Q3 2021 VAALCO Energy Inc Earnings Call
Hello, and welcome to the VAALCO Energy third quarter earnings Conference call.
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Now I'd like to turn the conference over to your host today Al Petrie. Mr. Pietri. Please go ahead.
Thank you operator, good morning, everyone and welcome to VAALCO Energy's third quarter 2021 conference call.
After I cover the forward looking statements George Maxwell our CEO will review key highlights along with operational results Ron <unk>. Our CFO will then provide a more in depth financial review George will then return for 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 re enter the queue with additional questions.
I would like to point out that we posted a Q3 2021 supplemental information deck on our website. This morning that has additional financial analysis comparisons and guidance that should be helpful. With that let me proceed with our forward looking statement comment during the course of this conference call the comp.
He 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 yesterday's press release, the presentation posted on our website and the reports we file with the S. E C, including the Form 10-Q that was filed yesterday. Please note that this conference call is being recorded let me now turn the call over to George.
Thank you all.
Good morning, everyone and welcome to a third quarter 2021 earnings conference call.
I am very pleased with our ability to execute on our strategic vision on 2021 has been a banner year for Vulcan thus far.
We nearly doubled our production with the acquisition of Sasol is working interest in Etame in February 2021 in June we secured a jackup rig for the upcoming 2021 2022 drilling campaign.
In August we finalized an agreement with world Cardio that will allow us to sustain our operational excellence and robust financial performance at Etame through 'twenty 30, with a new <unk> solution that reduces cost by almost 50% when compared to the current F. P. S O and will reduce our overall.
Operating costs by approximately 17% to 20%.
In October we were provisionally awarded two offshore blocks as part of a consortium with BW energy and <unk> energy.
This expands our presence in the relationship in Gabon.
Further indication of an investment commitment in Gabon.
All three companies in the consortium are uniquely positioned since we have world class discoveries in Gabon adjacent to these awarded blocks.
We also recently announced that we have completed a feasibility study for the Standalone development of the Venus discovery in block P and Equatorial Guinea, and we are moving forward now with a field development plan.
We have also completed our planned annual full field turnaround maintenance on time and within budget in the third quarter.
I'm also pleased to see we have already completed the second shutdown that wasn't needed for maintenance on the F. P. S O that could not be completed at the same time as the full field turnaround.
That second shutdown lasted six days and was started and completed in early October.
Finally, we have successfully performed two workovers in September and October which resulted in an increase to production.
As you can see we are delivering on our strategic objectives and in many cases exceeding expectations, which says firmly placed vocal and are financially enviable position.
Turning to the third quarter, we produced an average of 7694 net barrels of oil per day, which was near the high end of guidance. Despite the annual 70 field wide turnaround.
The third quarter reflected stronger seals on realized pricing, which drove revenue higher.
This also helped to grow our adjusted EBITDAX to $23 $3 million in Q3 2021.
In fact, we have no generated $63 $2 million and adjusted EBITDAX for the first nine months of 2021.
Which is almost the same amount as the previous two full calendar years combined.
This has allowed us to grow our cash position to $52 8 million at the end of the third quarter in preparation to fund our 2021 2022 drilling campaign from cash on hand and from operational cash flow.
We continue to be pleased with the ongoing strength of the oil price environment and with a significant increase in production. We will continue to hedge opportunistically unlocking free cash flow and adjusted EBITDAX to assure we have the funds for activities in 2022.
Turning your attention to the future our strategic vision is built on accretive growth through organic drilling opportunities and through acquisitions.
We have used to three D seismic that we acquired over at Etame to maximize the impact of our upcoming drilling campaign. Additionally, we're derisking future drilling locations and potentially identify new drilling locations with further three D processing.
In June we secured a contract with board drilling limited to drill at least three wells with auctions to drill additional wells.
We are expecting the rig to begin drilling our first well the etame Ath sidetrack in early December as planned.
We will provide details on other planned drilling locations in early 2022, but we are very excited by the production upside of this campaign.
As a reminder, assuming a successful drilling campaign the estimated increase in gross field production is seven to 8000 barrels of oil per day or 3500 to 4100 net barrels of oil per day to VAALCO. When the drilling campaign is completed in 2022.
Hand in hand, with the production increase will be margin expansion and per barrel cost reductions.
