VAALCO Energy (NYSE: EGY): New country entry with immediate production

• VAALCO is acquiring Svenska Petroleum Exploration for a headline price of US$66.5 mm. This price includes a pre-closing dividend of cash on Svenska’s balance sheet to the seller and an estimated cash payment by VAALCO of ~US$30-40 mm on closing in 2Q24.
• The primary asset of Svenska is a 27.39% interest in Block CI-40, offshore Cote d'Ivoire with 1P and 2P reserves of respectively 13 mmboe (99% oil) and 21.7 mmboe (97% oil) (as at the end of 3Q23) and current WI production of 4,500 boe/d at the Baobab offshore field (900-1,300 m water depth). The operator is Canadian Natural Resources (CNR) that holds 57.61% interests in the licence.
• The Baobab FPSO is scheduled to be taken offline in early 2025 for planned maintenance and upgrades to return to production in 2026. Significant development drilling is expected to begin in 2026 with meaningful additions to production from Baobab. According to the Svenska 2019 annual report, the latest development phase (phase 4) grew gross production to 30 mbbl/d to recover 50 mmbbl.
• The transaction provides further risk diversification by adding a location with a relatively low risk profile. The transaction also appears very attractive given the low price paid by VAALCO. As we incorporate our estimates of the value of Baobab’s 2P reserves, we have increased our target price from US$9/sh to US$10/sh in line with our new ReNAV. Pending further details, we are not ascribing any value to Svenska’s appraisal assets yet.

Further sources of potential resource upside
150 mmboe (gross) have been cumulatively produced at Baobab since production started in 2005 with 24 producing and five injection wells. This represents ~15% recovery factor. The 2P reserves estimate at the end of 3Q23 implies an additional recovery factor of only ~8% (total of 23% including historical production). This is far below what has been achieved in the Gamba reservoir at Etame Marine (up to 50%) and suggests material potential further upside. In addition, the Kossipo light oil discovery could be developed as a tie-back to Baobab. The discovery was reported in the media to hold 35 mmbbl gross resources.

Economics and financials
The fiscal terms in Cote d’ Ivoire are very attractive. They include an 80% cost stop (for cost recovery) with a 25% uplift on development capex. The government takes only 47% of profit oil. Opex are ~US$15/boe. Pending further information on the capex programme and production outlook in Cote d’Ivoire, we have not yet incorporated these assets in our detailed financial forecasts. Based on our understanding of the fiscal terms and historical costs reported by Svenska, we have increased our Core NAV from US$5.50/sh to US$7.00/sh and our ReNAV from US$8.45/sh to US$9.88/sh.