NOTES TO
UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACCOUNTING
POLICIES
VAALCO Energy, Inc.
(together with
its consolidated subsidiaries
,
“VAALCO
,
” or the “Company”)
is a Houston
, Texas
based independent energy company engaged in the acquisition, exploration, development and production of crude oil. As operator, we have production operations and conduct
development
activities in Gabon, West Africa. As non-operator, we
have opportunities to
participate in
development
and
exploration
activities in Equatorial Guinea, West Africa. As discussed further in Note
3
below, we have discontinued operations associated with our activities in Angola, West Africa.
Our consolidated subsidiaries are VAALCO Gabon (Etame), Inc., VAALCO Production (Gabon), Inc., VAALCO Gabon S.A., 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, 201
6
, 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.
Bad debt
–
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 and other” line of the condensed consolidated statements of 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.
Portions of our costs in Gabon (including our VAT receivable) are denominated in the local currenc
y of Gabon, the Central African
CFA Franc (
“
XAF
”
).
As of March 31, 2017, the exchange rate was XAF61
0
.
4
8
= $1.00.
In June 2016, we entered into an agreement with the government of Gabon to receive payments related to the outstanding VAT receivable balance
, which was approximately
XAF
16.3
billion (XAF
4.9
billion, net to VAALCO
)
as of December 31, 2015, in
thirty-six
monthly installments of
$0.2
million
,
net to VAALCO. We received one monthly installment payment in July 2016; however, no further payments have been received. We are in discussions with the Gabonese government regarding the timing of the resumption of payments
.
In the three months ended March 31, 2017 and 2016, we recorded allowances of
$0.
1
million and
$0.5
million, respectively, related to VAT
for
which the government of Gabon has not reimbursed
us
.
The receivable amount, net of allowances, is reported as a
non-current asset
in the
“Value added tax and other receivables” line item
in the
condensed
consolidated balance sheet. Because both the VAT receivable and the related allowance
s
are denominated in
XAF
, the
exchange rate
revaluation of these balances into U.S. dollars at
the end of
each
reporting
period also has an impact on profit/loss. Such
foreign currency gains/(losses) are reported separately in the Other, net, operating income (expense) line of the
condensed
consolidated statements of
operations.
General and administrative related to shareholder matters
– Amounts related to
shareholder matters for the three months ended March 31,
2016 relate to costs incurred related to shareholder litigation that was settled in April 2016
. For 2016,
the amounts also include the offsetting insurance proceeds related to these matters.
2
. NEW ACCOUNTING STANDARDS
Not yet adopted
In January 2017, the
Financial Accounting Standards Board (“FASB”) issued ASU No.
2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01”).
The purpose of the amendment is to clarify the definition of a business with the objective of adding guidance to assist e
ntities with evaluating whether
transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public entities, the amendments in ASU 2017-01 are effective
for interim and annual reporting periods beginning after December 15, 2017.
The amendments in this
u
pdate
are to
be applie
d prospectively to acquisitions and disposals completed on or after the
effective date
, with n
o disclosures required at transition.
The adoption of ASU 2017-01 is not expected to have a material impact
on
our
condensed consolidated financial statements.
In November 2016, the
FASB
issued ASU No. 2016-18, State
ment of Cash Flows (Topic 230):
Restricted Cash (“ASU 2016-18”), which requires that a statement of cash flows explain the change during the period in the total of cash,
cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described
as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of
-
period
and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. We are currently evaluating the provisions of this guidance and are
assessing its potential impact on our cash flows and related disclosures. Due to the nature of this
accounting standards update, this may have an impact on items reported in our statements of cash flows, but no i
mpact is expected on
our
financial position, results of operations or related disclosures as a result of implementation.
