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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 September 30, 2002
[_] 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
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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
Transitional Small Business Disclosure Format (Check one)
Yes ___ No X
---
As of November 14, 2002 there were outstanding 20,836,350 shares of Common
Stock, $.10 par value per share, of the registrant. In addition, as of November
14, 2002 there were outstanding 10,000 shares of Preferred Stock convertible
into 27,500,000 shares of Common Stock.
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VAALCO ENERGY, INC. AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 2002 (Unaudited) and December 31, 2001 ................................... 3
Statements of Consolidated Operations (Unaudited)
Three months and nine months ended September 30, 2002 and 2001 ......................... 4
Statements of Consolidated Cash Flows (Unaudited)
Nine months ended September 30, 2002 and 2001 .......................................... 5
Notes to Consolidated Financial Statements (Unaudited) .................................... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................................................... 10
CONTROLS AND PROCEDURES ................................................................... 17
PART II. OTHER INFORMATION ............................................................... 18
2
VAALCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands of dollars, except par value amounts)
September 30, December 31,
2002 2001
--------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,500 $ 9,804
Funds in escrow 10,038 38
Receivables:
Trade 142 179
Accounts with partners 2,794 --
Other 212 255
Crude oil inventory at cost 600 --
Materials, fuel and supplies, net of allowance for inventory obsolescence of $5 739 324
Prepaid expenses and other 196 34
--------------- --------------
Total current assets 21,221 10,634
--------------- --------------
PROPERTY AND EQUIPMENT-SUCCESSFUL EFFORTS METHOD
Wells, platforms and other production facilities 24,762 2,648
Undeveloped acreage 515 459
Work in progress -- 6,692
Equipment and other 129 98
--------------- --------------
25,406 9,897
Accumulated depreciation, depletion and amortization (2,177) (2,026)
--------------- --------------
Net property and equipment 23,229 7,871
--------------- --------------
OTHER ASSETS:
Deferred tax asset 392 393
Other long-term assets 848 50
--------------- --------------
TOTAL $ 45,690 $ 18,948
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 13,300 $ 1,173
Accounts with partners -- 4,323
Current portion of long term debt 2,000 --
Income taxes payable 2 30
--------------- --------------
Total current liabilities 15,302 5,526
--------------- --------------
LONG TERM DEBT 13,215 --
MINORITY INTEREST 340 13
FUTURE ABANDONMENT COSTS 3,294 3,294
--------------- --------------
Total liabilities 32,151 8,833
--------------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock, $25 par value, 500,000 shares authorized;
10,000 shares issued and outstanding in 2002 and 2001 250 250
Common stock, $.10 par value, 100,000,000 authorized shares 20,836,350 and
20,749,964 shares issued in 2002 and 2001 of which 5,395 are in the treasury 2,084 2,075
Additional paid-in capital 46,412 41,215
Subscription receivable (569) --
Accumulated deficit (34,626) (33,413)
Less treasury stock, at cost (12) (12)
--------------- --------------
Total stockholders' equity 13,539 10,115
--------------- --------------
TOTAL $ 45,690 $ 18,948
============== ==============
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 September 30, Nine months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
----------- ----------- ----------- ----------
REVENUES:
Oil and gas sales $ 199 $ 396 $ 671 $ 1,230
Gain on sale of assets -- -- -- 215
----------- ----------- ----------- ----------
Total revenues 199 396 671 1,445
----------- ----------- ----------- ----------
OPERATING COSTS AND EXPENSES:
Production expenses 136 195 356 504
Exploration expense 48 -- 57 --
Depreciation, depletion and amortization 40 73 147 125
General and administrative expenses 307 494 1,005 1,282
----------- ----------- ----------- ----------
Total operating costs and expenses 531 762 1,565 1,911
----------- ----------- ----------- ----------
OPERATING LOSS (332) (366) (894) (466)
OTHER INCOME (EXPENSE):
Interest income 44 28 89 250
Interest expense and financing charges (375) -- (375) --
Equity loss in unconsolidated entities -- 2 -- (443)
Other, net (22) 4 (31) 2
----------- ----------- ----------- ----------
Total other income (expense) (353) 34 (317) (191)
----------- ----------- ----------- ----------
LOSS BEFORE TAXES (685) (332) (1,211) (657)
Income tax expense -- (1) 2 16
----------- ----------- ----------- ----------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ (685) $ (331) $ (1,213) $ (673)
=========== =========== =========== ==========
LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (0.03) $ (0.02) $ (0.06) $ (0.03)
=========== =========== =========== ==========
WEIGHTED AVERAGE COMMON SHARES:
BASIC AND DILUTED 20,788 20,745 20,760 20,745
=========== =========== =========== ==========
See notes to consolidated financial statements.