90% of our production costs are fixed and as production increases of per barrel costs will decrease significantly.
Every new bottle will bring online is more economic because of the little variable costs. So as we grow production. We're also growing our margin per barrel and reducing our cost per barrel.
From a capital standpoint, we estimate the cost of the drilling program is between $117 $143 million gross or <unk> $74 million to $91 million net to VAALCO.
This is slightly higher than our estimates at the beginning of the EOG to inflationary pressures on service of manpower.
But given the current sustained higher oil price environment. The upcoming drilling campaign has the potential to generate significant additional free cash flow.
In line with our strategy to be a low cost operator, we're constantly looking at ways to reduce cost and improve margins.
In August we announced that we had signed them receive partner approval for a new <unk> solution.
From an operating cost standpoint, our current S peso costs are around about 40% of our total production expense.
The new <unk> will significantly reduce storage and offloading cost by almost 50% increase effective capacity for storage of by over 50% and is expected to need an extension of the economic field life, resulting in a corresponding increase in recovery and reserves at Etame.
In U S. S. O agreement requires the prepayment of $2 million gross $1 three net in 2021, which we paid in the third quarter and $5 million gross $3 2 million in 2022.
These advanced payments will be recovered against future rentals.
Additionally, current total field level capital conversion estimates are around $40 million to $50 million gross.
26% to $32 million net to VAALCO with majority of the Capex being spent in 2022.
This capital investment is projected to save approximately $20 million to $25 million gross per year $13 million to $16 million net to VAALCO and operational costs through 2013, given the project a very attractive payback period of only two to two and a half years.
<unk> solution is expected to greatly improve our margin per barrel and allow us to deliver more free cash flow to fund our future activities.
In October we announced an exciting new opportunity in Gabon, VAALCO has entered into a consortium with BW energy and <unk> energy.
The consortium had been provisionally awarded two blocks in the 12 offshore licensing round in Gabon with two exploration periods totaling eight years, which may be extended by a further two years.
The consortium will commence detailed production sharing contract discussions with the Gabonese government.
The bid terms or one on a basis that bulk who would pay a net $4 $6 million signature bonus in total for the blocks when the blocks are officially awarded.
BW energy will be the operator with a 37, 5% working interest.
Alco will have a 37, 5% working interest and Pinola energy, a 25% working interest and both will be nonoperating joint owners.
The two blocks to 12, and 13 and 812 and 13 are adjacent to Vulcan's Etame PSC as well as BW energy and panels disappeared PSC offshore southern Gabon.
The majority of these two blocks in water depths similar to Etame, both etame and discipline have been highly successful exploration development and production projects undertaken by the consortium members over the past 20 years with approximately 250 million barrels discovered to date.
As you can see this consortium is uniquely positioned with the knowledge experience and expertise are progressing world class discoveries in Gabon adjacent to these awarded blocks.
The consortium bid with the intent to shoot <unk> seismic on block G and reprocess existing data on blockade during the first exploration terminals agreed to drill an exploration well on each block.
We don't expect to shoot that new seismic until 2023 with any drilling to occur after that.
The existing seismic on both blocks indicate several opportunities and our goal will be to efficiently and effectively explore develop and potentially produce additional resources in Gabon.
We believe that this opportunity fits perfectly with our strategy to maximize shareholder returns in the area of a new best in West Africa.
Another area that holds significant future potential for VAALCO is equatorial Guinea.
We have a substantial working interest in block P. And we are evaluating several development step out exploration opportunities on a record.
We are excited about our opportunities in the block and believe it makes sense to move this project forward with a more definable timeline for potential development.
This summer we completed a drilling feasibility study for the Standalone development.
Venus discovery in block P and we're moving forward now with a field development concept as.
As we walk through the development concept, we will provide more details about potential timing capital costs and reserves and production estimates.
We are committed to profitably exploiting the resource potential of our assets and EG could become a significant operational asset moving forward.
Before I turn the call over to Ron I would like to briefly discuss the Workovers that we performed in September and October.
We began the workovers in late September and utilize a arcos mobile hydraulic Workover unit, which was purchased in early 2021 to rapidly mobilize and replace the electrical submersible pump the ESP units cheaper and more effectively compared to using a drilling rig.
Also by performing the work over sequentially, we saw significant cost savings there.
