Table of Contents











UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



 

 



 

 



 

 



FORM 10-Q



 

 



 

 



 

 

(Mark One)



  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018



  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 1-32167



 

 



 

 



 

 

VAALCO Energy, Inc.

(Exact name of registrant as specified in its charter)



 

 



 

 



 

 







 

 

Delaware

 

76‑0274813

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification No.)



 

9800 Richmond Avenue

Suite 700

Houston, Texas

 

77042

(Address of principal executive offices)

 

(Zip code)

(713) 623-0801

(Registrant’s telephone number, including area code)



 

 



 

 



 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No    

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.





 

 

 

 

Large accelerated filer

 

Accelerated filer

Non‑accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).          Yes      No  

As of July 31, 2018 there were outstanding 59,445,688 shares of common stock, $0.10 par value per share, of the registrant.

As of July 31, 2018 there were outstanding 59,445,688 shares of common stock, $0.10 par value per share, of the registrant.  









 

 


 

Table of Contents

VAALCO ENERGY, INC. AND SUBSIDIARIES

Table of Contents





 



 

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Condensed Consolidated Balance Sheets

 

June 30, 2018 and December 31, 2017

Condensed Consolidated Statements of Operations

 

Three and Six Months Ended June 30, 2018 and 2017

Condensed Consolidated Statements of Cash Flows

 

Six Months Ended June 30, 2018 and 2017

Notes to Condensed Consolidated Financial Statements

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

19 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

26 

ITEM 4. CONTROLS AND PROCEDURES

27 

PART II. OTHER INFORMATION

27 

ITEM 1. LEGAL PROCEEDINGS

27 

ITEM 1A. RISK FACTORS

27 

ITEM 6. EXHIBITS

28 



 Unless the context otherwise indicates, references to “VAALCO,” “the Company”, “we,” “our,” or “us” in this Form 10-Q are references to VAALCO Energy, Inc., including its wholly-owned subsidiaries.

2


 

Table of Contents



PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

VAALCO ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except per share amounts)





 

 

 

 

 

 



 

June 30, 2018

 

December 31, 2017

ASSETS

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

40,490 

 

$

19,669 

Restricted cash

 

 

1,029 

 

 

842 

Receivables:

 

 

 

 

 

 

Trade

 

 

9,607 

 

 

3,556 

Accounts with joint venture owners, net of allowance of $0.5 million at June 30, 2018 and December 31, 2017

 

 

 —

 

 

3,395 

Other

 

 

122 

 

 

100 

Crude oil inventory

 

 

1,298 

 

 

3,263 

Prepayments and other

 

 

3,721 

 

 

2,791 

Current assets - discontinued operations

 

 

3,172 

 

 

2,836 

Total current assets

 

 

59,439 

 

 

36,452 

Property and equipment - successful efforts method:

 

 

 

 

 

 

Wells, platforms and other production facilities

 

 

390,404 

 

 

389,935 

Undeveloped acreage

 

 

10,000 

 

 

10,000 

Equipment and other

 

 

8,531 

 

 

9,432 



 

 

408,935 

 

 

409,367 

Accumulated depreciation, depletion, amortization and impairment

 

 

(387,808)

 

 

(386,146)

Net property and equipment

 

 

21,127 

 

 

23,221 

Other noncurrent assets:

 

 

 

 

 

 

Restricted cash

 

 

918 

 

 

967 

Value added tax and other receivables, net of allowance of $6.4 million
and $6.5 million at June 30, 2018 and December 31, 2017, respectively

 

 

6,724 

 

 

6,925 

Deferred tax asset

 

 

1,260 

 

 

1,260 

Abandonment funding

 

 

10,808 

 

 

10,808 

Total assets

 

$

100,276 

 

$

79,633 



 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

10,876 

 

$

11,584 

Accounts with joint venture owners

 

 

9,807 

 

 

 —

Accrued liabilities and other

 

 

16,893 

 

 

12,991 

Foreign taxes payable

 

 

5,431 

 

 

 —

Current portion of long term debt

 

 

 —

 

 

6,666 

Current liabilities - discontinued operations

 

 

15,186 

 

 

15,347 

Total current liabilities

 

 

58,193 

 

 

46,588 

Asset retirement obligations

 

 

20,708 

 

 

20,163 

Other long-term liabilities

 

 

892 

 

 

284 

Long term debt, excluding current portion, net

 

 

 —

 

 

2,309 

Total liabilities

 

 

79,793 

 

 

69,344 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Preferred stock, none issued, 500,000 shares authorized, $25 par value

 

 

 —

 

 

 —

Common stock, $0.10 par value; 100,000,000 shares authorized, 66,966,301 and 66,443,971 shares issued, 59,420,471 and 58,862,876 shares outstanding

 

 

6,696 

 

 

6,644 

Additional paid-in capital

 

 

72,013 

 

 

71,251 

Less treasury stock, 7,545,830 and 7,581,095 shares at cost

 

 

(37,776)

 

 

(37,953)

Accumulated deficit

 

 

(20,450)

 

 

(29,653)

Total shareholders' equity

 

 

20,483 

 

 

10,289 

Total liabilities and shareholders' equity

 

$

100,276 

 

$

79,633 

See notes to condensed consolidated financial statements.

3


 

Table of Contents

VAALCO ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,

 

Six Months Ended June 30,



2018

 

2017

 

2018

 

2017

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas sales

$

24,426 

 

$

20,425 

 

$

52,071 

 

$

41,691 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Production expense

 

12,817 

 

 

9,866 

 

 

23,777 

 

 

17,812 

Exploration expense

 

12 

 

 

 —

 

 

12 

 

 

 —

Depreciation, depletion and amortization

 

1,035 

 

 

1,970 

 

 

2,159 

 

 

3,839 

General and administrative expense

 

5,008 

 

 

3,049 

 

 

7,611 

 

 

6,191 

Bad debt expense and other

 

145 

 

 

183 

 

 

89 

 

 

281 

Total operating costs and expenses

 

19,017 

 

 

15,068 

 

 

33,648 

 

 

28,123 

Other operating income, net

 

314 

 

 

230 

 

 

338 

 

 

167 

Operating income

 

5,723 

 

 

5,587 

 

 

18,761 

 

 

13,735 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(30)

 

 

(378)

 

 

(384)

 

 

(781)

Other, net

 

(1,224)

 

 

338 

 

 

(1,155)

 

 

222 

Total other expense, net

 

(1,254)

 

 

(40)

 

 

(1,539)

 

 

(559)

Income from continuing operations before income taxes

 

4,469 

 

 

5,547 

 

 

17,222 

 

 

13,176 

Income tax expense

 

3,582 

 

 