4
VAALCO ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(in thousands of dollars)
Nine months Ended September 30,
------------------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,213) $ (673)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization 147 125
Equity loss in unconsolidated entities -- 443
Exploration expense 57 --
Gain on sale of assets -- (215)
Change in assets and liabilities that provided (used) cash:
Funds in Escrow -- 715
Trade receivables 37 29
Accounts with partners (7,117) (63)
Other receivables 43 31
Crude oil inventory (600) --
Materials, fuel and supplies (415) (1)
Prepaid expenses and other (161) (114)
Accounts payable and accrued liabilities 12,127 45
Income taxes payable (28) (10)
--------- --------
Net cash provided by operating activities 2,877 312
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Disposals of property and equipment -- 1,023
Exploration expense (57) --
Additions to property and equipment (15,509) (6,000)
Funds in Escrow (10,000) --
Investment in unconsolidated entities -- 169
Other (467) 4
--------- --------
Net cash used in investing activities (26,033) (4,804)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 15,215 --
Proceeds from issuance of common stock in subsidiary -- --
and from the issuance of warrants 4,637 --
--------- -------
Net cash provided by financing activities 19,852 --
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,304) (4,492)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,804 12,440
--------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,500 $ 7,948
========= ========
Cash Income Taxes Paid $ -- $ 21
========= ========
Cash Interest Paid $ 35 $ 21
========= ========
See notes to consolidated financial statements.
5
VAALCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(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, 2001.
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
On September 8, 2002 the Company, as Operator of the Etame Field offshore
Gabon, commenced production from the field at an average rate in excess of
14,000 BOPD.
In the fourth quarter of 2001, the Company, as Operator, announced its
intent to develop the Etame discovery located offshore of the Republic of
Gabon. Based upon estimates by the Company's independent reserve engineers,
the Company recorded 6.1 million barrels of proved undeveloped oil reserves
at December 31, 2001 representing $23.1 million of net present value of
future cash flows in conjunction with the plan to develop the field.
The budget for the field development was $54.3 million dollars ($16.5
million net to the Company) to complete and gravel pack three existing
wells with subsea wellheads, and to lay flowlines to connect the wells to a
1.1 million barrel floating production storage and offloading tanker
("FPSO"). Major contracts for the FPSO, wellheads, flowlines, and the
drilling rig were awarded and entered into to perform the project. A
semi-submersible drilling rig completed the three wells. A flowline
installation vessel installed six flowlines (two for each well) and three
control umbilicals from the wells to the location where the FPSO was
moored. The FPSO had completed retrofitting in Singapore and arrived on
location on August 29, 2002 and was moored and ready to receive the
flowlines on September 3, 2002. Flowline hookup was completed on September
7, 2002 and production commenced the next day.
6
VAALCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)
To fund its share of the development project, the Company entered into a
line of credit for $10.0 million with the International Finance Corporation
("IFC"), a subsidiary of the World Bank. The loan agreement was signed on
April 19, 2002. The first draw of $7.0 million was made in early July 2002.
The balance of the loan was funded in early October 2002. Prior to project
completion date, which is projected to occur 90 days after first oil
production, the IFC loan is guaranteed by the Company via cash received
from loans from the 1818 Fund II, L.P. (the "1818 Fund") and an investor.
