reasonable terms that are acceptable to us.
As discussed in Note
4
to the condensed
consolidated financial
statements, we have recorded impairments of our proved properties
in previous quarters
.
We may experience write-downs in
the remainder of 2016
. It is difficult to predict with reasonable certainty the amount of expected future impairments given the many factors impacting the calculation including, but not limited to, future pricing, operating costs, drilling and completion costs,
and
reserve add
itions and adjustment
s.
Impairments
we
calculated have been based upon reserve economics using forecast
ed
future prices, adjusted for specifics related to our
production.
If
projected
per barrel
prices
had been
$
5
.00
lower,
we would have had a
first
quarter
impairment
of
approximately $
4.2
million
.
Given the uncertainty associated with the factors used
in
th
ese
calculation
s,
these estimates should not necessarily be construed as indicative
of
our future financial results.
As discussed further in Note 6 to the condensed consolidated financial statements, on March 14, 2016, we received $19.0 million from Sonangol P&P as payment for the full amount owed us, including the previously written off receivable, as of December 31, 2015. The $7.6 million recovery
of the previously written off receivable
is reflected in the Bad debt expense (recovery) and other line of the condensed consolidated statement of operations. Default interest of $3.2 million is shown in Interest income on the condensed statement of
consolidated
operations. While this payment has improved our liquidity, we are continuing to pursue ways to increase liquidity.
In light of the depressed levels in oil prices, we intend to focus on maintaining oil production and lowering operating costs with respect to current production in our Etame Marin block
located offshore Gabon in which our working interest is 28.1%.
We have
determined that additional development drilling is uneconomic at current commodity prices. Development drilling may become economic in the future when prices recover. In January 2016, we began demobilizing
our contracted drilling
rig and no longer intend to drill any wells in 2016 on the Etame Marin block.
GOING CONCERN
Ou
r revenues, cash flow, profitability, oil and natural gas reserves value and future rate of growth are substantially dependent upon prevailing prices for oil and natural gas. Our ability to borrow funds and to obtain additional capital on attractive terms is also substantially dependent on oil and natural gas prices. Historically, world-wide oil and natural gas prices and markets have been volatile, and may continue to be volatile in the future. In particular, the prices of oil and natural gas declined dramatically in the second half of 2014 and remained low, decreasing further in 2015 and early 2016.
As a result, our revenues have decreased from $18.2 million in the first quarter of
2015 to $
11.0
million
in
the
first quarter of 2016
,
primarily due to price declines.
Continued depressed oil and natural gas prices or further declines in oil and natural gas prices for 2016 and thereafter would have a material adverse effect on our liquidity, financial condition, results of operations and on the carrying value of our proved reserves.
If oil and natural gas prices continue to remain at depressed levels, we expect that for 2016 we will not generate adequate revenue to cover our operating expenses, we will generate losses from operations, and our cash flows will not be sufficient to cover our operating expenses. To meet our capital needs, we are considering multiple alternatives, including, but not limited to, additional debt or equity financing, a sale or farm-downs of assets, delay of the discretionary portion of our capital spending to future periods and/or operating cost reductions. There can be no guarantee of future capital acquisition or fundraising success. Our current cash position and our ability to access additional capital may limit our available opportunities, or not provide sufficient cash available for our operations which raises substantial doubt about our ability to continue as a going concern.
Our financial statements for the quarter ended March 31, 2016, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern
. See Note 2 to the
condensed
consolidated financial statements for further information.
Gabon
Offshore
Development and Production
We operate the Etame, Avouma/South Tchibala, Ebouri, Southeast Etame and the North Tchibala fields on behalf of a consortium of five
companies.
In 2015, we completed a development plan, initiated in 2012, consisting of two new platforms, a multi-well development drilling campaign and several well workovers
.
As of
March 31, 2016,
production
is
from three subsea wells and
10
platform wells
which
are tied back by pipelines to deliver oil
and associated
natural
gas through a riser system to allow for delivery, processing, storage and ultimately offloading the oil from a leased Floating, Production, Storage and Offloading vessel (“FPSO”) anchored to the seabed on the block. With the FPSO limitations of approximately 25,000 barrels of oil per day (“BOPD”) and 30,000 barrels of total fluids per day, the challenge is to optimize production on both a near and long-term basis subject to investment and operational agreements between VAALCO and the consortium.
