VAALCO Energy Inc

NYSE:EGY

Q1-2025 Earnings Call

[Operator]

Good morning, and welcome to VAALCO Energy's First Quarter 2025 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Chris Delange, Investor Relations Coordinator. Please go ahead.

[Chris Delange]

Thank you, operator. Welcome to VAALCO Energy's First Quarter 2025 Conference Call. After I cover the forward-looking statements, George Maxwell, our CEO, will review operational and financial highlights, discuss our updated operational plans for 2025 and add some closing comments before we take your questions. During our question and answer session, we ask you to limit your questions to one and a follow up. You can always reenter the queue with additional questions. I would like to point out that we posted a supplemental investor deck on our website that has additional financial analysis, comparisons and guidance that should be helpful. With that, let me proceed with our forward-looking statement comments.

During the course of this conference call, the company will be making forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance, and those actual results or developments may differ materially from those projected in the forward-looking statements. VAALCO disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in our earnings release, the presentation posted on our website and in the reports we file with the SEC, including our Form 10-K.

Please note that this conference call is being recorded. Let me turn the call over to George.

[George Maxwell, executive]

Thank you, Chris. Good morning, everyone, and welcome to our first quarter 2025 earnings conference call. In Q1 2025, we delivered net income of $7.7 million or $0.07 per share and adjusted EBITDAX of $57 million. This was driven by NRI production of 17,764 barrels of oil equivalent per day, which was above the high end of guidance. Working interest production of 22,402 barrels of oil equivalent was at the high end of guidance and NRI sales of 19,074 barrels of oil equivalent per day, which was also at the high end of guidance.

Prices in Q1 2025 was nearly flat with Q4 2024, but we have seen a decline in pricing thus far in Q2. We also entered into a new reserves-based revolving credit facility in the first quarter to complement our internally generated cash flow and cash on hand from time to time as needed to fund our growth initiatives. As Ron discussed on the last call, we have an initial commitment of $190 million with the ability to grow to $300 million as we look to fund projects across our diverse portfolio. Over the past 2 years, we have delivered record-breaking operational and financial results while meeting or exceeding our quarterly guidance targets.

Maintaining operational excellence and consistent production across our portfolio is essential to expanding adjusted EBITDAX, which has allowed us to grow inorganically and also to fund organic growth initiatives, better positioning VAALCO for the future. We had a strong start to 2025, but I want to remind everyone that this will be a transitional year as we had production come offline in Q1 at Cote d'Ivoire as planned for the FPSO project, and we are not expecting kicking off the drilling campaign in Gabon until Q3, which means meaningful production uplift should begin at the end of 2025 and into 2026.

Before I go into more detail regarding our assets, I would like to discuss the current macroeconomic environment and discuss how VAALCO is reacting to the uncertainty in the commodity pricing. Given the softening of commodity pricing, in particular, oil, we are looking at ways to reduce our discretionary capital spending and delay some smaller projects. We have decided to cut about 10% from our capital budget in 2025, which includes the drilling program in Canada due to pricing and some smaller projects that can be delayed until we see better commodity pricing stability. Given the strong production performance in Gabon and Egypt thus far in 2025, we believe that the 10% CapEx reduction will not impact our production or sales for the year.

Our guidance for the full year 2025 has remained unchanged with the exception of the 10% reduction in capital. Our long-term projects like the FPSO project in Cote d'Ivoire and our drilling campaign in Gabon are continuing as planned, given that these are long-term projects extending economic field life by adding production and reserves. These projects take multiple years of planning and their economics are evaluated on a longer-term basis. I would also like to point out that there are fiscal benefits in our African PSCs related to lower commodity prices that offer some protection from lower pricing and allow for additional cost pool recovery to encourage continued investment at lower pricing.

Let me now get into the details of some of our assets, starting with Cote d'Ivoire. I would like to remind you that a year ago, we had no production or interest in Cote d'Ivoire. And then in April 2024, we swiftly and efficiently completed the Svenska acquisition, securing a valuable asset. In line with the project time line, the FPSO ceased hydrocarbons production as scheduled on January 31, 2025, with the final lifting of crude oil from the vessel occurring in early February. The vessel is currently on tow to the shipyard in Dubai for refurbishment. Significant development drilling is expected to begin in 2026 after the FPSO returns to service with potential meaningful additions to production from the main Baobab field.