During the third quarter of 2002, the 1818 Fund loan was amended and raised
from $10 million to $13 million in the form of a subordinated note secured
by a second lien on certain collateral with respect to the Company's
investment in VAALCO Gabon (Etame), Inc. including the $10 million cash
collateral to support the Company's guarantee of the IFC loan. The interest
rate on the loan is 10%. The $3 million increase in the loan was part of
$6.0 million in additional financing obtained by the Company from an
investor to help pay for its share of the development project and other
planned exploration activities on the Etame Block. The Company established
a new subsidiary, VAALCO International, Inc., which owns VAALCO Gabon
(Etame), Inc., the subsidiary that owns the interest in the Gabon
Production Sharing Contract. An investor agreed to provide $3.0 million of
equity net of transaction costs and the $3.0 million additional loan
mentioned above in return for a 9.99% stake in VAALCO International, Inc.
VAALCO Energy, Inc will own the remaining 90.01% of the stock of VAALCO
International Inc.
In conjunction with receiving the 1818 Fund loan, the Company on June 10,
2002 issued 15 million warrants, each of which entitles the holder to
purchase one share of the Company's Common Stock at a price of $0.50 per
share, 7.5 million of which will be cancelled if project completion occurs
on the Etame Block. In conjunction with the additional $3.0 million loan,
the Company on August 30, 2002 issued 4.5 million warrants, each of which
entitles the holder to purchase one share of the Company's Common Stock at
a price of $0.50 per share, 2.25 million of which will be cancelled if
project completion occurs on the Etame Block. Management has allocated
$2.465 million of the anticipated proceeds from the $13 million loan to the
warrants, which has been accounted for in the equity section of the balance
sheet as additional paid in capital, with a corresponding offset to debt
discount, which is being amortized to interest expense. The allocation is
based on the relative fair values of the loan and the warrants. The
valuation of the warrants is based upon a Black Scholes model, adjusted for
liquidity issues associated with a potential sale of such a large volume of
shares. The Company formed an independent committee of the Board of
Directors, which received a fairness opinion with regards to the terms of
the 1818 Fund loan.
As of the date of this filing, $10.0 million of the 1818 Fund loan has been
drawn, which has been placed in escrow to guarantee the IFC loan until
project completion. If certain conditions are met, the Company could draw
down the additional $3.0 million available under the 1818 Fund Loan. If the
$3.0 million balance of the 1818 Fund loan is not drawn,
7
VAALCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)
1818 Fund will return 4.5 million of its warrants on May 1, 2003. The
Company is carrying a subscription receivable associated with the $3.0
million balance of the 1818 Fund loan which has not been drawn, which would
be extinguished if the 4.5 million warrants are returned. At the present
time, the Company does not anticipate drawing the remaining $3.0 million
balance available under the 1818 Fund loan.
Summary of Short and Long Term Debt as of September 30, 2002
(Thousands of dollars)
IFC loan 7,000
1818 Fund loan
1818 Fund 7,000
Investor 3,000
Less debt discount for issuance of warrants
1818 Fund (1,307)
Investor ( 589)
Amortization of debt discount 111
------
Total Short and Long Term Debt 15,215
======
3. EARNINGS PER SHARE
The weighted average common shares outstanding represent those of VAALCO
for the applicable periods.
The Company accounts for earnings per share in accordance with 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. The Company's
preferred stock is convertible into 27,500,000 shares of common stock. As
all of the convertible securities were anti-dilutive at September 30, 2002,
basic EPS is equal to diluted EPS.
4. RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." The Statements change the accounting for business
combinations and goodwill in two significant ways. SFAS No. 141 requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method will be prohibited. SFAS No. 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Thus,
amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon
8
VAALCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(Unaudited)
adoption of that statement, which for the Company was January 1, 2002. The
adoption of these statements did not have a material effect on the
Company's financial position, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible,
long-lived assets and the associated asset retirement costs. This Statement
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred by
capitalizing it as part of the carrying amount of the long-lived assets. As
required by SFAS No. 143, the Company will adopt this new accounting
standard on January 1, 2003. The Company is currently evaluating the
effects of adopting this pronouncement.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement establishes a
single accounting model for the impairment or disposal of long-lived
assets. As required by SFAS No. 144, the Company adopted this new standard
on January 1, 2001. The adoption of this statement did not have a material
effect on the Company's financial position, results of operation or cash
flows.
