VAALCO Energy(EGY) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This part contains the unaudited condensed consolidated financial statements and related notes for VAALCO Energy, Inc ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) This section presents VAALCO Energy, Inc.'s unaudited condensed consolidated financial statements and related notes, covering financial position, operations, equity, and cash flows Condensed Consolidated Balance Sheets This section provides a snapshot of VAALCO's financial position, detailing assets, liabilities, and shareholders' equity at specific points in time Condensed Consolidated Balance Sheets (in thousands) | Item | As of March 31, 2023 (in thousands) | As of December 31, 2022 (in thousands) | | :----------------------------------- | :---------------------------------- | :----------------------------------- | | Total Assets | $823,983 | $855,641 | | Total Liabilities | $368,808 | $389,536 | | Total Shareholders' Equity | $455,175 | $466,105 | | Cash and cash equivalents | $52,119 | $37,205 | | Trade receivables, net | $30,795 | $52,147 | | Crude oil inventory | $11,778 | $3,335 | | Accounts payable | $49,982 | $59,886 | | Retained earnings | $140,639 | $147,024 | Condensed Consolidated Statements of Operations and Comprehensive Income This section outlines VAALCO's financial performance over specific periods, including revenues, expenses, operating income, and net income Condensed Consolidated Statements of Operations and Comprehensive Income (in thousands) | Item | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Crude oil, natural gas and NGLs sales | $80,403 | $68,656 | | Total operating costs and expenses | $58,784 | $28,646 | | Operating income | $21,619 | $40,005 | | Derivative instruments gain (loss), net | $21 | $(31,758) | | Income tax expense (benefit) | $14,771 | $(4,628) | | Net income | $3,470 | $12,164 | | Basic net income per share | $0.03 | $0.21 | | Diluted net income per share | $0.03 | $0.20 | Condensed Consolidated Statements of Shareholders' Equity This section details changes in VAALCO's shareholders' equity, including retained earnings, treasury stock, and dividend distributions Condensed Consolidated Statements of Shareholders' Equity (in thousands) | Item | Balance at January 1, 2023 (in thousands) | Balance at March 31, 2023 (in thousands) | | :----------------------------------- | :-------------------------------------- | :------------------------------------- | | Total Shareholders' Equity | $466,105 | $455,175 | | Retained Earnings | $147,024 | $140,639 | | Treasury Stock | $(47,652) | $(53,029) | | Dividend Distributions (Q1 2023) | N/A | $(6,735) | - Retained earnings decreased by $6.385 million in Q1 2023, primarily due to dividend distributions and a cumulative effect adjustment from ASU 2016-13 adoption, partially offset by net income[12] Condensed Consolidated Statements of Cash Flows This section summarizes the cash inflows and outflows from VAALCO's operating, investing, and financing activities over specific periods Cash Flow Activity (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net cash provided by (used in) operating activities | $42,006 | $(758) | | Net cash used in investing activities | $(27,700) | $(23,148) | | Net cash used in financing activities | $(13,539) | $(2,118) | | Net change in cash, cash equivalents and restricted cash | $458 | $(26,024) | | Cash, cash equivalents and restricted cash at end of period | $60,234 | $46,290 | - The significant increase in net cash provided by operating activities in Q1 2023 was driven by lower cash settlements on derivative contracts and positive changes in receivables and foreign income taxes, despite lower net income[278] - Net cash used in financing activities increased due to higher dividend distributions ($6.7 million) and treasury stock repurchases ($5.4 million) in Q1 2023[280] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements 1. ORGANIZATION AND ACCOUNTING POLICIES This note details VAALCO's core business, significant accounting policies, and key operational factors including OPEC+ impacts and supply chain issues - VAALCO is an independent energy company engaged in the acquisition, exploration, development, and production of crude oil, natural gas, and NGLs, with operations in Gabon, Canada, and Egypt, and opportunities in Equatorial Guinea[17][245] - OPEC+ announced plans to reduce overall oil production, including a voluntary reduction by the Gabonese government of 8 thousand barrels per day starting May 2023, though VAALCO has not received a mandate to reduce its current oil production from the Etame Marin block[21][328] - The average Brent crude oil price for the three months ended March 31, 