VAALCO Energy: A New Company Is Born (NYSE:EGY)

Introduction

The American oil producer VAALCO Energy (NYSE:EGY) released its third quarter of 2022 results on November 8, 2022.

Note: This article is an update of my article published on September 27, 2022. I have followed EGY quarterly since April 2014.

However, VAALCO Energy has changed drastically since October 13, 2022:

On October 13, 2022, the Company and AcquireCo completed the previously announced business combination with TransGlobe whereby AcquireCo acquired all of the issued and outstanding common shares of TransGlobe and TransGlobe became a direct wholly owned subsidiary of AcquireCo and an indirect wholly owned subsidiary of the Company pursuant to an arrangement agreement entered into by the Company, AcquireCo and TransGlobe on July 13, 2022. (10-Q Filing)

For those who want to know more about the above acquisition, I recommend reading my article published on July 16, 2022.

Thus, the third quarter will be the last quarter on a standalone basis for VAALCO Energy. I will also indicate what has changed notably between the end of September and November.

1 – 3Q22 production and revenue snapshot

Oil Production was 9,157 Bop/d during 3Q22 (10,525 WI Bop/d), up 19% over the same period a year earlier.

Total revenues for 3Q22 were $90.021 million, with oil and gas revenues at $78.10 million. Oil price averaged $103.61 in 3Q22.

The company sold a record 731K Barrels of oil this quarter at an average price of $103.61 per barrel.

2 – Stock performance

EGY is up 28% on a one-year basis, underperforming most of its peers. EGY has dropped significantly since the company announced its merger with TransGlobe and did not recover after that.

3 – Investment thesis and Recent development

I have been in and out of EGY for many years but have also kept a significant long-term position.

I still like the business model, even if I had reservations about the recent merger.

One positive is that EGY is now a diversified small E&P company, making the business model stronger and less risky. It is a crucial point when we are dealing with oil stocks.

The new company is bigger and more complex. Unfortunately, It is too early to venture a valid opinion about Newco until we get a couple of quarters and witness how the merger works to benefit the balance sheet and its shareholders. Sometimes, a good deal at the business level can be terrible for shareholders, and I think it is the case here.

One regret is that VAALCO sacrificed an excellent growth potential attached to its assets in Gabon and Equatorial Guinea that I see permanently diluted in this merger.

Thus, I recommend using about 40%-45% of your position to trade EGY short-term LIFO. It has been my recommendation for many quarters.

VAALCO Energy – 3Q22 Balance Sheet (Preliminary data available) – The Raw Numbers

VAALCO Energy	3Q21	4Q21	1Q22	2Q22	3Q22
Total Oil and Gas Revenues in $ million	63.95	56.38	68.66	110.99	78.10
Total Revenues EGY in $ million	55.90	65.20	77.60	127.51	90.02
Net income In $ million	31.72	34.36	12.16	15.10	6.87
EBITDA $ million	27.32	30.05	45.17	81.91	43.88
EPS diluted in $/share	0.53	0.58	0.21	0.25	0.11
Operating cash flow in $ million	33.56	3.40	-0.76	69.77	60.69
CapEx in $ million	4.16	8.10	23.15	37.13	43.57
Free Cash Flow in $ million	29.40	-4.70	-23.91	32.64	17.12
Total cash $ million	52.84	48.68	18.94	53.06	69.29
Total Debt and Op. Lease liability (current and non-current) In $ million	0	0	0	0	0
Share Outstanding diluted in millions	58.92	59.00	59.18	59.36	59.45/108.75*
Quarterly Dividend $/share	0	0	0.0325	0.0325	0.0325
Oil Production	3Q21	4Q21	1Q22	2Q22	3Q22
Oil Production in Boep/d average (“NRI”)	7,694	7,554	8,051	9,211	9,157
Quarterly oil Production K Boe	741	695	725	958	731
Oil price realized $/ Oz	73.02	77.31	109.65	113.38	103.61

Click to enlarge

Data Source: Company 10-Q filing.

* In the 10-Q: On October 13, 2022, in connection with the closing of the Arrangement, the total number of authorized shares of common stock of the Company was increased from 100 million to 160 million, and VAALCO issued approximately 49.3 million shares to TransGlobe’s shareholders.

Analysis: Revenues, Total Debt, Cash, and Preliminary Oil Production

1 – Total revenues were $90.021 million in 3Q22

1.1 – Quarterly Revenues

Revenues for the third quarter of 2022 were $90.02 million compared to $63.95 million for 3Q21. Net income was $6.87 million or $0.11 per share compared to $31.72 million in 3Q21.

The adjusted net income was $33.3 million in 3Q22 or $0.56 per share. The Adjusted EBITDAX totaled $42.4 million in 3Q22.

George Maxwell, VAALCO’s Chief Executive Officer, said in the conference call:

We continued our solid financial and operational results in the third quarter. We benefited from sustained high Brent pricing over $103 per barrel and solid sales of 731,000 barrels. This combination allowed us to continue to generate significant cash flow, execute on our accretive growth strategy and fully fund our capital commitments. We remain committed to paying out dividends to our shareholders. And with a debt-free balance sheet, we are clearly in a very strong financial position.

2 – Free cash flow is $17.12 million in 3Q22

Note: The generic free cash flow is the cash for operating activities minus CapEx.

