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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-20928
_______________________
VAALCO Energy, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 76-0274813
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4600 Post Oak Place
Suite 309
Houston, Texas 77027
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (713) 623-0801
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No __
-
As of May 4, 2001 there were outstanding 20,744,569 shares of Common Stock,
$.10 par value per share, of the registrant.
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VAALCO ENERGY, INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)
March 31, 2001 and December 31, 2000............ 3
Statements of Consolidated Operations (Unaudited)
Three months ended March 31, 2001 and 2000...... 4
Statements of Consolidated Cash Flows (Unaudited)
Three months ended March 31, 2001 and 2000...... 5
Notes to Consolidated Financial Statements......... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............. 8
PART II. OTHER INFORMATION........................ 11
2
VAALCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of dollars, except par value amounts)
March 31, December 31,
2001 2000
--------------------- ----------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,971 $ 12,440
Funds in escrow 36 751
Receivables:
Trade 239 237
Other 151 153
Materials and supplies, net of allowance for inventory obsolescence of $5 334 329
Prepaid expenses and other 25 24
--------------------- ----------------------
Total current assets 10,756 13,934
--------------------- ----------------------
PROPERTY AND EQUIPMENT-SUCCESSFUL EFFORTS METHOD
Wells, platforms and other production facilities 1,524 1,154
Undeveloped acreage 633 555
Work in progress 4,215 2,268
Equipment and other 65 65
--------------------- ----------------------
6,437 4,042
Accumulated depreciation, depletion and amortization (853) (850)
--------------------- ----------------------
Net property and equipment 5,584 3,192
--------------------- ----------------------
OTHER ASSETS:
Investment in unconsolidated entities 1,015 1,448
Deferred tax asset 410 410
Other long-term assets 55 57
--------------------- ----------------------
TOTAL $ 17,820 $ 19,041
===================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 548 $ 463
Accounts with partners 853 2,047
Income taxes payable 25 10
--------------------- ----------------------
Total current liabilities 1,426 2,520
--------------------- ----------------------
MINORITY INTEREST 13 13
FUTURE ABANDONMENT COSTS 3,294 3,294
--------------------- ----------------------
Total liabilities 4,733 5,827
--------------------- ----------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $25 par value, 500,000 shares authorized;
10,000 shares issued and outstanding in 2001 and 2000 250 250
Common stock, $.10 par value, 100,000,000 authorized shares
20,749,964 shares issued of which 5,395 are in the treasury in 2001
and 2000 2,075 2,075
Additional paid-in capital 41,215 41,215
Accumulated deficit (30,441) (30,314)
Less treasury stock, at cost (12) (12)
--------------------- ----------------------
Total stockholders' equity 13,087 13,214
--------------------- ----------------------
TOTAL $ 17,820 $ 19,041
===================== ======================
See notes to consolidated financial statements.
3
VAALCO ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited)
(in thousands of dollars, except per share amounts)
Three months Ended March 31,
-------------------------------------
2001 2000
--------------- --------------
REVENUES:
Oil and gas sales $ 317 $ 289
Gain on sale of assets 215 --
--------------- --------------
Total revenues 532 289
--------------- --------------
OPERATING COSTS AND EXPENSES:
Production expenses 93 74
Depreciation, depletion and amortization 3 4
Exploration expense -- 554
General and administrative expenses 251 408
--------------- --------------
Total operating costs and expenses 347 1,040
--------------- --------------
OPERATING INCOME (LOSS) 185 (751)
OTHER INCOME (EXPENSE):
Interest income 138 155
Equity loss in unconsolidated entities (433) (2,393)
Other, net (2) --
--------------- --------------
Total other expense (297) (2,238)
--------------- --------------
LOSS BEFORE TAXES (112) (2,989)
Income tax expense 15 --
--------------- --------------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ (127) $ (2,989)
=============== ==============
LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (0.01) $ (0.14)
=============== ==============
WEIGHTED AVERAGE COMMON SHARES:
BASIC AND DILUTED 20,745 20,745
=============== ==============
See notes to consolidated financial statements.
4
VAALCO ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(in thousands of dollars)
Three months Ended March 31,
----------------------------------------------
2001 2000
------------------ ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (127) $ (2,989)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization 3 4
Equity loss in unconsolidated entities 433 2,393
Exploration expense -- 554
Gain on sale of assets (215) --
Change in assets and liabilities that provided (used) cash:
Funds in escrow 715 1,717
Trade receivables (2) (91)
Accounts with partners (1,194) (14)
Other receivables 2 (14)
Materials and supplies (5) (1)
Prepaid expenses and other (1) (66)
Accounts payable and accrued liabilities 85 (40)
Income taxes payable 15 --
------------------ ----------------
Net cash (used in) provided by operating activities (291) 1,453
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Disposals of property and equipment 1,023 27
Additions to property and equipment (3,203) --
Investment in unconsolidated entities -- (1,688)
Other 2 (36)
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Net cash used in investing activities (2,178) (1,697)
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NET CHANGE IN CASH AND CASH EQUIVALENTS (2,469) (244)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,440 2,925
------------------ ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,971 $ 2,681
================== ================
See notes to consolidated financial statements.