The Council of Ministers recently approved a 10-year extension of the license on CI-40, extending it to 2038. We are making a very sizable investment in this project. But given the license extension and 125% cost oil return on the capital spent, this investment will provide solid economic future growth. In March 2025, we announced a farm-in agreement for the CI-705 block offshore Cote d'Ivoire, where we will operate with a 70% working interest and a 100% paying interest under a commercial carrier arrangement through the seismic reprocessing and interpretation stages and potentially drilling up to 2 exploration wells.

We invested $3 million to acquire our interest in the new block, and we are partnering with Ivory Coast Exploration Oil & Gas, SAS and PETROCI. We plan to conduct a detailed integrated geological analysis to assess and mature our understanding of the block's overall prospectivity. We believe the block is favorably located in a proven hydrocarbon system, the prolific Tano Basin and is approximately 70 kilometers to the west of our CI-40 block. We have demonstrated our ability to acquire, develop and enhance value through accretive acquisitions, and we are excited about the prospects in Cote d'Ivoire.

In Egypt, in the fourth quarter of 2024, we contracted a rig and drilled 2 wells, starting a drilling campaign that has carried into the first half of 2025. In the first quarter of 2025, we drilled a further 5 wells and completed 4 of them with an average 30-day initial production rates of about 120 barrels of oil per day. We are continuing to drill and expect a further 3 to 4 wells to be drilled in the second quarter of 2025 with strong results from the first well in quarter 2. Both the drilling program and the workover program in Egypt add solid production and are economic even in lower-priced environments.

I'm also very proud of our continued performance from a safety standpoint in Egypt. We have not had a lost time incident in 2024. And thus far, in 2025, we have not had a lost time incident, which means that we have now gone over 4.3 million man-hours without an incident, which is a testament to our ongoing commitment to safety. Moving to Gabon. Given that we haven't drilled a well in Gabon for over 2 years, we are pleased with the positive overall production results with strong production uptime and improved decline curves on the wells. We secured a drilling rig in December 2024 for our 2025-2026 drilling program, which is planned to begin in Q3 2025. But the timing of when we start the drilling program is dependent on when the rig will become available from its current commitments. The contract we signed for the rig is for a firm commitment of 5 wells with an option for 5 additional wells.

We are targeting 2 wells to be drilled and 1 completed in 2025 with the remainder of the program to occur in 2026. We have options to drill additional wells if information gathered during the program results in high grading and derisking of already identified well locations. Since the last call, we have continued to review the well sequencing of the program and the testing of the Ebouri shut-in wells. We are pleased that the extended flow test on the Ebouri 4H well has continued into the second quarter with the well producing at a rate of around about 1,000 barrels of oil per day. We originally wanted to gather information on the H2S concentrations at this location to aid in equipment design and to evaluate our chemical crude sweetening process.

The well has now flowed for over 4 months with the H2S concentration within our modeling expectations, demonstrating our assessment to chemically treat the oil. The well's production has also helped us to exceed guidance in Q1 2025, while adding some additional production costs for chemicals. This well will be worked over during the program and should provide a further boost to oil production. Regarding our exploration blocks in Gabon, the Niosi Marin and the Guduma Marin, we are working with our partners and the operator, BW Energy, on plans for the 2 blocks moving forward.

A seismic survey to fulfill a work commitment on Niosi is being planned for acquisition in late of 2025 or early 2026. Given the proximity of these blocks to the prolific producing fields of Etame and Dussafu, we are excited about the future possibility for these blocks. Turning to Canada. We successfully drilled 4 wells with lateral lengths of 2.75 miles in early 2024. These wells helped to improve the liquid mix of our production in Canada, adding to the financial performance. As I mentioned in the last call, we also drilled a well in the southern acreage in Q4 2024. Because we have minimal horizontal subsurface information across our southern acreage, this well was drilled to help us better understand the acreage and potentially add reserves.

The well floated around 200 barrels of oil per day in its initial testing phase, and we have shut the [ well while ] we evaluate options to tie in the well into production. This positive result could lead to future reserves and resources for our southern acreage. While we remain optimistic about the drillable inventory in Canada, we did decide not to drill wells this year due to the current commodity price uncertainty. We will continue to monitor the performance of our wells and plan for future drilling opportunities. [Indiscernible] Equatorial Guinea, we are currently conducting our front-end engineering design or FEED study.

We continue to anticipate the completion of the FEED study will lead to an economic final investment decision, or FID, in 2025, which will enable the development of the [ FEED or Venus ] discovery. We remain excited to proceed with our plans to develop, operate and begin producing from the discovery in Block P offshore Equatorial Guinea over the next few years. I would now like to discuss some of our financial results. In the first quarter, we spent $58 million in capital expenditures on a cash basis, which was below our guidance range.

