VAALCO Energy, Inc. (EGY) Q4 2022 Earnings Call Transcript

VAALCO Energy, Inc. (NYSE:EGY) Q4 2022 Earnings Conference Call April 6, 2023 10:00 AM ET

Company Participants

Al Petrie - Investor Relations Coordinator

George Maxwell - Chief Executive Officer

Ron Bain - Chief Financial Officer

Conference Call Participants

Stephane Foucaud - Auctus Advisors

Jeffrey Robertson - Water Tower Research

Charlie Sharp - Canaccord Genuity

Bill Dezellem - Tieton Capital

Operator

Good morning and welcome to the VAALCO Energy Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] Please also note that this event is being recorded today.

I would now like to turn the conference over to Al Petrie, Investor Relations Coordinator. Please go ahead, sir.

Al Petrie

Thank you, operator. Welcome to VAALCO Energy's fourth quarter and full year 2022 conference call. After I cover the forward-looking statements, George Maxwell, our CEO, will review key highlights of the fourth quarter and full year 2022. Ron Bain, 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'd like to point out that we posted a supplemental investor deck on our website that has additional financial analysis, comparisons and guidance that should be helpful. With that, let me proceed with our forward-looking statement comments.

During the course of this conference call, the company 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 our earnings release the presentation posted on our website and in the reports we file with the SEC, including our Form 10-K. Please note that this conference call is being recorded. Let me turn the call over to George.

George Maxwell

Thank you, Al. Welcome to our fourth quarter and full year 2022 earnings conference call. 2022 was truly a transformational year for VAALCO that saw us generate record financial results, successfully complete multiple high-impact operational projects, close an acquisition that nearly doubled production, diversify our asset base and increase SEC proved reserves by 150%.

Additionally, we implemented our first ever dividend program in 2022, paying out $9.3 million in dividends to shareholders. In 2023, we increased our dividend by 92% and approved a stock buyback program in late 2022 to further demonstrate and enhance our commitment to returning meaningful value to our shareholders. Our balance sheet remains debt-free even after we fully funded the largest capital program in our company history, that included drilling multiple wells and completely reconfiguring our Etame field infrastructure, while adding a long-lasting FSO solution that lower cost and extended the economic field life at Etame.

We have a strong production base to help us generate significant cash flow moving forward to fund our dividend, buybacks, capital programs and potentially additional acquisitions where we build additional cash for the future.

Before I go into more detail on these many accomplishments, let me first summarize some high-level financial and operational results that led to a record-breaking year. We grew production by over 40% year-over-year which helped us deliver record-breaking adjusted EBITDAX of $186.6 million in 2022. To put this in perspective, we generated $85.8 million in all of 2021 and $26.6 million in 2020. We fully funded a $160 million capital program with cash on hand and cash from operations. We maintained a strong debt-free balance sheet with significant cash on hand and positioned ourselves to generate meaningful free cash flow in 2023. We have positive momentum in 2023 both operationally and financially, and we are building size and scale to substantially grow VAALCO.

On the TransGlobe acquisition. On October 13, we completed the transformational combination with TransGlobe, which has built a business of scale with a stronger balance sheet and a more diversified production base that derisks our overall portfolio and will underpin VAALCO's future opportunities for success. VAALCO now has a diversified portfolio of assets across four countries, including Gabon, Egypt, Equatorial Guinea and Canada. This larger diversified production base positions us to generate meaningful cash flow in 2023 and beyond to fund the increased stockholder dividend, share buybacks and potential supplemental stockholder returns at a rate that would not have been achievable by either VAALCO or TransGlobe on a standalone basis.

We are also capturing meaningful synergies as a result of the combination and the first trends that we initially outlined have already been captured. We canceled the additional public listings, streamlined the total number of Board and executive positions, actioned a more efficient corporate structure, consolidated our advisors and reduced external reporting requirements. This will save us up to $5 million per year annually, but this is only the beginning. We are increasing optimization, digitalization and back-office efficiencies as well as initiating service, supply chain and operational savings that could potentially double the amount of annualized savings as we continue to implement them over the next 18 to 24 months.

A key part of the value proposition around the combination was the opportunity to significantly increase shareholder returns. In 2022, through dividends and share buybacks, we returned over $12 million in cash to our shareholders. In February of 2023, we nearly doubled our quarterly dividend to $0.0625 per share or $0.25 per share annually from the $0.13 per share in 2022. Based on where our stock is currently trading, this would give a dividend yield of over 5%, which is compelling in today's market. This dividend, when coupled with the share buyback, provides a meaningful return of cash to our shareholders in 2023. When this is combined with the capital appreciation we aim to deliver through our operational efficiency, the result is a strong investment proposition. We believe the market has not yet recognized the value that was created from the combination of our two companies into a single entity, making right now a particularly opportune time for a buyback program.

Bottom line is this acquisition propels VAALCO to a much stronger position, both operationally and financially, providing diversification to maximize cash flow in different pricing environments, reducing the overall risk to our shareholders and allowing us to return additional value to our shareholders. This is done through cash distributions, but also by prudently investing in the future and a very promising asset base across our 4 countries to continue to grow cash flow.

We also continue to evaluate additional accretive acquisition opportunities to invest in that will further build value. The TransGlobe acquisition was a major accomplishment for VAALCO in 2022. And but it was only one of many. At Gabon, we completed a drilling campaign, reconfigured the Etame field for efficiency and entered into a long-term contract for an upgraded FSO.

Now to review Gabon. With the FSO, we successfully completed the highly complex FSO installation, field reconfiguration and full field turnaround in October of 2022. As we have noted, this project positions us to realize substantial and sustainable operating cost savings in 2023 and continuing through the remainder of the decade. The new FSO provides us with additional flexibility and has an effective capacity for storage that is approximately 50% larger than the previous FPSO.

The lower overall cost will also lead to an extension of the economic field life, resulting in a corresponding increase in recovery on reserves at Etame. This project was an incredible feat from an engineering, logistical and operational standpoint. I would like to put this in perspective for you.