In August 2016, the
FASB
issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) related to how certain cash receipts and payments are presented and classified in the statement of cash flows. These cash flow issues include debt prepayment or extinguishment costs, settlement of zero-coupon debt, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We are currently evaluating the provisions of this guidance and are assessing its potential impact on our cash flows and related disclosures. Due to the nature of this accounting standards update, this may have an impact on items reported in our statements of cash flows, but no impact is expected on our financial position, results of operations or related disclosures as a result of implementation.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) related to the calculation of credit losses on financial instruments. All financial instruments not accounted for at fair value will be impacted, including our trade and partner receivables. Allowances are to be measured using a current expected credit loss model as of the reporting date which is based on historical experience, current conditions and reasonable and supportable forecasts. This is significantly different from the current model which increases the allowance when losses are probable. This change is effective for all public companies for fiscal years beginning after December 31, 2019, including interim periods within those fiscal years and will be applied with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We are currently evaluating the provisions of ASU 2016-13 and are assessing its potential impact on our
financial position, results of operations, cash flows and related disclosures
.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which amend
s
the accounting standards for leases. ASU 2016-02 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 and 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 cas
h flows arising from leases. In
transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest pe
riod presented using a modified
retrospective approach. The amendments are effective for fiscal years beginning after December 15, 2018, i
ncluding interim periods within
those fiscal years, with early application permitted. We are required to use a modified retrospective approa
ch for leases that exist or are
entered into after the beginning of the earliest comparative period presented in the financial statements. Early adoption is allowed.
Assuming adoption January 1, 2019, we expect that leases in effect on January 1, 2017 and leases entered into after such date will be
reflected in accordance with the new standard in the audited consolidated financial statements included in our Annual Report on Form 10-K for 2019, including comparative financial statements presented in such report. We are in the preliminary stages of our gap assessment, but
we expect that leases treated as operating leases will be capitalized. We expect adoption of this standard to result in the recording of a right
of use asset related to our operating leases with a corresponding lease liability. This is expected to result in a material increase in total assets
and liabilities as certain of our operating leases are significant as disclosed in
our Annual Report on Form 10-K for 2016
. We do not expect there will be a material overall
impact on results of operations or cash flows; however, cash flows from operations will increase and cash from financing activities will
decrease as a result of reflecting a significant portion of lease payments as payments on the lease liabilities rather than rental expense. We
are continuing to evaluate the impact of this new standard, and are in the process of developing our implementation plan.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”)
.
The new standard will replace most existing revenue recognition guidance in U.S. GAAP. The core principle of ASU 2014-09 requires companies to reevaluate when revenue is recorded on a transaction based upon newly defined criteria, either at a point in time or over time as goods or services are delivered. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and estimates, and changes in those estimates. In early 2016, the FASB issued additional guidance: ASU No. 2016-10, 2016-11 and 2016-12 (and together with ASU 2014-09, “Revenue Recognition ASU”). These updates provide further guidance and clarification on specific items within the previously issued ASU 2014-09. The Revenue Recognition ASU becomes effective for the Company as of January 1, 2018, with the option to early adopt the standard for annual periods beginning on or after December 15, 2016, and allows for both retrospective and modified-retrospective methods of adoption. The Company does not plan to early adopt the standard. We have preliminarily concluded that we will adopt the Revenue Recognition ASU via the modified retrospective transition method, taking advantage of the allowed practical expedients. We are substantially complete with our gap assessment and have determined that we will qualify for point in time recognition for essentially all of our sales. As such, the Company does not expect adoption of this standard to result in a
change in the timing of revenue recognition compared to current practices, and therefore we do not expect adoption of this standard to have a material impact on our financial position or results of operations. We do expect that we will have expanded disclosures around the nature of our sales contracts and other matters related to revenues and the accounting for revenues. We are continuing to evaluate the impact of this new standard, and are in the process of developing our implementation plan.
Adopted
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11) to simplify the measurement of inventory. This simplification applies to all inventory other than that measured using last-in, first out (“LIFO”) or the retail inventory method and requires measurement of inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal and transportation. This guidance is to be applied prospectively effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. We adopted ASU 2015-11 in the first quarter of 2017 and the application of this guidance did not have a significant impact on our financial position, results of operations or cash flows.
3
. AQUISITIONS AND DISPOSITIONS
Sojitz Acquisition
On
November 22, 2016
, we
closed on the
purchase
of
an additional
2.98%
working interest (
3.23%
participating interest) in the Etame Marin block located offshore the Republic of Gabon from Sojitz Etame Limited (“Sojitz”), which represents all interest owned by Sojitz in the concession. The acquisition has an e
ffective date of August 1, 2016
and
was funded with cash on hand.