During the first quarters of 2016 and 2015, production from the block
was approximately
1
,654
MBbls (
404
MBbls net to us) and
1
,55
6
MBbls (
380
MBbls net to us).
We completed annual maintenance and inspection of the Etame complex production and storage facilities during a planned six-day shutdown in February 2016. The results of the shutdown were positive and confirmed that routine asset integrity programs are effective. Production was restored successfully at levels higher than pre-shutdown rates.
During the first quarter of 2016, workovers were conducted on two wells producing from the Avouma platform.
An ESP was
successfully replaced in the first well and the second workover was suspended due to operational problems. Following the workovers and an ESP failure in another Avouma well, there are two wells producing from the Avouma platform. Based on recent technical analysis, the loss of these wells will not have a significant impact on production or ultimate recovery.
Impairment
No impairment of proved properties was necessary in the first quarter of 2016.
In the
first
quarter of
2015
,
we
recorded
an
impairment of
$
5.4
million
to write down
our
investment in certain fields
of
the Etame Marin
b
loc
k
to
their f
air value
. The decrease in fair value
was
primarily a result of lower forecasted oil prices, as well as higher
costs
for planned development wells used in the impairment evaluation.
Onshore
VAALCO ha
s
a 50% working interest (41% net working
interest assuming the Republic of Gabon exercises its back-in rights)
and
operates the Mutamba Iroru block located onshore Gabon.
We made a discovery on the block in 2012
; however, a
s a result of lower projected oil price data at September 30, 2015, the results from the economic modeling indicated that the costs for this well did not continue to meet the criteria for suspended well costs, and all capitalized costs related to the project, including capitalized exploratory
well costs, were charged to exploration expense in the third quarter of 2015.
The government of Gabon believes that our
new
production sharing contract (“PSC”)
for the block expired in mid-2014. While we maintain that the PSC is still valid, s
ince mid-2014, we have been working to finalize a revised
PSC
or with the government of Gabon to allow for development of the discovery and
to maintain ex
ploration rights on the block.
We can provide no assurance that we will enter into a new PSC. We can provide no assurances as to either the approval of the PSC by the Government of Gabon, or the subsequent approval of a development area by the Government of Gabon
.
Angola
Offshore
Exploration well commitment
Under the current agreement with the Republic of Angola, we and
our working interest partner, Sonangol P&P
are obligated to perform certain
exploration activities
by
November 30, 2017
.
In the first quarter of 2015, we drilled an unsuccessful exploratory well on the Kindele prospec
t, which satisfied one of the well commitments.
The agreement requires us to drill or commence drilling three additional exploration wells by the expiration date.
A
$10.0
million assessment ($
5.0
million net to VAALCO) applies to each of the
three remaining exploratory well
commitment
s,
if any, that
have not been spud
at the end of the exploration period in November 2017.
Due to the current outlook for oil prices and the uncertainties about the timing for our partner to pay its share of future costs, there may be delays in drilling the remaining three wells. We have continued to classify the $15.0 million commitment for drilling these wells as long term restricted cash on our balance
sheet. We
are seeking to extend the term of the exploration license and hence the well commitment deadline.
Equatorial Guinea
Offshore
VAALCO has a 31% working interest in a portion of Block P, offshore Equatorial Guinea, which was acquired for $10.0 million in 2012 primarily for the exploration potential on the block. Prior to our acquisition in the block, two oil discoveries had been made on the block, establishing a development and production area in the block (the “PDA”). At the time the PDA was established, the block was divided into PDA and non-PDA portions, and we do not have a participating interest in the non-PDA portion of the block. The Ministry of Mines, Industry and Energy and GEPetrol, the current block operator, are currently reviewing a revised joint operating agreement which
would
name us as operator. Given the current depressed commodity price cycle, it is likely we will minimize any near-term expenditures and expenses in Equatorial Guinea.
