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Friday, March 31, 2023
VAALCO Energy reported operational highlights for the fourth quarter and full year of 2022 and the reporting includes the combined assets from the business combination with TransGlobe Energy on October 13, 2022 through the end of 2022.
Operational Updates
Equatorial Guinea
VAALCO owns a working interest in Block P offshore Equatorial Guinea, where there are previously discovered but undeveloped resources as well as additional exploration potential. In March 2023, VAALCO held productive meetings with the MMH and its partners in Houston. During these meetings VAALCO finalized multiple substantive documents for Block P which includes the Venus development, relating to the Production Sharing Contract. The Company is working on concluding remaining documents and expect to update the market in the second quarter of 2023.
VAALCO anticipates a strong, efficient and economic development of this exciting discovery with first oil projected for 2026. The Company believes that there are clear strategic benefits in further diversifying the revenue generation and country focus of its portfolio. VAALCO has a proven operating track record for a development of this kind, and it looks forward to demonstrating these capabilities as the Company progresses the Venus discovery into production and further demonstrates the meaningful value of our asset base.
Gabon 2021/2022 Drilling Campaign
VAALCO began its 2021/2022 drilling campaign in December 2021 with the drilling of the Etame 8H-ST development well. The well came online in February 2022. VAALCO moved the contracted jack-up rig to the Avouma platform to drill the Avouma 3H-ST development well. The well was completed and brought online in April 2022 and was another successful development well targeting the Gamba reservoir.
The third well drilled and completed was the South Tchibala 1HB-ST, which discovered two potential Dentale producing zones, the Dentale D1 sand and the Dentale D9. The second completion was in the shallower D1 which included a hydraulic fracture treatment to increase both the production flow rate and recovery from the D1 interval.
Following the completion of the South Tchibala 1HB-ST well, the rig was mobilized to the Southeast Etame North Tchibala (SEENT) Platform to drill the North Tchibala 2H-ST well, targeting the Dentale formation. The North Tchibala 2H-ST well is naturally flowing with no produced water at about 250 gross barrels of oil per day (bopd) and stable reservoir pressure indicating minimal depletion. In the fourth quarter of 2022, the Company performed two workovers, the North Tchibala 1-H well due to a safety valve in the well that required replacement and the South East Etame 4H Well, which restored production of about 1,350 gross BOPD. This well went offline because of an upper electrical submersible pump (ESP) failure and VAALCO was unable to restart the upper ESP or the lower ESP to restore production.
The Company estimates the cost of the 2021/2022 drilling program with four wells and two workovers to be $180 million, or $114 million, net to VAALCO’s participating interest. For 2022, the Company incurred approximately $148 million, or about $94 million net to VAALCO’s participating interest. About 82% of that total spend occurred in 2022 and 18% was previously recorded in 2021.
In August 2021, VAALCO and its co-venturers at Etame approved the Bareboat Contract and Operating Agreement with World Carrier Offshore Services Corp to replace the FPSO with an FSO at the Etame Marin block offshore Gabon for up to eight years with additional option periods available. The FPSO contract was set to expire in September 2022, however, on September 9, 2022, VAALCO signed an addendum to the FPSO contract which extended the use of the FPSO through October 4, 2022, and ratified certain decommissioning and demobilization items associated with exiting the contract. VAALCO worked closely with the FPSO charterer regarding timing for commencing shutdown of production, schedule for decommissioning and associated costs to ensure a smooth transition to the FSO. The Teli, a double-hull crude tanker built in 2001, was re-engineered into a FSO for use in the field.
VAALCO announced in October 2022 that all related FSO and field reconfiguration processes were completed. First oil flowed into the Teli FSO and the Company completed the annual field-wide maintenance turnaround concurrently with the FSO and field reconfiguration. Compared to the FPSO agreement, the new FSO is expected to reduce storage and offloading costs. Additionally, we have increased the effective capacity for storage by over 50%, and led to an extension of the economic field life, resulting in a corresponding increased recovery and reserves at Etame. This capital investment is projected to save approximately $20 to $25 million gross per year ($13 to $16 million net to VAALCO) in operational costs through 2030.