We had about 5x the number of personnel in the field during the project with additional boats, equipment and operational responsibilities, all working to ensure that we coordinate and complete the substantial project with minimal downtime to our production. We also had specialized equipment being manufactured, delivered and installed from all over the world during a particularly difficult worldwide supply chain environment. Availability of equipment, consumables and global logistics have been strained over the past two years, which led to upward cost pressure and some delays. Remaining committed to safety and operational excellence, we took every opportunity to reduce project risk exposure. This effort increased our project cost by eliminated costly delays ensured employee safety, mitigated the overall project risk and ensure minimum production interruptions during installation.

A project of this magnitude with regards to Etame occurs once every 20 years. And I'm extremely proud of our team managed and minimized the risk associated with such a large and complex project. Hart Energy wrote an interesting story about this project, which we have posted on the home page of our website and I think you would enjoy reading. Ron will review the cost of the project and our financials in more detail, but we are seeing the cost savings materialize in our Etame operations in 2023; and moving forward, with about $13 million to $16 million of annual savings net to VAALCO and operational costs through 2030.

Turning to the 2021-2022 drilling campaign. Our attention to the drilling campaign at Etame, we have had tremendous success at Etame, drilling and developing the vast resource over the past 20 years. Our overall 2021-2022 drilling campaign was a success as the two initial wells were highly successful and exceeded our pre-drill estimates. The program has materially increased production and extended the economic life of the Etame field, thereby fulfilling the primary objectives of the campaign. We forecast the total drilling program at Etame will achieve payback in 2023 and have strong overall economics at the current strip pricing, demonstrating the strong cash flow profile generated from this quality asset.

Our two highly successful wells, the Etame 8H-ST and the Avouma 3H-ST wells were brought online with rates above our initial internal estimates. The third and fourth wells, the South Tchibala 1HB-ST and the North Tchibala 2H-ST wells, both encountered the entirely producing zones but the production rates and reservoir permeabilities for these wells were below our expectations.

In addition to drilling the four wells and with the rig already on site, it made performing two workovers easier and more economic. The first workover was needed due to a safety valve in the well that required replacement; the second workover on the ETSEM-4H restored production of about 1,350 gross barrels of oil per day. This well went offline as a result of an upper ESP failure and was restored in late Q4. We are evaluating the learnings from this most recent drilling campaign and further evaluating prospects for our next drilling campaign at Etame. We have reviewed our internal processes for target evaluation and proposal planning and have augmented these into a more integrated approach. This process is being applied to the next drilling campaign, which will likely begin mid- to late 2024, subject to rig availability.

With this, we will incorporate all of our learnings from our last two drilling campaigns in Gabon into our planning process, and we are making the necessary changes to do that effectively. Our implementation of the next drilling campaign will depend on rig availability, commodity pricing, supply chain issues and procurement of long lead items. So the exact timing is yet to be determined. We are focused on drilling additional Gamba targets in the next drilling program, while we continue to better map and understand deeper Dentale potential across the Etame. Our primary objectives with any future drilling are successfully adding production and extending the economic life of our Etame asset. We will share with the market additional details on our next drilling campaign once we have our planning complete.

Let me reiterate that we accomplished that with our 2021-2022 drilling campaign and the overall economics of the entire drilling campaign are expected to be over 100% internal rate of return given realized pricing and current strip pricing. This is a very attractive rate of return, especially for a company with no debt, strong cash flow and a low cost of capital.

On Equatorial Guinea -- now let me turn to a discussion on Equatorial Guinea, another area that holds significant future potential for VAALCO. VAALCO owns a working interest in Block P offshore Equatorial Guinea, where they have previously discovered but undeveloped resources as well as an additional exploration potential. In March 2023, we held productive meetings with the Ministry of Mines and Hydrocarbons and our partners in Houston.

During these meetings, we finalized multiple substantive documents for Block P, which includes the Venus development relating to the Production Sharing Contract. We are working on concluding remaining documents and expect to update the market in the second quarter of 2023. We are excited about the future of Equatorial Guinea, and we anticipate a strong, efficient and economic development of this discovery with first oil projected for 2026.

Additionally, there are clear strategic benefits in further diversifying the revenue generation and country focus of our portfolio. We have a proven track record for a development of this kind, and we look forward to demonstrating these capabilities as we progress the Venus discovery into production.

In Egypt, we are focused on drilling opportunities in Egypt, which include drilling the first ever Nukhul horizontal well on our acreage. This well was spudded in December of 2022, and the lateral was successfully drilled encountering good oil and gas shows. Our drilling and completion program in Egypt will be a large part of our 2023 capital program and we continue to develop one of our anchor assets.

In Canada, in the fourth quarter, we drilled several wells in Canada, but completions were delayed into 2023. We will drill a couple more wells as part of our Canadian program and complete them all in 2023.

Turning to reserves. We're very pleased with the substantial growth of our reserve base, which was driven by several of the accomplishments that have already discussed this morning. We have added 18.6 million barrels of oil equivalent from the TransGlobe acquisition and 2 million barrels of oil equivalent from positive revisions, which significantly boosted our SEC proved reserves. The proved reserve increase was partially offset by production of 3.9 million barrels of oil equivalent. SEC proved reserves at year-end increased by 149% to 27.9 million barrels of oil equivalent. This compelling increase in our SEC proved reserves does not include any positive impact from Equatorial Guinea. We believe that once the final documents are executed for Equatorial Guinea, we will begin adding proved reserves as we proceed with the development plan.

The PV-10 value of our proved reserves utilizing SEC pricing of approximately $100 per barrel Dated Brent increased by 529% from $99.3 million to $624 million. This was largely driven by the TransGlobe transaction and from the SEC pricing increase. Our 2P CPR estimate, which includes proven and probable reserves using VAALCO's management assumptions for future Brent escalated crude oil pricing and cost reported on a working interest basis prior to deductions for government royalties saw a year-over-year increase of 292% to 76.4 million barrels of oil equivalent.

The 2P CPR NPV-10 volume increased more than 4x from $183.7 million at year-end 2021 and to $815 million at year-end 2022. I would like to point out that pricing played only a small role in these 2P CPR increases as pricing was kept broadly similar year-on-year. The overall NPV-10 for our SEC proved reserves under management 2P CPR is significantly higher than our current market cap of around $500 million.

We have no debt and a net positive cash and working capital position, but remain significantly undervalued.