The following amounts represent the preliminary estimates of the fair value of identifiable assets acquired
and liabilities assumed in the
Sojitz acquisition. The final determination of fair value for certain assets and liabilities will be completed as soon as the information
necessary to complete the analysis is obtained. These amounts will be finalized as soon as possible, but no later than one year from the date
of the acquisition.
|
|
|
|
|
November 22, 2016
|
|
|
(in thousands)
|
Assets acquired:
|
|
|
Wells, platforms and other production facilities
|
$
|
5,754
|
Equipment and other
|
|
684
|
Value added tax and other receivables
|
|
297
|
Abandonment funding
|
|
546
|
Accounts receivable - trade
|
|
888
|
Other current assets
|
|
220
|
Liabilities assumed:
|
|
|
Asset retirement obligations
|
|
(1,731)
|
Accrued liabilities and other
|
|
(747)
|
Total identifiable net assets and consideration transferred
|
$
|
5,911
|
All assets and liabilities associated with Sojitz’s interest in Etame Marin block, including oil and g
as properties, asset retirement
obligations and working capital items were recorded at their fair value. In determining the fair value of the oil and gas properties, we
prepared estimates of oil and natural gas reserves. We used estimated future prices to apply to the estimated reserve quantities acquired and
the estimated future operating and development costs to arrive at the estimates of future net revenues. The valuations to derive the purchase
price included the use of both proved and unproved categories of reserves, expectation for timing
of production
and amount of future development and
operating costs, projections of future rates of production, expected recovery rates, and risk adjusted discount rates. Other significant
estimates were used by management to calculate fair value of assets acquired and liabilities assumed. We may record purchase price
adjustments as a result of changes in such estimates. These assumptions represent Level 3 inputs.
Sale of Certain U.S. Properties
On October 17, 2016, we signed a letter of intent to sell our interests in the East Poplar Dome field in Montana for
$250,000
, which
is classified as
“
h
eld for
sale” as of March 31, 2017 and December 31, 2016
.
We completed the sale of this property in April 2017 and we expect to recognize a gain of approximately
$0.
3
million in the quarter ended June 30, 2017.
Discontinued Operations - Angola
In November 2006, our Angolan subsidiary,
Vaalco A
ngola
(
Kwanza), Inc., (“VAALCO Angola”),
signed a production sharing contract for Block 5 offshore Angola (“PSA
”
). The
four
year primary term, referred to as the Initial Exploration Phase (IEP”), with an optional
three
year extension, awarded
VAALCO Angola
exploration rights to
1.4
million acres offshore central Angola, with a commitment to drill
two
exploratory wells. The IEP was extended on two occasions
to run until December 1, 2014.
In October 2014,
VAALCO Angola
entered into the Subsequent Exploration Phase (“SEP”) which extended the exploration period to November 30, 2017 and required
VAALCO Angola
and the co-participating interest owner, the Angolan national oil company, Sonangol P&P, to drill
two
additional exploration wells.
VAALCO Angola’s
working interest is
40%
, and it carries Sonangol P&P, for
10%
of the work program. On September 30, 2016,
VAALCO Angola
notified Sonangol P&P that it was withdrawing from the joint operating agreement effective October 31, 2016. On November 30, 2016,
VAALCO Angola
notified the national concessionaire, Sonangol E.P., that i
t was withdrawing from the PSA.
Further to the decision to withdraw from Angola,
VAALCO Angola
has taken actions to begin reducing its office in Angola and reducing future activities in Angola. As a result of this strategic shift, we classified all the related assets and liabilities as those of discontinued operations in the condensed consolidated balance sheets. The operating results of the Angola segment have been classified as discontinued operations for all periods presented in our condensed consolidated statements of operations. We segregated the cash flows attributable to the Angola segment from the cash flows from continuing operations for all periods presented in our condensed consolidated statements of cash flows. The following tables summarize selected financial information related to the Angola segment’s operations as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016.