Our unrestricted cash balance at March 31, 2025, was $40.9 million, which is down about $40 million from year-end 2024. This was driven by the elevated capital spending and the state lifting in Gabon to settle our in-kind taxes of about $30 million. We believe that this will likely be our only state lifting in 2025 in Gabon. As we have previously stated, our foreign income taxes are settled by the government through oil liftings in Gabon and Cote d'Ivoire and the government taking their share in Egypt.

The state lifting in Gabon in Q1 also drove our outflow in our working capital. While we had an outflow in working capital, the good news is that we did reduce our Egyptian receivables balance, which marginally offset the state lifting impact. We completed the first quarter bank debt-free with an undrawn $190 million credit facility available to fund our capital projects. Let me now turn to guidance. I would like to point out that our full guidance breakout is in the earnings release and in our supplemental slide deck on our website with production breakout of both working interest and net revenue interest by asset area.

As I stated earlier, we are reducing our full year capital budget from $270 million to $330 million down to $250 million to $300 million, and our full year production and sales guidance will remain unchanged. For the second quarter, we're expecting to spend between $65 million and $85 million in capital expenditures. NRI production is expected to be between 15,400 and 16,800 barrels of oil equivalent per day, and sales are expected to be from 17,800 to 19,300 barrels of oil equivalent per day.

In Q2, we expect 3 liftings to occur in Gabon, which is why our sales guidance is higher than our production guidance. As a reminder, the FPSO project in Cote d'Ivoire began in Q1 and the production and sales for the Baobab field are not expected until the FPSO return in 2026. Production expenses for Q2 are expected to be in line with Q1 2025 when normalized for one-time expenses. Given the current commodity price uncertainty, we are continuing to watch every dollar we spend. And just like with our capital spending, we are looking to defer discretionary spending in operating and G&A expenses as well.

Turning to hedging. We have added some additional hedges, and we now have 70,000 barrels of oil per month hedged in Q2 with a [ floor ] of $65. In July, we have 160,000 barrels of oil per month hedged with a [ floor ] of about $65. And in August and September, we have 60,000 barrels of oil per month with a [ floor ] of $65. In addition, we have gas hedges amounting to 75% of our anticipated gas production in place from May through October of this year. Our hedging program has always looked to help mitigate risk and protect our commitment to shareholder returns. As you have heard this morning, we have a track record over the past several years of not only delivering strong operational and financial results at or above expectations every quarter, but also making highly accretive acquisitions that have materially grown VAALCO.

We have an exciting array of organic projects that we are executing over the next few years and that we expect will double our size and scale and enhance our ability to generate even more cash flow in the future for growth. Next week, we have our Capital Markets Day, where we will go into additional details about the upside capabilities across our diversified asset portfolio. And I want everyone to come away from our Capital Markets Day is that VAALCO is on the right trajectory with multiple high-quality upside opportunities across our portfolio.

Additionally, we have an outstanding team whose operational, technical and financial acumen will be on full display during the presentation. This, coupled with our track record of meeting or exceeding expectation, should instill the investment community with confidence that we can deliver on our commitments that will drive our valuation to a level more in line with the cash flows and NPV potential VAALCO can deliver in the future. Our strategy remains unchanged to operate efficiently, invest prudently and maximize our asset base and look for accretive opportunities.

We are in an enviable financial position with a much stronger and diverse portfolio of producing assets with significant future upside potential. Our entire organization is actively working to deliver sustainable growth and strong results to continue funding our capital programs whilst also returning value to our shareholders through a top quartile dividend yield. In Q1 2025, we paid a quarterly cash dividend of $0.0625 per common share or around $6.5 million. We also announced the second dividend payment of 2025, which will be paid later in June, and we remain on pace to deliver another $0.25 per share annual dividend for 2025, which at our current share price is a dividend yield of over 7.5%.

After paying the second quarter 2025 dividend, VAALCO will have returned over $100 million to our shareholders through dividends and share buybacks since 2022 when the first dividend payment was made. We are truly excited about the future, and VAALCO now has multiple producing areas and future prospects that have diversified our risk profile and our sources of income for many years to come. Our disciplined approach to maximizing value for our shareholders by delivering growth in production, reserves and cash flow has not been reflected in our stock price, but we believe that we will see the market begin to properly value VAALCO as we execute on our organic opportunities. Thank you. And with that, operator, we are ready to take questions.