5
VAALCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(Unaudited)
1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of VAALCO Energy, Inc. and subsidiaries
(collectively, "VAALCO" or the "Company"), included herein are unaudited, but
include all adjustments consisting of normal recurring accruals which the
Company deems necessary for a fair presentation of its financial position,
results of operations and cash flows for the interim period. Such results are
not necessarily indicative of results to be expected for the full year. These
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-KSB for the
year ended December 31, 2000.
VAALCO Energy, Inc., a Delaware corporation, is a Houston-based independent
energy company principally engaged in the acquisition, exploration,
development and production of crude oil and natural gas. VAALCO owns
producing properties and conducts exploration activities as operator of
consortiums internationally in the Philippines and Gabon. Domestically, the
Company has interests in the Texas Gulf Coast area.
VAALCO's Philippine subsidiaries include Alcorn (Philippines) Inc., Alcorn
(Production) Philippines Inc. and Altisima Energy, Inc. VAALCO's Gabon
subsidiaries are VAALCO Gabon (Etame), Inc. and VAALCO Production (Gabon),
Inc. VAALCO Energy (USA), Inc. holds interests in certain properties in the
United States.
2. RECENT DEVELOPMENTS
In January 2001, the Company acquired a 65% interest in the Etame Block
offshore Gabon, West Africa from Western Atlas Afrique, Ltd. a subsidiary of
Baker Hughes. Consideration for the acquisition was $1 million in cash and a
future net profits interest in the event the existing discoveries on the
block are developed. The Company resold 52.5% of the interest held by Western
Atlas Afrique to two companies for $1 million and their proportionate
assumption of the future net profits interest. The Company now holds a 30.35%
interest in the Etame Block and is operator of the 3,073 square kilometer
concession.
The Company made a Gamba sandstone discovery on the Etame concession in 1998,
which tested approximately 3,700 barrels of oil per day on a 32/64's inch
choke. In January 1999, the Company completed the drilling of the Etame 2V
well, which delineated the oil water contact for the discovery. Because the
Gamba reservoir lies below a layer of salt and is structurally complex,
during 1999 and the first half of 2000, a seismic reprocessing effort was
performed to better map the Gamba reservoir. Based on the seismic
reprocessing effort, the Company drilled a third well, the Etame 3V well, on
the discovery during the first quarter of 2001. The well found pay in the
Gamba sandstone approximately 1.2 kilometers away from the Etame 1 well. In
addition, pay was found in the Dentale sandstones below the Gamba. A total of
34 meters of gross pay interval was encountered in the Etame 3V well. As a
result of the successful delineation well, the consortium is analyzing
development options and intends to pursue development of the field.
Additional wells will be required to maximize field production.
6
VAALCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(Unaudited)
Effective June 30, 2000, the Company elected to withdraw from Hunt Overseas
Exploration Company L.P. ("Hunt"). The Company formerly held a 7.5% limited
partnership interest in Hunt. The Company's obligations under the partnership
were to contribute up to $22.5 million for its share of the exploration phase
of the partnership, $22.3 million of which had been funded as of June 30,
2000. In addition, if Hunt discovered oil, the Company may have been required
to contribute an additional $7.5 million to fund the appraisal of the
discovery. As a result of withdrawing from the Hunt venture, Hunt released
certain funds in escrow totaling $8.4 million and reimbursed the Company $1.3
million for its share of net working capital in the partnership as of June
30, 2000.
The Company has elected to terminate its joint venture with Paramount
Petroleum, Inc., which focused on domestic onshore prospects in Mississippi,
Alabama and Louisiana. The Company will receive its proportionate 93.75%
interest in kind in all remaining prospects within the joint venture on June
1, 2001, unless the prospects are sold to industry for drilling prior to that
time.
3. EARNINGS PER SHARE
The weighted average common shares outstanding represent those of historical
VAALCO for the applicable periods.
The Company accounts for earnings per share in accordance with the Statement
of Financial Accounting Standards ("SFAS") No. 128 - "Earnings per Share,"
which establishes the requirements for presenting earnings per share ("EPS").
