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)
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,681
|
|
$
|
25,357
|
Restricted cash
|
|
|
783
|
|
|
1,048
|
Receivables:
|
|
|
|
|
|
|
Trade
|
|
|
7,363
|
|
|
5,353
|
Accounts with partners
|
|
|
12,220
|
|
|
27,856
|
Other
|
|
|
100
|
|
|
42
|
Crude oil inventory
|
|
|
704
|
|
|
639
|
Materials and supplies
|
|
|
161
|
|
|
194
|
Prepayments and other
|
|
|
3,630
|
|
|
3,253
|
Total current assets
|
|
|
38,642
|
|
|
63,742
|
Property and equipment - successful efforts method:
|
|
|
|
|
|
|
Wells, platforms and other production facilities
|
|
|
410,423
|
|
|
412,593
|
Undeveloped acreage
|
|
|
10,000
|
|
|
10,000
|
Equipment and other
|
|
|
10,545
|
|
|
10,948
|
|
|
|
430,968
|
|
|
433,541
|
Accumulated depreciation, depletion, amortization and impairment
|
|
|
(403,888)
|
|
|
(400,168)
|
Net property and equipment
|
|
|
27,080
|
|
|
33,373
|
Other noncurrent assets:
|
|
|
|
|
|
|
Restricted cash
|
|
|
15,830
|
|
|
15,830
|
Value added tax and other receivables, net of allowance of
$4.8
million
and $4.2 million at
June 30, 2016
and December 31, 2015
|
|
|
4,968
|
|
|
4,221
|
Deferred finance charge
|
|
|
-
|
|
|
1,655
|
Abandonment funding
|
|
|
5,137
|
|
|
5,137
|
Total assets
|
|
$
|
91,657
|
|
$
|
123,958
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
23,579
|
|
$
|
46,848
|
Foreign taxes payable
|
|
|
3,074
|
|
|
-
|
Accrued liabilities and other
|
|
|
14,701
|
|
|
19,868
|
Current portion of long term debt
|
|
|
5,000
|
|
|
-
|
Total current liabilities
|
|
|
46,354
|
|
|
66,716
|
Asset retirement obligations
|
|
|
16,632
|
|
|
16,166
|
Long term debt, excluding current portion
|
|
|
9,344
|
|
|
15,000
|
Total liabilities
|
|
|
72,330
|
|
|
97,882
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
Preferred stock, none issued,
500,000
shares authorized,
$25
par value
|
|
|
-
|
|
|
-
|
Common stock,
65,941,338
and
66,041,338
shares issued
$0.10 par value,
100,000,000
shares authorized
|
|
|
6,594
|
|
|
6,604
|
Additional paid-in capital
|
|
|
70,744
|
|
|
69,118
|
Less treasury stock,
7,545,978
and
7,514,169
shares at cost
|
|
|
(37,923)
|
|
|
(37,882)
|
Accumulated deficit
|
|
|
(20,088)
|
|
|
(11,764)
|
Total shareholders' equity
|
|
|
19,327
|
|
|
26,076
|
Total liabilities and shareholders' equity
|
|
$
|
91,657
|
|
$
|
123,958
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements
.
VA
ALCO ENERGY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas sales
|
|
$
|
18,847
|
|
$
|
27,137
|
|
$
|
29,823
|
|
$
|
45,376
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Production expense
|
|
|
7,341
|
|
|
8,867
|
|
|
18,594
|
|
|
18,778
|
Exploration expense
|
|
|
2
|
|
|
1,113
|
|
|
3
|
|
|
28,572
|
Depreciation, depletion and amortization
|
|
|
1,945
|
|
|
9,299
|
|
|
4,186
|
|
|
15,234
|
General and administrative expense
|
|
|
4,043
|
|
|
2,829
|
|
|
7,027
|
|
|
7,702
|
Impairment of proved properties
|
|
|
-
|
|
|
5,821
|
|
|
-
|
|
|
11,220
|
Other operating expense
|
|
|
754
|
|
|
-
|
|
|
9,635
|
|
|
-
|
General and administrative related
to shareholder matters
|
|
|
18
|
|
|
-
|
|
|
(435)
|
|
|
-
|
Bad debt expense (recovery) and other
|
|
|
171
|
|
|
296
|
|
|
(7,115)
|
|
|
576
|
Total operating costs and expenses
|
|
|
14,274
|
|
|
28,225
|
|
|
31,895
|
|
|
82,082
|
Other operating income (loss), net
|
|
|
-
|
|
|
58
|
|
|
(3)
|
|
|
398
|
Operating income (loss)
|
|
|
4,573
|
|
|
(1,030)
|
|
|
(2,075)
|
|
|
(36,308)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
-
|
|
|
5
|
|
|
3,202
|
|
|
9
|
Interest expense
|
|
|
(1,470)
|
|
|
(344)
|
|
|
(1,959)
|
|
|
(654)
|
Other, net
|
|
|
(363)
|
|
|
438
|
|
|
161
|
|
|
382
|
Total other income (expense)
|
|
|
(1,833)
|
|
|
99
|
|
|
1,404
|
|
|
(263)
|
Income (loss) before income taxes
|
|
|
2,740
|
|
|
(931)
|
|
|
(671)
|
|
|
(36,571)
|
Income tax expense
|
|
|
3,001
|
|
|
4,273
|
|
|
7,653
|
|
|
7,638
|
Net loss
|
|
$
|
(261)
|
|
$
|
(5,204)
|
|
$
|
(8,324)
|
|
$
|
(44,209)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.00)
|
|
$
|
(0.09)
|
|
$
|
(0.14)
|
|
$
|
(0.76)
|
Diluted net loss per share
|
|
$
|
(0.00)
|
|
$
|
(0.09)
|
|
$
|
(0.14)
|
|
$
|
(0.76)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
58,464
|
|
|
58,302
|
|
|
58,488
|
|
|
58,143
|
Diluted weighted average shares outstanding
|
|
|
58,464
|
|
|
58,302
|
|
|
58,488
|
|
|
58,143
|
See notes to condensed consolidated financial statements.
