VAALCO Energy (NYSE: EGY): Raising production guidance with lower capex budget on strong operational performance
• 2Q23 WI production stood at 24,863 boe/d (19,676 boe/d NRI), above the top end of the 2Q23 production guidance (WI: 22.6-24.5 mboe/d) with strong performance across all the company’s assets.• In Gabon, 2Q23 WI production was 10,262 bbl/d (guidance of 9.5-10.3 mbbl/d) given very high uptime (97% during 1H23 vs 85% over 2022). In Egypt, 2Q23 WI production was 11,579 boe/d (guidance of 10.6-11.6 mboe/d) with 13 new wells drilled in 1H23. In Canada, 2Q23 WI production was 3,021 boe/d (guidance of 2.5-2.7 mboe/d) with the two new longer lateral wells exceeding expectations. Future drilling campaigns could be based exclusively on similar wells.
• As a result of this strong operational performance, VAALCO has increased the lower end of the FY23 production guidance range from 20.4-24.4 mboe.d to 22.4-24.3 mboe/d. This confirms our view of the potential of the assets. We are increasing our FY23 production forecast from 23.1 mboe/d to 23.6 mboe/d. With better drilling efficiency in Canada and Egypt, the FY23 capex guidance has been reduced from US$70-90 mm to US$65-75 mm.
• The strong performance of the Canadian and Egyptian assets since VAALCO took over TransGlobe showcases the rationale for the transaction. VAALCO will sanction further drilling campaigns in upcoming years, unlocking further growth. The company has already bought back US$12.5 mm in shares in 2023. Assuming share buybacks of US$5 mm per quarter during 2H23 (total of US$19.5 mm during 2023) and with an annual dividend of US$0.25/sh would lead to total shareholder distributions of >9% of the market cap in 2023. We re-iterate our target price of US$9.00 per share.
Cashflow and balance sheet
2Q23 cashflow from operation adjusted for a ~US$9 mm negative working capital movement was ~US$44 mm (in line with our expectations). At the end of June, VAALCO held US$46 mm in cash with total receivables of US$124 mm (US$98 mm at the end of March). However, VAALCO expects to have a 3Q23 Egyptian export cargo offshore of ~0.5 mmbbl. In addition, with the completion of drilling in Canada and near completion in Egypt, VAALCO expects to see a reduction in its outstanding accounts payable and accruals.
Cashflow and value
Assuming US$85/bbl and with lower capex over 2H23, we forecast that VAALCO will hold US$125 mm in net cash at YE23 (~25% of the current market cap). This is after shareholder distributions and does not include the potential for an important reduction of receivables in Egypt. We have increased our ReNAV from US$8.50/sh to US$8.80/sh.
VAALCO Energy is an independent energy company engaged in the acquisition, exploration, development and production of crude oil. The company is primarily engaged in its Etame Production Sharing Contract related to the Etame Marin block located offshore the Republic of Gabon in West Africa. The company also owns interests in an undeveloped block offshore Equatorial Guinea, West Africa.
Auctus Advisors is a specialist Equity Capital Markets and Advisory business with a focus in the Energy Sector.
The partners have complementary skill sets, with decades of experience across Equity Capital Markets, Investment Banking and the Energy industry. We have worked at Société Générale, Canaccord Capital, BMO Capital Markets and Schlumberger. Most recently we have worked together for many years at GMP FirstEnergy.
Auctus has been set up at the beginning of a new decade in which we see significant opportunities in the Energy space. Globally, demand for energy is at record levels and continues to grow. Conversely, investment in traditional energy sources has been severely constrained. We believe this imbalance creates opportunities for both companies and investors.
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