2023, was $81 per barrel, a decrease from $100 per barrel for the same period in 2022[22][339] - The company is experiencing lengthened lead times and increased prices for materials due to global supply chain issues, the Russia-Ukraine conflict, China's economic slowdown, inflation, and higher interest rates[23][24][325] Cash, Cash Equivalents and Restricted Cash Reconciliation (in thousands) | Item | As of March 31, 2023 (in thousands) | As of December 31, 2022 (in thousands) | | :--------------------------------- | :---------------------------------- | :----------------------------------- | | Cash and cash equivalents | $52,119 | $18,939 | | Restricted cash - current | $76 | $4,230 | | Restricted cash - non-current | $1,771 | $1,752 | | Abandonment funding | $6,268 | $21,369 | | Total | $60,234 | $46,290 | - The Gabonese Directorate of Hydrocarbons approved a $26.6 million ($15.6 million net to VAALCO) abandonment funding payment associated with the FPSO retirement in Q1 2023, which the company received[32][159] - As of March 31, 2023, the company had $16.8 million in current receivables from the Gabon refinery for crude oil delivered and $50.3 million remaining from a $67.5 million effective date adjustment related to the Egypt Merged Concession Agreement[36][37] - Upon adopting ASU 2016-13 on January 1, 2023, the company recognized a $3.1 million provision for current expected credit losses on other receivables (Gabon refinery) as a cumulative effect adjustment to retained earnings, with an additional $0.4 million provision recorded in Q1 2023[42] Fair Value of Financial Instruments (Level 2) (in thousands) | Item | As of March 31, 2023 (in thousands) | As of December 31, 2022 (in thousands) | | :--------------- | :---------------------------------- | :----------------------------------- | | Derivative asset | $124 | $102 | | SARs liability | $297 | $556 | 2. NEW ACCOUNTING STANDARDS This note details the adoption of Accounting Standards Update 2016-13 (ASU 2016-13) on January 1, 2023, which mandates measuring credit losses based on expected credit losses. The company recognized a $3.1 million cumulative-effect adjustment to retained earnings upon adoption - VAALCO adopted ASU 2016-13 (ASC 326) on January 1, 2023, using the modified-retrospective approach[84] - Upon adoption, the company recognized a $3.1 million Expected Credit Loss (ECL) allowance as an opening balance adjustment to retained earnings[84] 3. ACQUISITIONS AND DISPOSITIONS This note discusses the significant business combination with TransGlobe Energy Corporation on October 13, 2022, which expanded VAALCO's operations into Egypt and Canada, and the financial impact of this merger. It also covers the classification of Angola and Yemen operations as discontinued - VAALCO completed the acquisition of TransGlobe Energy Corporation on October 13, 2022, issuing approximately 49.3 million VAALCO shares to TransGlobe shareholders, resulting in VAALCO stockholders owning approximately 54.5% of the combined company[85][86] - The TransGlobe merger increased 'Crude oil, natural gas and NGLs sales' by $43.7 million and 'Net income' by $9.7 million for the three months ended March 31, 2023[89][252] - An initial $10.8 million bargain purchase gain was recognized from the TransGlobe acquisition, later reduced to $9.4 million due to a deferred tax liability adjustment in Egypt[91] - Operations in Angola and Yemen have been classified as discontinued, with no material financial impact on the company's financial position, results of operations, or cash flows for the periods presented[96][97][98][276][277] 4. SEGMENT INFORMATION This note provides a breakdown of VAALCO's financial performance and assets by geographic operating segment: Gabon, Egypt, Canada, Equatorial Guinea, and Corporate and Other. It highlights revenues, operating income, and capital expenditures for continuing operations Segment Revenues (Three Months Ended March 31, 2023) (in thousands) | Segment | Crude oil, natural gas and NGLs sales (in thousands) | | :------------------ | :--------------------------------------------------- | | Gabon | $36,737 | | Egypt | $34,784 | | Canada | $8,882 | | Equatorial Guinea | $0 | | Corporate and Other | $0 | | Total | $80,403 | Segment Operating Income (Loss) (Three Months Ended March 31, 2023) (in thousands) | Segment | Operating income (loss) (in thousands) | | :------------------ | :------------------------------------- | | Gabon | $10,916 | | Egypt | $12,700 | | Canada | $2,917 | | Equatorial Guinea | $(491) | | Corporate and Other | $(4,423) | | Total | $21,619 | - Consolidated capital expenditures for the three months ended March 31, 2023, totaled $25.425 million[100] - For Q1 2023, Glencore Energy