3,096 

 

 

7,624 

 

 

6,290 

Income from continuing operations

 

887 

 

 

2,451 

 

 

9,598 

 

 

6,886 

Loss from discontinued operations

 

(343)

 

 

(168)

 

 

(395)

 

 

(344)

Net income

$

544 

 

$

2,283 

 

$

9,203 

 

$

6,542 



 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

0.02 

 

$

0.04 

 

$

0.16 

 

$

0.12 

Loss from discontinued operations

 

(0.01)

 

 

0.00 

 

 

(0.01)

 

 

(0.01)

Net income per share

$

0.01 

 

$

0.04 

 

$

0.15 

 

$

0.11 

Basic weighted average shares outstanding

 

59,090 

 

 

58,658 

 

 

58,977 

 

 

58,613 

Diluted net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

0.02 

 

$

0.04 

 

$

0.16 

 

$

0.12 

Loss from discontinued operations

 

(0.01)

 

 

0.00 

 

 

(0.01)

 

 

(0.01)

Net income per share

$

0.01 

 

$

0.04 

 

$

0.15 

 

$

0.11 

Diluted weighted average shares outstanding

 

59,851 

 

 

58,658 

 

 

59,358 

 

 

58,619 





































See notes to condensed consolidated financial statements.

 

4


 

Table of Contents





VAALCO ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)





 

 

 

 

 

 



 

Six Months Ended June 30,



 

2018

 

2017

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

9,203 

 

$

6,542 

Adjustments to reconcile net income to net cash provided by
operating activities:

 

 

 

 

 

 

Loss from discontinued operations

 

 

395 

 

 

344 

Depreciation, depletion and amortization

 

 

2,159 

 

 

3,839 

Other amortization

 

 

191 

 

 

201 

Unrealized foreign exchange (gain)/loss

 

 

79 

 

 

(580)

Stock-based compensation

 

 

2,674 

 

 

783 

Commodity derivatives loss

 

 

999 

 

 

50 

Bad debt expense and other

 

 

89 

 

 

281 

Other operating gain, net

 

 

(338)

 

 

(167)

Operational expenses associated with equipment and other

 

 

1,739 

 

 

 —

Change in operating assets and liabilities:

 

 

 

 

 

 

Trade receivables

 

 

(6,051)

 

 

(1,314)

Accounts with joint venture owners

 

 

13,203 

 

 

2,610 

Other receivables

 

 

(23)

 

 

58 

Crude oil inventory

 

 

1,965 

 

 

(39)

Prepayments and other

 

 

(764)

 

 

395 

Value added tax and other receivables

 

 

(249)

 

 

(1,130)

Accounts payable

 

 

(535)

 

 

(4,274)

Foreign taxes payable

 

 

5,431 

 

 

 —

Accrued liabilities and other

 

 

1,381 

 

 

(977)

Net cash provided by continuing operating activities

 

 

31,548 

 

 

6,622 

Net cash used in discontinued operating activities

 

 

(892)

 

 

(4,049)

Net cash provided by operating activities

 

 

30,656 

 

 

2,573 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Property and equipment expenditures

 

 

(976)

 

 

(1,032)

Acquisitions

 

 

 —

 

 

64 

Proceeds from sale of oil and gas properties

 

 

 —

 

 

250 

Net cash used in continuing investing activities

 

 

(976)

 

 

(718)

Net cash used in discontinued investing activities

 

 

 —

 

 

 —

Net cash used in investing activities

 

 

(976)

 

 

(718)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from the issuances of common stock

 

 

445 

 

 

38 

Debt repayment

 

 

(9,166)

 

 

(5,833)

Borrowings

 

 

 —

 

 

4,167 

Net cash used in  continuing financing activities

 

 

(8,721)

 

 

(1,628)

Net cash provided by discontinued financing activities

 

 

 —

 

 

 —

Net cash used in financing activities

 

 

(8,721)

 

 

(1,628)

NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

20,959 

 

 

227 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD

 

 

32,286 

 

 

30,643 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD

 

$

53,245 

 

$

30,870 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Interest paid

 

$

257 

 

$

574 

Income taxes paid

 

$

2,720 

 

$

9,142 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Property and equipment additions incurred but not paid at period end

 

$

463 

 

$

423 

Asset retirement obligation

 

$

 —

 

$

(103)

See notes to condensed consolidated financial statements. 

5


 

Table of Contents

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  ORGANIZATION AND ACCOUNTING POLICIES 

VAALCO Energy, Inc. (together with its consolidated subsidiaries “we”, “us”, “our”, “VAALCO,” or the “Company”) is a Houston, Texas based independent energy company engaged in the acquisition, exploration, development and production of crude oil. As operator, we have production operations and conduct exploration activities in Gabon, West Africa. As non-operator, we have opportunities to participate in development and exploration activities in Equatorial Guinea, West Africa. As discussed further in Note 4 below, we have discontinued operations associated with our activities in Angola, West Africa.

Our consolidated subsidiaries are VAALCO Gabon (Etame), Inc., VAALCO Production (Gabon), Inc., VAALCO Gabon S.A., VAALCO Angola (Kwanza), Inc., VAALCO UK (North Sea), Ltd., VAALCO International, Inc., VAALCO Energy (EG), Inc., VAALCO Energy Mauritius (EG) Limited and VAALCO Energy (USA), Inc.

These condensed consolidated financial statements are unaudited, but in the opinion of management, reflect all adjustments necessary for a fair presentation of results for the interim periods presented. All adjustments are of a normal recurring nature unless disclosed otherwise. Interim period results are not necessarily indicative of results to be expected for the full year.

These condensed consolidated financial statements have been prepared in accordance with rules of the Securities and Exchange Commission (“SEC”) and do not include all the information and disclosures required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. They should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017, which includes a summary of the significant accounting policies.

Reclassifications – Certain reclassifications have been made to prior period amounts to conform to the current period presentation related to the adoption of  Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”).  These reclassifications did not affect our consolidated financial results.  See Note 2 – New Accounting Standards for further information associated with ASU 2016-18.

Restricted cash and abandonment funding – Restricted cash includes cash that is contractually restricted. Restricted cash is classified as a current or non-current asset based on its designated purpose and time duration. Current amounts in restricted cash at June 30, 2018 and December 31, 2017 each include an escrow amount representing bank guarantees for customs clearance in Gabon. Long term amounts at June 30, 2018 and December 31, 2017 include a charter payment escrow for the floating, production, storage and offloading vessel (“FPSO”) offshore Gabon as discussed in Note 10.  We invest restricted and excess cash in certificates of deposit and commercial paper issued by banks with maturities typically not exceeding 90 days.