Summarized Results of Discontinued Operations
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
Operating costs and expenses:
|
|
|
|
|
|
|
General and administrative expense
|
|
$
|
171
|
|
$
|
298
|
Bad debt expense (recovery) and other
|
|
|
-
|
|
|
(7,625)
|
Total operating costs and expenses
|
|
|
171
|
|
|
(7,327)
|
Other operating loss, net
|
|
|
-
|
|
|
(21)
|
Operating income (loss)
|
|
|
(171)
|
|
|
7,306
|
Other income (expense):
|
|
|
|
|
|
|
Interest income
|
|
|
-
|
|
|
3,201
|
Other, net
|
|
|
(2)
|
|
|
266
|
Total other income (expense)
|
|
|
(2)
|
|
|
3,467
|
Income (loss) from discontinued operations before income taxes
|
|
|
(173)
|
|
|
10,773
|
Income tax expense
|
|
|
3
|
|
|
2,967
|
Income (loss) from discontinued operations
|
|
$
|
(176)
|
|
$
|
7,806
|
Assets and Liabilities Attributable to Discontinued Operations
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
(in thousands)
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Accounts with partners
|
|
$
|
2,415
|
|
$
|
2,139
|
Total current assets
|
|
|
2,415
|
|
|
2,139
|
Total assets
|
|
$
|
2,415
|
|
$
|
2,139
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
64
|
|
$
|
77
|
Foreign taxes payable
|
|
|
3,081
|
|
|
3,078
|
Accrued liabilities and other
|
|
|
15,175
|
|
|
15,297
|
Total current liabilities
|
|
$
|
18,320
|
|
$
|
18,452
|
Drilling Obligation
Under the PSA,
Vaalco A
ngola
and the other participating interest owner, Sonangol P&P, were obligated to perform exploration activities that included specified seismic activities and drilling a specified number of wells during each of the exploration phases under the PSA. The specified seismic activities were completed, and one well, the Kindele #1 well, was drilled in 2015. The PSA provides a stipulated payment of $10.0 million for each exploration well for which a drilling obligation remains under the terms of the PSA, of
which VAALCO Angola’s participating interest share would be $5.0 million per well. We have reflected an accrual of $15.0 million for a potential payment as of March 31, 2017 and December 31, 2016, which represents what we believe to be the maximum potential amount attributable to VAALCO Angola’s interest under the PSA. However, we are vigorously contesting this potential payment and believe that the ultimate amount paid, if any, will be substantially less than the accrued amount. We are currently engaged in discussions with representatives from Sonangol E.P. about such matters.
Other Matters – Partner Receivable
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. Efforts to collect from the defaulted partner were abandoned in 2012. 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 delinquent amounts from the defaulted partner plus the amounts incurred during the period prior to assignment of the working interest totaling
$7.6
million plus interest in April 2014. 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 a
$19.0
million payment from Sonangol P&P for the full amount owed us as of December 31, 2015, including the
$7.6
million of pre-assignment costs and default interest of
$3.2
million. The $7.6 million recovery is reflected in the “Bad debt expense (recovery) and other” line of our summarized results of discontinued operations
for the three months ended March 31, 2016
. Default interest of $3.2 million is shown in the “Interest income” line of our summarized results of discontinued operations
for the three months ended March 31, 2016
.
4
. OIL AND NATURAL GAS PROPERTIES AND EQUIPMENT
We review our oil and natural gas producing properties for impairment
quarterly or
whenever events or changes in circumstances indicate that the carrying amount of such properties may not be recoverable. When an oil and natural gas property’s undiscounted estimated future net cash flows are not sufficient to recover its carrying amount, an impairment charge is recorded to reduce the carrying amount of the asset to its fair value.
The fair value of the asset is measured using a discounted cash flow model relying primarily on Level 3 inputs into the undiscounted future net cash flows.
The undiscounted estimated future net cash flows used in our impairment evaluations at each quarter end are based upon the most recently prepared independent reserve engineers’ report adjusted to use forecasted prices from the forward strip price curves near each quarter end and adjusted as necessary for drilling and production results.
During the
first
quarter of 201
7
, our negative price differential to Brent narrowed and we incurred no significant capital spending. We considered these and other factors and determined that there were no events or circumstances triggering an impairment evaluation for
all
of our fields.
Declining forecasted oil prices and other factors caused us to perform impairment reviews of our proved properties in the fir
st quarter of
2016 for all fields in the Etame Marin block offshore Gabon and the Hefley field in North Texas.
However,
no
impairment was required for the quarter ended March 31, 2016.
5
. DEBT
On June 29, 2016, we executed a Supplemental Agreement with the
International Finance Corporation (
the
“
IFC
”)
which, among other things, amended and restated our existing loan agreement to convert
$20
million of the revolving portion of the credit facility, to a term loan (the “Term Loan”) with
$15
million outstanding
at that date
. The amended loan agreement is
secured by the assets of our Gabon subsidiary,
VAALCO Gabon
S.A.
and is guaranteed by VAALCO as the parent company
. The amended loan agreement provides for quarterly principal and interest payments on the amounts currently outstanding through June 30, 2019, with interest accruing at a rate of LIBOR plus
5.75%
.