We
and our partners
are also working on timing and budgeting for development and exploration activities in the PDA, including the approval of a development and production plan. Development project economics are being re-evaluated considering the continued depressed oil prices and the expected decrease in development costs associated with the fall in oil prices. The production sharing contract covering the PDA provides for a development and production period of twenty-five years from the date of approval of a development and production plan.
CAPITAL RESOURCES AND LIQUIDITY
Cash Flows
Our cash flows for
the three months ended March 31, 2016 and 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Increase
|
|
|
2016
|
|
2015
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(180)
|
|
$
|
(601)
|
|
$
|
421
|
Net cash used in investing activities
|
|
|
(1,021)
|
|
|
(22,343)
|
|
|
21,322
|
Net cash provided by financing activities
|
|
|
-
|
|
|
445
|
|
|
(445)
|
Net change in cash and cash equivalents
|
|
$
|
(1,201)
|
|
$
|
(22,499)
|
|
$
|
21,298
|
The
in
crease in net cash from operating activities was primarily related to the
collection of past due receivables from Sonangol P&P, as discussed in Note 6 to the condensed consolidated financial statements. L
ower
2016
crude oil prices
reduced cash flows from operating activities
between the two periods
.
Property and equipment expenditures
have historically been
our most sig
nificant
use of cash in
investing activities. During the t
hree month ended March 31, 2016
,
these expenditures on a cash basis
were
$
1
.
3
million
, primarily related to final payments of invoices related to the development program completed in 2015. This compares to
$2
8
.
1
million
in the same period of
201
5
when the d
evelopment program was in full swing
.
These cash property and equipment expenditures are included in capital expenditures. See “Capital Expenditures” below for further discussion.
Capital Expenditures
During
the three month
s
ended March 31, 2016
,
w
e had no
accrual basis
capital expenditure
s,
in k
eeping with our announced
minimal
2016 capital budget of $3 million to $6 million
.
We now ex
pect full year 2016 capital expenditure
s to be in the range of $1.0 million to $4.0 million, comprised mainly of maintenance capital.
First quarter 2015 capital expenditures of $
36.9
million were
a
ssociated with the
drilling of development
wells
from the new Etame platform
offshore Gabon and the unsuccessful exploratory Kindele well offshore Angola.
The difference between capital expenditures and the property and equipment expenditures reported in the
c
ondensed
c
onsolidated
s
tatement of
c
ash
f
lows is attributable to changes in accruals for costs incurred but not yet invoiced or paid on the report date
s
.
Liquidity
Credit Facility
Historically, our primary sources of capital have been cash flows from operating activities and cash balance
s
on hand.
We have a $65.0 million
revolving credit facility with the
IFC
, which is secured by the assets of our Gabon subsidiar
y
,
VAALCO Gabon (Etame), Inc
.
The borrowing base under the IFC credit facility is based upon our proved reserves and risk adjusted probable reserves and is re-determined semi-annually by the IFC as of June 30 and December 31. In addition, the borrowing base may be adjusted pursuant to certain non-scheduled redeterminations. The borrowing base was redetermined effective December, 31, 2015 at $20.1 million, with $15.0 million drawn at December 31, 2015. In addition, the IFC communicated to us that if we were to seek additional drawdowns before the next redetermination date (as of June 30, 2016), the IFC could elect, under the terms of the loan agreement, to conduct an interim redetermination, which it believes could result in a borrowing base of less than $20.1 million. Therefore, we currently have very limited borrowing capacity under our revolving credit facility.
Amounts outstanding under the IFC credit facility bear interest at the London InterBank Offered Rate (“LIBOR”) plus 3.75% for the senior tranche and LIBOR plus 5.75% for the subordinated tranche. We are also required to pay a commitment fee in respect of unutilized commitments, which is equal to 1.5% on the senior tranche and 2.3% on the subordinated tranche.
The loan agreement for the IFC credit facility provides that lending commitment amounts under the credit facility will begin decreasing on a semi-annual basis beginning June 30, 2016, and continue through December 2019. Under the loan agreement, the senior tranche commitment will decrease by $6.25 million and the subordinated tranche commitment will decrease by $1.88 million, every six months beginning effective June 30, 2016.
Our credit agreement contains a number of restrictive covenants that impose significant operating and financial restrictions on us.