VA
ALCO ENERGY, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,324)
|
|
$
|
(44,209)
|
Adjustments to reconcile net loss to net cash provided
by operating activities:
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
4,186
|
|
|
15,234
|
Amortization of debt issuance cost
|
|
|
1,076
|
|
|
311
|
Unrealized foreign exchange loss
|
|
|
2,351
|
|
|
18
|
Dry hole costs and impairment of unproved leasehold
|
|
|
-
|
|
|
27,871
|
Stock-based compensation
|
|
|
1,616
|
|
|
2,332
|
Commodity derivatives loss
|
|
|
578
|
|
|
-
|
Bad debt provision
|
|
|
514
|
|
|
-
|
Other operating (income) loss, net
|
|
|
3
|
|
|
(398)
|
Impairment of proved properties
|
|
|
-
|
|
|
11,220
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
Trade receivables
|
|
|
(2,010)
|
|
|
11,362
|
Accounts with partners
|
|
|
15,636
|
|
|
(4,821)
|
Other receivables
|
|
|
(52)
|
|
|
(2,556)
|
Crude oil inventory
|
|
|
(65)
|
|
|
1,458
|
Materials and supplies
|
|
|
33
|
|
|
32
|
Value added tax and other receivable
|
|
|
(1,236)
|
|
|
-
|
Prepayments and other
|
|
|
(303)
|
|
|
1,517
|
Accounts payable
|
|
|
(15,211)
|
|
|
10,656
|
Accrued liabilities and other
|
|
|
(237)
|
|
|
(3,074)
|
Foreign taxes payable
|
|
|
3,074
|
|
|
-
|
Net cash provided by operating activities
|
|
|
1,629
|
|
|
26,953
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
265
|
|
|
5,390
|
Property and equipment expenditures
|
|
|
(12,669)
|
|
|
(41,196)
|
Proceeds from sales of oil and gas properties
|
|
|
-
|
|
|
398
|
Other, net
|
|
|
(824)
|
|
|
-
|
Net cash used in investing activities
|
|
|
(13,228)
|
|
|
(35,408)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from the issuances of common stock
|
|
|
-
|
|
|
452
|
Debt issuance costs
|
|
|
(77)
|
|
|
-
|
Net cash (used in) provided by financing activities
|
|
|
(77)
|
|
|
452
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(11,676)
|
|
|
(8,003)
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
25,357
|
|
|
69,051
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
13,681
|
|
$
|
61,048
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Interest paid, net of capitalized interest
|
|
$
|
772
|
|
$
|
654
|
Income t
axes paid
|
|
$
|
4,435
|
|
$
|
9,254
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
Property and equipment additions incurred but not
paid at period end
|
|
$
|
2,111
|
|
$
|
33,297
|
Asset retirement cost capitalized
|
|
$
|
42
|
|
$
|
613
|
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 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 two unconventional wells in the United States in North Texas and holds undeveloped leasehold acreage 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 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, 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.
Correction of err
o
r
–
Accounts with partners and
Allowance for bad debts
–
Subsequent to the issuance of our 2015 financial statements, we identified an error in the presentation on the consolidated balance sheet of the accounts with partners and the associated allowance for bad debts. These accounts incorrectly included a fully reserved receivable of $7.6 million which should have been
charged off against the reserve
in 2012 when efforts to collect from a removed partner were no longer viable and had been abandoned. To correct this error, we remove
d
the reference to the $7.6 million allowance
from the caption
. This correction had no impact on the consolidated balance sheet or the consolidated results from operations.
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 (recovery) 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.
In the
three and six months ended June 30, 2016
, we increased the allowance
related to
VAT due from Gabon by $0.
1
million
and $0.
6
million
. There were no changes in the allowance for bad debts during the
three and six months ended June 30, 2015
.
In Ju
ne 2016
, we entered into an agreement with the government of Gabon to receive payments of the outstanding
VAT receivable
balance as of December 31, 2015 in thirty-six monthly installments of $
0.
2
million
net to VAALCO
, which commence
d
in
July
2016.
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 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
s
, profitability, oil and natural gas reserve value
s
and future rate
s
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
will likely
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.
However
,
revenues have
increased
from
$
1
1.0
million in
the
first quarter 2016 to
$18.8 million in the second quarter of 2016
primarily as a result of improving prices and higher sales volumes
.
As discussed in Note 5,
in June 2016,
we modified
our revolving credit facility with the
International Finance Corporation (“IFC”)
converting $20 million of
our
revolving credit
facility
into a term loan with $15 million borrowed and the option to request
,
with approval being
at the IFC’s discretion,
an additional $5 million
in a single draw between now and December 31, 2016. Our available liquidity
,
therefore, continues to be
somewhat
limited
.
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, an event of default could result, which would permit acceleration of such debt and which could result in an event of default under
the
amended loan agreement
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.
As discussed in Note 5,
certain of our
financial covenants
under the amended loan agreement
have been relaxed through the end of 2016.
Continued depressed oil and natural gas prices
, like those seen in the first quarter of 2016
,
would have a material adverse effect on our liquidity, financial condition, results of operations and on the carry
ing value of our proved oil and natural gas properties
.
If oil and natural gas prices continue
at levels seen in the second quarter 2016, w
e expect that for 2016 we will generate cash flows sufficient to cover our operating expenses. To
fund growth opportunities
, we are considering multiple alternatives, including, but not limited to, additional debt or equity financing, a sale or farm-down of assets,
continuing the
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
and
not provide sufficient cash available for our operations
. These conditions continue
to
raise doubt about our ability to continue as a going concern.
Our financial statements for the
three and six months
ended
June 30, 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 June 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance 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 this
guidance
and
are
assessing its potential impact on our
financial position, results of operations, cash flows
and
related disclosures
.
In March 2016, the FASB issued a new accounting standards update that changes several aspects of accounting for share-based payment transactions, including a requirement to recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2016, with early adoption permitted. Varying transition methods (modified retrospective, retrospective or prospective) are applied to different provisions of the standard. We are in the process of evaluati
n
g
all changes, both required and elective, and are developing implementation plans for each as appropriate; however, we do not expect any of the changes to have a significant impact on our
financial position, results of operations, cash flows or related disclosures
.
In February 2016, the 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
are
assessing the
potential
impact on our
financial position, results of operations, cash flows
and
related disclosures
.
In May 2014, the FASB issued revised guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity will recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard provides a five-step
approach
to determine when and how revenue is recognized. The guidance permits the use of either a full retrospective or a modified retrospective approach. In July 2015, the FASB approved a one
-
year deferral of the effective date of this standard to annual reporting periods beginning after December 15, 2017
for public companies
. The FASB approved early adoption of the standard, but not before the original effective date of
annual reporting periods beginning after
December 15, 2016.
Since May 2014, several additional accounting standards updates have been issued by FASB to clarify implementation issues.
We continue to evaluate the impact of this revised guidance and the several clarifications that have been issued since.