We are required under the Etame PSC to conduct abandonment studies to update the amounts being funded for the eventual abandonment of the offshore wells, platforms and facilities on the Etame Marin block. The current abandonment study was completed in January 2016.  This cash funding is reflected under “Other noncurrent assets” as “Abandonment funding” on our condensed consolidated balance sheets. Future changes to the anticipated abandonment cost estimate could change our asset retirement obligation and the amount of future abandonment funding payments.  See Note 10 for further discussion. 

Bad debtsQuarterly, we evaluate our accounts receivable balances to confirm collectability. When collectability is in doubt, we record an allowance against the accounts receivable, purchases of production and a corresponding income charge for bad debts, which appears in the “Bad debt expense and other” line item of the condensed consolidated statements of operations. The majority of our accounts receivable balances are with our joint venture owners and the government of Gabon for reimbursable Value-Added Tax (“VAT”). Collection efforts, including remedies provided for in the contracts, are pursued to collect overdue amounts owed to us. Portions of our costs in Gabon (including our VAT receivable) are denominated in the local currency of Gabon, the Central African CFA Franc (“XAF”). As of June 30, 2018, the outstanding VAT receivable balance, excluding the allowance for bad debt, was approximately XAF 21.5 billion (XAF 7.2 billion, net to VAALCO).  As of June 30, 2018, the exchange rate was XAF 563.1 = $1.00.

In June 2016, we entered into an agreement with the government of Gabon to receive payments related to the outstanding VAT receivable balance, of XAF16.3 billion (XAF 4.9 billion, net to VAALCO) representing the outstanding balance as of December 31, 2015, in thirty-six monthly installments of $0.2 million, net to VAALCO.  Since signing the agreement, we have received one payment of $0.3 million, net to VAALCO, in July 2016 and one payment in March 2018 of $0.3 million, net to VAALCO. We are in discussions with the Gabonese government regarding the timing of payments.  

For the three and six months ended June 30, 2018, we recorded a net recovery of $0.1 million and $0.1 million, respectively, related to the allowance for bad debt for VAT for which the government of Gabon has not reimbursed us.  For the three and six months ended June 30, 2017, we recorded an allowance of $0.2 million and $0.3 million, respectively.  The receivable amount, net of allowances, is reported as a non-current asset in the “Value added tax and other receivables” line item in the condensed consolidated balance sheets. Because both the VAT receivable and the related allowances are denominated in XAF, the exchange rate revaluation of these balances

6


 

Table of Contents

into U.S. dollars at the end of each reporting period also has an impact on profit/loss. Such foreign currency gains (losses) are reported separately in the “Other, net” line item of the condensed consolidated statements of operations.

The following table provides a rollforward of the aggregate allowance:











 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,

 

Six Months Ended June 30,



2018

 

 

2017

 

2018

 

2017



(in thousands)

Allowance for bad debt

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$

(7,164)

 

$

(5,399)

 

$

(7,033)

 

$

(5,211)

Charge to cost and expenses

 

(145)

 

 

(183)

 

 

(89)

 

 

(281)

Foreign currency gain (loss)

 

361 

 

 

(292)

 

 

174 

 

 

(382)

Balance at end of period

$

(6,948)

 

$

(5,874)

 -

$

(6,948)

 

$

(5,874)



 

 

 

 

 

 

 

 

 

 

 

Fair Value – Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs used in determining fair value are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. The three input levels of the fair-value hierarchy are as follows:

Level 1 – Inputs represent quoted prices in active markets for identical assets or liabilities (for example, exchange-traded commodity derivatives).

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs).

Level 3 – Inputs that are not observable from objective sources, such as internally developed assumptions used in pricing an asset or liability (for example, an estimate of future cash flows used in our internally developed present value of future cash flows model that underlies the fair-value measurement).

Fair value of financial instruments – Our current assets and liabilities include financial instruments such as cash and cash equivalents, restricted cash, accounts receivable, derivative assets and liabilities, accounts payable, liabilities for stock appreciation rights (“SARs”) and a  guarantee. Derivative assets and liabilities as well as SARs are measured and reported at fair value using level 3 inputs each period with changes in fair value recognized in net income. With respect to our other financial instruments included in current assets and liabilities, the carrying value of each financial instrument approximates fair value primarily due to the short-term maturity of these instruments. The carrying value of our long-term debt approximates fair value, as the interest rates are adjusted based on market rates currently in effect.  There were no transfers between levels during the three and six months ended June 30, 2018 or 2017.

Foreign currency transactions – The U.S. dollar is the functional currency of our foreign operating subsidiaries. Gains and losses on foreign currency transactions are included in income. Within the condensed consolidated statements of operations line item “Other income (expense)—Other, net,” we recognized losses on foreign currency transactions of $0.2 million and  $0.1 million during the three and six months ended June 30, 2018, respectively.  Within the condensed consolidated statements of operations line item “Other income (expense)—Other, net,” we recognized gains on foreign currency transactions of $0.2 million and $0.3 million during the three and six months ended June 30, 2017, respectively.    

2.  NEW ACCOUNTING STANDARDS

Adopted

In March 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” (“ASU 2018-05”). ASU 2018-05 adds the Securities and Exchange Commission’s (“SEC”) guidance released on December 22, 2017 in Staff Accounting Bulletin number 118 “(SAB 118”) regarding the Tax Reform Act to the FASB Accounting Standards Codification. The Company adopted ASU 2018-05 in March 2018. The income tax effects recorded in the Company’s financial statements in its Annual Report on Form 10-K for the year ended December 31, 2017 as well as for the three and six months ended June 30, 2018 as a result of the Tax Reform Act are provisional in accordance with ASU 2018-05 as discussed further in Note 13.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).   Beginning January 1, 2018, we adopted ASU No. 2014-09, and the related additional guidance provided under ASU No. 2016-10, 2016-11 and 2016-12 (together with ASU 2014-09, “Revenue Recognition ASU”). This new standard replaced most existing revenue recognition guidance in U.S. GAAP. The core principle of the Revenue Recognition ASU requires companies to reevaluate when revenue is recorded on a transaction based upon newly defined criteria, either at a point in time or over time as goods or services are delivered. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and estimates, and changes in those estimates. We adopted the Revenue

7


 

Table of Contents

Recognition ASU via the modified retrospective transition method, taking advantage of the allowed practical expedient that states we are not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. This standard applies to revenues from contracts with customers.  In addition, we recognize other items from carried interest recoupment and royalties paid which are reported in revenues but are not considered to be revenues from contracts with customers.  For revenues from contracts with customers, adoption of this standard did not result in a change in the timing or amount of revenue recognized, and therefore the adoption of this standard did not have a material impact on our financial position, results of operations, debt covenants or business practices.  The adoption did result in expanded disclosures related to the nature of our sales contracts and other matters related to revenues and the accounting for revenues, which are reflected in Note 7.  In addition, we implemented new internal controls and procedures associated with revenue recognition and disclosures related to revenues.