SFAS No. 128 requires the presentation of "basic" and "diluted" EPS on the
face of the income statement. Basic EPS is calculated using the average
number of common shares outstanding during each period. Diluted EPS assumes
the conversion of preferred stock to common stock and the exercise of all
stock options having exercise prices less than the average market price of
the common stock using the treasury stock method.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which was
amended in June 1999 by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133" and in June 2000 by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities". SFAS No. 133, as amended, is
effective for derivative instruments and hedging activities that require an
entity to recognize all derivatives as an asset or liability measured at its
fair value. Depending on the intended use of the derivative, changes in its
fair value will be reported in the period of change as either a component of
earnings or a component of comprehensive income. Retroactive application to
periods prior to adoption is not allowed. The Company adopted SFAS No. 133,
as amended, effective January 1, 2001. The adoption had no effect on the
Company's financial position or results of operations as all existing
contracts either do not meet the definition of a derivative or qualify for
the normal purchases and sales exemption. The Company does not currently
engage in hedging activities.
7
VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report includes "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended ("Exchange Act"). All statements other than
statements of historical fact included in this Report (and the exhibits hereto),
including without limitation, statements regarding the Company's financial
position and estimated quantities and net present values of reserves, are
forward looking statements. The Company can give no assurances that the
assumptions upon which such statements are based will prove to have been
correct. Important factors that could cause actual results to differ materially
from the Company's expectations ("Cautionary Statements") are disclosed in the
section "Risk Factors" included in the Company's Forms 10-KSB and other periodic
reports filed under the Exchange Act, which are herein incorporated by
reference. All subsequent written and oral forward looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified by the Cautionary Statements.
INTRODUCTION
------------
The Company's results of operations are dependent upon the difference between
prices received for its oil and gas production and the costs to find and produce
such oil and gas. Oil and gas prices have been and are expected in the future to
be volatile and subject to fluctuations based on a number of factors beyond the
control of the Company. The Company's production in the Philippines is from
mature offshore fields with high production costs. The Company's margin on sales
from these fields (the price received for oil less the production costs for the
oil) is lower than the margin on oil production from many other areas. As a
result, the profitability of the Company's production in the Philippines is
affected more by changes in oil prices than production located in other areas.
The Company's results of operations are also affected by currency exchange
rates. While oil sales are denominated in U.S. dollars, operating costs are
predominately denominated in pesos. An increase in the exchange rate of pesos to
the dollar will have the effect of increasing operating costs while a decrease
in the exchange rate will reduce operating costs.
A substantial portion of the Company's oil production is located offshore of the
Philippines. The Company produces into barges, which transport the oil to
market. Due to weather and other factors, the Company's production is generally
highest during the first and fourth quarters of the year.
The Company uses the successful efforts method to account for its investment in
oil and gas properties, whereby costs of productive wells, developmental dry
holes and productive leases are capitalized and amortized using the units-of-
production method based on estimated net proved reserves. The costs of
development wells are capitalized but charged to expense if and when the well is
determined to be unsuccessful. Geological and geophysical costs and the costs of
carrying and retaining undeveloped properties are expensed as incurred.
8
VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
-------------------------------
Historically, the Company's primary source of capital resources has been from
cash flows from operations, private sales of equity, borrowings and purchase
money debt. In 2001 and 2000, the Company's primary uses of capital have been to
fund its exploration operations.
The Company produces oil from the Matinloc and Nido fields in the South China
Sea, the Philippines. The fields produced approximately 415,000 gross barrels of
oil during 2000. In the quarter ended March 31, 2001, total production from the
fields was approximately 102,000 gross barrels of oil. Substantially all of the
Company's crude oil and natural gas is sold at the well head at posted or index
prices under short-term contracts, as is customary in the industry. The Company
markets its share of crude oil under agreements with Seaoil and Caltex, both
local Philippines refiners. While the loss of these buyers might have a material
effect on the Company in the near term, management believes that the Company
would be able to obtain other customers for its crude oil.
The Company has invested $3.0 million in the Paramount joint venture of which
$2.0 million has been impaired as of March 31, 2001. The Company has elected to
terminate the joint venture effective June 1, 2001. The Company will receive its
proportionate 93.75% interest in kind in all remaining prospects within the
joint venture on June 1, 2001, unless the prospects are sold to industry for
drilling prior to that time.