The first Workover that we completed was on the ability to each well to replace and upgrade the longest producing ESP unit at Etame.
The successful placement increased production from 500 barrels per day 294 net prior to the walk over to approximately 1400 barrels a day gross 730 barrels net in mid October.
The second Walker was to place the upper and lower ESP units and reconfigure the ESP design at the Etame 12, H well.
Production was restored in late October at a rate of approximately 1800 barrels a day gross.
In October we completed an additional 60 turnaround to accommodate the necessary Fps so maintenance, we discussed last quarter.
Taking into account these quarter event, we have narrowed the range of our annual guidance to be between 7000, and 7200 barrels of oil per day.
As a reminder, since our 2021 2022 drilling campaign doesn't begin until December there was no production uplift from that drilling campaign in 2021, but we should see significant uplift in 2022.
For sales volume, we have also narrowed our guidance to between 7350 7550 barrels per day.
As we have discussed before sales volume do not always equal production volumes due to timing and size of listings.
Going forward, we plan to provide sales volumes guidance on an annual and quarterly basis.
In summary, there is a lot to be excited about as we finished 2021 and enter 2022.
I would like to thank our hardworking team here at VAALCO, who continue to operate and execute on our strategic vision of accretive growth and free cash flow generation.
As you can see we are firmly focused on maximizing shareholder return opportunities our sustainable quarterly shareholder dividend policy that we announced yesterday, all while maintaining upside.
And operating with the highest regards towards ESG, while we progress our strategic objectives focused on accretive growth.
With that I would like to turn the call over to Ron to share our financial results.
Okay. Thank you George and good morning, everyone.
Let me begin by saying I'm also very pleased with our operational and financial performance as well as all of the strategic accomplishments that we've made enable to knocked over the past few months.
Turning to our financials.
Adjusted EBITDA totaled $23 3 million in the third quarter of 2021, compared with $21 9 million in the prior quarter, a more than triple the $7 million in the same period of 2020.
We benefited from increased sales volumes and higher realized pricing.
Not thus far in 2021, we've generated $63 2 million and adjusted EBIT diets, which as George mentioned is almost equal to the full year 2019 and 2020 combined.
This allowed us to fund our strategic initiatives with cash flow, while building, our cash position to $52 8 million at September 32021, and.
In preparation for the 2021 2022 drilling campaign.
Additionally, we reported strong net income of $31 7 million or <unk> 53 per diluted share in the third quarter of 2021, which included a $22 7 million noncash deferred tax benefit that will discuss in more detail shortly.
After normalizing for the deferred tax benefit on the unrealized derivatives loss or adjusted net income for the third quarter 2021 totaled 10 million or 17 cents per diluted share.
As compared to an adjusted net income of $8 4 million or <unk> 14 per diluted share for the second quarter 2021.
And the third quarter 2020, VAALCO reported $2 3 million and adjusted net income or four cents per diluted share.
Daily production for the third quarter was 7694 net barrels of oil per day down compared to 8018 net barrels of oil party in the second quarter of 2021, which was as expected due to the annual planned 70 field wide maintenance turnaround third.
Quarter 2021 production was up 75% from the third quarter 2020.
Sales volumes in Q3, 2021 were up 15% from the second quarter and up 80% compared to the same period in 2020.
The increase in volumes year over year again, primarily due to the additional sasol interest.
Our crude oil price realization increased 5% to $73 two per barrel in the third quarter of 2021 versus $69 61 per barrel in the second quarter of 2021 and was up 67% compared to $43 63 per barrel in the third quarter of 2020.
Our hedging strategy for 2021 has been to lock in production volume to attractive prices to protect cash flow and assure funding of our capital program in 2021, and 2022, but still allow for additional upside we took similar action in 2019 before we began our last program and we will continue to assess their needs to mitigate price.
Risk and protect cash flow in the future as we consider any additional future derivative contracts.
Our full hedge position can be found in yesterday's earnings release as well as in our Q3 supplemental information presentation on our website.
Turning to expenses production expense, excluding workovers for the third quarter 2021 was $21 4 million.
The third quarter was higher than the second quarter 2021, primarily due to the planned annual full field maintenance turnaround.
Costs were more than double the third quarter of 2020, due to 80% higher sales and the increase in working interest associated with the Sasol acquisition.