These covenants restrict our ability to engage in certain actions, including potentially limiting our ability to sell assets, make future borrowings under the credit facility or incur other additional indebtedness. Our ability to meet our net debt to EBITDAX ratio and our different coverage ratios can be affected by events beyond our control, including changes in commodity prices. There can be no assurance that we will be able to comply with these covenants in future periods. In addition, if we receive any additional waivers or amendments to our revolving credit facility loan agreement, the lender may impose additional operating and financial restrictions on us or modify the terms of the loan agreement.
See our 201
5
Fo
r
m 10-K for further details on these
covenants
.
As of March 31, 2016, we were in compliance with all of our financial covenants under
the IFC
credit facility. However, we can make no assurance that we will be able to comply with these financial covenants in the future. Failure to maintain these covenants or otherwise to negotiate waivers or amendments to
the IFC
credit facility would likely preclude us from borrowing under the credit facility and require us to immediately pay down any outstanding drawn amounts under the facility.
A breach of the covenants under
the IFC
credit facility could result in an event of default under the agreement. Such a default may allow the lender to accelerate payment of the indebtedness under the facility and may result in the acceleration of any other indebtedness to which a cross-acceleration or cross-default provision applies. Furthermore, if we were unable to repay the amounts due and payable under the
IFC
credit facility the lender could proceed against the collateral granted to it to secure that indebtedness.
Cash on Hand
At
March 31, 2016
, we
had
unrestricted
cash of
$
24
.
2
million. As operator of the Etame Marin and Mutamba Iroru blocks in Gabon, and Block 5 in Angola, we enter into project related activities
on behalf of our working interest partners. We generally obtain advances from partners prior to significant funding commitments.
We currently sell our crude oil production from Gabon under a term contract
that ends in
July
201
6
.
Pricing under the contract is
based upon an average of Dated Brent in the month of lifting, adjusted
for location and market factors
.
Share Repurchase
In the quarter
ended March 31, 2016
, n
o purchase
s
were made under th
e
share repurchase program
authorized by our Board of Directors on August 4, 2015
.
See
the
2015 Form 10-K for further
information about the program
.
OFF-BALANCE SHEET ARRANGEMENTS
Our guarantee of the
offshore Gabon
FPSO
lease
has
$
14
1
million in
remaining minimum obligations
for
the
gross
amount of
charter
payments
at March 31, 2016.
There have been no other changes to our off-balance
sheet arrangements since December 31, 201
5
.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
There have been no
significant
changes to our
commitments and contractual obligations
subsequent to
December
31, 201
5
.
CRITICAL ACCOUNTING POLICIES
There have been no changes to our critical accounting policies subsequent to
December
31, 201
5
.
NEW ACCOUNTING STANDARDS
See Note
3
to the
condensed
consolidated financial statements.
RESULTS OF OPERATIONS
Three
m
onths
e
nded
March 31, 2016
compared to the
t
hree
m
onths
e
nded
March 31
, 201
5
We
reported net
losses for the
three months ended March 31, 2016
of $
8
.
1
million compared $
39.0
million for the same period of 201
5
.
The net loss in 2016 is primarily the result of further declines in revenues, the
contracted
rig
release costs
and related expenses of $
8.9
million
and $3.0 million of additional income taxes in Angola, o
ffset by the bad debt recovery of $
7.
6
million and related interest
income
of $3.2 million.
Further discuss
ion of results by significant income line item follows
.
Oil and
natural
gas revenues
decreased $
7.3
million in the
three months ended March 31, 2016
compared to the same period of 201
5
. The decrease in revenue is primarily related to
41%
lower realized oil prices, which are due to decreases in the Dated Brent market price.