I will now review reserves and valuation by asset area. At Gabon, we saw positive technical revisions at Etame and from Southeast Etame and [Iburi] fields as well as strong performance from the Etame field primarily driven by the newly drilled ET 8H well. However, these positive technical movements were outweighed by disappointing drill result from North Tchibala Gamba well and South Tchibala Dentale well and the Avouma field revisions. Taking into account the upward pricing revisions and production for 2022, our net SEC proved reserves at Etame were down 9% year-over-year to 10.2 million barrels of oil. We replaced 67% of 2022 production with new SEC proved reserves at Etame. Our proved SEC NPV 10 for Etame did increase by 246% and to 244 million at year-end 2022.

As I stated earlier, we continue to work on high grading and better identifying future drilling locations at Etame, which we believe will help to increase our reserves in the future. We remain confident in the value of our future potential at Etame. We are planning to return to drilling at Etame in 2024, pending rig availability and commodity pricing, with a drilling campaign heavily weighted on Gamba opportunities.

I would now like to discuss the two asset bases that we acquired last year with the TransGlobe transaction. I remind you that since we are adding those to VAALCO's reserve base, I will not be giving year-over-year comparisons for these areas.

Turning now to Egypt. Our net 2022 SEC proved reserves were 8.6 million barrels of oil, and our proved SEC NPV 10 for Egypt was $227 million at year-end 2022. For 2022, SEC proved reserves, we had a 20% reserve replacement and despite positive impacts due to pricing overall, quite a bit of the upside was offset by reduced cost pools due to higher pricing. We see strong upside potential in Egypt and we'll be focusing our 2023 capital program on development opportunities in Egypt.

Looking at Canada, our net 2022 SEC proved reserves were 9.2 million barrels of oil equivalent. And our proved SEC NPV 10 for Canada was $153 million at year-end 2022. For 2022 SEC reserves, we had a 267% reserve replacement driven by the 2022 capital program that has strong reserves due to most of these wells not being captured in the previous SEC proved reserve base.

In summary, there is a lot to be excited about as we enter 2023. I would like to thank our hard-working team who continue to operate and execute on our strategic vision. We have captured meaningful synergies of the TransGlobe acquisition already and continue to make progress towards capturing more all while continuing to build size and scale. We have completed the highly complex FSO and full field configuration at Etame while completing another drilling campaign. We are working on concluding remaining documents at Block P in Equatorial Guinea and anticipate a strong, efficient and economic development of the Venus discovery with first oil projected for 2026. We are debt-free and remain firmly focused on our strategic vision of accretive growth while maximizing shareholder return opportunities and operating with the highest regard towards ESG.

With that, I would like to turn the call over to Ron to share our financial results.

Ron Bain

Thank you, George. Let me begin by echoing George's comments about our execution on several complex operational and corporate projects simultaneously, including the closing the acquisition of TransGlobe in the fourth quarter of 2022.

I am pleased with our record annual operating performance in 2022. And as we look to 2023 and beyond, we are better positioned today to execute on our strategy while adding and returning value to our shareholders.

Turning to our financials. We generated an adjusted EBITDAX of $49.8 million in the fourth quarter of 2022 and a record $186.6 million in 2022. This was more than double the $85.8 million in 2021. The record adjusted EBITDAX was primarily due to sales volumes increasing by 36% year-over-year and average sales price for crude oil increasing by 34%. We've clearly benefited from higher realized oil pricing, the impact of increased production at Etame and the TransGlobe acquisition, which only contributed to financials after the closing on acquisition on October 13, 2022. These factors have allowed us to fund our strategic initiatives with cash flow and cash on hand, including our drilling and completions CapEx, FSO conversion and field reconfiguration costs as well as our quarterly dividends and our share buyback.

We also reported net income of $17.8 million or $0.19 per diluted share in the fourth quarter of 2022 which included a $10.8 million gain on acquisition, a $5.3 million deferred tax expense and a $7 million in transaction costs associated with the TransGlobe combination.

For the full year 2022, VAALCO reported net income of $51.9 million or $0.74 per diluted share, which included a $44.8 million deferred tax expense, $14.6 million in transaction costs associated with the TransGlobe combination, a $10.8 million gain on acquisition, $8.9 million in FPSO demobilization costs and a $5.1 million in unrealized derivative gains. After normalizing for the deferred tax charge, transaction costs, gain on acquisition, FPSO charges and the unrealized derivative gain, our adjusted net income for the full year 2022 totaled $104.3 million or $1.49 per diluted share as compared to an adjusted net income of $39.6 million or $0.67 per diluted share for 2021. The same factors that drove record adjusted EBITDAX helped to meaningfully increase adjusted net income as well.

Production for the fourth quarter of 14,390 net barrels of oil equivalent per day was up by 57% compared to 9,157 net barrels of oil per day in the third quarter of 2022. Production for the full year 2022 was up 43% from the same period in 2021 due to our drilling program and the production benefit from the TransGlobe transaction after October 14, 2022.

Sales volumes in Q4 2022 were 1.37 million BOE, which was 88% higher than the third quarter of 731,000 and our full year 2022 sales increased 35% to 3.68 million BOE. In the fourth quarter, we had sales across Gabon, Egypt and Canada for the first time. Offsetting the benefit of these high sales volumes was a 32% decrease in realized commodity pricing in the quarter compared to Q3 2022. Despite the decline, we are pleased with our continued strong commodity price realization, which was $70.43 per barrel of oil equivalent in the fourth quarter of 2022. With Canada containing natural gas and natural gas liquids, Egyptian pricing driven by the Ras Gara blend, our pricing will be blended versus the past when it was tied to only Brent oil.

We continue to implement a hedging program to help us provide surety to fund our capital program, mitigate risk and also to protect our commitment to shareholder returns. We have protected via costless collars, a floor price of $65 for a percentage of our production through the first half of the year with upside to at least $100. As we look at 2023 and beyond, we will continue to implement our strategy and examine our capital spending outlay in the near term and the longer term.

Our full derivative position can be found in the year-end earnings release as well as in our supplemental information presentation on our website.