In November 2016, the FASB issued ASU No. 2016-18, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted ASU 2016-18 beginning January 1, 2018 with retroactive application to prior periods. Due to the nature of this accounting standards update, this had an impact on items reported in our statements of cash flows and related disclosures, but no impact on our financial position and results of operations.

The following tables provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows:









 

 

 

 

 

 



 

June 30, 2018

 

December 31, 2017



 

(in thousands)

Cash and cash equivalents

 

$

40,490 

 

$

19,669 

Restricted cash - current

 

 

1,029 

 

 

842 

Restricted cash - non-current

 

 

918 

 

 

967 

Abandonment funding

 

 

10,808 

 

 

10,808 

Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows

 

$

53,245 

 

$

32,286 



 

 

 

 

 

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2017-09) to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under ASU 2017-09, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The amendments in ASU 2017-09 are effective for all entities for interim and annual reporting periods beginning after December 15, 2017.  The amendments in this update are to be applied prospectively to an award modified on or after the adoption date. The adoption of ASU 2017-09 has not had a material impact on our financial position, results of operations, cash flows and related disclosures.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01”). The purpose of the amendment is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public entities, the amendments in ASU 2017-01 are effective for interim and annual reporting periods beginning after December 15, 2017. The amendments in this update are to be applied prospectively to acquisitions and disposals completed on or after the effective date, with no disclosures required at transition. The adoption of ASU 2017-01 has not had a material impact on our financial position, results of operations, cash flows and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) related to how certain cash receipts and payments are presented and classified in the statement of cash flows. These cash flow issues include debt prepayment or extinguishment costs, settlement of zero-coupon debt, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of ASU 2016-15 has not had a material impact on our financial position, results of operations, cash flows and related disclosures.

Not yet adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) related to the calculation of credit losses on financial instruments. All financial instruments not accounted for at fair value will be impacted, including our trade and joint venture owners receivables. Allowances are to be measured using a current expected credit loss model as of the reporting date which is based on historical experience, current conditions and reasonable and supportable forecasts. This is significantly different from the current model which increases the allowance when losses are probable. This change is effective for all public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and will be applied with a cumulative-effect adjustment to retained earnings

8


 

Table of Contents

as of the beginning of the first reporting period in which the guidance is effective. We are currently evaluating the provisions of ASU 2016-13 and are assessing its potential impact on our financial position, results of operations, cash flows and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which was further clarified by ASU 2018-10, Codification Improvements to Topic 842, issued in July 2018, which amends the accounting standards for leases.  ASU 2016-02 retains a distinction between finance leases and operating leases. The primary change is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases on the balance sheet. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous guidance. Certain aspects of lease accounting have been simplified and additional qualitative and quantitative disclosures are required along with specific quantitative disclosures required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early application permitted. We are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period presented in the financial statements. Early adoption is allowed. Assuming adoption January 1, 2019, we expect that leases in effect on January 1, 2017 and leases entered into after such date will be reflected in accordance with the new standard in the condensed consolidated financial statements included in our Form 10-Q  for the first quarter of 2019, including comparative financial statements presented in such report. We are in the early stages of our gap assessment, but we expect that leases with terms greater than 12 months, which are currently treated as operating leases, will be capitalized. We expect adoption of this standard to result in the recording of a right of use asset related to certain of our operating leases with a corresponding lease liability. This is expected to result in a material increase in total assets and liabilities as certain of our operating leases are significant as disclosed in Note 10 in our Annual Report on Form 10-K for 2017. We do not expect there will be a material overall impact on results of operations or cash flows. We have developed an implementation plan related to this new standard.  In connection with our implementation plan, we will be reviewing our lease contracts and evaluating other contracts to identify embedded leases and determining the appropriate accounting treatment, and we will be evaluating the impact on processes and procedures as well as the internal controls related to the proper accounting for leases under the new standard.







3.  LIQUIDITY

Our revenues, cash flow, profitability, oil and natural gas reserve values and future rates of growth are substantially dependent upon prevailing prices for oil and natural gas. Our ability to borrow funds and to obtain additional capital on attractive terms is also substantially dependent on oil and natural gas prices.  After a period of low commodity prices, oil and natural gas prices have stabilized at levels which are currently adequate to generate cash from operating activities for our continuing operations. In addition to the impact of oil and natural gas prices on our access to capital markets, the availability of capital resources on attractive terms may be limited due to the geographic location of our primary producing assets.     

4.  DISPOSITIONS

Discontinued Operations - Angola

In November 2006, we signed a production sharing contract for Block 5 offshore Angola (“PSA”). Our working interest is 40%, and we carry Sonangol P&P, for 10% of the work program.  On September 30, 2016, we notified Sonangol P&P that we were withdrawing from the joint operating agreement effective October 31, 2016. On November 30, 2016, we notified the national concessionaire, Sonangol E.P., that we were withdrawing from the PSA. Further to the decision to withdraw from Angola, we have taken actions to close our office in Angola and reduce future activities in Angola. As a result of this strategic shift, we classified all the related assets and liabilities as those of discontinued operations in the condensed consolidated balance sheets. The operating results of the Angola segment have been classified as discontinued operations for all periods presented in our condensed consolidated statements of operations. We segregated the cash flows attributable to the Angola segment from the cash flows from continuing operations for all periods presented in our condensed consolidated statements of cash flows. The following tables summarize selected financial information related to the Angola segment’s assets and liabilities as of June 30, 2018 and December 31, 2017 and its results of operations for the three and six months ended June 30, 2018 and 2017.