We have not yet quantif
ied
the impact
, if any,
of
this amended guidance on our financial position, results of operations, cash flows
and
related disclosures.
Adopted
In April 2015, the FASB issued guidance that require
s
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
prior
GAAP, debt issuance costs
were
reported as deferred charges (i.e., as an asset).
We adopted the standard
in the first quarter of 2016
.
As discussed in Note 5, i
n the second quarter of 2016, our
loan agreement was modified into a term loan. At that time,
a portion
of
deferred debt issuance costs related to the revolving credit facility were charged to expense.
The remaining unamortized deferred financing costs plus the incremental costs of converting the revolver into a term loan are
presented as a direct reduction
of
Long-term debt on the
condensed consolidated
balance sheet
.
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 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 second quarter of 2016,
f
orecasted oil prices
improved significantly
, our negative price differential to Brent narrow
ed
and we incurred no
significant
capital
spend
ing
. W
e
considered these and other factors and determined that there were no
events
or
circumstances trigger
ing
an impairment evaluation for most of our fields
, with the exception of the
Avouma field in the Etame Marine block offshore Gabon
. At the Avouma field,
the electrical submersible pumps (
“
ESPs
”
) in the South Tchibala 2-H well failed
on June 23, 2016, and the well was
temporarily shut-in. A workover is being planned to replace the ESPs and bring the well back on production by early fourth quarter 2016
.
The reserves used in our impairment evaluation
of the Avouma field
were
revised
to reflect the impact of this lost production for several months
and the impact of the forward price curve
.
The undiscounted f
uture net cash flows for the Avouma field were in excess of the field’s carrying value.
No impairment was required for
the Avouma field
,
or
any of our
other
fields
, for
the second quarter of 2016.
Declining forecasted oil prices and other factors caused us to perform impairment reviews of our proved properties in the first
and second
quarters of 2015 and
in the first quarter of
2016 for all fields in the Etame Marin block offshore Gabon and t
he Hefley field in North Texas.
No impairment was required for
the
first
quarter
of 2016
. As a result of a decline in forecasted oil prices and higher costs for planned development wells, for
the
first and second quarters of
2015
, we recorded aggregate impairment
s
of
$
11.2
million
.
5. DEBT
On June 29, 2016, we executed a Supplemental Agreement with the IFC which, among other things, amended and restated the 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 currently outstanding and an additional $5 million (the “Additional Term Loan”) which can be requested in a single draw between now and December 31, 2016. The amended loan agreement is
secured by the assets of our Gabon subsidiary,
VAALCO Gabon (Etame), Inc. and is guaranteed by VAALCO as the parent company
. Before we are able to draw the Additional Term Loan, the IFC, as part of their consideration of our loan request, will make a determination of whether our Gabon subsidiary’s current and projected revenues from operations are sufficient to cover the aggregate amount of principal, interest, commissions, fees and any other amounts due in respect of the Additional Term Loan. If drawn, the Additional Term Loan amount shall be amortized in equal quarterly installments through June 30, 2018. 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%. Principal repayments under the amended loan agreement are dependent upon the timing of our additional borrowing, if any, with the payments to commence no later than March 31, 2017.
Compared to the $15.0 million carrying value of debt, the estimated fair value of the term loan is $15.0 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, quarter-end net debt to EBITDAX (as defined in the loan agreement) must be no more than 3.0 to 1.0. However, the quarter-end
net debt to EBITDAX limitation has been raised to 5.0 to 1.0 for all periods through the end of 2016.
Forecasting our compliance with this and other financial covenants in future periods is inherently uncertain. Factors that could impact our quarter-end 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 June 30, 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 were 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 was available for utilization.
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 expense line of our condensed consolidated statements of operations and the average effective interest rate, excluding commitment fees, on our borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30, 2016
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
Interest incurred, including commitment fees
|
|
$
|
387
|
|
$
|
372
|
|
$
|
773
|
|
$
|
740
|
Deferred finance cost amortization
|
|
|
103
|
|
|
153
|
|
|
206
|
|
|
313
|
Deferred finance cost write-off due to loan modification
|
|
|
869
|
|
|
-
|
|
|
869
|
|
|
-
|
Capitalized interest
|
|
|
-
|
|
|
(288)
|
|
|
-
|
|
|
(506)
|
Other interest not related to debt
|
|
|
111
|
|
|
107
|
|
|
111
|
|
|
10
|
Interest expense
|
|
$
|
1,470
|
|
$
|
344
|
|
$
|
1,959
|
|
$
|
654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average effective interest rate, excluding commitment fees
|
|
|
4.38%
|
|
|
4.03%
|
|
|
4.37%
|
|
|
4.02%
|
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
totaling $775,000
due
to the costs of defense of that application and
the
litigation risk associated therewith
, all of which wa
s
covered by our directors and officers insurance as a covered claim.
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
2016
and released the drilling rig in February
2016
, prior to the
original
July 2016 contract termination date, because we no longer intend
ed
to drill any wells in 2016 on our Etame Marin block offshore Gabon.
In June 2016, we reached an agreement with the drilling contractor to pay $5.
1
million net to VAALCO’s interest for unused rig days under the contract. We will pay this amount, plus the demobilization charges, in seven equal monthly installments beginning in July 2016
.
The related expense is
reported
i
n the Other ope
rating expense line of the
condensed consolidated
state
ment of operations
.
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
sometime later
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
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 matte
rs, as well as audits by other members of the contractor group under our joint operating agreement
s
.
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.
In June 2016, we accrued $2.2 million
net to VAALCO
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. A process of negotiation with government payroll
agencies
in Gabon is underway to resolve this matter
.
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. 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
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.
The $7.6 million recovery is reflected in the Bad debt expense (recovery) and other line of the condensed
consolidated
statement
s
of operations. Default interest of $3.2 million was received and is shown in the Interest income line of the condensed
consolidated
statement
s
of operations.
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
although no assurances can be given that such an extension will be obtained
.
7. DERIVATIVES AND FAIR VALUE
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 forecasted sales volumes for the period. 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 will be measured at fair value each period, with changes in fair value recognized in net income. We do not enter into derivative instruments for speculative or trading proposes.
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 June 30, 2016, all of the put contracts were assets.
The following table sets forth, by level within the fair value hierarchy and location on the condensed consolidated balance sheets, the reported values of derivative instruments accounted for at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2016
|
|
|
|
|
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
|
|
$
|
265
|
|
$
|
-
|
|
$
|
265
|
|
$
|
-
|
We had neither derivative instruments outstanding as of December 31, 2015 nor derivative instrument activity during 2015.