In April 2002 the FASB issued Statement on SFAS No. 145, "Recission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that are similar to sale-leaseback
transactions. The statement also amends other existing pronouncements. This
statement is effective for fiscal years beginning after May 15, 2002. The
impact of adopting this statement on the consolidated financial position or
results of operations is not expected to be material.
In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses accounting and reporting
for costs associated with exit and disposal activities and replaces
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". This statement is
effective for exit or disposal activities that are initiated after December
31, 2002. The impact of adopting this statement on the consolidated
financial position or results of operations is not expected to be material.
9
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 does not presently engage in any hedging
activities and has no plans to do so in the near future.
The Company participated in the development of the Etame Block, which the
Company operates on behalf of a consortium of five companies offshore of the
Republic of Gabon. The Company administered a $54.3 million budget ($16.5
million net to the Company) to execute the development project. Substantially
all of the Company's capital resources and personnel have been dedicated to the
completion of the development project in 2002.
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
higher during the first and fourth quarters of the year.
10
VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The following describes the critical accounting policies used by VAALCO in
reporting its financial condition and results of operations. In some cases,
accounting standards allow more than one alternative accounting method for
reporting, such is the case with accounting for oil and gas activities described
below. In those cases, the Company's reported results of operations would be
different should it employ an alternative accounting method.
Successful Efforts Method of Accounting for Oil and Gas Activities.
The Securities and Exchange Commission ("SEC") prescribes in Regulation S-X the
financial accounting and reporting standards for companies engaged in oil and
gas producing activities. Two methods are prescribed: the successful efforts
method and the full cost method. Like many other oil and gas companies, VAALCO
has chosen to follow the successful efforts method. Management believes that
this method is preferable, as the Company has focused on exploration activities
wherein there are risks associated with future success and as such earnings are
best represented by attachment to the drilling operations of the Company.
Costs of successful wells, development dry holes and leases containing
productive reserves are capitalized and amortized on a unit-of-production basis
over the life of the related reserves. Estimated future abandonment and site
restoration costs, net of anticipated salvage values, are amortized on a unit of
production basis over the life of the related reserves. Other exploration costs,
including geological and geophysical expenses applicable to undeveloped
leasehold, leasehold expiration costs and delay rentals are expensed as
incurred.
In accordance with accounting under successful efforts, the Company reviews
proved oil and gas properties for indications of impairment whenever events or
circumstances indicate that the carrying value of its oil and gas properties may
not be recoverable. When it is determined that an oil and gas property's
estimated future net cash flows will not be sufficient to recover its carrying
amount, an impairment charge must be recorded to reduce the carrying amount of
the asset to its estimated fair value. This may occur if a field discovers lower
than anticipated reserves or if commodity prices fall below a level that
significantly affects anticipated future cash flows on the field. The Company
determines if an impairment has occurred through either identification of
adverse changes or as a result of the annual review of all fields. For the year
ended December 31, 2001, impairments of $567,145 were recognized. No impairments
have been recognized in 2002.
Undeveloped Acreage.
At September 30, 2002, the Company had undeveloped acreage on its balance sheet
totaling $515,000, representing costs that are not being amortized pending
evaluation of the respective leasehold for future development. Unproved
properties are assessed quarterly for impairment in value, with any impairment
charged to expense.
11
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 sources of capital have been from cash flows
from operations, private sales of equity, borrowings and purchase money debt. In
2002 and 2001, the Company's primary uses of capital have been to fund its
exploration and development operations in Gabon.
The Company commenced production from the Etame field on September 8, 2002.
Total production for the month of September was 289,000 gross barrels (74,000
net barrels) of oil. Oil is produced into a tanker and will be sold via
ship-to-ship transfers. The crude oil will be sold under a contract with Shell
Western Supply and Trading Limited ("Shell") with Shell taking title to the oil
upon transfer of the oil to their loading tanker. The contract is denominated in
U.S. dollars and will be based on the monthly average of Dated Brent adjusted
for transportation costs. The first oil sale occurred in November 2002. The
Company carries the costs of producing crude oil stored in the tanker as
inventory until the oil is sold.