The revenue changes in the
three months ended March 31, 2016
identified as related to changes in price or volume are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Over
|
|
(in thousands)
|
|
|
|
|
(Under) 2015
|
|
Price
|
|
|
|
|
$
|
(7,496)
|
|
Volume
|
|
|
|
|
|
233
|
|
|
|
|
|
|
$
|
(7,263)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
2015
|
|
Gabon net oil production (MBbls)
|
|
|
404
|
|
|
380
|
|
|
|
|
|
|
|
|
|
Gabon net oil sales (MBbls)
|
|
|
380
|
|
|
372
|
|
U.S. net oil sales (MBbls)
|
|
|
1
|
|
|
-
|
|
Net oil sales (MBbls)
|
|
|
381
|
|
|
372
|
|
Net natural gas sales (MMcf)
|
|
|
32
|
|
|
47
|
|
Net oil equivalents (MBOE)
|
|
|
386
|
|
|
380
|
|
|
|
|
|
|
|
|
|
Average realized oil price ($/Bbl)
|
|
|
$28.54
|
|
|
$48.65
|
|
Average realized natural gas price ($/Mcf)
|
|
|
1.57
|
|
|
2.82
|
|
Weighted average realized price ($/BOE)
|
|
|
28.28
|
|
|
48.01
|
|
Average Europe Brent spot* ($/Bbl)
|
|
|
33.84
|
|
|
53.98
|
|
*Average of daily Europe Brent spot prices posted on the U.S. Energy Information Administration website.
|
|
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. We made three liftings in
the
three months ended March 31, 2016
, while we made two
liftings in
the same period of 20
15
.
Our share of oil inventory aboard the FPSO, excluding royalty barrels, was
approximately
52
,000 and
85
,000 barrels at
March 31, 2016
and
2015
.
Production expenses
increased $
1.
3
million in the
three months ended March 31, 2016
compared to the same period of 201
5
.
O
verall
production
expenses
are higher
because they include
$
4.
3
million for workovers performed in the first quarter of 2016. Excluding workovers, production expenses declined, reflecting the results of our recent cost reduction efforts.
Exploration
expense
was minimal
in the
three months ended March 31, 2016
,
consistent with our stated plans to do no exploratory drilling in 2016.
During the
three months ended March 31, 201
5
,
e
xploration expense was primarily comprised of the unsuccessful exploratory well offshore Angola.
Depreciation, depletion and amortization
(“DD&A
”)
expenses
de
creased $
3.
7
million in the
three months ended March 31, 2016
compared to the same period of
2015
.
Although sales volumes are slightly higher, f
or the three months ended March 31, 2016, lower DD&A per BOE rates are the primary cause of the decrease.
A
smaller asset base due to impairments
in 2015
caused the DD&A rates to be lower in 2016.
General and administrative expenses
de
creased
$
1.
9
million in the
three months ended March 31, 2016
compared to the same period of
201
5
. The
de
crease in general and administrative expense
reflects costs reduction steps taken during 2015, with decreases in personnel costs, incentive compensation, services and various other cost categories.
Impairment of proved properties
is discussed in detail in
Note
4
to
the unaudited condensed consolidated financial statements
.
Other operating expenses
for the three months ended March 31, 2016 is
associated with
the demobilization and
release of the contracted drilling rig. It is
our net share
of
the maximum expense associated with
the
day rate for the demobilization period through contract expiration, plus normal and customary demobilization costs.
General and administrative related to shareholder matters
in the three months ended March 31, 2016 reflects the
payment of
some
previously expensed
legal costs by our insurance
carrier
.
Bad debt expense (recovery) and other
for
the
three months ended March 31, 2016 primarily consists of the $7.6 million bad debt recovery resulting from the payment of past-due amounts by Sonangol P&P.
Interest income
for the three months ended March 31, 2016
is
primarily
the
$3.2 million of default interest collected from Sonangol
P&P
i
n March 2016.
Interest expense
increased
$0.2
million
in the three months ended March 31, 2016 compared to the same period of 2015
.
None of the
interest expense incurred on the IFC credit facility was capitalized in the
three months ended March 31, 2016
, while
a considerable
portion of the interest expense incurred
was
capitalized in the same period of 2015. See Note
5
to the unaudited condensed consolidated financial statements for further discussion of interest expense.
Other, net
consists primarily of foreign currency gains (losses).
Income tax
expense
in
creased $
1.3
million in the
three months ended March 31, 2016
compared to the same period of
2015
.
For 2016, income tax expense includes $
3.0
million for income tax in Angola on financial gains. The remaining income tax expense is
attributable to Gabon and is lower than income tax for the comparable 2015 period as a result of lower revenues
.