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 effect of derivative instruments on the condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
Derivative Item
|
|
Statement of Operations Line
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
(in thousands)
|
Crude oil puts
|
|
Other, net
|
|
$
|
(578)
|
|
$
|
-
|
|
$
|
(578)
|
|
$
|
-
|
8
.
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
six months ended June 30, 2016
and 2015 were vested immediately with the remainder vesting over a two year period.
Stock option activity for the
six months ended June 30, 2016
is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Weighted
|
|
|
Shares
|
|
Average
|
|
|
Underlying
|
|
Exercise Price
|
|
|
Options
|
|
Per Share
|
|
|
(in thousands)
|
|
|
|
Outstanding at January 1, 2016
|
|
4,144
|
|
|
$ 6.41
|
Granted
|
|
1,519
|
|
|
1.16
|
Forfeited/expired
|
|
(1,058)
|
|
|
5.62
|
Outstanding at June 30, 2016
|
|
4,605
|
|
|
4.86
|
Common and r
estricted 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.
Share grants to directors vest immediately and are not restricted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and
|
|
Weighted
|
|
|
Restricted
|
|
Average
|
|
|
Stock
|
|
Grant Price
|
Non-vested shares outstanding at January 1, 2016
|
|
419,888
|
|
|
$ 3.83
|
Awards granted
|
|
357,145
|
|
|
1.12
|
Awards vested
|
|
(454,783)
|
|
|
2.06
|
Awards forfeited
|
|
(100,000)
|
|
|
1.97
|
Non-vested shares outstanding at June 30, 2016
|
|
222,250
|
|
|
3.94
|
In the three months ended March 31, 2016, 31,808
shares
were added to treasury due to tax withholding on vesting restricted shares.
No shares were added to
t
reasury in the three months ended June 30, 2016.
Stock appreciation rights
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
s
pread 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
s
pread of 300% of the $1.04
SAR
price per share specified in a SAR award on the date of grant.
Compensation
payable
related to these awards through June 30, 2016
is not significant
.
Compensation expense
We record non-cash compensation expense related to stock-based compensation
in the
G
eneral and administrative expense
line of the condensed consolidated statement
s
of operations
.
N
on-cash compensation expense was $
0
.
8
million and $
1
.
6
million
for three and six months ended June 30, 2016 and was
$0.
7 million and $2
.
3
million
for the
three and six months ended June 30, 2015
related to stock options,
SARs,
common stock
and
restricted stock. Because we do not pay significant United States federal income taxes, no amounts were recorded for tax benefits.
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, 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
June 30
, 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
and six
months ended
June 30
, 2016, we recorded
$
0
.
1
million
and $3.1 million
for income taxes in Angola on financial gains related to foreign exchange gains as well as the interest paid by Sonangol P&P on their past due joint interest account balance. The remaining income taxes for the
three and six months ended June 30, 2016
and all of the income taxes for
the
three and six months ended June 30, 2015
are attributable to foreign taxes payable in Gabon.
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 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 June 30,
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Basic weighted average shares outstanding
|
|
58,463,838
|
|
58,301,960
|
|
58,488,074
|
|
58,142,539
|
Effect of dilutive securities
|
|
-
|
|
-
|
|
-
|
|
-
|
Diluted weighted average shares outstanding
|
|
58,463,838
|
|
58,301,960
|
|
58,488,074
|
|
58,142,539
|
|
|
|
|
|
|
|
|
|
Stock options excluded from dilutive calculation because
they would be anti-dilutive
|
|
4,413,180
|
|
6,051,591
|
|
3,522,081
|
|
5,624,716
|
|
|
|
|
|
|
|
|
|
Because we recognized net losses for the
three and six months ended June 30, 2016
and 2015
, there were no dilutive securities for those periods
.
1
1
. 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
, 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 for the three
and six
months ended
June
3
0
, 2016 and 2015 and segment assets at
June 30
, 2016 and December 31, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
Equatorial
|
|
|
|
|
Corporate
|
|
|
|
(in thousands)
|
|
Gabon
|
|
Angola
|
|
Guinea
|
|
U.S.
|
|
and Other
|
|
Total
|
Revenues-oil and gas sales
|
|
$
|
18,764
|
|
$
|
-
|
|
$
|
-
|
|
$
|
83
|
|
$
|
-
|
|
$
|
18,847
|
Depreciation, depletion and amortization
|
|
|
1,833
|
|
|
3
|
|
|
-
|
|
|
42
|
|
|
67
|
|
|
1,945
|
Impairment of proved properties
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Bad debt expense (recovery) and other
|
|
|
171
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
171
|
Other operating expense
|
|
|
754
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
754
|
Operating income (loss)
|
|
|
8,424
|
|
|
(299)
|
|
|
(87)
|
|
|
-
|
|
|
(3,465)
|
|
|
4,573
|
Interest income (expense), net
|
|
|
(1,468)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2)
|
|
|
(1,470)
|
Income tax expense
|
|
|
2,894
|
|
|
107
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,001
|
Additions to property and equipment
|
|
|
(2,493)
|
|
|
-
|
|
|
-
|
|
|
140
|
|
|
-
|
|
|
(2,353)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2015
|
|
|
|
|
|
|
|
|
Equatorial
|
|
|
|
|
Corporate
|
|
|
|
(in thousands)
|
|
Gabon
|
|
Angola
|
|
Guinea
|
|
U.S.
|
|
and Other
|
|
Total
|
Revenues-oil and gas sales
|
|
$
|
26,991
|
|
$
|
-
|
|
$
|
-
|
|
$
|
146
|
|
$
|
-
|
|
$
|
27,137
|
Depreciation, depletion and amortization
|
|
|
9,078
|
|
|
3
|
|
|
-
|
|
|
157
|
|
|
61
|
|
|
9,299
|
Impairment of proved properties
|
|
|
5,821
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,821
|
Bad debt expense (recovery) and other
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
296
|
|
|
-
|
|
|
296
|
Operating income (loss)
|
|
|
2,266
|
|
|
(978)
|
|
|
(418)
|
|
|
(663)
|
|
|
(1,237)
|
|
|
(1,030)
|
Interest income (expense), net
|
|
|
(343)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4
|
|
|
(339)
|
Income tax expense
|
|
|
4,273
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,273
|
Additions to property and equipment
|
|
|
17,680
|
|
|
1,135
|
|
|
-
|
|
|
(16)
|
|
|
86
|
|
|
18,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
Equatorial
|
|
|
|
|
Corporate
|
|
|
|
(in thousands)
|
|
Gabon
|
|
Angola
|
|
Guinea
|
|
U.S.