UK Ltd. accounted for 100% of Etame revenues in Gabon, and Mercuria accounted for 100% of crude oil sales in Egypt, while Canada's revenues were concentrated in two customers (59% and 21%)[103][104] 5. EARNINGS PER SHARE This note details the calculation of basic and diluted earnings per share (EPS) for the three months ended March 31, 2023, and 2022, including the reconciliation of net income and weighted average shares outstanding Earnings Per Share Summary | Item | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | | Basic net income per share | $0.03 | $0.21 | | Diluted net income per share | $0.03 | $0.20 | | Basic weighted average shares outstanding (in thousands) | 107,387 | 58,702 | | Diluted weighted average shares outstanding (in thousands) | 108,752 | 59,179 | 6. REVENUE This note outlines VAALCO's revenue recognition policies and sources across its operating segments in Gabon, Egypt, and Canada, detailing how sales, royalties, and profit oil arrangements contribute to net revenues Gabon Net Revenues (Three Months Ended March 31) (in thousands) | Item | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------- | :------------------ | :------------------ | | Sales under COSPA or COSMA | $42,601 | $76,486 | | Carried interest recoupment | $0 | $1,112 | | Royalties | $(5,864) | $(8,942) | | Net revenues | $36,737 | $68,656 | Egypt Net Revenues (Three Months Ended March 31, 2023) (in thousands) | Item | 2023 (in thousands) | | :------------ | :------------------ | | Gross sales | $54,621 | | Royalties | $(19,340) | | Selling costs | $(497) | | Net revenues | $34,784 | Canada Net Revenues (Three Months Ended March 31, 2023) (in thousands) | Item | 2023 (in thousands) | | :------------ | :------------------ | | Oil revenue | $6,654 | | Gas revenue | $958 | | NGL revenue | $2,463 | | Royalties | $(1,193) | | Net revenues | $8,882 | - In Gabon, the government's share of Profit Oil can satisfy corporate income tax liability, which is reported as revenue with a corresponding income tax expense[115][116] - Egypt's production is shared with the government through Production Sharing Contracts (PSCs), with cost oil used for cost recovery and profit oil split based on production levels and oil prices[123] 7. CRUDE OIL, NATURAL GAS and NGLs PROPERTIES AND EQUIPMENT This note details VAALCO's crude oil, natural gas, and NGLs properties and equipment, including the successful efforts accounting method, impairment reviews, and capitalized equipment inventory. It provides updates on PSC terms and undeveloped leasehold costs across Gabon, Egypt, and Equatorial Guinea Net Crude Oil and Natural Gas Properties, Equipment and Other (in thousands) | Item | As of March 31, 2023 (in thousands) | As of December 31, 2022 (in thousands) | | :--------------------------------------------------- | :---------------------------------- | :----------------------------------- | | Net crude oil and natural gas properties, equipment and other | $499,953 | $495,272 | - The Etame Marin Block PSC in Gabon was extended to September 17, 2028, with two additional five-year extension options, and the Cost Recovery Percentage increased to 80% until September 16, 2028[133][135] - The Egypt Merged Concession Agreement (effective January 20, 2022) has a 15-year primary term, requiring annual $10.0 million modernization payments from February 2023 through February 2026 and minimum financial work commitments of $50.0 million per five-year period[136][137] - VAALCO's participating interest in Equatorial Guinea's Block P increased to 60.0% in February 2023, and the plan of development for the Venus discovery was approved in September 2022, providing a 25-year development and production period[147][148][274] Undeveloped Leasehold Costs (As of March 31, 2023) (in thousands) | Region | Amount (in thousands) | | :---------------- | :-------------------- | | Equatorial Guinea | $10,000 | | Gabon | $13,700 | | Egypt | $13,600 | | Canada | $16,700 | 8. DERIVATIVES AND FAIR VALUE This note describes VAALCO's use of derivative financial instruments, primarily collars, to mitigate crude oil price volatility, noting that hedge accounting is not elected. It provides details on outstanding contracts and subsequent hedging activities - VAALCO uses commodity derivative instruments (swaps and costless collars) to hedge price risk for a portion of its anticipated crude oil production, but does not elect hedge accounting[152][285] Outstanding Derivative Contracts (As of March 31, 2023) | Settlement Period | Type of Contract | Index | Monthly Volumes (Bbls) | Weighted Average Put Price (per Bbl) | Weighted Average Call Price (per Bbl) | | :---------------- | :--------------- | :---------- | :--------------------- | :----------------------------------- | :------------------------------------ | | April 2023 - June 2023 | Collars | Dated Brent | 95,500 | $65.00 | $100.00 | - Subsequent to March 31, 2023, on April 3, 2023, the company entered into additional collars for July-September 2023, covering 95 thousand barrels per month, with a weighted average put price of $65.00 per barrel and call price of $96.00 per barrel[156][332] - Derivative instruments gain (loss), net changed from a loss of $(31.758) million in Q1 2022 to a gain of $0.021 million in Q1 2023[155] 9. CURRENT ACCRUED LIABILITIES AND OTHER This note itemizes the components of VAALCO's current accrued liabilities and other as of March 31, 2023, and December 31, 2022, showing a decrease in total accrued liabilities Current Accrued Liabilities and Other (in thousands) | Item | As of March 31, 2023 (in thousands) | As of December 31, 2022 (in thousands) | | :----------------------------------- | :---------------------------------- | :----------------------------------- | | Total accrued liabilities and other | $80,707 | $91,392 | | Accrued accounts payable invoices | $21,185 | $28,360 | | Capital expenditures | $27,850 | $26,618 | | Gabon DMO, PID and PIH obligations | $11,569 | $10,509 | | Egypt modernization payments | $9,373 | $9,933 | | Accrued wages and other compensation | $2,626 | $8,161 | 10. COMMITMENTS AND CONTINGENCIES This note outlines VAALCO's significant commitments and contingencies, including abandonment funding, the FPSO charter, regulatory audits, dividend policy, share buyback program, and obligations under the Egypt Merged Concession Agreement and government-related receivables - The estimated abandonment funding for the Etame Marin block is $81.3 million ($47.8 million net to VAALCO) on an undiscounted basis, with the balance of the abandonment fund at $10.7 million ($6.3 million net) as of March 31, 2023[158][306] - The FPSO charter was extended through October 4, 2022, with demobilization fees totaling $15.3 million gross ($8.9 million net), and VAALCO relinquished control in Q4 2022[161][162] - VAALCO declared a quarterly cash dividend of $0.0625 per common share for Q1 2023 (paid March 31, 2023) and for Q2 2023 (to be paid June 23, 2023)[167][246][322] - A share buyback program for up to $30 million over 20 months was approved, with approximately $22.5 million remaining available for repurchase as of March 31, 2023[170][324] - Under the Egypt Merged Concession Agreement, VAALCO has three further annual $10.0 million modernization payments due from February 2024 to February 2026, and minimum financial work commitments of $50.0 million per each five-year period[173][174][308] - A $20.3 million receivable from the Sogara refinery in Gabon for domestic market crude oil delivery is past due since November 2022, with ongoing discussions for recovery[178] 11. DEBT This note confirms that VAALCO had no outstanding debt as of March 31, 2023, and December 31, 2022. It details the senior secured reserve-based revolving credit facility (RBL Facility) with Glencore and the closure of TransGlobe's ATB Facility - VAALCO had no outstanding debt as of March 31, 2023, and December 31, 2022[179] - The company has a senior secured reserve-based revolving credit facility (RBL Facility) of up to $50.0 million with Glencore, with a borrowing base of $50.0 million as of March 31, 2023, and no amounts were outstanding under the facility[180][185][298][303] - TransGlobe's credit facility with ATB Financial was repaid in full in October 2022 and formally closed on January 5, 2023[188] 12. LEASES This note explains VAALCO's accounting for operating and financing leases under ASC 842, including the recognition of Right of Use (ROU) assets and lease liabilities. It provides a breakdown of lease costs and future maturities Lease Cost (Three Months Ended March 31) (in thousands) | Item | 2023 (in thousands) | 2022 (in thousands) | | :-------------------- | :------------------ | :------------------ | | Finance lease cost | $4,365 | $66 | | Operating lease cost | $583 | $4,196 | | Short-term lease cost | $1,360 | $1,014 | | Variable lease cost | $0 | $1,338 | | Total lease expense | $6,308 | $6,614 | Weighted-Average Lease Terms and Discount Rates (As of March 31, 2023) | Lease Type | Weighted-Average Remaining Lease Term (years) | Weighted-Average Discount Rate | | :-------------- | :-------------------------------------------- | :----------------------------- | | Finance leases | 9.33 | 8.13% | | Operating leases | 1.14 | 10.29% | Future Maturities of Lease Liabilities (As of March 31, 2023) (in thousands) | Year | Operating Leases (in thousands) | Finance Leases (in thousands) | | :-------- | :------------------------------ | :---------------------------- | | 2023 | $1,829 | $10,377 | | 2024 | $672 | $13,759 | | 2025 | $33 | $15,559 | | 2026 | $0 | $16,156 | | 2027 | $0 | $15,023 | | Thereafter | $0 | $51,561 | | Total Lease Liabilities | $2,407 | $87,377 | 13. ASSET RETIREMENT OBLIGATIONS This note summarizes the changes in VAALCO's asset retirement obligations (ARO), including accretion, additions, revisions, and settlements. It also discusses the specific ARO considerations for Canadian and Egyptian operations Changes in Asset Retirement Obligations (in thousands) | Item | As of March 31, 2023 (in thousands) | As of December 31, 2022 (in thousands) | | :-------------------------- | :---------------------------------- | :----------------------------------- | | Beginning balance | $42,001 | $40,694 | | Accretion | $556 | $1,958 | | Additions | $0 | $6,134 | | Revisions | $79 | $(43) | | Settlements | $(123) | $(6,577) | | Foreign currency gain (loss) | $74 | $(165) | | Ending balance | $42,587 | $42,001 | - Additions in Q4 2022 included $6.1 million for Canadian assets due to the TransGlobe Arrangement[202] - Settlements in Q4 2022 included $6.6 million for FPSO decommissioning fees[203] - No asset retirement obligation is recorded for Egypt PSCs as of December 31, 2022, due to liabilities passing to the Egyptian Government or EGPC's discretion on decommissioning[205][206] 14. SHAREHOLDERS' EQUITY This note provides information on VAALCO's common stock, preferred stock, and treasury stock. It highlights the increase in authorized common shares following the TransGlobe acquisition and details the ongoing share buyback program - On October 13, 2022, authorized common stock increased from 100 million to 160 million shares, with approximately 49.3 million shares issued to TransGlobe shareholders as part of the merger[208] - A share buyback program was approved on November 1, 2022, for an aggregate purchase of up to $30 million of common stock over 20 months[210] Common Stock Repurchases (Three Months Ended March 31, 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Amount Remaining for Purchase | | :--------------------------- | :------------------------------- | :--------------------------- | :------------------------------------ | | January 1, 2023 - January 31, 2023 | 350,832 | $4.27 | $25,502,669 | | February 1, 2023 - February 28, 2023 | 326,992 | $4.59 | $24,003,172 | | March 1, 2023 - March 31, 2023 | 303,176 | $4.95 | $22,503,206 | | Total | 981,000 | | | 15. STOCK-BASED COMPENSATION AND OTHER BENEFIT PLANS This note details VAALCO's stock-based compensation plans, including stock options, restricted shares, RSUs, PSUs, DSUs, and stock appreciation rights (SARs), and the associated compensation expense. It also covers the available shares under the 2020 Long-Term Incentive Plan Stock-Based Compensation Expense (Three Months Ended March 31) (in thousands) | Item | 2023 (in thousands) | 2022 (in thousands) | | :---------------------------------- | :------------------ | :------------------ | | Stock-based compensation - equity awards | $675 | $404 | | Stock-based compensation - liability awards | $(26) | $1,018 | | Total stock-based compensation | $649 | $1,422 | - As of March 31, 2023, 3.989 million shares were available for future grants under the 2020 Long-Term Incentive Plan[214] - Awards from the TransGlobe merger, including RSUs, PSUs, and DSUs, were converted to equity awards settled in VAALCO common stock from the 2020 Plan[225][226][227][228] Stock Appreciation Rights (SARs) Activity (Three Months Ended March 31, 2023) | Item | Number of Shares Underlying SARs (in thousands) | Aggregate Intrinsic Value (in thousands) | | :-------------------------- | :-------------------------------------------- | :--------------------------------------- | | Outstanding at March 31, 2023 | 139 | $304 | 16. INCOME TAXES This note details VAALCO's income tax provision, effective tax rate, and the components of current and deferred tax expense. It highlights the impact of foreign taxes and oil price adjustments on the tax expense Provision for Income Taxes (Three Months Ended March 31) (in thousands) | Item | 2023 (in thousands) | 2022 (in thousands) | | :-------------------- | :------------------ | :------------------ | | U.S. Federal Current | $0 | $0 | | U.S. Federal Deferred | $586 | $(12,486) | | Foreign Current | $12,300 | $5,691 | | Foreign Deferred | $1,885 | $2,167 | | Total | $14,771 | $(4,628) | - The effective tax rate for Q1 2023 was 60.96%, compared to 67.9% for Q1 2022 (excluding discrete items)[235] - Q1 2023 current tax expense includes a $3.2 million unfavorable oil price adjustment related to the government of Gabon's allocation of Profit Oil[235] 17. OTHER