[Operator]

[Operator Instructions] And the first question comes from Jeff Robertson with Water Tower Research.

[Jeffrey Robertson, analyst]

George, can you comment on the production profile at Gabon over the back half of 2025 and how it fits into your guidance? And I'm wondering if you have any downtime in the numbers that would be caused by the drilling campaign that you'll start in the third quarter?

[George Maxwell, executive]

Yes, we can. I mean the first answer to that is no, we don't have any significant planned downtime related to the drilling program for 2025. However, we do have planned preventative maintenance downtime in July. We have -- in relation to the drilling program, we do see a slight uptick in production towards the end of Q4, which is the delivery of the first well that should be back -- should be drilled and on production in Q4. But there's not -- within our guidance, there's not a significant amount of production included from the drilling campaign.

[Jeffrey Robertson, analyst]

So would the third quarter then, would you expect that to be the lowest quarter of the year for production given the maintenance schedule?

[George Maxwell, executive]

Yes, we would because we're going to be, I think, between 7 and 10 days.

[Jeffrey Robertson, analyst]

And in CI, can you talk at all yet about how the development drilling campaign starts to look in 2026? And are you looking for -- are you and the partner looking for a rig there? Or when might you expect to start that? I know you'll probably talk about that in much more detail next week.

[George Maxwell, executive]

Yes. We have some more detail on that next week. Obviously, the Phase 5 drilling is scheduled to start mid-year 2026. The operator is actively working on securing the rig, and we'll wait for the operator to make that announcement as and when that's concluded. But right now, everything is on schedule for midyear 2026 for that campaign.

[Operator]

And your next question comes from Stephane Foucaud with Auctus Advisors.

[Stephane Guy Foucaud, analyst]

I guess in the context of oil price being lower and a lot of activity coming in 2026, 2027, [ especially Gabon ] [Indiscernible] Cote d'Ivoire, EG, if oil price were to remain low, I was wondering how you rank the project or how would you prioritize those projects?

[George Maxwell, executive]

Okay. Well, it depends, obviously, what you classify as a low oil price. Obviously, we've always been sensitizing between around $65 when it comes to our dividend, when it comes to our capital project. And as you're aware, Stephane, particularly in Africa, the PSCs are extremely forgiving on low oil prices and in many cases, remain very economic at low oil prices as your [ cost oil ] entitlement increases. So -- when we look at the priority of projects, obviously, anything that can be an enhancement of production through existing facilities in Gabon or in CDI is much more economic than a Blue water development.

So that being said, the biggest blue water development we have would be in Equatorial Guinea. And as we've already communicated to market, that particular project, given its short tenure of up to 60 months of production and the terms of that PSC do make it very attractive. So the bolt-on opportunities would obviously what we would look at if oil prices fell below the $60 levels on a longer-term basis. But when we did do the analysis of the only Blue water development we have on EG, we did sensitize that down to $50 when we did it at that time. Now -- the other thing we haven't seen quite yet in a lower oil price environment is the service and the equipment market moving towards lower prices to enable those developments to be far more economic.

So if there were a sustained low oil price environment, we would expect to see on the service side, a corresponding reduction in the cost that would support further economic development even at lower prices. Just to add on to that, we are starting to see some softening of supplier costs as well in the industry.

[Stephane Guy Foucaud, analyst]

Okay. And my follow-on, so Ebouri seems to be going very well, 1,000 barrels per day continued in Q2. How does that compare with your expectation? Is it better? I assume is it in line? And what does that mean for the development in terms of economics?

[George Maxwell, executive]

Okay. It doesn't mean anything. I mean Ebouri 4H was -- we took it online in order to get further information on the reservoir performance, further information on the H2S concentrations. And one of the things we've always cautioned about 4H, this well was shut in for about 8 years, 9 years and is still running on the older versions of the ESPs. So we've taken advantage of the resilience of that well to continue to produce beyond our testing expectations. When we look at what impact does it have on the redevelopment of Ebouri, it just gives us further information and a greater degree of confidence that the solution that we've established on downhole chemical scavenging is going to be more than sufficient to continue that development in Ebouri.

So it's a great boost to Q1. It was unplanned. And for our guidance, 4H continues to produce, but it's also something we've taken out of our guidance because it really is just a test well.

[Operator]

[Operator Instructions] Your next question comes from Chris Wheaton with Stifel.

