VAALCO Energy, Inc. reported net income attributable to VAALCO of $12.5 million or $0.22 per diluted share for the third quarter of 2010 compared to net income attributable to VAALCO of $4.2 million or $0.07 per diluted share for the comparable period in 2009.
Third quarter 2010 revenues were $32.6 million compared to $29.3 million in the third quarter of 2009. Third quarter 2010 results reflect higher oil prices when compared to the third quarter of 2009.
Exploration and Development Update
The Company provided the following update on its exploration and development program.
VAALCO has an ongoing drilling program offshore Gabon. As previously announced, VAALCO successfully completed the Ebouri 4H development well, which began producing oil in May 2010, and a workover of the Ebouri 3H well to replace submersible pumps. The third well in the drilling program resulted in a discovery on the Southeast Etame prospect (photo) . Various completion options for the Southeast Etame discovery are being considered as part of a study on future development plans for the Etame Marin block. The fourth well in the drilling program was a horizontal, sub-sea completed development well that replaces the original vertical field discovery well (ET-1V) in the Etame field. The Etame 7H well is expected to begin producing oil before the end of 2010.
The remaining wells in the ongoing drilling program offshore Gabon are as follows:
* ETBSM-2H Development well in the South Tchibala field which is being drilled from the existing Avouma/South Tchibala platform at an estimated gross cost of $22.5 million ($6.8 million net to VAALCO). After a successful drilling of the well, the completion assembly slipped through the elevator as it was being lowered in the hole. The top of the assembly has been tagged at 29 meters below the rotary table and operations are underway to retrieve the assembly. VAALCO will provide an update when these operations are completed.
* ETOMG-1 Exploration well on the Omangou prospect to test both the Gamba and Dentale reservoirs. The Omangou prospect is located approximately two miles southeast of the Ebouri platform and approximately four miles to the northwest of the center of the Etame field. The well is expected to be drilled in 2010 at a gross cost of $12.5 million ($3.8 million net to VAALCO).
The Company’s subsidiary, VAALCO Gabon Etame, Inc., operates and owns a 28.07% net interest in the Etame Marin block. Other partners in the block are Sinopec Group (31.36%) through its subsidiary, Addax Petroleum Etame, Inc., Sasol Petroleum Etame Limited (27.75%), Sojitz Etame Limited (2.98%), PetroEnergy Resources Corp. (2.34%) and Tullow Oil Gabon SA (7.5%).
Onshore Gabon, the Company has a working interest in the Mutamba Iroru block located near the coast in central Gabon. In October 2010, the Company negotiated a second exploration period extension, expiring in May 2012, with the Republic of Gabon. As previously announced, VAALCO has reached an agreement with Total Gabon establishing a joint operation on the Mutamba Iroru block. VAALCO expects the joint operation to result in seismic reprocessing in 2010 and 2011 followed by the drilling of a well in 2012.
VAALCO has a production sharing contract for a 40% working interest in Block 5 offshore Angola. Plans to drill two exploration wells have been delayed due to a non-performing partner.
In early 2010, the Company began working with the government of Angola to obtain both a replacement partner and a time extension for the drilling of the exploration wells committed to under its contract with the Angolan national oil company, Sonangol P&P. In an October 2010 meeting, the Sonangol Block Chairman confirmed that Sonangol and the Ministry of Petroleum have approved a one-year extension for the drilling of the two commitment wells. Sonangol also stated that the approval will be published in Angola’s Official Gazette, Diario da Republica.
The Company has opened a data room for potential partners to evaluate the opportunity. The data room will remain open until the end of November 2010 and interested companies will be referred to Sonangol for the negotiations and selection process.
With the expected time extension and the assignment of a replacement partner or partners, the Company estimates the drilling of the two Block 5 exploration wells will take place in the second half of 2011.
Financial Results Discussion
During the third quarter of 2010, the Company sold approximately 429,000 net barrels of oil equivalent at an average price of $76.17 per barrel compared to 436,000 barrels of oil equivalent at an average price of $67.07 per barrel in the third quarter of 2009. The Company reported operating income of $21.6 million in the third quarter of 2010 compared to operating income of $19.6 million in the third quarter of 2009.
Crude oil production averaged 20,600 barrels of oil per day (bopd) in the three months ended September 30, 2010 compared to approximately 23,300 bopd in the three months ended September 30, 2009. The decline in the bopd between the periods is primarily attributable to natural decline and increasing water cuts from mature wells.
Total production expenses were $4.8 million for the 2010 third quarter compared to $5.7 million in the prior year quarter. The decline in the 2010 third quarter production expense was primarily due to the domestic market obligation (“DMO”) invoice from the Republic of Gabon which was lower than the amount estimated by the Company. In addition, production expense for the third quarter of 2009 was impacted by one-time floating production, storage and offloading (FPSO) labor costs associated with a labor law change. The Company matches production expenses with crude oil sales. Any production expenses associated with unsold crude oil inventory are capitalized.
Exploration expense was $0.7 million in the third quarter of 2010 compared to $0.9 million of expense in the comparable period in 2009.
Income tax expense for the third quarter of 2010 was $7.4 million compared to $13.3 million in the 2009 third quarter. Income tax was lower due to a higher percentage of crude sales allocated as “cost oil” versus “profit oil” which is a result of the expenditures associated with the drilling program.
On September 30, 2010, the Company had unrestricted cash balances of $91.2 million and no debt. The Company expects its cash balances plus cash from continuing operations will be more than sufficient to fund the Company’s exploration and development programs in Gabon and Angola.
Source: PRNewswire, November 9, 2010;