Per unit production expense, excluding workovers of $28 85 per barrel in the third quarter of 2021 increased as compared to the 25 point or two per barrel in the second quarter of 2021 and 22, one in Q3 2020 with some inflationary pressures seen on our marine expenses.
Given these inflationary pressures we are narrowing our guidance range from production expense, excluding workovers for full year 2021 to the high end of the previous range at <unk> $72 million to $74 million or up 90 cents at the midpoint on a per barrel of oil sales.
As George mentioned, we had one workover in process at the end of the third quarter and completed the second Workover and October.
As a result, the workover costs in our spread over the third and fourth quarters.
In the third quarter, we recorded $3 $8 million for Workovers on our full year guidance is between nine and $10 million.
D D for the third quarter, 2021, with $7 million or $9 41 per net barrel of oil sales compared with $5 8 million or nine point all five per barrel in the second quarter, 2021, and $2 2 million or $5 37 per barrel in the third quarter of 2020.
DD&A was higher comparable to the prior year due to the higher to political costs associated with the Sasol acquisition, our asset base for the Sasol acquisition was valued at fair market value and a stronger pricing environment in which we negotiated the deal price, while we haven't given DD&A guidance in the past the rate you saw in the past quarter.
And about nine to 10 Bucks per barrel is not likely to change much until we get into our next drilling campaign and add capital costs and potentially more reserves.
General and administrative expense for the third quarter of 2021, excluding stock based compensation expense was $2 9 million compared with $4 2 million in the second quarter 2021, and $2 4 million in the third quarter of 2020.
The decrease in Q3, 2021 compared to Q2 'twenty 'twenty. One was a result of additional severance costs associated with changes in key personnel recorded in the second quarter.
The per unit G&A rate, excluding stock based compensation in the third quarter 2021 or $3 93 per barrel of oil sales were significantly lower than both the second quarter of 2021, and the third quarter of 2020 due to lower costs and higher sales.
For the full year, given the severance costs experienced we're forecasting G&A, excluding stock based compensation to be between $12 million and $30 million.
Noncash stock based compensation expense for the third quarter 2021 was not material for the third quarter 2021, and the stock based compensation expense excluding expense related to Sars was not point 3 million, which was mostly offset by SAR stock based compensation benefit of not point $3 million.
For the second quarter of 2021, the stock based compensation expense was <unk> 5 million and was comprised of non salary related expenses not $1 million in Sars related expense not point $4 million.
For Q3, 2020 stock based compensation expense was a benefit of not point 2 million, which included non SAR stock based expense of <unk> 2 million and Sars related benefit of not point $6 million.
Turning now to taxes income tax was a benefit for the three months ended September 32021, a $17 2 million is comprised of a $22 $7 million of a deferred tax benefit and a current tax expense of $5 5 million.
In the third quarter 2021, we determined a partial release of the valuation allowance on our deferred tax assets was warranted due to improving oil prices and other factors that indicate the VAALCO will utilize a portion of its deferred tax assets.
Income tax expense for the three months ended 30 June 2021, with $2 8 million.
This was comprised of $3 3 million of deferred tax benefit and a current tax expense of $6 1 million and.
Income tax benefit for the three months ended September 32020 was a benefit of $2 8 million and included $5 3 million of deferred tax benefit and a current tax expense of $2 5 million.
For all three periods. The overall effective tax rate was impacted by nondeductible items associated with the operations and the doctor and foreign taxes, rather than credit and then for United States tax purposes.
I'd like to refer you to a slide in our supplemental information deck that we posted to our website. This morning, we've updated their netback slate that reflects strong cash flow we are generating at the current prices.
At September 32021, we had unrestricted cash balance of $52 8 million, an increase of almost 30 million over the prior year quarter.
This was a result of operating income and a trade receivable as of June 30th that converted to cash during the quarter.
Working capital at September 32021 was not point 8 million compared with negative 9 million at June 32021, while adjusted working capital at September 30th 20, 201 totaled $13 5 million compared to $4 3 million at June 32021.
For the third quarter of 2021 net capital expenditures, excluding acquisitions totaled $4 2 million and a cash basis and $6 7 million on an accrual basis for the first nine months of 2021, VAALCO has invested eight and a half million dollars on a cash basis and 11 million in an accrual basis. These expenditures were.