9


 

Table of Contents

Summarized Results of Discontinued Operations



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,

 

Six Months Ended June 30,



2018

 

2017

 

2018

 

2017



(in thousands)

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

General and administrative expense

$

332 

 

$

167 

 

$

364 

 

$

338 

Total operating costs and expenses

 

332 

 

 

167 

 

 

364 

 

 

338 

Operating loss

 

(332)

 

 

(167)

 

 

(364)

 

 

(338)

Other expense:

 

 

 

 

 

 

 

 

 

 

 

Other, net

 

(11)

 

 

(1)

 

 

(31)

 

 

(3)

Total other expense

 

(11)

 

 

(1)

 

 

(31)

 

 

(3)

Loss from discontinued operations before income taxes

 

(343)

 

 

(168)

 

 

(395)

 

 

(341)

Income tax expense

 

 —

 

 

 —

 

 

 —

 

 

Loss from discontinued operations

$

(343)

 

$

(168)

 

$

(395)

 

$

(344)



Assets and Liabilities Attributable to Discontinued Operations





 

 

 

 

 

 



 

June 30, 2018

 

December 31, 2017



 

(in thousands)

ASSETS

 

 

 

 

 

 

Accounts with joint venture owners

 

$

3,172 

 

$

2,836 

Total current assets

 

 

3,172 

 

 

2,836 

Total assets

 

$

3,172 

 

$

2,836 



 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

 —

 

$

158 

Accrued liabilities and other

 

 

15,186 

 

 

15,189 

Total current liabilities

 

 

15,186 

 

 

15,347 

Total liabilities

 

$

15,186 

 

$

15,347 

Drilling Obligation

Under the PSA, we and the other participating interest owner, Sonangol P&P, were obligated to perform exploration activities that included specified seismic activities and drilling a specified number of wells during each of the exploration phases identified in the PSA. The specified seismic activities were completed, and one well, the Kindele #1 well, was drilled in 2015. The PSA provides a stipulated payment of $10.0 million for each of the three exploration wells for which a drilling obligation remains under the terms of the PSA, of which our participating interest share would be $5.0 million per well. We have reflected an accrual of $15.0 million for a potential payment as of June 30, 2018 and December 31, 2017, respectively, which represents what we believe to be the maximum potential amount attributable to VAALCO Angola’s interest under the PSA. We are currently engaged in discussions and meetings with representatives from Sonangol E.P. regarding possible mutually acceptable solutions to this potential payment issue.



5.  SEGMENT INFORMATION

Our operations are based in Gabon and Equatorial Guinea.  Each of our two reportable operating segments is organized and managed based upon geographic location. Our Chief Executive Officer, who is the chief operating decision maker, and management review and evaluate the operation of each geographic segment separately primarily based on Operating income (loss). The operations of all segments include exploration for and production of hydrocarbons where commercial reserves have been found and developed. Revenues are based on the location of hydrocarbon production. Corporate and other is primarily corporate and operations support costs which are not allocated to the reportable operating segments.

10


 

Table of Contents

Segment activity of continuing operations for the three and six months ended June 30, 2018 and 2017 as well as long-lived assets and segment assets at June 30, 2018 and December 31, 2017 are as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30, 2018

(in thousands)

 

Gabon

 

Equatorial Guinea

 

Corporate and Other

 

Total

Revenues-oil and natural gas sales

 

$

24,425 

 

$

 —

 

$

 

$

24,426 

Depreciation, depletion and amortization

 

 

971 

 

 

 —

 

 

64 

 

 

1,035 

Bad debt expense and other

 

 

145 

 

 

 —

 

 

 —

 

 

145 

Operating income (loss)

 

 

10,147 

 

 

(85)

 

 

(4,339)

 

 

5,723 

Other, net

 

 

(199)

 

 

(6)

 

 

(1,019)

 

 

(1,224)

Interest expense, net

 

 

(43)

 

 

 —

 

 

13 

 

 

(30)

Income tax expense

 

 

3,582 

 

 

 —

 

 

 —

 

 

3,582 

Additions to property and equipment - accrual

 

 

(527)

 

 

 —

 

 

(15)

 

 

(542)







 

 

 

 

 

 

 

 

 

 

 

 



 

Six Months Ended June 30, 2018

(in thousands)

 

Gabon

 

Equatorial Guinea

 

Corporate and Other

 

Total

Revenues-oil and natural gas sales

 

$

52,068 

 

$

 —

 

$

 

$

52,071 

Depreciation, depletion and amortization

 

 

2,030 

 

 

 —

 

 

129 

 

 

2,159 

Bad debt expense and other

 

 

89 

 

 

 —

 

 

 —

 

 

89 

Operating income (loss)

 

 

25,844 

 

 

(115)

 

 

(6,968)

 

 

18,761 

Other, net

 

 

(130)

 

 

(3)

 

 

(1,022)

 

 

(1,155)

Interest expense, net

 

 

(397)

 

 

 —

 

 

13 

 

 

(384)

Income tax expense

 

 

7,624 

 

 

 —

 

 

 —

 

 

7,624 

Additions to property and equipment - accrual

 

 

(955)

 

 

 —

 

 

(14)

 

 

(969)







 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30, 2017

(in thousands)

 

Gabon

 

Equatorial Guinea

 

Corporate and Other

 

Total

Revenues-oil and natural gas sales

 

$

20,415 

 

$

 —

 

$

10 

 

$

20,425 

Depreciation, depletion and amortization

 

 

1,902 

 

 

 —

 

 

68 

 

 

1,970 

Bad debt expense and other

 

 

183 

 

 

 —

 

 

 —

 

 

183 

Operating income (loss)

 

 

8,090 

 

 

(15)

 

 

(2,488)

 

 

5,587 

Other, net

 

 

237 

 

 

 

 

94 

 

 

338 

Interest expense, net

 

 

(378)

 

 

 —

 

 

 —

 

 

(378)

Income tax expense

 

 

3,096 

 

 

 —

 

 

 —

 

 

3,096 

Additions to property and equipment - accrual

 

 

(625)

 

 

 —

 

 

 —

 

 

(625)







 

 

 

 

 

 

 

 

 

 

 

 



 

Six Months Ended June 30, 2017

(in thousands)

 

Gabon

 

Equatorial Guinea

 

Corporate and Other

 

Total

Revenues-oil and natural gas sales

 

$

41,661 

 

$

 —

 

$

30 

 

$

41,691 

Depreciation, depletion and amortization

 

 

3,711 

 

 

 —

 

 

128 

 

 

3,839 

Bad debt expense and other

 

 

281 

 

 

 —

 

 

 —

 

 

281 

Operating income (loss)

 

 

19,050 

 

 

(53)

 

 

(5,262)

 

 

13,735 

Other, net

 

 

299 

 

 

 

 

(86)

 

 

222 

Interest expense, net

 

 

(781)

 

 

 —

 

 

 —

 

 

(781)

Income tax expense

 

 

6,290 

 

 

 —

 

 

 —

 

 

6,290 

Additions to property and equipment - accrual

 

 

(814)

 

 

 —

 

 

 —

 

 

(814)







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Gabon

 

Equatorial Guinea

 

Corporate and Other

 

Total

Long-lived assets from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

$

10,659 

 

$

10,000 

 

$

468 

 

$

21,127 

Balance at December 31, 2017

 

 

12,638 

 

 

10,000 

 

 

583 

 

 

23,221 



 

 

 

 

 

 

 

 

 

 

 

 

Assets from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

$

64,846 

 

$

10,089 

 

$

22,169 

 

$

97,104 

Balance at December 31, 2017

 

 

63,122 

 

 

10,095 

 

 

3,580 

 

 

76,797 



11


 

Table of Contents

Information about our most significant customers

For the period from August of 2015 through June 2018, we sold our crude oil production from Gabon under a term contract with Glencore Energy UK Ltd. (“Glencore”) with pricing based upon an average of Dated Brent in the month of lifting, adjusted for location and market factors. The contract with Glencore ends in January 2019. Sales of oil to Glencore were approximately 100% of total revenues for the three and six months ended June 30, 2018 and 2017.