Turning to expenses. Production expense, excluding offshore workovers and stock-based compensation for the fourth quarter of 2022 was $40.8 million, and for the full year 2022 was $107.9 million. These were sequential increases compared to prior periods, driven by higher sales volumes, inflationary pressures and higher levels of operational work in 2022. The inflationary pressure was seen in fuel, boats, personnel, chemicals and miscellaneous costs. We are monitoring our costs and looking for ways to safely reduce expense, but believe that the elevated cost levels driven by the inflationary pressures may continue into 2023. There continues to be increased competition for services.

Over the past two years, we saw a decrease in the number of overall service providers across the supply chain. From a macro level, both the higher demand and the lower supply of services is driving costs higher across the industry. We believe inflationary pressures could continue as we benefit from higher commodity pricing. We had no offshore workovers in the first three quarters of 2022. But in the fourth quarter of 2022, we performed two offshore workovers for $4.7 million. Both workovers were in Gabon with one due to a safety valve in the well that required replacement. The second was to restore production on the Southeast Etame 4H well, which went offline as a result of an upper ESP failure and VAALCO was enabled to restart the upper ESP or the lower ESP to restore production. We were able to restore production in Q4 to that well supporting the base production at Etame.

In the third quarter 2022, we had a onetime charge related to the FPSO demobilization costs of $8.9 million. This allowed us to continue producing into the Nautipa beyond the term of the original contract and allowed us to produce more barrels than we had previously guided for Q3. These onetime costs were incurred to retire the FPSO as we transition to the FSO. There were no similar expenses incurred in the fourth quarter of 2022. After year-end, these costs were cash funded from the abandonment fund.

Depreciation, depletion and amortization expense for the three months ended December 31, 2022, increased to $26.3 million, which was higher than the third quarter of 2022 of $9 million and higher than the $4.1 million in the fourth quarter of 2021. The increase in depreciation, depletion and amortization expense compared to both periods is due to higher depletable costs associated with the FSO field reconfiguration as well as step up to the fair value of DD&A associated with Egypt and Canada following the TransGlobe acquisition.

General and administrative expense for the fourth quarter 2022, excluding stock-based compensation expense, decreased to a negative $0.3 million compared with $2 million in the third quarter of 2022 and $2.2 million in the fourth quarter of 2021. The decrease compared to prior periods was primarily driven by a large increase in operational projects involving a majority of corporate resources, which realized a high percentage of costs charged to projects.

For the full year 2022, G&A costs, excluding stock-based compensation, was $8 million, a decrease of 35% compared with the full year 2021. G&A noncash stock-based compensation expense for the fourth quarter of 2022 was a negative $0.1 million. And for the full year 2022, it was $2.1 million. Income tax expense for the three months ended December 31, 2022, was $6.9 million. This is comprised of a $5.3 million of deferred tax expense and a current tax expense of $1.6 million.

From a cash tax standpoint, the only tax paid is on our profit barrels in both Gabon and in Egypt. No cash tax is payable in Canada due to the availability of net operating losses. The Gabonese government takes their taxes in going through an annual lifting. That lifting occurred in December 2022. We accrued quarterly during the year for the estimated value of the barrels they will lift using quarter end oil pricing. We then adjust for the actual cost based on the pricing at the time the lifting occurs.

The current tax liability was settled in December by the state taking their barrels. To recap, we build up the liability during the year, which impacts working capital akin to extending payables. Then when we settle, it's an outflow of working capital. This is why it impacts our overall cash from operations on the cash flow statement.

For the year ended 31st of December 2022, Income tax was an expense of $71.4 million, comprised of a current tax expense of $26.6 million and a deferred tax expense of $44.8 million. The effective tax rate for the year was 57.8% compared to a PSC tax rate in Gabon of 52.5%. We generated $186.6 million in adjusted EBITDAX in 2022, which is more than double what we generated in 2021. With our recent stock price around $4.50, we continue to trade at a very low multiple of EBITDAX despite paying a strong dividend yield and being debt free.

Additionally, with the TransGlobe combination, we should see a step-up in adjusted EBITDAX in 2023, depending on commodity prices. Our increased market cap implies that we should be trading at a much higher multiple than similar-sized companies enjoy. We believe that we are truly undervalued and that is another reason that we're excited about our share buyback program. We believe right now is an excellent opportunity to buy our common shares at a discount to their intrinsic value and are a very attractive investment of our cash balance.

At December 31, 2022, we had unrestricted cash balance of $37 million. A breakdown of the source and use of cash from the 30th of September is provided in the supplementary deck. TransGlobe had $17 million in completion-related costs to acquisition date and VAALCO had $7 million of completion costs. This, together with the annual state lifting, which settled our tax liability for the year were singular events that occurred only in the fourth quarter.

Adjusted working capital at December 31, 2022, grew to $44.2 million compared with a negative $19 million at September 30, 2022. Receivables grew with the inclusion of TransGlobe with $52 million of outstanding accounts receivable. We had $46 million outstanding with EGPC at the 31st of December, for September through December sales invoices. There were only direct sales in Egypt in Q4, and we successfully were provided a cargo in February 2023. Lifted 450,000 barrels and were paid offshore. Monetization is generally via export cargoes.

In addition, due to the drilling campaign commencing in Q4, we were provided a cash payment of $10 million in Q4. Historically, TGA has approximately $3 million to $4 million per month of expenditure with EGPC sister companies and have successfully managed this via offsets. Again, historically, as part of the merged concession, we had an annual commitment for five years to pay $10 million per annum as a modernization payment and this in February 2023 was achieved not through a cash payment but via our offset.

Canadian accounts receivable was $4.5 million for December, and that's since collected in January. And Gabon for accounts receivable was $1.7 million, and again, since collected in January.

Other balance sheet items worth highlighting are other assets where we hold the backdated entitlement receivable with EGPC of approximately $51 million and continue to work with EGPC on collection. Right-of-use assets have changed with the completion of the contract with Nautipa FPSO coming out of operating lease assets and the replacement of the Teli FSO within the finance lease assets.

In conjunction with the TransGlobe merger, VAALCO assumed an existing revolving loan facility with Alberta Treasury Branches. At the time of closing the merger, there were extending funds, which we repaid. And on January 5, 2023, we decided to exit the facility completely. We will continue to work with our banking group to potentially incorporate and expand our current facility to include the TransGlobe assets.