Primarily related to early cost associated with the <unk> 2021 2022 drilling program the purchase of a mobile workover unit equipment and enhancement as well as general maintenance capital expenditures.
With that I'll now turn the call back over to George.
Thanks, Ron.
Feature is very bright for vehicle and this is a very exciting time for VAALCO.
We remain focused on growing vocal in providing sustainable returns to shareholders.
We have a strong asset base at Etame that is generating meaningful free cash flow and adjusted EBITDA in the current pricing environment, which is evidenced by our results.
Sustained operational excellence and robust financial performance at Etame serves as the foundation for growing barco through organic drilling and future accretive acquisition opportunities in line with our strategy.
We have grown our cash position in anticipation of the next drilling program and to fund their episode conversion at Etame, both of which will enhance our ability to generate cash flows in the future.
But we're not simply looking to maintain production in Gabon, there are meaningful development opportunities across our assets.
In December we will begin another drilling campaign at Etame and with our recent additional hedges we have locked in sufficient cash flow generation from operations to fund. This program in defense at times, the risk of oil price movement.
We're very excited to have been awarded new blocks in Gabon as part of the consortium with BW energy in nodal.
The blocks are adjacent to our existing Etame field, and we believe the hold tremendous potential to help us establish sustainable long term production in Gabon.
We have completed a drilling feasibility study for the Standalone development of the Venus discovery of block P and Equatorial Guinea.
And we're moving forward now without field development concept.
Tommy block P and potentially now the new blocks in Gabon can enhance our business and provide a strong platform for organic growth, allowing vehicle to build size and scale in West Africa.
As we continue to generate significant free cash flows to fund our capital expenditures, we continue to evaluate ways to return some of that free cash flow to our shareholders.
Our board considered several alternatives to providing a meaningful return to our shareholders and believes the implementation of a sustainable quarterly cash dividend is the right approach for vocal based on our strong balance sheet and ability to generate meaningful free cash flow.
We feel that it is important for E&P companies to return cash to shareholders and the boards decision to initiate this dividend policy reflects the strength of our business and their confidence in vulcan's future.
We believe that prudently returning value to shareholders can complement our growth strategy and offer shareholders multiple ways to create volume.
As you can see we are firmly focused on maximizing shareholder return opportunities and operating with the highest regards towards ESG, while we progress our refreshed strategic objectives focused on sustainable and accretive growth.
Thank you and with that operator, we're ready to take questions.
Yes. Thank you.
We will begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speaker phone please pick up your handset before pressing the keys to try a question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And the first question comes from John White with Roth capital.
Good morning.
Morning, Joe.
Well congratulations on the very nice results.
Production was.
In line with what I was expecting you.
You put up a nice beat me in a nice margin on EBITDA.
And I really applaud you for initiating the cash dividend.
You've put up a real robust.
Amount of dividend.
Yeah.
It reflects a very generous annual yield.
As you mentioned certainly in line with current industry trends.
It looks like you're all set on the 2021 2022 drilling campaign, you've got your Jack up rig.
So good luck on that on the new blocks and.
Gabon, the G 12, 13 and age 12 deaths.
<unk>.
Had the reprocessing seismic started there yet.
No it hasn't.
So currently our we bought one of the blocks, we've got seismic coverage, but we'll start we'll be processing and thats. What we anticipate will be the majority of the walk through 2022, we don't anticipate until late 2022 early 2023 to look at any further size.
MC acquisition.
It's really just a reprocessing activity in 'twenty two post the negotiation of the of the block Awards.
Okay. That's very helpful that was going to be my next question. So.
And it's Balco is going to be the primary lead.
On evaluating the <unk>.
Reprocessed seismic.
So it will be in conjunction with our partner and BW energy or the operator.
At the moment and we will review that as and when the opportunities are discussed and discoveries are made on each of these blocks.
But we will have a very very active participation in the interpretation.
Okay and I think.
Go ahead sorry.
Got it.
And you can see that the the level of our activity.
And the equity percentages of the blocks, where we were level with VW. So we're starting shoulder to shoulder on these two.
Okay. Thank you for that I know you've.
Done a lot of.
Work in Africa have you been in wells with BW before.
No I haven't I've worked with VW previously in Africa on the therapy side, where they have supplied equipment to companies that I've run.