|
|
and Other
|
|
Total
|
Revenues-oil and natural gas sales
|
|
$
|
29,672
|
|
$
|
-
|
|
$
|
-
|
|
$
|
151
|
|
$
|
-
|
|
$
|
29,823
|
Depreciation, depletion and amortization
|
|
|
3,976
|
|
|
6
|
|
|
-
|
|
|
63
|
|
|
141
|
|
|
4,186
|
Impairment of proved properties
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Bad debt expense (recovery) and other
|
|
|
514
|
|
|
(7,629)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,115)
|
Other operating expense
|
|
|
9,635
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,635
|
Operating income (loss)
|
|
|
(3,532)
|
|
|
7,007
|
|
|
(135)
|
|
|
(3)
|
|
|
(5,412)
|
|
|
(2,075)
|
Interest income (expense), net
|
|
|
(1,956)
|
|
|
3,201
|
|
|
-
|
|
|
-
|
|
|
(2)
|
|
|
1,243
|
Income tax expense
|
|
|
4,579
|
|
|
3,074
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,653
|
Additions to property and equipment
|
|
|
(2,493)
|
|
|
-
|
|
|
-
|
|
|
140
|
|
|
-
|
|
|
(2,353)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2015
|
|
|
|
|
|
|
|
|
Equatorial
|
|
|
|
|
Corporate
|
|
|
|
(in thousands)
|
|
Gabon
|
|
Angola
|
|
Guinea
|
|
U.S.
|
|
and Other
|
|
Total
|
Revenues-oil and natural gas sales
|
|
$
|
45,091
|
|
$
|
-
|
|
$
|
-
|
|
$
|
285
|
|
$
|
-
|
|
$
|
45,376
|
Depreciation, depletion and amortization
|
|
|
14,784
|
|
|
6
|
|
|
-
|
|
|
327
|
|
|
117
|
|
|
15,234
|
Impairment of proved properties
|
|
|
11,220
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11,220
|
Bad debt expense and other
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
576
|
|
|
-
|
|
|
576
|
Operating loss
|
|
|
(2,279)
|
|
|
(28,844)
|
|
|
(657)
|
|
|
(414)
|
|
|
(4,114)
|
|
|
(36,308)
|
Interest income (expense), net
|
|
|
(650)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5
|
|
|
(645)
|
Income tax expense
|
|
|
7,638
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,638
|
Additions to property and equipment
|
|
|
33,419
|
|
|
(1,973)
|
|
|
-
|
|
|
(16)
|
|
|
151
|
|
|
31,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equatorial
|
|
|
|
|
Corporate
|
|
|
|
(in thousands)
|
|
Gabon
|
|
Angola
|
|
Guinea
|
|
U.S.
|
|
and Other
|
|
Total
|
Total assets as of June 30, 2016
|
|
$
|
75,259
|
|
$
|
2,290
|
|
$
|
10,174
|
|
$
|
1,314
|
|
$
|
2,620
|
|
$
|
91,657
|
Total assets as of December 31, 2015
|
|
|
98,858
|
|
|
10,304
|
|
|
10,200
|
|
|
1,470
|
|
|
3,126
|
|
|
123,958
|
1
2
. SUBSEQUENT EVENTS
On
July 28
, 2016, we signed a purchase and sale agreement to acquire an additional
2.9
8
%
working
interest in the Etame Marin block located offshore the Republic of Gabon from Sojitz Etame Limited (“Sojitz”), which represents the full interest owned by Sojitz in the concession.
The acquisition has an effective date of August 1, 2016, and closing is expected within 90 days, subject to customary closing conditions.
P
ayment
for the acquisition
is
expected to
be primarily funded by
cash on hand.
We intend to request to borrow the $5.0 million under the Additional Term Loan before December 31, 2016.
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;
|
|
·
|
|
our ability to meet the financial covenants of our
loan agreement
;
|
|
·
|
|
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.
As operator, we have production operations in 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
two
unconventional
wells
in
the United States in
North Texas and
holds
undeveloped leasehold
acreage
in Montana. We also own
some
minor interests in conventional production activities as a non-operator in the U
nited
S
tates
.
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
early
2016. C
urrent prices
, while higher than those in early 2016,
are significantly less than they
were in
the several years
prior to
mid-2014
.
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
and
the carrying value of our proved
oil and natural gas properties
and
undeveloped leasehold interest
s
and our ability to request the additional $5 million term loan from the IFC
. 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
experienced in 2015
. 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
revolving credit facility with the
International Finance Corporation (“
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;
|
|
·
|
|
us to implement reductions in our workforce in order to reduce costs;
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 also adversely affected
our borrowing capacity
based mainly on the value of our oil and natural gas reserves. These reductions limited our ability to carry out our operations.
O
ur borrowing base
was
reduc
ed fr
om $65.0 million to $20.1 million effective December 31, 2015.
On June 29, 2016,
we
executed a Sup
plemental Agreement with the
IFC, the lender under
our
revolving credit facility
which
among other things, amended and restated
our
loan agreement
to convert $20 million of the revolving portion of the credit facility
into
a term loan
. Currently $
15 million is outstanding
as a term loan with an additional $5 million that may be requested
in a single draw between now and December 31, 2016.
See Note 5 to the condensed consolidated financial statements and
“Capital Resources and
Liquidity
—Liquidity—
Credit Facility” below for additional details about the loan agreement.
In January 2016, our Board of Directors formed a strategic committee to oversee the evaluation of our strategic alternatives. The
committee is
explor
ing
strategic
options 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. 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 recorded impairments o
n
our proved
oil and natural gas
properties
in
periods
prior to 2016
.
We
could
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.
Our i
mpairment
calculations
have been based upon reserve economics using forecast
ed
future prices, adjusted for specifics related to our
production
. If
projected
per barrel
prices
used in the impairment calculation made as of June 30, 2016
had been
$
5
.00
lower
, there would still have been no impairment.
Given the uncertainty associated with the factors used
in
th
ese
calculation
s,
these estimates sh
ould 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 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. The $7.6 million recovery is reflected in the Bad debt expense (recovery) and other line of the condensed consolidated statement
s
of operations. Default interest of $3.2 million was received and is shown in the Interest income line of the condensed consolidated statement of operations.
While this payment improved our liquidity
in the short-term
, we are continuing to pursue
alternative
s
for increasing our liquidity
.