As has been the case since the third quarter of 2018, we are carrying no debt and our facilities available to utilize for additional accretive acquisition opportunities to continue to build our value.

For the full year 2022, net capital expenditures, excluding acquisitions, totaled $159.9 million on a cash basis and $178.5 million on an accrual basis. These expenditures were primarily related to costs associated with the 2021-2022 drilling program, the FSO conversion on the Etame field reconfiguration as well as drilling activity in Egypt and Canada.

In 2022, VAALCO paid quarterly cash dividends of $0.0325 per common share beginning in Q1 2022 for a total of $0.13 per share annually. That equates to about $9.3 million in cash returned to shareholders through dividends in 2022. In addition, for 2023, the Board approved nearly doubling the dividend to $0.0625 per share quarterly or $0.25 per share annually. The Q1 2023 dividend was paid on March 31, 2023, to stockholders of record at the close of business on March 24, 2023. As stated previously, growing the dividend is a direct result of our increased asset base and cash flow generation ability as a result of the TransGlobe acquisition.

Additionally, in November 2022, the Board approved a share buyback program that provides for an aggregate purchase of currently outstanding common stock of up to $30 million. Through March 31, 2023, VAALCO has repurchased a total of $7.5 million worth of shares or about 1.55 million shares. With the completion of the TransGlobe acquisition on October 13, 2022, we have incorporated all the assets and costs into our guidance moving forward on both Q1 2023 and full year 2023 guidance are available on our supplemental deck.

As a reminder, we show all of our production with working interest and net realized interest. The difference between production working interest and net revenue interest represents royalties paid or taken in barrels. For the total company, we are forecasting Q1 2023 production to be between 22,500 and 23,800 on our working interest barrels of oil equivalent per day and between 17,300 and 18,600 NRI BOE per day. Looking at production by asset, we're expecting Gabon to be between 8,700 and 9,100 NRI BOE per day; Egypt to be between 6,400 and 7,100 NRI BOE per day; and Canada to be between 2,200 and 2,400 NRI BOE per day. For the full year 2023, we are forecasting our total company production to be between 20,400 and 24,400 WI BOE per day between 15,300 and 18,600 NRI BOE per day.

Looking at production by asset, we are expecting Gabon to be between 7,400 and 9,000 NRI BOE per day; Egypt to be between 6,000 and 7,300 NRI BOE per day; and Canada to be between 1,900 and 2,300 NRI BOE per day. For the full year 2023, we are assuming our sales will be in line with our production. But for the first quarter, this was not the case. You will notice that Q1 sales were lower than production because our lifting in Gabon shifted from March into April. We have just completed this lifting of about 630,000 barrels of oil in early April.

Turning to cost for the first quarter 2023. We expect production expense, excluding workover and stock compensation to be between $28 million and $34 million on an absolute basis or between $17.50 and $21 on a working interest per barrel of oil equivalent basis. We also expect offshore workovers to be between zero and $1 million. Our cash G&A for the combined company is expected to be between $3.5 million and $5.5 million. For the full year 2023, we expect production expense, excluding offshore workover and stock compensation to be between $135 million and $157 million on an absolute basis, or between $16 and $20 per BOE. We also expect offshore workovers to be between $4 million and $10 million. Our cash G&A for the combined company is expected to be between $15 million and $20 million.

Finally, looking at CapEx for the first quarter of 2023, and we are forecasting between $25 million and $35 million of CapEx spend. For the full year 2023, we are forecasting between $70 million and $90 million. In 2023, our drilling and completion program is focused in Egypt and Canada. In addition, we have some long lead items for the future drilling campaign in Gabon and some maintenance capital.

Approximately 50% of our 2023 capital is earmarked for Egypt, with the remaining 50% split between Canada, long lead items and maintenance capital. We have 10 to 15 wells planned in Egypt. And in Canada, we are planning to drill between 4 and 8 wells. Also, our capital spending is weighted for the first half of 2023 which can be seen in our Q1 guidance amount compared to the full year 2023 forecast. This does not include any capital associated with Equatorial Guinea but we are assessing the timeline and capital needs for the development plan at the Venus discovery in Block P, and we will have more information associated with EG as we move through 2023 with a target of first production from EG in 2026.

You can see full year and first quarter 2023 guidance in the supplemental slide deck on our website. Additionally, we've added a netback slide to the presentation that shows netbacks for each of the areas broken out by liquids and natural gas. There is also a total company blended netback a different realized pricing where we break out the major cash costs to approximately a free cash flow before CapEx and working capital changes.

One of the costs shown is a differential. Traditionally, VAALCO sold in Gabon based on dated Brent with a differential that was sometimes a premium and sometimes a discount. But overall, it was negligible. Now we have Canadian oil, natural gas and NGLs, all of which trade at a discount based on the market that they are sold in. Also in Egypt, we're marked off of Ras Gara Blend, which is generally a discount to Brent with a further discount for quality of the crude. We're hoping that this additional information and transparency will provide better clarity to the profitability of our producing areas and the company in total at different pricing scenarios.

With that, I will now turn the call back over to George.

George Maxwell

Thanks, Ron. As you heard, 2022 was a very successful and transformative year for VAALCO. We completed an all-equity combination of two undervalued companies, VAALCO and TransGlobe that provides us additional size, scale, cash flow, geographical diversity and creating a more derisked portfolio. We expect our enhanced size and scale to yield meaningful cost synergies, the first tranche of which we have already captured, and we should benefit from a higher trading multiple that has accorded E&Ps with that increased market capitalization. We now have a vast resource base of organic opportunities in four countries: Gabon, Egypt, Equatorial Guinea and Canada.

Our 2P CPR reserves increased 292% to 76.4 million barrels of oil equivalent and our proved reserves increased 149% to 27.9 million barrels of oil equivalent. The 2P CPR NPV 10 value at year-end 2022 is $815 million compared to our current market cap of around $500 million. We invested in drilling campaigns in Gabon, Egypt and Canada and successfully completed one of the most comprehensive and complex operational projects in nearly 20 years at Etame with the FSO conversion and full field reconfiguration. We developed and received approval for a POD from the Equatorial Guinea government for the Venus discovery at Block P and are negotiating final documents for the approval by the partners.