But I've never worked with them directly on the on the E&P side I think when looking at BW energy.
They've got this asset in Africa, and they've got an asset over in Brazil. So this will be the first time, we worked in partnership.
But the companies are closely linked we know all the same people.
Well, that's going to have that.
Isn't it.
Yeah.
Okay well.
Everything is there.
You are running on all cylinders.
Those are our.
That's my question.
With my questions very nice results congratulations.
Thank you Joe Thanks, Joe.
Okay. Thank you and the next question comes to Charlie Sharp with Canaccord.
Okay.
Yes, good morning, gentlemen, thank you very much for the update so that was very comprehensive.
Two questions if I may.
The first one is on the Capex.
For the upcoming drilling program.
And ultra slightly the bottom end of the range has barely moved from the upper end of the range that shifts to quite a lot.
So theres still.
Well in fact doesn't increase range that you gave on what is it that.
Determines where you will actually fall in that range.
Is it the work program involved or is it just.
In anticipation of further cost pressure and then secondly on the dividend.
Are you thinking about dividend in terms of.
For example, a percentage of free cash flow, how should we think about that going forward.
Okay. All Covid question on the drilling the drilling program and I'll, let Ron answer the one on the dividend.
The.
Only program, what we've tried to show in the guidance is.
Maximizing the opportunity we have with the drilling rig at this time. So we have a contractual commitment for three wells and we have options for a buy.
And we've tried to violence or capex guidance and with the opportunity of perhaps extending.
We said, we're going to do a four well program, but perhaps extending that so that's where the upper end of the of the guidance is there is a little bit of cost pressure and a little bit of a potential of an additional well.
Yeah, I'll, just add a little bit more color to that as well George what I would say as well Charlie I don't think anybody is expected at which there will be an COVID-19 quarantine situation going into 2022, when we first looked at the Capex program.
All of that.
Oh, it's quite a bit behind on the on the vaccination, which means a lot.
We're still quarantine and all our personnel contractors on star.
Warehouse costs.
The capex kind of pain as well, but yet we're also seeing some inflationary pressure as we mentioned.
Moving to the dividend I think on the dividend side of it.
What are you interested in sustainable long term dividend that we know we can we can a P O rather than.
Directing.
A comparable.
Percentage of free cash flow.
I think that would be something that we'd consider a commodity prices remaining high and aggregating character of that program and we've got line of sight in our production.
Maybe we take a look at and we feel that what we've got on the table at this point in time.
A long term sustainable dividend.
We've committed to.
Okay. That's great. Thank you.
Thank you.
The next question comes from Matt Dane with Titan Capital management.
Great. Thank you wanted to discuss the Workover.
Folks are tackled here at the firm.
The two H, well, where production jumped up to 1400.
Apparel barrels per day versus the 500 prior to the Workover is this.
Steady state production now.
At current time, and what allowed such a dramatic step over in production with Us Workover.
Okay.
We.
Of course at the mid month position of 1400, we will expect to see some decline on that Matt. So.
Gradually go down towards the end of the year to date was 1100.
And the real the real.
Benefit of this was.
On the Workover was improved.
Access into the reservoir will be had.
We thought will perhaps at a scanning issues and the walk over initially and going down and performing that work over rig preparation.
Increasing those floors, we've also got to take into consideration that.
Particular wells to be shut in for some time and we'd have some reservoir buildup and get the cost reduction out of that.
Great. Thank you also want to touch on the drilling program really quickly here.
With the first one to be spud here early next month, just curious with that in mind. What is your current expectations for the first well to come online for production from that drilling program.
Yes, we would expect first of all it well to be working around coming onto completion and hook up by towards the end of January.
Early February.
Okay.
Okay.
And then the factors.
That that are playing a role in your decision to draw more than four wells can you walk us through.
What are the key factors that you'd look at that would lead you to drill more than four.
Some additional color there would be great.
Yes.
The relatively simple.
We put our budget together at a certain price and if the commodity prices stay high and available cash flow is there to the company we will look at.
Opportunities beyond that well well locations that we have worked out.
The the reason, we contractually position and with the rig was to give us that optionality. So if we can look at options of wells that are ready to drill, but we have the equipment and obviously you'd expect us to be in that position already and the payback on those well so is there a cash generative.