6.  EARNINGS PER SHARE

Basic earnings per share (“EPS”) is calculated using the average number of shares of common stock outstanding during each period. For the calculation of diluted shares, we assume that restricted stock is outstanding on the date of vesting, and we assume the issuance of shares from the exercise of stock options using the treasury stock method.

A reconciliation from basic to diluted shares follows:   



 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2018

 

2017

 

2018

 

2017



 

(in thousands)

Basic weighted average shares outstanding

 

59,090 

 

58,658 

 

58,977 

 

58,613 

Effect of dilutive securities

 

761 

 

 —

 

381 

 

Diluted weighted average shares outstanding

 

59,851 

 

58,658 

 

59,358 

 

58,619 

Stock options and unvested restricted stock grants excluded from dilutive calculation because they would be anti-dilutive

 

172 

 

3,307 

 

1,713 

 

2,772 











7.  REVENUE



Substantially all of our revenues are attributable to our Gabon operations.  Revenues from contracts with customers are generated from sales in Gabon pursuant to crude oil sales and purchase agreements (“COSPA”). These contracts have been and will be renewed or replaced from time to time either with the current buyer or another buyer. Since August 2015, the COSPA has been executed with the same buyer, initially for a one-year period, with amendments to extend the period through January 31, 2018.  Beginning February 1, 2018 through January 31, 2019, a new COSPA was entered into with this same customer.

   

The COSPA with the third party is renegotiated near the end of the contract term and may be entered into with a different buyer or the same buyer going forward.   Except for internal costs (which are expensed as incurred), there are no upfront costs associated with obtaining a new COSPA. 



Customer sales generally occur on a monthly basis when the customer’s tanker arrives at the FPSO and the crude oil is delivered to the tanker through a connection. There is a single performance obligation (delivering oil to the delivery point, i.e. the connection to the customer’s crude oil tanker) that gives rise to revenue recognition at the point in time when the performance obligation event takes place.  This is referred to as a “lifting”.  Liftings can take one to two days to complete.  The intervals between liftings are generally 30 days; however, changes in the timing of liftings will impact the number of liftings which occur during the period. Therefore, the performance obligation attributable to volumes to be sold in future liftings are wholly unsatisfied, and there is no transaction price allocated to remaining performance obligations.    We have utilized the practical expedient in ASC Topic 606-10-50-14(a) which states that the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. 



Previously, we followed the sales method of accounting to account for crude oil production imbalances. In conjunction with our adoption of Accounting Standards Codification (“ASC”) Topic 606 on January 1, 2018, we will continue to account for production imbalances as a reduction in reserves.  The volumes sold may be more or less than the volumes to which we are entitled based on our ownership interest in the property, and we would recognize a liability if our existing proved reserves were not adequate to cover an imbalance.



For each lifting completed under the COSPA, payment is made by the customer in U.S. Dollars by electronic transfer thirty days after the date of the bill of lading.  For each lifting of oil, the price is determined based on a formula using published Dated Brent prices as well as market differentials plus a fixed contract differential.



Generally, no significant judgments or estimates are required as of a given filing date with regard to applicable price or volumes sold because all of the parameters are known with certainty related to liftings that occurred in the recently completed calendar quarter. As such, we deem this situation to be characterized as a fixed price situation.

 

The Company also has income associated with the Production Sharing Contract (“PSC”) for the Etame block in Gabon.  This contract is not a customer contract, and therefore the associated revenues are not within the scope of ASC 606.  The terms of the PSC includes provisions for payments to the government of Gabon for: royalties based on 13% of production at the published price, a  shared portion of “profit oil” determined based on daily production rates, and a carried working interest of 7.5%.  For both royalties and profit oil, the

12


 

Table of Contents

PSC provides that the government of Gabon may settle these obligations in-kind, i.e. taking crude oil barrels, rather than with cash payments.  



The government of Gabon has not elected to take its royalties in-kind, and this obligation is settled through a monthly cash payment.  Payments for royalties are reflected as a reduction in revenues from customers.  Should the government elect to take the production attributable to its royalty in-kind, we would no longer have sales to customers associated with production assigned to royalties.



With respect to the government’s share of profit oil, the PSC provides that corporate income tax is satisfied through the payment of profit oil.  In the condensed consolidated statements of operations, the government’s share of revenues from profit oil is reported in revenues with a corresponding amount reflected in the current provision for income tax expense.  Prior to February 1, 2018, the government did not take any of its share of profit oil in-kind.  These revenues have been included in revenues to customers as the Company entered into the contract with the customer to sell the crude oil and was subject to the performance obligations associated with the contract.  For the in-kind sales by the government beginning February 1, 2018, these are not considered revenues under a customer contract as the Company is not a party to the contracts with the buyers of this crude oil.  However, consistent with the reporting of profit oil in prior periods, the amount associated with the profit oil under the terms of the PSC is reflected as revenue with an offsetting amount reported in current income tax expense.  Payments of the income tax expense will be reported in the period in which the government takes its profit oil in-kind, i.e. the period in which it lifts the crude oil.  As of June 30, 2018, the foreign taxes payable attributable to this obligation is $5.4 million. 



We also report as revenues the amounts associated with the carried interest under the PSC.  In this carried interest arrangement, the carrying parties, which include the Company and other working interest owners, are obligated to fund all of the working interest costs which would otherwise be the obligation of the carried party.  The carrying parties recoups these funds from the carried interest party’s revenues.  Under the PSC, the Company and the other working interest owners are carrying a party which has a 7.5% working interest in the Etame block.



The following table presents revenues from contracts with customers as well as revenues associated with the obligations under the PSC.