We implemented the first ever dividend program for VAALCO that began in Q1 2022, and we nearly doubled the dividend in 2023, which paid out March 31. And while also implementing a $30 million share buyback program. And through the first six months of the program, we have returned $7.5 million to shareholders through buybacks. Our buybacks are governed by a 10-5b plan that allows us to buy shares even during blackout windows as it sets out our plan for the buybacks. We have been in a blackout period since December 2022. I would also like to point out that we have made the share buyback commitment in August of 2022 when oil prices were much higher, and we stress tested the buyback to $80 oil and communicated that commitment. We have continued to buy back stock below the $80 oil level given that we believe the stock is undervalued and a good use of our cash flow.

We're delivering on what we committed to the market and to our shareholders, and we are in an enviable position as we enter 2023. Our strategy is simple: operate efficiently, invest prudently increase and return value to our shareholders, maximize our asset base and look for accretive opportunities. In 2023, our guidance calls for a significantly lower capital spend profile which should allow us to build meaningful cash throughout the year. In 2023, the forecasted CapEx range is $70 million to $90 million and we are forecasting about $45 million will be returned to shareholders through dividends and share buybacks. The plan for cash flow generated in 2023 over and above our existing obligations, are to build up a reserve for future drilling campaigns and development.

In addition, we will look to enhance or accelerate the return to shareholders as well as evaluating potential accretive opportunities. However, our current projections show that the majority of the cash generation for 2023 above our obligations will be weighted in the back half of 2023 because our capital programs in Egypt and Canada are weighted towards the first half of the year. We are very excited for the future of VAALCO and remain confident that we will continue to deliver superior long-term value to our shareholders. Thank you.

And with that, operator, we are ready to take questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our first question here will come from Stephane Foucaud with Auctus Advisors.

Stephane Foucaud

Thanks for the visibility on the moving part working capital. I have some follow-up on that. I'm trying to reconcile the balance sheet with some of the comments that you made, Ron. So looking at that, the balance sheet has a big foreign income tax receivable of $68 million. Is that mostly Egypt, the 50 million you talked about ranks could confirm that would be great. Then there is in the -- liability is currently $91 million, which I think is referring to accrued liabilities. I think it's mostly CapEx, but if you could confirm that, that would be great. And lastly, in the noncurrent liabilities, there are some jump in the lease, whether it's finance or operating reason? And if you could confirm why it has jumped so much? That would be great.

Ron Bain

Hi, Stephane. Thank you for that. I can -- I'll take each one of those. Yes, the other net -- I think you're referring to -- I think it's just the way the line is on the balance sheet. It's nothing to do with foreign income taxes. That's a line above. The other net $68 million does include the backdated entitlement in the composition of that balance.

As I stated on the call, that's roughly about $51 million that is within that particular balance.

Looking through the accrued liabilities, there's a number of different things in there. You've got your accrued payables that is quite high at the end of the year. One, because we've taken in TransGlobe and virtually doubling the size of the company. So our accrued payables go up along with it. There's capital expenditure, which we got accruals at the end of the year that's gone out in the beginning of 2023. I think that went up about [$15 million] from where we were the previous year. You've got -- always at the end of the year, you've got a higher accrued wages and compensation costs. That's basically mechanical part in relation to the buildup of any bonuses or PTO during the year.

And of course, within there, we've also got the current or the current liability for the modernization payment for Egypt, which is approximately about $10 million. So as you take those things, those are the big increases that take you up to the $91 million that we have in there in the liability section.

The leases, yes. I mean we had -- we obviously had Nautipa and there is an operating lease before. It's been there for 20-plus years. The Teli was taken in. We went live with that in October. And at that point in time, it is a finance lease. That's taken into consideration that we've got a lease term of 8 years plus 2, 1-year options. When you look at that from a U.S. GAAP perspective, and we work through the standard, that becomes the right-of-use finance asset. And we have obviously both the asset and the liability to put onto the balance sheet.

So that's really the main drivers and leases, you've got the operating lease for the Nautipa going off, and that was basically reducing over the last few years as it got through its contract life. And then you've got the new finance lease coming in, in the tally, which will be there for at least the 8-year period.

Stephane Foucaud

So as -- for my follow-up question, for the -- I'm coming back to the -- in the current liability, the $91 million. How do you split between what's account payable, which is about 60? And what would be as part of this other accrued?

Ron Bain

Yes.

Stephane Foucaud

I mean that goes into account payable, doesn't it? I'm trying to understand -- let me explain where I'm coming from, trying to understand what really -- to avoid double counting when I look at the working capital between what is part of the announced CapEx guidance and OpEx guidance, and what is not, what might be carry over for last year or some payment that comes on top of the OpEx and CapEx guidance within this $91 million?

Ron Bain

Yes. Okay. So obviously, the accounts payables in that separate section of 60 million. But to the extent that the invoices are in and we've got accruals, that's sitting with roughly between $25 million and $30 million between all of the different areas. And then you've got capital expenditure, which is again about another $25 million that's accrued CapEx down in that particular line in the Accrued Liabilities and Others.

So you've got 50 million that I would say is a degree of timing. Traditionally, for us, that's been probably running about the 20 million mark in total. But again, because we've doubled -- virtually doubled in size with TransGlobe coming in, you would think that 20 million should be somewhere between 30 million and 40 million, Stephane. So I do think there's an increase overall at the end of the year. That will unwind. But I don't think it's -- it's certainly nothing to the extent that full balance is going to reverse. I would traditionally see somewhere between 30 million and 40 million Stephane in that count period-on-period.

The crude wages, you're talking about $5 million or $6 million of an increase there. There will be an element of timing in Q1. Is that unwind? And then, of course, the modernization payment, as we stated earlier, it was paid by offset in Q1 by EGPC. So basically, we've settled that $10 million liability that we had against receivables that we had with EGPC. So that will definitely move out in the period. Does that help you?

Stephane Foucaud

Yes.

Operator

Our next question will come from Jeff Robertson with Water Tower Research.