Effective June 30, 2000 the Company elected to withdraw from Hunt Overseas
Exploration Company L.P. ("Hunt"). The Company formerly held a 7.5% limited
partnership interest in Hunt. The Company's obligations under the partnership
were to contribute up to $22.5 million for its share of the exploration phase of
the partnership, $22.3 million of which had been funded as of June 30, 2000. In
addition, if Hunt discovered oil, the Company may have been required to
contribute an additional $7.5 million to fund the appraisal of the discovery. As
a result of withdrawing from the Hunt venture, Hunt released certain funds in
escrow totaling $8.4 million and reimbursed the Company $1.3 million for its
share of net working capital in the partnership as of June 30, 2000.
The Company continues to seek financing to fund the development of existing
properties and to acquire additional assets. The Company will rely on the
issuance of equity and debt securities, asset sales and cash flow from
operations to provide the required capital for funding future operations. While
there can be no assurance the Company will be successful in raising new
financing, management believes the prospects the Company has in hand will enable
it to attract sufficient capital to fund required oil and gas activities.
During 2001, the Company anticipates that it will make capital expenditures on
oil and gas properties of approximately $4.0 million, primarily in Gabon. This
amount may increase if the Etame field in Gabon is approved for development. The
Company will seek outside funds for the development of the Etame field. The
anticipated capital expenditures exclude potential acquisitions. Other than the
funding required to develop the Etame field, which will be sourced from outside
the Company, the Company believes the cash on hand at March 31, 2001 will be
sufficient to fund the Company's capital budget through 2001.
9
VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
Three months ended March 31, 2001 compared to three months ended March 31, 2000
Revenues
--------
Total revenues were $532 thousand for the three months ended March 31, 2001
compared to $289 thousand for the comparable period in 2000. Higher crude
production volumes and a gain on the resale of certain interests acquired in
Gabon in 2001 accounted for the increase in revenues.
Operating Costs and Expenses
----------------------------
Total production expenses for the three months ended March 31, 2001 were $93
thousand compared to $74 thousand in 2000. Expenditures in 2001 included
additional activity at the Nido field. Exploration expense was $0 for the three
months ended March 31, 2001, compared to $554 thousand in 2000. Exploration
expense in 2000 included $392 thousand for dry hole expense associated with a
well drilled in Demmit County, Texas and $162 thousand for costs associated with
lease expirations in Brazos County, Texas. General and administrative expenses
for the three months ended 2001 and 2000 were $251 thousand and $408 thousand.
The Company benefited from overhead reimbursements associated with capital
expenditure programs in Gabon in 2001.
Other Income (Expense)
----------------------
Interest income of $138 thousand was received from amounts on deposit in 2001
compared to $155 thousand in the quarter ended March 31, 2000. The decrease can
be attributed to smaller balances on deposit in 2001 when compared to 2000. The
equity loss in unconsolidated entities in the quarter ended March 31, 2001 of
$433 thousand compared to a loss of $2,393 thousand in 2000. The loss reported
in the quarter ended March 31, 2001 was associated only with the Paramount joint
venture and consisted of the write off of unsold prospect costs. The loss
reported in the first quarter of fiscal 2000 was primarily associated with
exploration costs incurred by the Hunt partnership from which the Company
withdrew effective June 30, 2000.
Income Taxes
------------
The Company incurred $15 thousand in income tax expenses, associated with
activity in the Philippines, in the quarter ended March 31, 2001, compared to $0
in 2000.
Net Loss
--------
Net loss attributable to common stockholders for the three months ended March
31, 2001 was $127 thousand, compared to a net loss attributable to common
stockholders of $2,989 thousand for the same period in 2000. The net loss in
both periods was primarily due to exploration costs associated with the
Company's investment in unconsolidated entities.
10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not presently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3. Articles of Incorporation and Bylaws
3.1(b) Restated Certificate of Incorporation
3.2(b) Certificate of Amendment to Restated Certificate of Incorporation
3.3(b) Bylaws
3.4(b) Amendment to Bylaws
3.5(c) Designation of Convertible Preferred Stock, Series A
27. Financial Data Schedule
_____________
(a) Filed as an exhibit to the Company's report on Form 8-K filed with the
Commission on March 4, 1998 (file no. 000-20928) and hereby incorporated by
reference herein.
(b) Filed as an exhibit to the Company's Registration Statement on Form S-3
filed with the Commission on July 15, 1998 and hereby incorporated by
reference herein.
(c) Filed as an exhibit to the Company's Report on Form 8-K filed with the
Commission on May 6, 1998 and hereby incorporated by reference herein.
(b) Reports on Form 8-K.
None
11
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VAALCO ENERGY, INC.
(Registrant)
By /s/ W. RUSSELL SCHEIRMAN
-------------------------------------
W. Russell Scheirman, President,
Chief Financial Officer and Director
(on behalf of the Registrant and as the
principal financial officer)
Dated May 4, 2001
12