The amended loan agreement also provided for
an additional
$5
million (the “Additional Term Loan”), which
could
be requested in a single draw, subject to the IFC’s approval,
through March 15, 2017. On March 14, 2017, we borrowed
$4.2
million of the Additional Term Loan. The additional borrowings will be repaid in
five
quarterly principal installments commencing June 30, 2017, together with interest which will accrue at LIBOR plus 5.75%.
Compared to the
$15.4
million
principal
carrying value of debt
as of March 31, 2017
, the estimated fair value of the term loan is
$15.2
million when measured using a discounted cash flow model over the life of the current borrowings at forecasted interest rates. The inputs to this model are Level 3 in the fair value hierarchy.
Covenants
Under the amended loan agreement,
the ratio of
quarter-end net debt to EBITDAX (as defined in the loan agreement) must be no more than
3.0
to 1.0.
Additionally, our debt service coverage ratio must be greater than
1.2
to 1.0 at each quarter end.
Certain of VAALCO’s
subsidiaries are contractually
prohibited from making payments, loans or transferring assets to the Parent Company or other affiliated entities. Specifically, under the
terms of our IFC Term Loan, VAALCO Gabon S.A. could be restricted from transferring assets or making dividends, if the positive and
negative covenants are not in compliance with the Term Loan.
Forecasting our compliance with these and other financial covenants in future periods is inherently uncertain; therefore, we can make no assurance that we will be able to comply with our term loan covenants in future periods. Factors that could impact our quarter-end financial covenants 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 were in compliance with all financial covenants as of
March
3
1
, 201
7
and December 31, 2016.
Interest
Until June 29, 2016, under the terms of the original revolving credit facility, we paid commitment fees on the undrawn portion of the total commitment. Commitment fees
had been
equal to
1.5%
of the unused balance of
a
senior tranche of
$50.0
million and
2.3%
of the unused balance of
a
subordinated tranche of
$15.0
million when a commitment was available for utilization.
With the execution of the
Supplemental Agreement with the IFC
i
n June 2016,
beginning
June 29, 2016
and continuing
through March 1
4
, 2017, commitment fees
were
equal to
2.3%
of the undrawn Additional Term Loan
amount
of $5 million.
There are
no
commitment fees after March 14, 2017.
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.
The table below shows the components of the Interest
income (expense)
, net line of our condensed consolidated statements of operations and the average effective interest rate, excluding commitment fees, on our borrowings:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
Interest incurred, including commitment fees
|
|
$
|
304
|
|
$
|
386
|
Deferred finance cost amortization
|
|
|
97
|
|
|
103
|
Other interest not related to debt
|
|
|
2
|
|
|
(1)
|
Interest expense (income), net
|
|
$
|
403
|
|
$
|
488
|
|
|
|
|
|
|
|
Average effective interest rate, excluding commitment fees
|
|
|
6.75%
|
|
|
4.36%
|
6
. COMMITMENTS AND CONTINGENCIES
Litigation
McDonough litigation
On December 7, 2016, a lawsuit was filed against the Company alleging that a former worker on the Comp
any’s oil and gas platforms off
the coast of Gabon was terminated because of his age in violation of the Age Discrimination in Employment Act and the Texas Commission
on Human Rights Act. The Plaintiff seeks damages for lost wages and benefits as well as attorneys’ fees. The case is pending in the U.S.
District Court for the Southern District of Texas and is styled as McDonough v. VAALCO Energy, Inc., No. 4:17-cv-
00361. In a February 2017 demand letter, the plaintiff made a demand for $361,000 to settle this claim. We intend
to defend the claim vigorously, and we do not
expect that this claim will have a material effect on our financial condition, results of operations or liquidity.
Rig commitment
In 2014, we entered into a long-term contract for
the Constellation II drilling
rig that was under a long-term
contract 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 2016 and released the drilling rig in February 2016, prior to the original July 2016 contract termination date, because we no longer intended to drill any wells in 2016 on our Etame Marin block offshore Gabon.
In June 2016, we reached an agreement with the drilling contractor
for us
to pay
$5.1
million net to VAALCO’s interest for unused rig days under the contract. We pa
id
this amount, plus the demobilization charges, in
seven
equal monthly installments
,
which began in July 2016
and ended in January 2017
.