Jeffrey Robertson

George, you talked about incremental acquisitions. And with the TransGlobe acquisition in 2022, which added two more countries to VAALCO's portfolio with a little bit different cycle times in terms of the project lives. Can you talk maybe generally about what kind of what characteristics of an acquisition fit VAALCO in its current profile as opposed to what you might have been looking for a year ago?

George Maxwell

Yes. That's a good question, Jeff. I mean first and foremost, the acquisition portfolio to -- for us to go and action anything, it has to be exceedingly compelling, particularly where our stock price is at the moment. And as I mentioned earlier, with a 2P reserve valuation of PV-10 of over $800 million, we've got a little bit to consider more investment in our stock buyback before we really go into a large acquisition.

But part of the drive behind that and the drive behind the TransGlobe acquisition was twofold. One was diversification and derisking the revenue stream. And the second thing was the reserve base, so we have a longer life platform for the company. So the -- when we look at the opportunities that are in the market at the moment, first and foremost, unless it's in our backyard and we are going into a new country, we're looking for producing assets. We're looking for assets that will immediately start to contribute to revenue and cash flow.

And in addition to that, assets that fit our skill set. Now our skill set has increased considerably since the acquisition of TransGlobe to include a lot of onshore expertise as well as shallow water offshore. And with that, similar to the driver for TransGlobe is to ensure we have a 10, 15-year life span around these reserves, so we have the longevity to report forward.

Jeffrey Robertson

And a question, and it sounds like the answer in terms of the free cash flow profile that you mentioned, Ron, with the capital program in '23 weighted to the first half of the year in Egypt, is that imply the production benefit from that capital starts to impact second half of '23 and therefore, you have growing production and less CapEx, therefore, more free cash flow?

Ron Bain

Yes. I would say you're definitely going to have an impact on Q1 on free cash flow with the drilling underway, and we're already seeing some tangible production from that. So what I would say to that is you're very much correct, Jeff, in modeling it that you've got a weighted part on your CapEx to the first half of the year, as we stated. So free cash flow will be impacted by that in the first half of the year and generating a lot of free cash flow from the second half of the year.

Operator

And our next question will come from Charlie Sharp with Canaccord.

Charlie Sharp

Yes. Thank you, and good morning, gentlemen. Appreciate the presentation. Just a question, if I may, on the production expense. I guess two questions really on it. Firstly, I think applying the lens of 136 million to 157 million, can you give us an approximate breakdown geographically of that production expense? And then secondly on it, just looking at the production range that you've indicated, if I assume that the production expense range is related to the production range, that turns out a $18 a barrel production expense. And so I just wonder where that 16 to 20, which you highlight in the presentation, where that comes from? Is that related to production or partially related to production? Or are there other factors?

Ron Bain

Okay, Charlie, I think I can take those. When we look at the overall guidance for the year, we assume production and sales are going to be the same for the whole year. And so most of the year, production expense a barrel of oil is actually done on a sales basis. So that's why those particular statistics look the way they are when you calculate them, it will be based on effectively the sales models.

When I look at the overall composition of that full year guidance on a per barrel basis, 21 to 27, I guess I would probably point you to, to a certain extent, to the netback slide, just for confirmation of those costs. I know that they're blended in there. But when we look at the overall composition of the cost by area, the operating cost by area, by far, the majority is obviously going to still be in Gabon. I would say that that's probably somewhere between 50% and 55%, Charlie. The remaining 45%, I would basically put that to Egypt and Canada, obviously, I would wait that 40% in Egypt and the remaining part in Canada.

Charlie Sharp

That's very helpful. And one small follow-up, if I may. You indicated that you've made some progress in terms of I think you described them as documentation on Equatorial Guinea and that there should be another update in Q2. Can you just say a little bit more about what that means, documentation? And in Q2, are you going to be able to give us some sort of flesh around the details of the plan as you see it at the moment to commercialize Venus at least?

George Maxwell

Okay. Well, I can say a few things, Charlie. One is that a few weeks ago, we had some excellent meetings here in Houston with our partners and with the government, emanate. In those meetings, what we've been working on for some time is whilst we were looking at the plan of development and where we were in Q4 with that plan of development and we got the plan of development approved. We still had a number of issues outstanding in relation to the amendment to the production sharing contract with regards to equity percentages that were historically not signed off properly and one or two other issues.

So we basically had two PSC amendments outstanding with the government. Both of these amendments were executed in March and allow us to move forward to then finalize amendments within the joint operating agreement between the partners, but at the moment remain outstanding, so I can't go into the details of those. But we do expect those to be executed in the very near future.

When we look at the development itself, we have in Q4 of 2022 we went through a peer review of that development, essentially looking at each of the gating criteria from the long lease drilling program through to the plans of doing an extended DSP and the topside facilities. So we're currently optimizing that with the input of the peer review to improve both the efficiency of the development and the -- reduce the complexity of the development.

So when we look at where we are in 2023, the majority of the work that we'll do in relation to Block P for '23 will be finalizing the studies work in coming up with the development plan as optimized. That may include looking at drilling all the wells at the same time as opposed to drilling them staggered just because the economics of moving the rig in there and leaving it there to drill the two producers in the water injector makes more sense. But -- and then looking at the top side.

So we're looking at what real activity will happen in 2023, I expect we will do -- complete our seabed survey to ensure that we can locate the mop and the rig and the location that we plan. We'll finalize the construction and engineering phase and be able to then put a more detailed timeline on the development in -- towards the end of this year. It certainly is planned that when we look at the drilling program for 2024, to utilize that same unit to drill the wells for us in 2025, early '25 for the Venus development.

Charlie Sharp

That's terrific.

Operator

We have time for one more guest with questions, and we will take questions from Bill Dezellem with Tieton Capital.

Bill Dezellem

I have two questions. First of all, would you please discuss further your comment in the press release that you are looking and expect to deliver more synergies with TransGlobe than originally anticipated? And I guess the spirit of the question is I know you noted in -- early in the call, 5 million of savings has been achieved and you're looking for an additional 5 million with other administrative type expenses. Was that really the essence of the comment? Or was there more beyond that, that we should be thinking about?