The Company produces oil from the Matinloc and Nido fields in the South China
Sea, the Philippines. During the year ended December 31, 2001, total production
from the fields was approximately 308,000 gross barrels (69,000 barrels net) of
oil. For the nine months ended September 2002 production from the fields was
186,000 gross barrels (40,000 net barrels) of oil. The Company markets its share
of crude oil under an agreement with Caltex, a local Philippines refiner.
Substantially all of the Company's crude oil and natural gas is sold at posted
or index prices under short-term contracts, as is customary in the industry.
While the loss of either Shell or Caltex as 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.
Domestically, the Company produces from wells in Brazos County, Texas. Domestic
production is sold under two contracts, one for oil and one for gas. The Company
has access to several alternative buyers for oil and gas sales domestically.
The Company elected to terminate its joint venture with Paramount Petroleum,
Inc., effective June 1, 2001. The joint venture focused on domestic onshore
prospects in Mississippi, Alabama and Louisiana. In connection with the wind up
of the joint venture, the Company received $169,000 in cash, a receivable for
$47,000 representing its share of cash in the joint venture and $259,000 of
undeveloped acreage representing its proportionate 93.75% working interest in
all remaining prospects within the joint venture. Final completion of assignment
documentation is ongoing. The Company has an interest in production from two
small gas discoveries drilled by the joint venture.
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,
12
VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 2002, the Company anticipates that it will make capital expenditures on
oil and gas properties of approximately $15.9 million, all in Gabon. The Company
has entered into a line of credit for its subsidiary VAALCO Gabon (Etame), Inc.
in the amount of $10.0 million with the IFC to partially fund its share of the
development project, which loan agreement was signed on April 19, 2002. The
first draw of $7.0 million was made in early July 2002. The balance of the loan
was funded in early October 2002. Prior to project completion, the IFC loan is
to be guaranteed by the Company and cash collateralized with proceeds from a
loan from the 1818 Fund. Project completion requires gross project production of
14,250 BOPD and gross proved reserves of 16.5 million barrels and compliance
with financial covenants and other conditions, which may not be achieved. The
IFC requires project completion to occur prior to March 31, 2003.
During the third quarter of 2002, the 1818 Fund loan was amended and raised from
$10 million to $13 million in the form subordinated note secured by a second
lien on certain collateral with respect to the Company's investment in VAALCO
Gabon (Etame), Inc. including the $10 million cash collateral to support the
Company's guarantee of the IFC loan. The interest rate on the loan is 10%. The
$3 million increase in the loan was part of $6.0 million in additional financing
obtained by the Company from an investor to help pay for its share of the
development project and other planned exploration activities on the Etame Block.
The Company established a new subsidiary VAALCO International, Inc., which owns
VAALCO Gabon (Etame), Inc., the subsidiary that owns the interest in the Gabon
Production Sharing Contract. An investor agreed to provide $3.0 million of
equity net of transaction costs and the $3.0 million additional loan mentioned
above in return for a 9.99% stake in VAALCO International, Inc. VAALCO Energy,
Inc will own the remaining 90.01% of the stock of VAALCO International, Inc.
In conjunction with receiving the 1818 Fund loan, the Company on June 10, 2002
issued 15 million warrants, each of which entitles the holder to purchase one
share of the Company's Common Stock at a price of $0.50 per share, 7.5 million
of which will be cancelled if project completion occurs on the Etame Block. In
conjunction with the additional $3.0 million loan, the Company on August 30,
2002 issued 4.5 million warrants, each of which entitles the holder to purchase
one share of the Company's Common Stock at a price of $0.50 per share, 2.25
million of which will be cancelled if project completion occurs on the Etame
Block. Management has allocated $2.465 million of the anticipated proceeds from
the $13 million loan to the warrants, which has been accounted for in the equity
section of the balance sheet as additional paid in capital, with a corresponding
offset to debt discount, which is being amortized to interest expense. The
allocation is based on the relative fair values of the loan and the warrants.