As discussed further in Note 12 to the condensed consolidated financial statements, on July 28, 2016, we signed a purchase and sale agreement
to acquire an additional 2.9
8
% working interest in the Etame Marin block located offshore the Republic of Gabon from Sojitz Etame Limited (“Sojitz”), which represents the full interest owned by Sojitz in the concession.
In
light of the depressed levels of
oil prices, we intend to focus on maintaining oil production
levels
and lowering operating costs with respect to current production in our Etame Marin block
located offshore Gabon
.
We have determined that additional development drilling is uneconomic at current commodity prices. In January 2016, we began demobilizing
our contracted drilling
rig and
do not
intend to drill any wells in 2016 on the Etame Marin block.
In June 2016, we reached an agreement with the drilling contractor to pay $5.1 million net to VAALCO’s interest for unused rig days under the contract. We
are paying
this amount, plus the demobilization charges, in seven equal monthly installments beginning in July 2016.
Development drilling may become economic in the future when prices recover.
GOING CONCERN
Our revenues, cash flow
s
, profitability, oil and natural gas reserve value
s
and future rate
s
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
will likely
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.
However, revenues have increased
from $11.0 million in
the
first quarter 2016 to $18.8 million in the second quarter of 2016
primarily as a result of improving prices and higher sales volumes
.
As discussed in Note 5,
in June 2016,
we modified our revolving credit facility with the International Finance Corporation (“IFC”)
converting $20 million of our revolving credit facility into a term loan with $15 million borrowed and the option to request,
with approval being
at the IFC’s discretion, an additional $5 million
in a single draw between now and December 31, 2016. Our available liquidity, therefore, continues to be somewhat limited.
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, an event of default could result, which would permit acceleration of such debt and which could result in an event of default under
the
amended loan agreement 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. As discussed in Note 5,
certain of our
financial covenants under the amended loan agreement have been relaxed through the end of 2016.
Continued depressed oil and natural gas prices, like those seen in the first quarter of 2016, would have a material adverse effect on our liquidity, financial condition, results of operations and on the carry
ing value of our proved oil and natural gas properties
.
If oil and natural gas prices continue at levels seen in the second quarter 2016, we expect that for 2016 we
will generate cash flows sufficient to cover our operating expenses. To fund growth opportunities, we are considering multiple alternative
s, including, but not limited to, additional debt or equity financing, a sale or farm-down of assets, continuing the 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
and
not provide sufficient cash available for our operations
. These conditions continue
to raise doubt about our ability to continue as a going concern.
Our financial statements for the three and six months ended June 30, 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
.
ACTIVITIES BY ASSET
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
June 30, 2016
production
is
from
three subsea wells and
seven
platform wells
which
are tied back by pipelines to deliver oil and associated
natural
gas through a riser system t
o 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
six month
s
of 2016 and 2015, production from the block
was
approximately
3,417
MBbls (
834
MBbls net to us) and
3,210
MBbls (
784
MBbls net to us).
We completed
the
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.
Since the shutdown through mid-year we have achieved greater than 97% runtime.
On June 23,
2016,
the ESPs in the South Tchibala 2-H well failed
, and it was
temporarily shut-in.
It
was producing approximately 1,700 gross
BOPD
, or 415
BOPD
net to
VAALCO just before b
eing temporarily shut-in.
We are
working to mobilize
a
hydraulic workover unit
on
to the Avouma platform
t
o
replace the ESPs
and
expect
to have the South Tchibala 2-H well
back on production by early fourth quarter 2016.
Our net
share of the cost is expected to be
a
pproximately $1.
7
million.
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
were
two wells producing from the Avouma platform. Based on recent technical analysis, the loss of these wells will not have a significant impact on
our estimated reserves
.
Impairment
No impairment of proved properties was necessary in the first
and second
quarter
s
of 2016.
In
the
first
and second
quarter
s
of
2015
,
we
recorded
aggregate
impairment of
$
11.2
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, a
nd 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
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
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 tha
t 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
; however, no assurances c
an be given that such an
extension
will be obtained
.
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, two oil discoveries had been made on the block, establishing a development and production area (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. The Ministry of Mines, Industry and Energy and GEPetrol, the current block operator, are reviewing a revised joint operating agreement which
would
name us as operator of Block P.
Given the current depressed commodity price
s
, it is likely we will minimize any near-term expenditures and expenses in Equatorial Guinea.
Before beginning exploration
, we
and our partners
will need to evaluate
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 d
evelopment and production plan.
CAPITAL RESOURCES AND LIQUIDITY
Cash Flows
A summary of our cash flows for the six-month periods
ending June 30, 2016 and 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Increase
|
(in thousands)
|
|
2016
|
|
2015
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
1,629
|
|
$
|
26,953
|
|
$
|
(25,324)
|
Net cash used in investing activities
|
|
|
(13,228)
|
|
|
(35,408)
|
|
|
22,180
|
Net cash (used in) provided by financing activities
|
|
|
(77)
|
|
|
452
|
|
|
(529)
|
Net change in cash and cash equivalents
|
|
$
|
(11,676)
|
|
$
|
(8,003)
|
|
$
|
(3,673)
|
|
|
|
|
|
|
|
|
|
|
The
de
crease in net cash
provided by
operating activities
for the six mon
ths ended June 30, 2016 compared to the same period of 2015 was primarily related
to:
lower 2016 crude oil prices
and
higher workover expense
,
as well as a reduction in cash provided by changes in working capital.
P
roperty and equipment expenditures
have historically been
our most sig
nificant
use of cash in
investing activities. During the
six
months ended June 30, 2016
,
these expenditures on a cash basis
were
$
12
.
7
million
, primarily
related to final payments
made on
invoices related to the development program completed in 2015. This
compares to
$
41.2
million in the same period of
2015
.
These cash property and equipment expenditures are included in capital expenditures. See “Capital
Expenditures” below for further discussion.
The six months ended June 30, 2015 also included the cash inflows of $5.4 million for the reduction in restricted cash
.
Capital Expenditures
During
the
six months ended June 30, 2016
,
w
e had
negative
accrual basis
capital expenditure
s
of
$2.6
million
as a result of
better information.
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.
C
apital
expenditures of $
55.5
million
incurred during the six months ended June 30, 201
5
were
primarily
a
s
sociated with
the
drilling of two development wells from the Etame platform Gabon, the Southeast Etame 2-H w
e
ll from the SEENT platform 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
, borrowings under the credit facility with the IFC
and cash balance
s
on hand.