In 2022 at the higher commodity prices and that gets into almost a no brainer category for me what we've done and completed in 2022 budget has tried to put together a balanced portfolio between investment and returns.
And that balanced portfolio.
As we have today made certain commitments and statements to market that we are confident and sure that we can deliver it.
If we have a position.
Sustained higher commodity prices, then obviously, we have opportunities to.
Readdress that balanced portfolio, either through additional investment or additional restaurants.
Great. Thank you George.
Thank you and the next question comes from Jamie Wilen with Wilen management.
Hi, Fellas nice job out there a couple of different areas I don't know if you're discussed equatorial Guinean.
When do you expect to.
Begin that animal.
Any expectations for the cost to drill over in that area.
Yes, I mean, we're.
As we said before we've been spending a lot of time on the drilling campaign in the feasibility.
The drilling study.
Yes.
<unk>.
But the long lead drilling that we're doing we wanted.
But a lot of time, making sure that it was achievable before we started to talk about this in its development.
Alrighty.
We continue to refine these processes so as I said.
Earlier statement were looking to get to a proof of concept of field development plan.
Before the end of this year.
That takes a number of forms so and we can look at what we're looking at right now.
Engineering challenges set in place to try and target.
<unk> costs at a level, where we can have a robust development.
Lower oil prices. So we're looking to get a robust development that can be more of an economic sub $50 oil. That's the challenge we've got and the engineering section. So we continually look at.
Well, we need the timing of the wells the efficiency of the world.
To see if we can stagger those capex investments over it.
A multi year period, rather than having to.
Multiple wells upfront, but prior to production and those kind of analysis are still out there and we're still working them out and we haven't come to a landing, but we still hope to be there before.
For the end of this year.
With regard to the cost of the drilling wells more or less in the same region as they are in Gabon assembler water depths and we're looking at around about $30 million per well.
Okay.
And the block that you were just provisionally awarded in Gabon, and it's kind of surprising it is right in between two incredibly productive fields.
Pricing that this block has been sitting there.
On awarded for a long time, any particular reason why.
It was now offered.
We were able to secure it.
It goes back to the history. So if we look at what the blocks originally where they were originally a lot of that acreage was originally within the existing blocks.
For Delta two and four four vocal on turning to block commercial on renewing the licenses, the where we're forced to relinquish certain acreage.
EMEA was previously I was that we had to relinquish to move forward with the Etame development and we will move forward with license renewal.
Never been an area that we said we're not interested in.
It's always been an area, where particularly when we've been looking at the reprocessed seismic and when you look at the geology between ourselves and disciplined.
Again, it gets into the category.
Wouldn't want anyone else to be in that area. Because we are excited about it and we understand that the area very well.
So it's not a case of it's been sitting around for a while.
It came out of the existing structure in our elite Cushman.
Gabonese DG did try to do have been trained on this.
Years ago, they didn't get the kind of pricing that they were looking for in the end they canceled it.
Came back and put a big ramp back up again last year, and we participated and the.
The decision to go in a consortium rather than a loan was more one of of economics because.
As you can see in the slide that we have in the slide deck I think it's slide eight.
If you look at the opportunities that exist in those two blocks with the developments that we have in the developments BW rehab, we're giving ourselves maximum evacuation opportunity and minimized.
And the cost structure for evacuation if we're in a consortium.
Excellent.
And also on the U S. So could you go over a little bit of a year.
Accounting for that the capital cost I assume or amortized, but the expense reduction obviously as a direct bottom line cost savings is that correct.
Yeah. So when we're looking at we're looking at the cash savings that's what we've reiterated that they are quite right in raising the point.
Our team are actually looking at the accounting.
Aspects of it now, but it's likely to be a financing lease. So it will be treated differently with a right of use assets onto the balance sheet and DBA right.
When we've been looking at any comparison with ESPN and the operating leases that we have there.
We've always looked at this.
On a cash basis.
Gotcha.
I applaud the dividend just wanted to ask one question how did you arrive at.
Was there a little board discussion to arrive at an uneven rate like that.
As you can imagine.
It was a lot of discussion.
What was the most appropriate method.
Shareholder return and I think.
As I said in answer to one of the earlier questions. What we tried to present to the board.
And we'll look forward from 2021 through 2023.
It was a balanced portfolio and we did that.
Certain price.