The valuation of the warrants is based upon a Black Scholes model, adjusted for
liquidity issues associated with a potential sale of such a large volume of
shares. The Company
13
VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
formed an independent committee of the Board of Directors, which received a
fairness opinion with regards to the terms of the 1818 Fund loan.
As of the date of this filing, $10.0 million of the 1818 Fund loan has been
drawn, which has been placed in escrow to guarantee the IFC loan until project
completion. If certain conditions are met, the Company could draw down the
additional $3.0 million available under the 1818 Fund loan. If the $3.0 million
balance of the 1818 Fund loan is not drawn, 1818 Fund will return 4.5 million of
its warrants on May 1, 2003. The Company is carrying a subscription receivable
associated with the $3.0 million balance of the 1818 Fund loan which has not
been drawn, which would be extinguished if the 4.5 million warrants are
returned. At the present time, the Company does not anticipate drawing the
remaining $3.0 million balance available under the 1818 Fund loan.
Summary of Short and Long Term Debt as of September 30, 2002
(Thousands of dollars)
IFC loan 7,000
1818 Fund loan
1818 Fund 7,000
Investor 3,000
Less debt discount for issuance of warrants
1818 Fund (1,307)
Investor (589)
Amortization of debt discount 111
------
Total Short and Long Term Debt 15,215
======
RESULTS OF OPERATIONS
Three months ended September 30, 2002 compared to three months ended September
30, 2001
Revenues
Total revenues were $199 thousand for the three months ended September 30, 2002
compared to $396 thousand for the comparable period in 2001. Lower volumes
produced in the Philippines caused the decline in revenues.
Operating Costs and Expenses
Total production expenses for the three months ended September 30, 2002 were
$136 thousand compared to $195 thousand during the same period in 2001.
Exploration expense of $48 thousand for seismic exploration activities in Gabon
was incurred during the three months ending September 30, 2002. Depreciation,
depletion and amortization for the three months ending September 30, 2002 was
$40 thousand compared to $73 thousand for the same period in 2001 due to lower
volumes producing in Texas during 2002. General and administrative expenses for
the three months ended September 30, 2002 and 2001 were $307 thousand and
14
VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$494 thousand, respectively. Overhead cost reimbursements associated with the
development project in Gabon during 2002 accounted for the decrease in general
and administrative costs.
Other Income (Expense)
Interest income of $44 thousand was received from amounts on deposit in 2002
compared to $28 thousand in the quarter ended September 30, 2001. The increase
is attributed to higher balances on deposit in 2002 as compared to 2001.
Interest expense and financing charges in the quarter ended September 30, 2002
were $375 thousand consisting of $198 thousand in interest expense and $177
thousand of amortization of financing costs associated with the IFC and 1818
Fund loans. With the termination of the Paramount Joint Venture in June 2001,
there was no equity gain or loss for unconsolidated entities in the second
quarter of 2002, compared to an equity gain in unconsolidated entities in the
quarter ended September 30, 2001 of $2 thousand.
Income Taxes
An income tax reduction of $1 thousand for the quarter ending September 30, 2001
was associated with activity in the Philippines. No taxes were due in the
quarter ending September 30, 2002.
Net Loss
Net loss attributable to common stockholders for the three months ended
September 30, 2002 was $685 thousand, compared to a net loss attributable to
common stockholders of $331 thousand for the same period in 2001. The higher net
loss in 2002 was primarily due to lower revenues from production, interest
expense and financing charges.
Nine months ended September 30, 2002 compared to nine months ended September 30,
2001
Revenues
Total revenues were $671 thousand for the nine months ended September 30, 2002
compared to $1,445 thousand for the comparable period in 2001. Higher production
rates plus a gain on the resale of certain interests acquired in Gabon in 2001
contributed to the higher 2001 revenues.
Operating Costs and Expenses
Total production expenses for the nine months ended September 30, 2002 were $356
thousand compared to $504 thousand for the same period in 2001. Expenditures in
2001 included additional activity at the Nido field. Exploration expense of $57
thousand was incurred for exploration activities in Gabon and for seismic
reinterpretation in the Philippines during the nine months ending September 30,
2002. Depreciation, depletion and amortization increased from $125 thousand in
the nine months ended September 30, 2001 to $147 thousand in the nine months
ended September 30, 2002 due to higher depletion rates per barrel oil equivalent
from
15
VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the Brazos County wells. General and administrative expenses for the nine
months ended 2002 and 2001 were $1,005 thousand and $1,282 thousand,
respectively. The Company benefited from overhead reimbursements associated with
capital expenditure programs in Gabon in both 2002 and 2001.