COMPREHENSIVE INCOME This note clarifies that all of VAALCO's other comprehensive income (loss) is attributable to currency translation adjustments from TransGlobe's Canadian operations, whose functional currency is the Canadian dollar - VAALCO's other comprehensive loss for the three months ended March 31, 2023, was $(0.1) million[236] - This loss entirely arises from currency translation adjustments of TransGlobe Energy Corporation's Canadian operations, whose functional currency is the Canadian dollar, into USD[236][237] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's analysis of VAALCO's financial condition, operational results, and key developments for the reported periods CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This section outlines the inherent risks and uncertainties associated with forward-looking statements, emphasizing potential material differences in actual results - The report contains forward-looking statements subject to risks such as commodity price volatility, operational hazards, regulatory changes, and economic conditions, which could cause actual results to differ materially from expectations[239][240][245] - VAALCO disclaims any duty to update forward-looking statements, which are based on current expectations and best judgment, but actual events and results may vary materially[243][244] INTRODUCTION This section introduces VAALCO as an independent energy company engaged in crude oil, natural gas, and NGLs operations across multiple regions - VAALCO is a Houston-based independent energy company focused on the acquisition, exploration, development, and production of crude oil, natural gas, and NGLs[245] - The company operates in Gabon, Egypt, and Canada, with development and exploration opportunities in Equatorial Guinea, and has discontinued operations in Angola and Yemen[245] RECENT DEVELOPMENTS This section highlights recent corporate actions, including dividend policy changes, share buyback programs, and the impact of the TransGlobe merger - VAALCO increased its quarterly cash dividend policy to $0.0625 per common share, with payments made on March 31, 2023, and declared for June 23, 2023[246] - A share buyback program was ratified for up to $30 million over 20 months, funded by cash on hand and cash flow from operations[248] - The TransGlobe merger, completed on October 13, 2022, increased 'Crude oil, natural gas and NGLs sales' by $43.7 million and 'Net income' by $9.7 million for Q1 2023[250][252] - VAALCO entered into a senior secured reserve-based revolving credit facility (RBL Facility) of up to $50.0 million on May 16, 2022[253] Recent Operational Updates This section provides updates on drilling campaigns, infrastructure transitions, and production enhancements across VAALCO's operating assets - In Gabon, VAALCO completed its 2021/2022 drilling campaign, transitioned to a Floating Storage and Offloading (FSO) vessel in October 2022, and commissioned a gas lift compression system in Q1 2023, enhancing production and reliability[254][255] - In Egypt, VAALCO completed the Arta 77Hz horizontal well and drilled and cased five development wells (EA-53, K-81, K-79, Arta-80 Red Bed, and Arta 81 Red Bed) in Q1 2023, with initial production rates ranging from 192 bopd to 504 bopd[258][260][262][263][264] - In Canada, two wells were tied in and producing in early 2023, and the 2023 drilling campaign commenced in January 2023 with two wells expected online in May 2023[268][269] ACTIVITIES BY ASSET This section details production volumes, working interests, and development plans for VAALCO's key assets in Gabon, Egypt, Canada, and Equatorial Guinea - Gabon's Etame Marin Block has 17 producing wells, with Q1 2023 production of 1.603 million barrels (820 thousand barrels net)[270] - In Egypt, VAALCO holds a 100% working interest in the Eastern Desert and Western Desert concessions, with Q1 2023 Eastern Desert production of 903 thousand barrels (616 thousand barrels net)[271] - Canadian assets in Harmattan produced 239 thousand barrels of oil equivalent (211 thousand barrels of oil equivalent net) in Q1 2023 from Cardium light oil and Mannville liquids-rich gas assets[273] - VAALCO's participating interest in Equatorial Guinea's Block P increased to 60.0% in February 2023, and the Venus development plan has been initiated[274] DISCONTINUED OPERATIONS - ANGOLA AND YEMEN This section confirms the classification of Angola and Yemen operations as discontinued, noting their immaterial financial impact - The Angola and Yemen segments are classified as discontinued operations, having no material impact on VAALCO's financial position, results of operations, or cash flows for Q1 2023 and Q1 2022[276][277] CAPITAL RESOURCES