We're confident in that balanced portfolio that we can more than achieved that that return comfortably without putting any kind of.
That pressure on cash balances.
But we maintain the upside of the current strip pricing.
See the hard commodity prices so it wasn't it.
It was more.
Looking at an absolute allocation and the cash balances rather than coming up.
Our composite rate of return.
Got you and lastly, as I look at the at the presentation and current oil prices without adding any benefit too.
The drilling program that is expected to begin.
Come up with a 90 to $100 $100 million of.
Of income for VAALCO somewhere north of a $1 50, a share or in that ballpark.
Am I reading all this correctly.
Yeah.
Help us out.
Yes.
Look it really just going back to the guidance that we've been given.
We provided.
Happy to take that one offline with you I can go back through in that guidance.
Yes.
The areas that we're seeing at this point in time, we we basically reiterated.
Okay.
We're on guidance and we have been on guidance for the year on on both production and sales. So yeah, I really can't see any more than that.
Okay, Great strategic plan do you guys have articulated.
And well presented.
In your presentation that you put online today. Thanks Ross.
Thank you.
Thank you.
As a follow up from John White with Roth capital.
Thank you.
With the initiation of this robust dividend.
Does that take the place of the possibility of a stock buyback program.
No. It doesn't I mean, I've stated it ever since I took this role my commitment to.
Growing the company with it.
Existing cash flow and returning value to investors in whatever form that takes.
So it doesn't this is not excluding the opportunity to go in and develop forms of shareholder returns.
Yep.
Thank you very much.
Okay I have two questions emailed to us from our analysts Stefan forgot it August and the first one is incorporating better visibility of the timing of the 2021 2022 drilling program the impact of recent Workovers and natural decline.
Where would you see production next year.
Yes.
Well I think.
We're not giving 2022 guidance.
Time.
Because I'll just say the drilling program.
Is dependent on our success case, and we've given a range of where we see the success of that drilling program or we see that it's between 7000 barrels growth.
And I think that's about as much guidance as I can give on on that kind of activity.
Okay.
Second and last question do you see additional capex items in the 2022 activity program. In addition to the SSO in the 2021 'twenty two drilling program detailed today.
What would this be and what would be the associated capex.
Again, I don't see any additional capex in the peso.
That's.
What I'd like to say there is we've signed the contracts we're confident on our execution we.
We set up three project teams to manage the peso to manage the fps's J&J and to manage the infield modifications on the Capex side. So for that changeover, where we're very confident in that where we've got the right team in place.
<unk> contracts in place for execution.
I guess I already kind of answered that when we gave that.
On Charlies question with regard to the drilling Capex, we have given ourselves a little bit flexibility there to increase the scope of the drilling program.
And so far as we can see a near term economic benefit so.
I don't see us going beyond that at this time.
But it.
It wouldn't be.
I don't see any more significant capex in.
And drilling four.
Or at the moment.
The only.
As we mentioned earlier on block G&A.
<unk>.
The only thing we've got their own capex basically the bonus.
What's the signature bonus and this is why again I think it's a.
It's a really good deal for Balco and for.
BW energy.
<unk> energy to go into a consult.
Basically it's in our backyard im going in together, we're reducing the exploration cost risks signature bonus growth is down to $5 million for both blocks, which is an exciting price.
So I think that that whole deal is.
It's a very accretive deal could be an exceptionally accretive deal.
<unk> and the method we've approached it.
Thank you and this concludes question and answer session I would like to turn the Florida, Georgia Maxwell for any closing comments.
Keith Thank you very much.
I, thank everyone for their questions and their attendance I'd also like to thank the staff we've.
Yeah.
We pulled it forward one week earlier, so our finance.
And our technical staff in Houston have worked hard to take a weekend of this program and are very pleased for that and it gives us.
Our ability to communicate to the market earlier.
I think.
I hope you're seeing.
Resurgence in a redirection of where the company is trying to go and how we communicate and we.
We always communicated on the basis that we.
We tell you what we plan to do and we certainly plan to execute it and we do that without elaborate a level of confidence and comfort both from the start we have the assets, we have and the forecast and cash flow.
We're putting in place so I'd like to thank everyone for their attendance today and look forward to talking to you again in the near future.
Thank you. The conference has now concluded thank you for attending today's presentation.
Central lines.
Okay.