Other Income (Expense)
Interest income of $89 thousand was received from amounts on deposit in 2002
compared to $250 thousand in the nine months ended September 30, 2001. The
decrease is attributed to smaller average balances on deposit in 2002 when
compared to 2001 and lower interest rates in 2002. Interest expense and
financing charges in the nine months ended September 30, 2002 were $375 thousand
consisting of $198 thousand in interest expense and $177 thousand of
amortization of financing costs associated with the IFC and 1818 Fund loans. The
equity loss in unconsolidated entities in the nine months ended September 30,
2001 was $443 thousand. The loss reported in the nine months ended September 30,
2001 was associated with the Paramount joint venture and consisted of the write
off of unsold prospect costs. The joint venture was terminated on September 30,
2001.
Income Taxes
The Company incurred $2 thousand in income tax expense associated with activity
in the Philippines, in the nine months ended September 30, 2002, compared to $16
thousand in 2001 due to greater taxable profits in the Philippines in 2001.
Net Loss
Net loss attributable to common stockholders for the nine months ended September
30, 2002 was $1,213 thousand, compared to a net loss attributable to common
stockholders of $673 thousand for the same period in 2001. Lower production
rates in 2002 contributed to lower revenues for the nine months ending September
30, 2002 as compared to the comparable period in 2001. Interest expense and
financing charges commenced in the third quarter of 2002 on the IFC and 1818
Fund loans. Also in 2001, the Company benefited from the gain on the resale of
certain assets acquired in Gabon.
16
VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission.
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
17
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
On August 23, 2002, the Company issued warrants to purchase 4.5 million shares
of common stock at a price of $0.50 per share, 2.25 million of which the Company
will receive back if project completion occurs on the Etame Block. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources and Liquidity." The warrants were issued in
connection with a loan from an investor, the proceeds of which have been used to
collateralize a loan with IFC. The warrants are exercisable for five years from
the date of issuance. Half of the warrants issued are immediately exercisable,
and warrants to purchase 2.25 million shares of common stock are not exercisable
for two years from the date of issuance. The issuance of the warrants was exempt
pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3. Articles of Incorporation and Bylaws
3.1 Restated Certificate of Incorporation (incorporated by reference
to exhibit 4.1 to the Company's Registration Statement on Form S-3
filed with the Commission on July 15, 1998, Reg. No. 333-59095).
3.2 Certificate of Amendment to Restated Certificate of Incorporation
(incorporated by reference to exhibit 4.2 to the Company's
Registration Statement on Form S-3 filed with the Commission on
July 15, 1998, Reg. No. 333-59095).
3.3 Bylaws (incorporated by reference to exhibit 4.3 to the Company's
Registration Statement on Form S-3 filed with the Commission on
July 15, 1998, Reg. No. 333-59095).
3.4 Amendment to Bylaws (incorporated by reference to exhibit 4.4 to
the Company's Registration Statement on Form S-3 filed with the
Commission on July 15, 1998, Reg. No. 333-59095).
3.5 Designation of Convertible Preferred Stock, Series A (incorporated
by reference to exhibit 4.1 to the Company's Report on Form 8-K
filed with the Commission on May 6, 1998, File No. 000-20928).
4. Instruments Defining the Rights of Security Holders
4.1 Warrant granted to Nissho Iwai Corporation to purchase 2,250,000
shares, par value $.10, of common stock of the Company dated
August 23, 2002.
18
4.2 Warrant, subject to vesting requirements, granted to Nissho
Iwai Corporation to purchase 2,250,000 shares, par value $.10,
of common stock of the Company dated August 23, 2002.
10. Material Agreements
10.1 Stock Purchase Agreement dated as of August 23, 2002, by and
between the Company, VAALCO International, Inc. and Nissho
Iwai Corporation.