AND LIQUIDITY This section analyzes VAALCO's cash flows, capital expenditures, hedging strategies, and overall liquidity position, including future commitments Cash Flow Summary (Three Months Ended March 31) (in thousands) | Cash Flow Activity | 2023 (in thousands) | 2022 (in thousands) | | :--------------------------------------- | :------------------ | :------------------ | | Net cash provided by (used in) operating activities | $42,006 | $(758) | | Net cash used in investing activities | $(27,700) | $(23,148) | | Net cash used in financing activities | $(13,539) | $(2,118) | - Accrual basis capital expenditures for Q1 2023 were $25.4 million, primarily for development drilling programs in Egypt and Canada[281] - VAALCO uses commodity derivative instruments (swaps and costless collars) to hedge price risk for a portion of its anticipated crude oil production, as required when drawing on the RBL Facility[285][286] - Unrestricted cash on hand was $52.1 million at March 31, 2023[288] - VAALCO believes it has sufficient liquidity from existing cash balances and cash flow from operations (including Egypt and Canada segments) to support current cash requirements[296] - The Egypt Merged Concession Agreement requires $10.0 million annual modernization payments from February 2024-2026 and minimum financial work commitments of $50.0 million per five-year period[297][308] - The RBL Facility has an aggregate maximum principal amount of up to $50.0 million, with a borrowing base of $50.0 million as of March 31, 2023, and no outstanding borrowings were reported[298][299][303] - The estimated abandonment funding for the Etame Marin block is approximately $81.3 million ($47.8 million net to VAALCO) on an undiscounted basis, with a fund balance of $10.7 million ($6.3 million net) at March 31, 2023[306] - VAALCO is part of the BWE Consortium, provisionally awarded two blocks in Gabon, committing to seismic campaigns and drilling exploration wells[311] - Key trends and uncertainties include geopolitical climate (Russia-Ukraine, China slowdown) impacting global supply chain, inflation, OPEC+ production cuts (Gabon voluntary reduction of 8 thousand barrels per day from May 2023), ESG focus, and potential COVID-19 impacts[325][326][327][328][329][330] RESULTS OF OPERATIONS This section provides a detailed comparison of VAALCO's financial performance, including revenues, expenses, and net income, for the reported periods - Net income decreased to $3.5 million for Q1 2023, compared to $12.2 million for Q1 2022[336] - Crude oil and natural gas revenues increased by $11.7 million (17%) to $80.4 million in Q1 2023, driven by higher sales volumes from the TransGlobe acquisition, partially offset by lower realized sales prices[337][340] Revenue Change Breakdown (Q1 2023 vs Q1 2022) (in thousands) | Factor | Change (in thousands) | | :----- | :-------------------- | | Price | $(53,832) | | Volume | $66,690 | | Other | $(1,111) | | Total | $11,747 | Production and Sales Volumes & Prices (Three Months Ended March 31) | Item | 2023 | 2022 | | :------------------------------------------ | :--- | :--- | | Net crude oil, natural gas and NGLs production (MBoe) | 1,647 | 725 | | Net crude oil, natural gas and NGLs sales (MBoe) | 1,224 | 616 | | Average realized crude oil, natural gas and NGLs price ($/Boe) | $65.68 | $109.65 | | Average Dated Brent spot price ($/Bbl) | $81.07 | $100.87 | - Production expenses increased by $9.8 million (54%) to $28.2 million in Q1 2023, primarily due to the TransGlobe combination and higher operating costs, though per barrel production expense decreased to $23.91 per barrel from $29.83 per barrel due to higher sales volumes[343] - Depreciation, depletion and amortization costs increased by $19.7 million (423%) to $24.4 million in Q1 2023, mainly due to the FSO, field reconfiguration capital costs at Etame, and the fair value step-up of TransGlobe assets[345] - Derivative instruments gain (loss), net changed from a loss of $(31.8) million in Q1 2022 to an immaterial gain of $0.021 million in Q1 2023[350] - Income tax expense (benefit) shifted from a benefit of $(4.6) million in Q1 2022 to an expense of $14.8 million in Q1 2023[353] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details VAALCO's exposure to various market risks, including foreign exchange risk, counterparty risk, and commodity price risk, and outlines the potential financial impact of adverse changes in these areas - VAALCO is exposed to foreign exchange risk, particularly with the Central African CFA Franc (XAF) in Gabon (net monetary assets of $22.6 million at March 31, 2023) and the Canadian dollar (CAD) in Canada, where a 10% XAF weakening against the USD would reduce net assets by $2.1 