[Christopher Wheaton, analyst]

A couple of questions from me really around working capital, if I may. Firstly, on Gabon, are you able to give an indication of how big the working capital swing later in the year will be as the government lifting is absorbed. Looking at the difference between your sales and your production numbers looks to be about $20 million or so at 1Q oil prices. Secondly, another -- a broader question on working capital. We've seen reasonably meaningful outflow over the last 2 years now. I think cumulatively since beginning of '23 is a total of $49 million of working capital. So I'm interested in, again, going back -- coming back to my first question, how much of that is the Gabon lifting, but also if there's a chance that some of this working capital is structural that it won't actually come back into the business in the next -- over the next sort of 9 to 12 months or so. Those are kind of my key questions for now.

[Ronald Bain, executive]

It's Ron. Thanks for that. Let me take Gabon. As you can see in Q1, we had the state lift in February. And you can see on the earnings release that the cash equivalent value for that oil lift for us was just over $30 million. There was also [ co-lifts ], both partner lifts and state lifts for obviously CDI in Q1, too. And I think that's about another $1 million. So we actually paid cash taxes through those oil lifts of about $31 million in the quarter. And that really is the outflow or driving the outflow in working capital in Q1. We had some receivables collections, which obviously helps minimize that overall impact.

Now what that will do is effectively, that really represents our taxes for the year, we believe, in Gabon, and there'll be nothing in CDI because we're out production in 2025. So what you will see is your foreign tax payable and the balance sheet start to grow over the next -- the coming months, 6 to 9 months. So if anything, it's going to be a working capital improvement, Chris, because we won't have a state lift until into 2026 in Gabon, and we certainly won't have a state lift until 2026 in CDI. Hopefully, that helps answer that question.

[Christopher Wheaton, analyst]

No, that's great. And can I just have a follow-up on Egypt, please? You've got your $32 million back in the quarter from Egypt, which I have to say very well done. Does that represent all of those of the aged receivable that was outstanding that you've managed to get reclassified? I think it was in the third quarter of last year, reclassified as a payable. So it looks like you've got most of that receivable issue in Egypt resolved now. I guess the question is, if that's been resolved, does that mean the Egyptian government is expecting you to put some of that back into more CapEx in Egypt because obviously, that would be the quid pro quo, but it feels like at current oil prices, that isn't probably what you ought to be doing.

[George Maxwell, executive]

Again, great question, Chris. The situation in relation to Egypt, first and foremost, let me just make sure and clarify. The movement of $32 million, I think you believe you see in the cash flow is in relation to the contractual backdated entitlement, which at one point in time was over $60 million. We've managed to collect the bulk of, in fact, all of that over the last year and a bit. Now what I would say is we haven't seen a $30 million reduction in Egyptian receivables in the quarter. The overall position on receivables improved about $8 million or $9 million because although there is payments and offsets going against that contractual backdated because it's the oldest, your current receivables are actually -- there's a detrimental issue there.

So net-net, Chris, I just want to make sure that people understand the receivables did not come in by $30 million. They came in by closer to $10 million. Now what that also means is, as you know, we started drilling in the end of 2024. I think we completed 2 wells in Q4 2024, and we've been drilling in Q1. And I think we've completed about 5 wells in Q1. That current campaign, I think, is somewhere between 12 and 15 wells should be completed by the end of Q2. So we will be in a situation where we've met our contractual requirements and indeed our work program that we agreed with EGPC.

And I'd just, again, like to thank our local team who've done a great job with EGPC and making sure that everyone at the end of the day are aligned to the verbal agreements that we have with one another.

[Operator]

Seeing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to George Maxwell for any closing remarks.

[George Maxwell, executive]

Thank you very much. I think we've had -- as I mentioned in the call earlier, we've had a very strong Q1. It rolled right off of a strong Q4 in 2024. The company has obviously got its Capital Markets Day on Wednesday next week, and the details of that are available on our website, where we'll be giving an outline more out towards 2028 and 2029. One of the key messages, obviously, with the growth in our organic portfolio, we've created a number of opportunities and developments for the company to grow over the coming years.

In that position, we're also very confident with the resources that are available within the company, both human and financial, that we currently have at our disposal, sufficient resources to execute the plans that you're going to see on Wednesday. And that's a key message that we're not looking to secure any further resources in order to deliver the plans that you're going to see on Wednesday. And with that said, I'd like to thank everyone for attending the conference and clearly thank all my colleagues in VAALCO for the efforts that have clearly put in for Q1 and look forward to talking to you again in the Q2 results. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.