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2018

 

2017

 

2018

 

2017



 

(in thousands)

Revenue from customer contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Glencore oil revenue

 

$

27,193 

 

$

19,812 

 

$

55,656 

 

$

40,156 

Gabonese government share of profit oil

 

 

 —

 

 

3,096 

 

 

2,193 

 

 

6,290 

U.S. oil and gas revenue

 

 

 —

 

 

10 

 

 

 —

 

 

30 

Other items reported in revenue not associated with customer contracts:

 

 

 —

 

 

 —

 

 

 

 

 

 

Carried interest recoupment

 

 

705 

 

 

570 

 

 

1,356 

 

 

1,387 

Royalties

 

 

(3,472)

 

 

(3,063)

 

 

(7,134)

 

 

(6,172)

Total revenue, net

 

$

24,426 

 

$

20,425 

 

$

52,071 

 

$

41,691 







8.  OIL AND NATURAL GAS PROPERTIES AND EQUIPMENT

We review our oil and natural gas producing properties for impairment quarterly or whenever events or changes in circumstances indicate that the carrying amount of such properties may not be recoverable. When an oil and natural gas property’s undiscounted estimated future net cash flows are not sufficient to recover its carrying amount, an impairment charge is recorded to reduce the carrying amount of the asset to its fair value. The fair value of the asset is measured using a discounted cash flow model relying primarily on Level 3 inputs into the undiscounted future net cash flows. The undiscounted estimated future net cash flows used in our impairment evaluations at each quarter end are based upon the most recently prepared independent reserve engineers’ report adjusted to use forecasted prices from the forward strip price curves near each quarter end and adjusted as necessary for drilling and production results.

There was no triggering event in the second quarter of 2018 that would cause us to believe the value of oil and natural gas producing properties should be impaired.  Factors considered included the fact that we incurred no significant capital expenditures in 2018 related to the fields in the Etame Marin block, the future strip prices for the second quarter of 2018 modestly increased from the first quarter of 2018, and there were no indicators that adjustments were needed to the  year-end reserve report.

There was no triggering event in the second quarter of 2017 that caused us to believe the value of oil and natural gas producing properties should be impaired.  During the second quarter of 2017, prices remained stable and we incurred no significant capital spending.  We considered these and other factors and determined that there were no events or circumstances triggering an impairment evaluation for all of our fields.

13


 

Table of Contents

9.  DEBT

On June 29, 2016, we executed a Supplemental Agreement with the International Finance Corporation (the “IFC”) which, among other things, amended and restated our existing loan agreement to convert $20.0 million of the revolving portion of the credit facility, to a term loan (the “Term Loan”) with $15.0 million outstanding at that date. The amended loan agreement (“Amended Term Loan Agreement”) was  secured by the assets of our Gabon subsidiary, VAALCO Gabon S.A. and was guaranteed by VAALCO as the parent company. The Amended Term Loan Agreement provided for quarterly principal and interest payments on the amounts currently outstanding, with interest accruing at a rate of LIBOR plus 5.75%.

The Amended Term Loan Agreement also provided for an additional borrowing of up to $5.0 million, which could be requested in a single draw, subject to the IFC’s approval, through March 15, 2017. On March 14, 2017, we borrowed $4.2 million under this provision of the Amended Term Loan Agreement. The additional borrowings must be repaid in five quarterly principal installments commencing June 30, 2017, together with interest accruing at LIBOR plus 5.75%.

On May 22, 2018, the Amended Term Loan Agreement was terminated by a prepayment of the outstanding principal and accrued interest.  We did not incur any termination or prepayment penalties as a result of the termination of the Amended Term Loan Agreement.  At December 31, 2017, the deferred financing costs were $0.2 million. 

Interest 

With the execution of the Supplemental Agreement with the IFC in June 2016, beginning June 29, 2016 and continuing through March 14, 2017, commitment fees were equal to 2.3% of the undrawn term loan amount of $5.0 million. There are no further commitment fees owing after March 14, 2017.

We capitalize interest and commitment fees related to expenditures made in connection with exploration and development projects that are not subject to current depletion. Interest and commitment fees are capitalized only for the period that activities are in progress to bring these projects to their intended use.

The table below shows the components of the “Interest expense, net” line item of our condensed consolidated statements of operations and the average effective interest rate, excluding commitment fees, on our borrowings:





 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,

 

Six Months Ended June 30,



2018

 

2017

 

2018

 

2017



(in thousands)

Interest incurred, including commitment fees

$

84 

 

$

270 

 

$

257 

 

$

574 

Deferred finance cost amortization

 

131 

 

 

103 

 

 

191 

 

 

201 

Other interest not related to debt (a)

 

(185)

 

 

 

 

(64)

 

 

Interest expense, net

$

30 

 

$

378 

 

$

384 

 

$

781 



 

 

 

 

 

 

 

 

 

 

 

Average effective interest rate, excluding commitment fees

 

8.21% 

 

 

6.90% 

 

 

7.09% 

 

 

6.88% 



(a) The “Other interest not related to debt” line item includes interest income. 



10.  COMMITMENTS AND CONTINGENCIES

Abandonment funding

As part of securing the first of two five-year extensions to the Etame field production license to which we are entitled from the government of Gabon, we agreed to a cash funding arrangement for the eventual abandonment of all offshore wells, platforms and facilities on the Etame Marin block. The agreement was finalized in the first quarter of 2014 (effective as of 2011) providing for annual funding over a period of ten years in amounts equal to 12.14% of the total abandonment estimate for the first seven years and 5.0% per year for the last three years of the production license. The amounts paid will be reimbursed through the cost account and are non-refundable. The abandonment estimate used for this purpose is approximately $61.1 million ($19.0 million net to VAALCO) on an undiscounted basis. Through June 30, 2018, $34.8 million ($10.8 million net to VAALCO) on an undiscounted basis has been funded. This cash funding is reflected under “Other noncurrent assets” as “Abandonment funding” on our condensed consolidated balance sheets. Future changes to the anticipated abandonment cost estimate could change our asset retirement obligation and the amount of future abandonment funding payments.

14


 

Table of Contents

FPSO charter 

In connection with the charter of the FPSO, we, as operator of the Etame Marin block, guaranteed all of the lease payments under the charter through its contract term, which expires in September 2020. At our election, the charter may be extended for two one-year periods beyond September 2020. We obtained guarantees from each of the joint venture owners for their respective shares of the payments. Our net share of the charter payment is 31.1%, or approximately $9.7 million per year. Although we believe the need for performance under the charter guarantee is remote, we recorded a liability of $0.4 million as of June 30, 2018 and $0.5 million as of December 31, 2017 representing the guarantee’s estimated fair value. The guarantee of the offshore Gabon FPSO lease has  $69.7 million and $85.2 million in remaining gross minimum obligations as of June 30, 2018 and December 31, 2017, respectively.

Regulatory and Joint Interest Audits

We are subject to periodic routine audits by various government agencies in Gabon, including audits of our petroleum cost account, customs, taxes and other operational matters, as well as audits by other members of the contractor group under our joint operating agreements. 