million[356][357] - Counterparty risk on derivative instruments is mitigated by engaging creditworthy financial institutions[359] - Commodity price risk is a major exposure, where a $5 per barrel decrease in crude oil price would cause a $2.3 million decrease per quarter in Gabon revenues/operating income (based on 459 thousand barrels sales) and a $1.1 million decrease in Canada (based on 211 thousand barrels sales)[361][364] - VAALCO had unexpired derivative instruments covering approximately 287 thousand barrels of production through June 2023 and an additional 285 thousand barrels from July through September 2023 to hedge against crude oil price declines[366] - Interest rate risk is minimal as of March 31, 2023, with no amounts drawn under the RBL facility[367] ITEM 4. CONTROLS AND PROCEDURES This section reports that VAALCO's disclosure controls and procedures were not effective as of March 31, 2023, due to previously disclosed material weaknesses. However, management believes the financial statements are fairly presented and is actively implementing a remediation plan, with integration of TransGlobe's controls expected in Q2 2023 - VAALCO's disclosure controls and procedures were not effective as of March 31, 2023, due to material weaknesses in internal control over financial reporting[368] - Despite the material weaknesses, management believes the consolidated financial statements in this report fairly represent the company's financial condition, results of operations, and cash flows[369] - VAALCO is integrating TransGlobe's internal controls and plans to incorporate them into the evaluation of disclosure controls and procedures starting in Q2 2023[370] - A remediation plan is being implemented to address the material weaknesses, with expected completion by the end of fiscal year 2023[371] PART II. OTHER INFORMATION This part contains additional information not covered in the financial statements, including legal matters, risk factors, equity sales, and exhibits ITEM 1. LEGAL PROCEEDINGS This section states that VAALCO is involved in litigation and governmental/regulatory proceedings in the ordinary course of business, but management believes none of these are material to the company's operations - VAALCO is subject to litigation claims and governmental and regulatory proceedings arising in the ordinary course of business[374] - Management's opinion is that none of the current claims and litigation are material to the company's business[374] ITEM 1A. RISK FACTORS This section refers readers to the comprehensive discussion of potential risks and uncertainties in VAALCO's 2022 Form 10-K, stating that there have been no material changes in these risk factors since that filing - For a discussion of potential risks and uncertainties, readers are referred to Item 1A. 'Risk Factors' in VAALCO's 2022 Form 10-K[376] - There have been no material changes in the company's risk factors from those described in its 2022 Form 10-K[376] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section reports no unregistered sales of equity securities during the quarter and provides details on VAALCO's dividend policy and the ongoing share buyback program, including the number of shares repurchased and the remaining authorization - There were no unregistered sales of equity securities during the quarter ended March 31, 2023[377] - VAALCO declared a quarterly cash dividend of $0.0625 per common share, paid on March 31, 2023, and declared for June 23, 2023[379] - A share buyback program was approved on November 1, 2022, for an aggregate purchase of up to $30 million of common stock over 20 months[381] Issuer Repurchases of Common Stock (Quarter Ended March 31, 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Amount Remaining for Purchase | | :--------------------------- | :------------------------------- | :--------------------------- | :------------------------------------ | | January 1, 2023 - January 31, 2023 | 350,832 | $4.27 | $25,502,669 | | February 1, 2023 - February 28, 2023 | 326,992 | $4.59 | $24,003,172 | | March 1, 2023 - March 31, 2023 | 303,176 | $4.95 | $22,503,206 | | Total | 981,000 | | | - Subsequent to March 31, 2023, and through May 9, 2023, an additional 666,812 shares were repurchased, leaving $19.503 million available under the program[383] ITEM 6. EXHIBITS This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents, employment agreements, Sarbanes-Oxley certifications, and Inline XBRL documents - Exhibits include corporate governance documents (Restated Certificate of Incorporation, Bylaws), employment-related agreements (Separation Agreement, Consulting Agreement), Sarbanes-Oxley Section 302 and 906 certifications, and Inline XBRL documents[384]