The related expense
wa
s reported in the “Other operating expense” line
item in
our c
ondensed consolidated statement
of operations
for the three months ended March 31, 2016
.
Abandonment funding
As part of securing the first of
two
five
-year extensions to the Etame field production license to which we a
re entitled from the government
of Gabon, we agreed to a cash funding arrangement for the eventual abandonment of all offshore wells, platforms and facilities on the Etame
Marin block. The agreement was finalized in the first quarter of 2014 (effective 2011) providing for annual funding over a period of
ten
years at
12.14%
of the total abandonment estimate for the first
seven
years and
5.0%
per year for the last
three
years of the production
license. The amounts paid will be reimbursed through
the cost account and are non-refundable. The abandonment estimate used for this purpose is approximately
$61.1
million (
$19.0
million net to VAALCO) on an undiscounted basis. Through March 31, 2017,
$27.4
million (
$8.5
million net to VAALCO) on an undiscounted basis has been funded. This
cash funding is reflected under “Other noncurrent assets” as “Abandonment funding” on our condensed consolidated balance sheet. Future changes to the anticipated abandonment cost estimate could change our asset retirement obligation and the amount of future abandonment funding payments.
Audits
We are subject to periodic routine audits by various government agencies in Gabon, including audits of our petroleum cost account, customs, taxes and other operational matters, as well as audits by other members of the contractor group under our joint operating agreements.
As of
December
3
1
, 201
6
, we had accrued
$1.0
million net to VAALCO in “Accrued liabilities and other” on our condensed consolidated balance sheet for certain payroll taxes in Gabon which were not paid pertaining to labor provided to us over a number of years by a third-party contractor. While the payroll taxes were for individuals who were not our employees, we could be deemed liable for these expenses as the end user of the services provided.
These liabilities were substantially resolved at the accrued amount
in
January 2017.
In 2016, the government of Gabon conducted an audit of our operations in Gabon, covering the years 2013 through 2014. We received the
findings from this audit and responded to the audit findings in January 2017. We do not anticipate that the ultimate outcome of this audit
will have a material effect on our financial condition, results of operations or liquidity.
7
. DERIVATIVES AND FAIR VALUE
During 2016,
we executed crude oil put contracts as market conditions a
llowed in order to economically
hedge anticipated 2016 and 2017 cash flows from crude oil producing activities. While these crude oil puts are intended to be an economic hedge to mitigate the impact of a decline in
oil prices, we have not elected hedge accounting. The contracts are being measured at fair value each period, with changes in fair value
recognized in net income. These changes in fair value have no cash flow impact. The impact to cash flow occurs upon settlement of the
underlying contract. We do not enter into derivative instruments for speculative or trading proposes.
As of
March
31, 201
7
, we h
ad unexpired oil puts covering 540
,000 barrels of anticipated sales volu
mes for the period from April
2017 through December 31, 2017 at a weighted average price of $4
9
.
63
. Our put contracts are subject to agreements similar to a master
netting agreement under which we have the legal right to offset assets and liabilities. At
March
31, 201
7
,
our unexpired oil puts represented a fair value asset position of $1.0 million in the Prepayments and other line of our condensed consolidated balance sheets. We had no commodity derivative
activity during
the three months ended March 31,
201
6, and no commodity price derivatives in place as of March 31, 2016.
The following table sets forth, by level within the fair value hierarchy and location on our
condensed
consolidated balance sheets, the reported values
of derivative instruments accounted for at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
Fair Value Measurements Using
|
Derivative Item
|
|
Balance Sheet Line
|
|
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
(in thousands)
|
Crude oil puts
|
|
Prepayments and other
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
$
|
1,047
|
|
$
|
-
|
|
$
|
1,047
|
|
$
|
-
|
Balance at December 31, 2016
|
|
$
|
1,227
|
|
$
|
-
|
|
$
|
1,227
|
|
$
|
-
|
The crude oil put contracts are measured at fair value using the Black’s option pricing model. Level 2 observable inputs used in the valuation model include market information as of the reporting date, such as prevailing Brent crude futures prices, Brent crude futures commodity price volatility and interest rates. The determination of the put contract fair value includes the impact of the counterparty’s non-performance risk.
To mitigate counterparty risk, we enter into such derivative contracts with creditworthy financial institutions deemed by management as competent and competitive market makers.