On June 29, 2016, we executed a Supplemental Agreement with the IFC which, among other things, amended and restated the existing loan agreement to convert $20 million of the revolving portion of the credit
facility, of which $15 million is currently outstanding, to a term loan (the “Term Loan”), with an additional $5 million (the “Additional Term Loan”) which can be requested in a single draw between now and December 31, 2016. The amended loan agreement is
secured by the assets of our Gabon subsidiary,
VAALCO Gabon (Etame), Inc. and is guaranteed by VAALCO as the parent company
. Before we are able to draw the Additional Term Loan, the IFC, as part of their consideration of our loan request, will make a determination of whether our Gabon subsidiary’s current and projected revenues from operations are sufficient to cover the aggregate amount of principal, interest, commissions, fees and any other amounts due in respect of the Additional Term Loan. If drawn, the Additional Term Loan amount shall be amortized in equal quarterly installments through June 30, 2018. The amended loan agreement provides for quarterly principal and interest payments through June 30, 2019, with interest accruing at a rate of LIBOR plus 5.75%. Principal repayments under
the amended loan agreement are dependent upon the timing of our additional borrowing
, if any,
with the payments to commence no later than March 31, 2017.
The
a
mended
l
oan
a
greement
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 or incur other additional indebtedness. Our ability to meet our
quarter-end
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 waivers or amendments to our
amended
loan agreement, the lender may impose additional operating and financial restrictions on us or modify the terms of the loan agreement.
Under the amended loan agreement, quarter
-
end net debt to EBITDAX (as defined in the loan agreement) must be no
more than 3.0 to 1.0. However, the quarter-end
net debt to EBITDAX limitation has been raised to 5.0 to 1.0 for all periods through the end of 2016.
Forecasting our compliance with this and other financial covenants in future periods is inherently uncertain. Factors that could
impact
our quarter
-
end 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 June 30, 2016.
However, we can make no assurance that we will be able to comply with these financial covenants in the future.
C
ash on Hand
At
June 30, 2016
, we
had
unrestricted
cash of
$
13.7
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
January 2017
.
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
three and six months ended June 30, 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
$
134
million in
remaining minimum obligations
for
the
gross
amount of
charter
payments
at
June 30, 2016
.
There have been no other changes to our off-balance
sheet arrangements since December 31, 201
5
.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
Other than the negotiated reduction in the drilling rig commitment
,
the amendment of our loan agreement
and the Sojitz purchase and sale agreement
, discussed in Notes 6
,
5
and 12
respectively, to
the
cond
ensed consolidated financial statements, t
here have been no significant changes to our commitments and contractual obligations subsequent to December 31, 2015.
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 months ended June 30, 2016
compared to the
three months ended June 30, 2015
We
reported
a
net loss for the three months ended June 30, 2016 of $
0.3
million compared
to
$5.2 million for the same period of 2015.
Further discuss
ion of results by significant line item follows
:
Oil and natural gas revenues
decreased $8.3 million in the three months ended June 30, 2016 compared to the same period of 2015. The decrease in revenue is primarily related to 28% lower realized
oil prices, which are due to decreases in the Dated Brent market price.
The revenue changes in the three months ended June 30, 2016 identified as related to changes in price or volume are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Price
|
|
|
|
|
$
|
(7,809)
|
|
Volume
|
|
|
|
|
|
(904)
|
|
Other
|
|
|
|
|
|
423
|
|
|
|
|
|
|
$
|
(8,290)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
2015
|
|
Gabon net oil production (MBbls)
|
|
|
430
|
|
|
404
|
|
|
|
|
|
|
|
|
|
Gabon net oil sales (MBbls)
|
|
|
435
|
|
|
455
|
|
U.S. net oil sales (MBbls)
|
|
|
1
|
|
|
2
|
|
Net oil sales (MBbls)
|
|
|
436
|
|
|
457
|
|
Net natural gas sales (MMcf)
|
|
|
35
|
|
|
46
|
|
Net oil equivalents (MBOE)
|
|
|
442
|
|
|
465
|
|
|
|
|
|
|
|
|
|
Average realized oil price ($/Bbl)
|
|
|
$42.13
|
|
|
$59.16
|
|
Average realized natural gas price ($/Mcf)
|
|
|
1.64
|
|
|
2.70
|
|
Weighted average realized price ($/BOE)
|
|
|
42.64
|
|
|
58.45
|
|
Average Europe Brent spot* ($/Bbl)
|
|
|
45.57
|
|
|
60.37
|
|
*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 second quarters of both 2016 and
2015. Our share of oil inventory aboard the FPSO, excluding royalty barrels, was
approximately 40,000 and 27,
000 barrels at
June 30, 2016
and
2015
.
Production
expenses
de
creased $
1.5
million in the
three months ended June 30, 2016
compared to the same period of 2015
. Cost reductions implemented in late 2015
and early 2016 are taking effect and the estimated accrual for workovers
was
reduced on better information.
Exploration
expense
was minimal
in the
three months ended June 30, 2016
, consistent with our stated plans to suspend exploratory drilling during 2016. Exploration expense during the same period in 2015 was primarily comprised of a $0.6 million impairment of our unproved leasehold in Montana and $0.4 million of seismic activity related to Angola.
Depreciation, depletion and amortization
(“DD&A
”)
decreased $
7
.
4
million in the three
months ended June 30, 2016
compared to the same period of
2015
.
Although sales volumes are slightly higher in 2016 f
or the
three months ended June 30, 2016
, DD&A per BOE
was lower in 2016 due
to impairments
in 2015
.
General and administrative expenses
increased $
1
.
2
million in
three months ended June 30, 2016
compared to the same period of
2015.
We have taken steps beginning in 2015 to reduce overall general and administrative costs,
with decreases
realized
in personnel costs, services and various other cost categories
. However, the amount of overhead we are able to recover from our partners in 2016 has decreased. Under our operating agreements the amount of overhead recoverable is larger when capital spending is higher, as it was in 2015 with the development program in Gabon and the exploratory drilling in Angola
.
Impairment of proved properties
is discussed in detail in
Note
4
to
the unaudited condensed consolidated financial statements
.
Other operating expenses
for
three months ended June 30,
2016
includes $2.1 million accrued
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 and a $1.3 million representing the
negotiated reduction in our net share of contract cost
associated with the day rate for the demobilization period through contract expiration, plus normal and customary demobilization costs.
In June 2016, we reached an agreement with the drilling contractor to pay
less than our originally estimated maximum day rate, plus demobilization costs,
in seven equal monthly installments beginning in July
2016
.