In 2016, the government of Gabon conducted an audit of our operations in Gabon, covering the years 2013 through 2014. We received the findings from this audit and responded to the audit findings in January 2017.  Since providing our response, there have been changes in the Gabonese officials responsible for the audit.  We are currently working with the newly appointed representatives to resolve the audit findingsWe do not anticipate that the ultimate outcome of this audit will have a material effect on our financial condition, results of operations or liquidity.

In 2017, the government of Gabon conducted a tax audit of our Gabon subsidiary covering the years 2013 through 2016, and in December 2017, we received a report on their findings.  In April 2018, we reached a final settlement of the audit resulting in a payment for taxes of $0.2 million and penalties of $0.2 million, net to VAALCO.  At December 31, 2017, we had an accrual of $0.5 million, net to VAALCO, for the estimated additional taxes along with penalties in the “Accrued liabilities and other” line item of our consolidated balance sheets.

At June 30, 2018 and December 31, 2017, we had accrued $1.3 million, net to VAALCO, in “Accrued liabilities and other” on our condensed consolidated balance sheets for potential fees which may result from a customs audit. 

11.  DERIVATIVES AND FAIR VALUE

We use derivative financial instruments to achieve a more predictable cash flow from oil production by reducing our exposure to price fluctuations.

Commodity Swaps - During the three months ended June 30, 2018, we entered into commodity swaps at a Dated Brent weighted average of $74 per barrel for the period from and including June 2018 through June 2019 for a quantity of approximately 400,000 barrels.  If a liability position exceeds $10.0 million, we would be required to provide a  bank letter of credit or  deposit cash into an escrow account for the amount by which the liability exceeds $10.0 million. These swaps settle on a monthly basis.  At June 30, 2018, our unexpired commodity swaps represented a fair value liability position of $1.0 million in “Accrued liabilities and other” line of our condensed consolidated balance sheet. 

Put options - During 2016, we executed crude oil put contracts as market conditions allowed in order to economically hedge anticipated 2016 and 2017 cash flows from crude oil producing activities.  At December 31, 2017, our crude oil put contracts expired. 

While these commodity swaps and crude oil puts are intended to be an economic hedge to mitigate the impact of a decline in oil prices, we have not elected hedge accounting. The contracts are being measured at fair value each period, with changes in fair value recognized in net income. We do not enter into derivative instruments for speculative or trading proposes.

We record balances resulting from commodity risk management activities in the condensed consolidated balance sheets as either assets or liabilities measured at fair value. Gains and losses from the change in fair value of derivative instruments and cash settlements on commodity derivatives are presented in the “Other, net” line item located within the “Other income (expense)” section of the condensed consolidated statements of operations. 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

Derivative Item

 

Statement of Operations Line

 

2018

 

2017

 

2018

 

2017



 

 

 

(in thousands)

Crude oil puts

 

Other, net

 

 

 —

 

 

130 

 

$

 —

 

$

(50)

Crude oil swaps

 

Other, net

 

 

(1,010)

 

 

 —

 

 

(1,010)

 

 

 —















12 STOCK-BASED COMPENSATION 



Our stock-based compensation has been granted under several stock incentive and long-term incentive plans. The plans authorize the Compensation Committee of our Board of Directors to issue various types of incentive compensation. Currently, we have issued stock options, restricted shares and stock appreciation rights from the 2014 Long-Term Incentive Plan (“2014 Plan”). At June 30, 2018,  1,071,348 shares were authorized for future grants under the 2014 plan.

15


 

Table of Contents

For each stock option granted, the number of authorized shares under the 2014 Plan will be reduced on a one-for-one basis. For each restricted share granted, the number of shares authorized under the 2014 Plan will be reduced by twice the number of restricted shares. We have no set policy for sourcing shares for option grants. Historically the shares issued under option grants have been new shares.

We record compensation expense related to stock-based compensation as general and administrative expense.  For the three months ended June 30, 2018 and 2017, stock-based compensation was $2.4 million and $0.6 million, respectively, related to the issuance of stock options, restricted stock and SARsFor the six months ended June 30, 2018 and 2017, stock-based compensation was $2.7 million and  $0.8 million, respectively, related to the issuance of stock options,  restricted stock and SARs. Because we do not pay significant United States federal income taxes, no amounts were recorded for future tax benefits.

Stock options

Stock options have an exercise price that may not be less than the fair market value of the underlying shares on the date of grant. In general, stock options granted to participants will become exercisable over a period determined by the Compensation Committee of our Board of Directors, which in the past has been a five year life, with the options vesting over a service period of up to five years. In addition, stock options will become exercisable upon a change in control, unless provided otherwise by the Compensation Committee. There were $0.4 million and $38 thousand in cash proceeds from the exercise of stock options in the six months ended June 30, 2018 and 2017, respectively.  During the six months ended June 30, 2018, options for 494,941 shares were granted to employees; these options vest over a three-year period, vesting in three equal parts on the first, second and third anniversaries after the date of grant and have an exercise price of $0.86 per share.  During the six months ended June 30, 2018, options for 175,644 shares were granted to directors; these options vested immediately on the date of grant and have an exercise price of $1.60 per share.

Stock option activity for the six months ended June 30, 2018 is provided below:



 

 

 

 

 



 

Number of Shares Underlying Options

 

Weighted Average Exercise Price Per Share



 

(in thousands)

 

 

 

Outstanding at January 1, 2018

 

2,597 

 

$

1.77 

Granted

 

671 

 

 

1.05 

Exercised

 

(435)

 

 

1.02 

Forfeited/expired

 

(97)

 

 

7.59 

Outstanding at June 30, 2018

 

2,736 

 

 

1.51 

Exercisable at June 30, 2018

 

1,540 

 

 

1.92 



Restricted shares

Restricted stock granted to employees will vest over a period determined by the Compensation Committee which is generally a three year period, vesting in three equal parts on the first three anniversaries following the date of the grant. Share grants to directors vest immediately and are not restricted.   During the six months ended June 30, 2018, the Company issued 323,474 shares of service based restricted stock to employees with a grant date fair value of $0.86 per share.  The vesting of these shares is dependent upon the employee’s continued service with the Company.  The shares will vest in three equal parts over three years. The following is a summary of activity in unvested restricted stock in the six months ended June 30, 2018.  During the six months ended June 30, 2018, restricted stock for 75,000 shares were granted to directors; these shares vested immediately on the date of grant and had a grant date fair value of $1.60 per share.



 

 

 

 

 



 

Restricted Stock

 

Weighted Average Grant Price



 

(in thousands)

 

 

 

Non-vested shares outstanding at January 1, 2018

 

340 

 

$

1.10 

Awards granted

 

398 

 

 

1.00 

Awards vested

 

(122)

 

 

1.36 

Awards forfeited

 

 —