10.2 Stockholders' Agreement dated August 23, 2002, by and among
the Company, VAALCO International, Inc. and Nissho Iwai
Corporation.
10.3 Subscription Agreement between the Company and VAALCO
International, Inc. dated August 23, 2002.
10.4 Amended and Restated Registration Rights Agreement by and
among the Company, Nissho Iwai Corporation and The 1818 Fund
II, L.P. dated as of August 23, 2002.
10.5 Amended and Restated Subordinated Credit Agreement by and
between the Company and The 1818 Fund II, L.P. dated as of
August 23, 2002.
10.6 Second Amendment to Loan Agreement between VAALCO Gabon
(Etame), Inc. and International Finance Corporation dated
August 23, 2002.
99. Additional exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002.
(b) Reports on Form 8-K.
Current report on Form 8-K dated August 19, 2002 reporting Item 9
Regulation FD Disclosure attaching certifications of the Company's Chief
Executive Officer and Chief Financial Officer, under Section 906 of the
Sarbanes-Oxley Act of 2002, filed August 19, 2002.
19
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant 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)
November 14, 2002
20
CERTIFICATIONS
I, Robert L. Gerry, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of VAALCO
Energy, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Day: November 14, 2002
By: /s/ Robert L. Gerry
-------------------
Robert L. Gerry, Chief Executive Officer
(principal executive officer)
21
CERTIFICATIONS
I, W. Russell Scheirman, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of VAALCO Energy,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Day: November 14, 2002
By: /s/ W. Russell Scheirman
------------------------
W. Russell Scheirman, President and Chief Financial Officer
(principal financial officer)
22
EXHIBIT INDEX
Exhibits
3.1 Restated Certificate of Incorporation (incorporated by reference to
exhibit 4.1 to the Company's Registration Statement on Form S-3
filed with the Commission on July 15, 1998, Reg. No. 333-59095).
3.2 Certificate of Amendment to Restated Certificate of Incorporation
(incorporated by reference to exhibit 4.2 to the Company's
Registration Statement on Form S-3 filed with the Commission on July
15, 1998, Reg. No. 333-59095).
3.3 Bylaws (incorporated by reference to exhibit 4.3 to the Company's
Registration Statement on Form S-3 filed with the Commission on
July 15, 1998, Reg. No. 333-59095).
3.4 Amendment to Bylaws (incorporated by reference to exhibit 4.4 to the
Company's Registration Statement on Form S-3 filed with the
Commission on July 15, 1998, Reg. No. 333-59095).
3.5 Designation of Convertible Preferred Stock, Series A (incorporated
by reference to exhibit 4.1 to the Company's Report on Form 8-K
filed with the Commission on May 6, 1998, File No. 000-20928).
4. Instruments Defining the Rights of Security Holders
4.1 Warrant granted to Nissho Iwai Corporation to purchase 2,250,000
shares, par value $.10, of common stock of the Company dated August
23, 2002.
4.2 Warrant, subject to vesting requirements, granted to Nissho Iwai
Corporation to purchase 2,250,000 shares, par value $.10, of common
stock of the Company dated August 23, 2002.
10. Material Agreements
10.1 Stock Purchase Agreement dated as of August 23, 2002, by and among
the Company, VAALCO International, Inc. and Nissho Iwai Corporation.
10.2 Stockholders' Agreement dated August 23, 2002, by and among the
Company, VAALCO International, Inc. and Nissho Iwai Corporation.
10.3 Subscription Agreement between the Company and VAALCO International,
Inc. dated August 23, 2002.
10.4 Amended and Restated Registration Rights Agreement by and among the
Company, Nissho Iwai Corporation and The 1818 Fund II, L.P. dated as
of August 23, 2002.
10.5 Amended and Restated Subordinated Credit Agreement by and between
the Company and The 1818 Fund II, L.P. dated as of August 23, 2002.
23
10.6 Second Amendment to Loan Agreement between VAALCO Gabon (Etame),
Inc. and International Finance Corporation dated August 23, 2002.
99. Additional exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002.
24