Interest expense
increased
$1.
1
million in the
three months ended June 30, 2016 compared to the same period of 2015. Deferred finance costs totaling
$
0
.
9
million
were charged to interest expense in June 2016 when our loan agreement was amended.
None of the interest expense incurred in the
three months ended June 30, 2016 was capitalized
, while a considerable portion of the interest expense incurred was capitalized in the same period of 2015. See Note 5 to the condensed consolidated financial statements for further discussion of
our loan agreement and
interest expense.
Other, net
consists primarily of
derivative instrument gains (losses) as discussed in Note 7 to the condensed consolidated financial statements
and
foreign currency gains (losses)
.
Income tax
expense
decreased $1.3 million in three
months ended June 30, 2016
compared to the same period of
2015
.
I
ncome tax expense
in both periods
is
primarily attributable to our operations in Gabon and is lower in 2016 than income tax for the comparable 2015 period as a result of lower revenues.
Six months ended June 30, 2016
compared to the
six months ended June 30, 2015
We reported
a
net
loss of $
8
.
3
million for the six months ended June 30, 2016
compared
to
$
44.2
million for the same period of 201
5
.
Further discuss
ion of results by significant line item follows
:
Oil and natural gas revenues
decreased $15.6 million in the six months ended June 30, 2016
compared to the same period of 2015. The decrease in revenue is primarily related to
33
% lower realized
oil prices, which are due to decreases in the Dated Brent market price.
The revenue changes in the six months ended June 30, 2016 identified as related to changes in price or volume are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Price
|
|
|
|
|
$
|
(15,552)
|
Volume
|
|
|
|
|
|
(473)
|
Other
|
|
|
|
|
|
472
|
|
|
|
|
|
$
|
(15,553)
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
Gabon net oil production (MBbls)
|
|
|
834
|
|
|
784
|
|
|
|
|
|
|
|
Gabon net oil sales (MBbls)
|
|
|
815
|
|
|
827
|
U.S. net oil sales (MBbls)
|
|
|
2
|
|
|
2
|
Net oil sales (MBbls)
|
|
|
817
|
|
|
829
|
Net natural gas sales (MMcf)
|
|
|
67
|
|
|
93
|
Net oil equivalents (MBOE)
|
|
|
828
|
|
|
845
|
|
|
|
|
|
|
|
Average realized oil price ($/Bbl)
|
|
|
$35.79
|
|
|
$54.46
|
Average realized natural gas price ($/Mcf)
|
|
|
1.63
|
|
|
2.73
|
Weighted average realized price ($/BOE)
|
|
|
35.44
|
|
|
53.76
|
Average Europe Brent spot* ($/Bbl)
|
|
|
39.80
|
|
|
57.67
|
*Average of daily Europe Brent spot prices posted on the U.S. Energy Information Administration website.
|
We made
six
and five
liftings in
the six months ended June 30, 2016 and 2015
.
Production
expenses
de
creased $
0.
2
million
in the
six months ended June 30, 2016
compared to the same period of 2015. Overall production expenses are higher
because they include $
3
.
6
million incurred for workovers
completed
in the first quarter of 2016, compared to no workovers in the same period of 2015. Excluding workovers, production expenses declined approximately $3.
8
million, reflecting the results of our cost reduction implemented in late 2015 and early 2016.
Exploration
expense
was minimal
in the
six months ended June 30, 2016. E
xploration expense for the six months ended June 30, 2015 was primarily comprised of the unsuccessful exploratory well offshore Angola
,
the impairment of our unproved leasehold in Montana and seismic activity.
Depreciation, depletion and amortization
(“DD&A
”)
decreased $1
1
.
0
million in the
six months ended June 30, 2016
compared to the same period of
2015
.
Although sales volumes are higher, f
or the
six months ended June 30, 2016
, DD&A per BOE rates
were lower in 2016
due to impairments
in 2015
.
General and administrative expenses
decreased
$
0
.
7
million
in the six months ended June 30, 2016
compared to the same period of
201
5
.
We have taken steps beginning in 2015 to reduce overall general and administrative costs,
with decreases
realized
in personnel costs, services and various other cost categories
. However, the full benefit of those reductions is not apparent because the amount of overhead we are able to recover from our partners in 2016 has decreased. Under our operating agreements the amount of overhead recoverable is larger when capital spending is higher, as it was in 2015 with the development program in Gabon and the exploratory drilling in Angola
.
Impairment of proved properties
is discussed in detail in
Note
4
to
the unaudited condensed consolidated financial statements
.
Other operating expenses
for
the six months ended June 30, 2016
includes $2.1 million accrued
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 and $7.6 million,
net to VAALCO, of expense associated with the demobilization and release of the contracted drilling rig.
In June 2016, we reached an
agreement with the drilling contractor to pay
less than our originally estimated maximum day rate, plus demobilization costs,
in seven equal monthly installments beginning in July
2016
.
General and administrative related to shareholder matters
for
the six months ended June 30, 2016
reflects our reimbursement by our insurance carrier of
some
previously expensed
legal costs
.
Bad debt expense (recovery) and other
for
the six months ended June 30, 2016
primarily consists of the $7.6 million bad debt recovery resulting from the payment of past-due amounts by Sonangol P&P, net of increases in the VAT allowance.
Interest income
for
the six months ended June 30, 2016
is
primarily
the
$3.2 million of default interest collected from Sonangol
P&P in March 2016.
Interest
expense
increased $1.
3
million in the six months
ended June 30, 2016 compared to the same period of 2015.
D
eferred finance
costs totaling $
0
.
9
million were
charged
to interest expense in June 2016 when our loan agreement was amended.
None of the interest expense incurred in the
six months ended June 30, 2016 was capitalized
, while a considerable portion of the interest expense incurred was capitalized in the same period of 2015. See Note 5 to the condensed consolidated financial statements for further discussion of
our loan agreement and
interest expense.
Other, net
consists primarily of
derivative instrument gains (losses) as discussed in Note 7 to the condensed consolidated financial statements
and
foreign currency gains (losses).
Income tax
expense
is almost the same in both the six months ended June 30, 2016
and 2015
. For 2016, income tax expense
includes
$3.
1
million for income tax in Angola on financial gains
and $4.6
million attributable to Gabon. In 2015, all income tax was attributable to Gabon
.
As a result of lower revenues from Gabon oil sales in 2016, income tax for Gabon is significantly lower in the six-months of 2016 than the same period of 2015.