The trailing 12-month free cash flow for VAALCO was $21.15 million. EGY recorded a third quarter FCF estimated at $17.12 million.

The company funded $43.57 million cash in CapEx during 3Q22 with cash on hand and cash from operations of $60.69 million.

The company announced a quarterly dividend of $0.0325 per share or a yield of 2.64%. The company expects an increase of the quarterly dividend to $0.25 per share starting 1Q24. Also, EGY ratified and approved a share buyback program for an aggregate purchase of currently outstanding common stock up to $30 million.

CEO George Maxwell said in the conference call:

On October 31, we reiterated our plan to increase our dividend to $0.25 per share annually, commencing in Q1, 2023. When you combine the increased dividend with our buyback program, we will be returning about $0.50 per diluted share back to our shareholders in 2023.

3 – The company is debt-free and has a cash position of $69.29 million in 3Q22

4 – Oil-equivalent production and other considerations

4.1 – Daily oil production NRI

Production for the third quarter of 2022 was 9,157 NRI* Bop/d (10,525 WI), up 14.9% from the same quarter a year ago and up 14.4% sequentially. VAALCO sold 731K Bo in 3Q22.

The company indicated 4Q22 guidance, including the newly acquired TransGlobe subsidiary. Production is expected to be between 13. k to 16.3K Boep/d NRI or 18K to 20.6K Boep/d WI.

Note*: The production indicated is NRI, which means Net Revenue Interest. It is the total revenue interest that EGY owns in Gabon’s oil and gas lease. The company also reveals the production in WI (working interest), which is higher.

4.2 – 4Q22 Guidance including TransGlobe subsidiary

The company is now indicating production from Gabon, Egypt, and Canada. However, Egypt and Canada’s output does not reflect the entire 4Q22 and will start from October 14.

I noticed that production for Gabon is about to go down 12.1% from 3Q22, which is not a good sign. Also, the oil price average will drop significantly quarter over quarter.

4.3 New reserves, including Egypt and Canada

2P reserves are now significantly higher for the combined company and represent 90% oil.

4.3 – New lower-cost FSO Solution will replace the FPSO in 4Q22

The existing Floating Production, Storage, and Offloading unit (“FPSO”), the Nautipa owned by BW Offshore, has been extended thru October 2022 and will be replaced by the Tilla FSO in 4Q22. Lower operating costs will lead to a higher profit margin for EGY.

The company said it completed the highly complex FSO installation, field grade configuration, and field turnaround in October.

4.4 – Equatorial Guinea – Another exciting Endeavor with the Venus development well.

VAALCO Energy announced the approval of the Plan of Development for Discovery on Block P in Equatorial Guinea on September 26, 2022.

[T]he Government of Equatorial Guinea has approved the Venus – Block P Plan of Development (“POD”). VAALCO has an 80% participation interest in the project and is the operator. Upon the execution of final documents, VAALCO will proceed directly to project execution which targets first oil in 2026 and adds 23.1 million barrels of oil of 2P CPR gross reserves, and 18.5 MMBO of 2P CPR Working Interest (“WI”) reserves (16.2 MMBO net 2P reserves).

VAALCO has a 45.9% WI in Block P Offshore Equatorial Guinea after the Ministry of Mines and Hydrocarbons approved the new amendment to the PSC.

VAALCO will hold an 80% WI in the Venus development in Block P, and Guinea Ecuatorial de Petroleós GEPetrol has a 20% carried working interest; as the result of EGY’s joint venture owner, Atlas Petroleum International, opting not to participate in the POD.

However, Atlas Petroleum denies it opted out of the project. We did not get any information about this issue during the last conference call.

The Block P PSC provides for a development and production period of 25 years from the date of approval of the POD, subject to the completion of final PSC amendment documentation, which we are diligently working towards. We are excited and look forward to adding significantly to our reserves once final documents are agreed and approved.

There is also additional future upside with Europa development and exploration upside with Saturno and Southwest Grande prospects. As part of the development of the Venus discovery we’re planning to spud the first development well in early 2024. Over the next three years we will work to acquire, convert and install production facilities to support the discovery.

Note: The chart is adjusted for dividends.

EGY forms an ascending (rising) triangle pattern with resistance at $5.8 and support at $5, with potential lower support at $4. The ascending triangle is a bullish formation that usually forms during an uptrend as a continuation pattern. However, the pattern points to the downside in this case, suggesting that the stock may drop to $4s before turning bullish.

The general strategy that I usually promote in my marketplace, “The gold and oil corner,” is to keep a core long-term position and use about 40%-45% to trade LIFO while waiting for a higher final price target for your core position between $8 and $10. The recent merger complicates the analysis, and I may change my long-term target depending on the long-term effect of the merger that I still see on the negative side now. I will reevaluate my long-term target in H2 2023.

If you adopt a short-term strategy to complement your investment, I recommend accumulating EGY below $5 with a potential lower support at $4. Conversely, it is reasonable to take partial profits between $5.8 and $6.15.

Oil prices are solid, but they have retraced significantly from the preceding quarter and may drop even more due to the FED’s action and the risk of a recession that could hamper oil demand.

So watch oil prices like a hawk.

Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States to generally accepted accounting principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stocks, one for the long term and one for short-term trading.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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