Asset Diversity Provides Capital Allocation Choices
VAALCO diversified its asset base in 4Q22, adding producing properties in Egypt and Canada through the TransGlobe acquisition. Before, the Etame field located ~20 miles offshore Gabon in ~250 feet of water, was the company’s sole source of reserves, production, and cash flow. Egypt and Gabon contributed 47% and 41%, respectively, to 2Q23 working interest (WI) production. Canada contributed 12%. Egypt and Gabon combined to account for 93% of net revenue. VAALCO’s Gabon operations have not been affected by the August 30, 2023, coup d’état in which President Ali Bongo Ondimba was deposed by military officers. General Brice Oligui Nguema was sworn in as Gabon’s new President on September 5. Gabon rejoined OPEC in July 2016 after having been a full member of the organization from 1975 to 1995. Oil exports are a vital source of government revenue. In 2018, VAALCO’s production sharing contract (PSC) for the Etame Marin Block was extended through 2028. The PSC has two five-year extension periods. The terms were grandfathered under a new hydrocarbon law that took effect in 2019. 1H23 operations across VAALCO’s asset base have benefited from improved operational efficiency and better-than-expected well performance on the newly acquired assets in Egypt and Canada. A full-field reconfiguration at Etame was completed in 4Q22 and has contributed to higher operational run times and lower production expenses. Egypt production was also lifted by facility upgrades, adding ~500 b/d of oil for zero incremental operating cost. Strong 1H23 production provided management room to increase the midpoint of FY23 estimated WI production to 23.25 MBOE/d from its prior estimate of 22.4 MBOE/d. Our updated FY23 and FY24 adjusted EBITDA estimates are $270 million and $258 million, respectively. Our FY24 estimates build in some natural decline in Gabon as no new wells are expected to be completed until 4Q24, assuming a mid-2024 commencement of new drilling campaign. Management is committed to generating free cash flow. Our estimates suggest cash could build through 2024, enabling VAALCO to fund the capital program and continue distributing cash to shareholders. The shares are trading at 1.2x and 1.1x our FY23 and FY24 adjusted EBITDA estimates and at a 5.9% dividend yield.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.
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