George Maxwell

I'll take the first part of the question, Bill, and I'll let Ron take the second part on the synergies. When we look at the expectation of further synergies, we're already -- when we look at the operating part of the business, both in Egypt and Canada, we're looking at how we improve the efficiencies of these operations. So when we look at what we've been doing at the moment through the latter part of Q4 and the majority of Q1 and the drilling campaign in Egypt, we've been reducing the time between drilling complete cycles. We, in the last -- in the last two wells, we've hit record reductions in that cycle time. So we're starting to see much more greater efficiencies when it comes to the drilling operations inside Egypt. We're applying that same methodology and with no same challenges to Canada to reduce the cycle time between drill and completion and hookup.

So that allows us to have these great synergies, have the oil on production at a much earlier time and obviously becomes much more efficient for our capital spend.

Ron Bain

Yes. Just taking the -- mainly the G&A component part of that synergies as well, Bill, I think we put on our investment deck back at the time when we were looking for the shareholder vote, that we were looking somewhere between 3 million and 5 million on the short term, we've got more than 5 million on the G&A side right away. That's really achieved on a couple of fronts.

First of all, we had the situation where TransGlobe was not only listed in Toronto but listed in London, too. So we managed to combine and with the local listing we've managed to get out of those particular filings. So that saved a considerable cost. The UK office, we effectively were the TransGlobe executives were based. All those TransGlobe executives, they left the business on basically mid-January. So we got the savings that we were targeting very, very quickly. We've had a number of others in there that we've identified and worked through, including insurance costs, including the interest cost that they had on their ATB facility. There's a variety of different professional services that -- when we look at it, we're not -- we're duplicative for both businesses, and we've managed to take those out.

So more than 5 already achieved. I think where we're really focusing on from a G&A point of view now is we're looking at back-office functions. We're looking at I would think we will be looking at an ERP tool in the near future so that we can get everyone on the same system rather than having three or four different systems, which we've got today. That in itself will bring efficiencies and I would say, improvements in our control process, too. So that's what we target and build for 2023.

Bill Dezellem

That's helpful. And then relative to the Arta 77HC well in Egypt that you said had encountered some good sands. What's the time line to bring that on? And with the wells you are drilling in Egypt, what do you think about in terms of the -- what is a more normal production level?

George Maxwell

Okay. The well is on clean up right now. So I can't really on the production rate until the completion of cleanup is done, but it is flowing. When we look at the changes we're making in both cycle time and production efficiencies inside Egypt. I mean I think we had Egypt going down around 10,000 barrels a day working interest towards the turn of the year. We're already seeing at least a 10% improvement in that as we come into the end of Q1 on a working interest -- sorry, on a gross basis on a gross basis.

So we do start to see improvement. We are looking at how much more we can get efficiency out into the production system in Egypt. We've looked at some of the activities that they perform annually in turn emptying to the storage facility, and we're looking at moving these quarterly to reduce these cycles that we see traditionally in Q3. So -- and I think we're starting to see benefits from that.

When we look at the relationship between the company and its joint venture partner in EGPC, we're seeing considerable improvements there in cooperation. And again, in how we execute the program. So I think we're still very hopeful that we can continue to improve the efficiencies in Egypt. It is one of our key focuses. You heard Ron talked earlier about the cash situation and how we've been managing that in Egypt. We are -- we've seen other operators make statements around Egypt and the cash position as regard to the difficulties in liquidity that, that country is going through. We keep a very close focus on that and a very close dialogue. We will -- as long as the operation and the interaction with our partners remains as it is at the moment, we will continue to make the improvements and make the investments.

Bill Dezellem

That's helpful. And then my final question is that you spent -- got a fair amount of time in multiple components of your opening remarks or your prepared remarks referencing VAALCO being undervalued. With that being said, what do you think investors are missing, whether it be relative to the TransGlobe acquisition or in total today that's leading to that lack of favorable valuation?

George Maxwell

That's a good question. I mean, as we've discussed in the past, traditionally, in either the London market or the New York market, West African or an African-focused producer always trades at a discount. But the level of discount is what we need to discuss.

What's the market missing? Well, I think we've made a big step towards giving the market the confidence with the value issues today because what the market may have been missing and it's a number of questions have come from the analysts both in London and here in the United States, its longevity. Where are the reserves? Where is the position that goes two, three, four years out? That we can invest in that gives you suture to cash flow.

The TransGlobe acquisition, in addition to the position we have in Gabon, provides that surety. The development that we've went forward with in Equatorial Guinea that gives us that forward-looking position. It puts -- it puts a lot more value into our balance sheet in 2022 through Equatorial Guinea through the acquisition than has ever been there before. And I think the market is missing that at the moment. We continue -- from the numbers we've guided to for 2023, we're guiding to a significant number in revenue and production which will lead itself to a significant number in EBITDAX that we don't guide to, but people can work that out.

So I think once the analysts sit down and run that equation, and you say that you're basically running at sometimes less than 2x EBITDAX, then we're looking for that step change in value as we continue to emphasize these values are on our balance sheet.

Bill Dezellem

Great. Thank you both. And have a good weekend.

Operator

And this concludes our question-and-answer session. I'd like to turn the conference back over to George Maxwell for any closing remarks.

George Maxwell

Thank you. I'd like to thank everyone for listening into our delayed 2022 earnings call. It's hopefully, from the listeners that we've managed to put a lot more color around our Q4 and 2022 activities and also put some color around where we see 2023 and some of the questions we've been asked have assisted in us given the ability to emphasize that point.

I think the company has clearly transformed. I think when you look at the numbers that we talked about today, particularly with regard to our ability for cash flow generation, our ability the reserve base and the company for future value, our ability in utilizing that cash and delivering significant value back to shareholders, not just in the potential for capital appreciation for the stock, but also in dividends and buybacks.

You heard me state in the closing remarks that we will also look at the opportunity to continue and perhaps accelerate that buyback position as soon as the company comes out of its blackout period, which will be sometime in May with regard to our Q1 results. Again, the commitment is there to continue to do that. Well, the stock price clearly is in a depressed state versus the value that we've been talking about that contained in our balance sheet.

So I thank everyone for listening today. As I say at the end of every call, for every shareholder, if they want to get in touch with Al or Chris and want to have a follow-up conversation with management. We're always willing and able to do that. Thank you very much.

Operator

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.