The following table sets forth the gain (l
oss) on derivative instruments i
n our condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
Three Months Ended March 31,
|
Derivative Item
|
|
Statement of Operations Line
|
|
2017
|
|
2016
|
|
|
|
|
(in thousands)
|
Crude oil puts
|
|
Other, net
|
|
$
|
(180)
|
|
$
|
-
|
8
.
COMPENSATION
Our stock-based compensation has been granted under several stock incentive and long-term incentive plans. The plans authorize the Compensation Committee of our Board of Directors to issue various types of incentive compensation. Currently, we have issued stock options, restricted shares and SARs
under
the 2014 Long-Term Incentive Plan (“2014 Plan”).
At
March
31, 201
7
,
3,121,
839 shares
were
authorized for future grants under this plan.
For each stock option granted, the number of authorized shares under the 2014 Plan will be reduced o
n a one-for-one basis. For each
restricted share granted, the number of shares authorized under the 2014 Plan will be reduced by twice the number of restricted shares. We
have no set policy for sourcing shares for option grants. Historically the shares issued under option grants have been new shares.
We record non-cash compensation expense related to stock-based compensation
as
general and administrative
expense.
For the three months ended March 31, 2017 and 2016, n
on-cash compensation
was
$0.
2
million and $
0.4 million, respectively, related to the issuance of stock options and restricted stock
.
Because we do not pay significant United States federa
l income
taxes,
no
amounts were recorded for tax benefits
.
Stock options
Stock options have an exercise price that may not be less than the fair market value of the underlying shares on the date of grant.
In general, s
tock 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.
There were immaterial cash proceeds from the exercise of stock options in the three months ended March 31, 2017 and 2016
. A portion of the stock options granted in the three months ended March 31, 2016 were vested immediately with the remainder vesting over a
two-
year period.
Stock option activity for the
three
months ended
March
3
1
, 201
7
is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Weighted
|
|
|
Shares
|
|
Average
|
|
|
Underlying
|
|
Exercise Price
|
|
|
Options
|
|
Per Share
|
|
|
(in thousands)
|
|
|
|
Outstanding at January 1, 2017
|
|
2,644
|
|
$
|
3.92
|
Granted
|
|
-
|
|
|
-
|
Exercised
|
|
(37)
|
|
|
1.04
|
Forfeited/expired
|
|
(515)
|
|
|
7.85
|
Outstanding at March 31, 2017
|
|
2,092
|
|
|
3.01
|
No stock options were granted during the three months ended March 31, 2017.
In April 2017, options for
1,084,491
shares with an exercise price of
$0.99
per share were granted to employees. These options vest over a three-year period, vesting in three equal parts on the first, second and third anniversaries from the date of grant.
R
estricted shares
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. Share grants to directors vest immediately and are not restricted.
The following is a summary of
activity in unvested restricted
stock in
the three months ended March 31,
201
7
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Restricted
|
|
Average
|
|
|
Stock
|
|
Grant Price
|
Non-vested shares outstanding at January 1, 2017
|
|
251,853
|
|
$
|
1.31
|
Awards granted
|
|
-
|
|
|
-
|
Awards vested
|
|
-
|
|
|
-
|
Awards forfeited
|
|
-
|
|
|
-
|
Non-vested shares outstanding at March 31, 2017
|
|
251,853
|
|
|
1.31
|
In the three months ended March 31, 201
7 and 2016,
no
shares
and 31,808 shares
were added to treasury due to tax withholding
on vesting restricted shares.
No restricted share grants were made to employees during the three months ended March 31, 2017.
In April 2017,
183,919
restricted shares were granted to employees which vest in three equal parts on the first, second and third anniversaries from the date of grant.
Stock appreciation rights
(“SARs”)
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.
Of these, only the amounts listed in the table below remain outstanding as of March 31, 2017.
Compensation payable related to these awards through March 31, 2017 is not significant.
SAR activity for the three months ended March 31, 2017 is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Weighted
|
|
|
Shares
|
|
Average
|
|
|
Underlying
|
|
Exercise Price
|
|
|
Options
|
|
Per Share
|
|
|
(in thousands)
|
|
|
|
Outstanding at January 1, 2017
|
|
179,580
|
|
$
|
1.04
|
Granted
|
|
-
|
|
|
-
|
Forfeited/expired
|
|
-
|
|
|
-
|
Outstanding at March 31, 2017
|
|
179,580
|
|
|
1.04
|
No SARs were granted during the three months ended March 31, 2017. In April 2017,
1,049,528
SARs were granted with an exercise price of
$1.20
per share. One-third of the SARs vest on the date on or after the first anniversary of the grant date when the price exceeds
$1.30
; one-third of the SARs vest on the date on or after the second anniversary of the grant date when the share price exceeds
$1.50
; and one-third of the SARs vest on the date on or after the third anniversary of the grant date when the share price exceeds
$1.75
.