Egypt
In Egypt, as of December 31, 2022, VAALCO’s interests are spread across two regions: the Eastern Desert, which contains the West Gharib, West Bakr and Northwest Gharib merged concessions, and the Western Desert, which contains the South Ghazalat concession. The Eastern Desert merged concession is approximately 45,067 acres and the Western Desert, South Ghazalat concession, is approximately 7,340 acres. VAALCO is the operator and has a 100% working interest in both PSCs.
Both of the company’s Egyptian blocks are PSCs among the Egyptian General Petroleum Corporation (EGPC), Egyptian government and VAALCO. The company’s oil entitlement is the sum of cost oil, profit oil and excess cost oil, if any. The government takes their share of production based on the terms and conditions of the respective contracts. VAALCO’s share of royalties is paid out of the government’s share of production and taxes are captured in the Egyptian government’s net entitlement oil due and therefore there is no additional tax burden to the Company. In December 2022, VAALCO spudded the Arta77 HC well targeting the Nukhul reservoir. The lateral was successfully drilled through reservoir encountering laterally 1,363 meters of good oil and gas shows.
George Maxwell, VAALCO’s Chief Executive Officer commented, “In 2022, we transformed VAALCO into a diversified, multi-country company focused on sustainable growth and returning value to shareholders. We delivered record financial results, completed a major acquisition and successfully executed multiple high-impact operational projects. Production volumes grew 44% in 2022, and coupled with a strong commodity pricing environment, VAALCO was able to generate significant operating cash flow and record Adjusted EBITDAX. This allowed us to fully fund dividend and share buyback programs, a $160 million capital program focused on lowering long-term costs, and growing production while closing on a major acquisition and remaining debt free. We are in a financially stronger position entering 2023 with more reserves, production and future potential than at any other time in our history. We are a diversified, multinational exploration and production company with 2P WI CPR reserves of 76.4 million barrels of oil equivalent.
“This past year, we completed the transformational combination with TransGlobe which has built a business of scale with a stronger balance sheet and a more diversified baseline of production that will underpin VAALCO’s future opportunities for success. We are focused on generating meaningful cash flow to fund our increased stockholder dividends, share buybacks, capital expenditures and potential additional acquisitions. We have achieved the first tranche of synergies related to the acquisition. We now have a streamlined management team and Board and have captured the savings from delisting TGA and eliminating other related duplicative public company costs. We continue to rationalize our operational and G&A costs in 2023 as we look to attain additional synergies beyond what we originally anticipated.
“In Gabon, we are very pleased to have successfully delivered a highly complex, full field reconfiguration, maintenance turnaround and upgraded FSO installation. This project was completed in October despite a difficult global supply chain environment and is a testament to the dedication of our workforce and partners who helped complete the project, underlining VAALCO’s status as a quality operator. The new FSO provides us with additional flexibility and has an effective capacity for storage that is 50% larger than our relinquished FPSO. It also reduces our expected storage and offloading costs by 50% which we believe will lead to an extension of the economic field life, resulting in a corresponding increase in recovery and reserves at Etame. We also completed our 2021/2022 drilling program in Gabon that materially increased production and extended the economic life of the field. We expect full payback on the cost of the program by later this year.
“In March 2023, we held productive meetings with the MMH and our partners in Houston. During these meetings we finalized multiple substantive documents for Block P which includes the Venus development, relating to the Production Sharing Contract. We are working on concluding remaining documents and expect to update the market in the second quarter of 2023. We anticipate a strong, efficient and economic development of this exciting discovery with first oil projected for 2026. We believe that there are clear strategic benefits in further diversifying the revenue generation and country focus of our portfolio. VAALCO has a proven operating track record for a development of this kind and we look forward to demonstrating these capabilities as we progress the Venus discovery into production and further demonstrates the meaningful value of our asset base.
“We are clearly well-positioned for continued success in this current commodity price environment, with no net debt and strong free cash flow generation. We have made significant progress integrating the TransGlobe team and assets into our strategic vision. We are firmly focused on delivering meaningful shareholder returns while continuing to progress our objective of accretive growth.”
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