9
. 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, 201
6
, 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
3
1
, 201
7
and December 31, 201
6
.
Income taxes attributable to continuing operations for the
three months ended
March
3
1
, 201
7
and
201
6
are attributable to foreign taxes payable in Gabon.
In April 2017, we were notified by the U.S. Internal Revenue Service (“IRS”) that they would be conducting an audit of our 2014 U.S. federal tax return. This audit is in the preliminary stages; the IRS has not communicated any findings.
10
.
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
vesting
, 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,
|
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
Basic weighted average shares outstanding
|
|
58,567
|
|
58,513
|
Effect of dilutive securities
|
|
13
|
|
-
|
Diluted weighted average shares outstanding
|
|
58,580
|
|
58,513
|
|
|
|
|
|
Stock options and unvested restricted stock grants excluded from dilutive
|
|
|
|
|
calculation because they would be anti-dilutive
|
|
2,238
|
|
4,284
|
Because we recognized
a net loss
for the
three months ended
March
3
1
,
2016,
there were no dilutive securities for th
at period
.
11
. SEGMENT INFORMATION
Our operations are based in Gabon, Equatorial
Guinea and the U.S
.
Each of our
three
reportable operating segments is organized and managed based upon geographic location. Our Chief Executive Officer, who is the chief operating decision maker, and 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 costs which are not allocated to the reportable operating segments.
Segment activity
of continuing operations
for the three months ended
March
3
1
, 201
7
and 201
6
and segment assets at
March
3
1
, 201
7
and
December 31,
201
6
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
Equatorial
|
|
|
|
|
Corporate
|
|
|
|
(in thousands)
|
|
Gabon
|
|
Guinea
|
|
U.S.
|
|
and Other
|
|
Total
|
Revenues-oil and natural gas sales
|
|
$
|
21,246
|
|
$
|
-
|
|
$
|
20
|
|
$
|
-
|
|
$
|
21,266
|
Depreciation, depletion and amortization
|
|
|
1,809
|
|
|
-
|
|
|
1
|
|
|
59
|
|
|
1,869
|
Bad debt expense and other
|
|
|
98
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
98
|
Operating income (loss)
|
|
|
10,960
|
|
|
(38)
|
|
|
7
|
|
|
(2,781)
|
|
|
8,148
|
Interest income (expense), net
|
|
|
(403)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(403)
|
Income tax expense
|
|
|
3,194
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,194
|
Additions to property and equipment
|
|
|
262
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
Equatorial
|
|
|
|
|
Corporate
|
|
|
|
(in thousands)
|
|
Gabon
|
|
Guinea
|
|
U.S.
|
|
and Other
|
|
Total
|
Revenues-oil and natural gas sales
|
|
$
|
10,908
|
|
$
|
-
|
|
$
|
68
|
|
$
|
-
|
|
$
|
10,976
|
Depreciation, depletion and amortization
|
|
|
2,143
|
|
|
-
|
|
|
21
|
|
|
74
|
|
|
2,238
|
Bad debt expense and other
|
|
|
343
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
343
|
Operating loss
|
|
|
(11,956)
|
|
|
(48)
|
|
|
(3)
|
|
|
(1,508)
|
|
|
(13,515)
|
Interest income (expense), net
|
|
|
(488)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(488)
|
Income tax expense
|
|
|
1,685
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,685
|
Additions to property and equipment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equatorial
|
|
|
|
|
Corporate
|
|
|
|
(in thousands)
|
|
Gabon
|
|
Guinea
|
|
U.S.
|
|
and Other
|
|
Total
|
Total assets from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
$
|
64,108
|
|
$
|
10,119
|
|
$
|
173
|
|
$
|
3,182
|
|
$
|
77,582
|
As of December 31, 2016
|
|
|
64,478
|
|
|
10,122
|
|
|
382
|
|
|
3,911
|
|
|
78,893
|