UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-QSB/A
(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, 1997
|_| 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
-----------------------
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
Check whether the issuer (1) 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 [X] No [ ].
As of November 11, 1997 there were outstanding 15,566,527 shares of Common
Stock, $.10 par value per share, of the registrant.
VAALCO ENERGY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 1997 (Unaudited)-as restated and December 31, 1996....3
Statements of Consolidated Operations (Unaudited)
Three and nine months ended September 30, 1997-as restated and 1996.4
Statements of Consolidated Cash Flows (Unaudited)
Nine months ended September 30, 1997-as restated and 1996...........5
Notes to Consolidated Financial Statements.............................6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................10
PART II. OTHER INFORMATION...........................................17
2
VAALCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PAR VALUE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------- --------
(AS RESTATED
SEE NOTE 6)
CURRENT ASSETS:
Cash and equivalents ................................. $ 3,447 $ 1,055
Advances - related party ............................. -- 1,916
Marketable securities - related party ................ -- 777
Receivables:
Trade .............................................. 766 103
Accounts with partners ............................. -- 190
Other .............................................. 680 1,177
Materials and supplies ............................... 389 387
Prepaid expenses and other ........................... 268 9
-------- --------
Total current assets ............................... 5,550 5,614
-------- --------
PROPERTY AND EQUIPMENT-SUCCESSFUL EFFORTS METHOD
Wells, platforms and other production facilities ..... 46,961 46,866
Undeveloped acreage .................................. 840 808
Equipment and other .................................. 547 342
-------- --------
48,348 48,016
Accumulated depreciation, depletion and amortization ... (46,782) (46,383)
-------- --------
Net property and equipment ......................... 1,566 1,633
-------- --------
OTHER ASSETS:
Funds in escrow .................................... 393 370
Other long-term assets ............................. 378 119
-------- --------
TOTAL .................................................. $ 7,887 $ 7,736
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ..................................... 1,327 $ 1,862
Accrued liabilities .................................. 80 1,280
253 --
Accounts with partners
Current portion of debt obligations .................. -- 3,918
-------- --------
Total current liabilities .......................... 1,660 7,060
-------- --------
FUTURE ABANDONMENT COSTS ............................... 4,942 4,942
OTHER LONG TERM LIABILITIES ............................ -- 1,000
-------- --------
Total liabilities .................................... 6,602 13,002
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $25 par value, 10% cumulative
dividend. 500,000 authorized shares; 0 and
90,000 shares issued and outstanding ............... -- 2,250
Common stock, $.10 par value, 50,000,000 and
15,000,000 authorized Shares, 15,566,527 and
8,870,864 shares issued of which 5,395 are in
the treasury in 1997 and 1996, respectively ........ 1,557 887
Additional paid-in capital ........................... 16,904 11,401
Accumulated deficit .................................. (17,163) (19,707)
Net unrealized loss on non-current marketable
securities ......................................... -- (84)
Less treasury stock, at cost ......................... (13) (13)
-------- --------
Total stockholders' equity (deficit) ............... 1,285 (5,266)
-------- --------
TOTAL .................................................. $ 7,887 $ 7,736
======== ========
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(AS RESTATED (AS RESTATED
SEE NOTE 6) SEE NOTE 6)
REVENUES:
Oil and gas sales .................... $ 472 $ 228 $ 1,734 $ 2,391
Gain (loss) on sale of assets ........ 45 (59) 3,377 1,081
--------- --------- --------- ---------
Total revenues ..................... 517 169 5,111 3,472
OPERATING COSTS AND EXPENSES:
Production expenses .................. 255 109 1,032 1,540
Exploration costs .................... (20) 82 46 211
Depreciation, depletion and
amortization ....................... 103 4 405 622
General and administrative
expenses ........................... 389 368 1,147 1,462
--------- --------- --------- ---------
Total operating costs and
expenses ......................... 727 563 2,630 3,835
--------- --------- --------- ---------
OPERATING INCOME (LOSS) ................ (210) (394) 2,481 (363)
OTHER INCOME (EXPENSES):
Interest income ...................... 30 1 50 72
Interest expense and financing
charges ............................ (59) (65) (175) (218)
Other, net ........................... (29) (70) 103 (200)
--------- --------- --------- ---------
Total other income (expenses) ...... (58) (134) (22) (346)
--------- --------- --------- ---------
NET INCOME (LOSS) ...................... (268) (528) 2,459 (709)
Preferred dividends .................... -- (56) (56) (169)
--------- --------- --------- ---------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS .................. $ (268) $ (584) $ 2,403 $ (878)
========= ========= ========= =========
INCOME (LOSS) PER COMMON SHARE:
PRIMARY .............................. $ (0.02) $ (0.06) $ 0.21 $ (0.10)
========= ========= ========= =========
FULLY DILUTED ........................ $ (0.02) $ (0.06) $ 0.21 $ (0.10)
========= ========= ========= =========
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,
-------------------
1997 1996
------- -------
(AS RESTATED
SEE NOTE 6)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ 2,459 $ (709)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation, depletion and amortization ........... 405 622
Seismic and exploration costs ...................... 46 197
Gain on sale of assets ............................. (3,377) (1,081)
Change in assets and liabilities that provided
(used) cash:
Funds in escrow .................................... (23) --
Accounts with partners ............................. (335) (1,275)
Trade receivables .................................. (663) (65)
Other receivables .................................. 497 (39)
Crude oil inventory ................................ -- 970
Materials and supplies ............................. (69) 173
Prepaid expenses and other ......................... (259) 47
Accounts payable ................................... 680 (216)
Accrued liabilities ................................ (592) (266)
------- -------
Net cash used in operating activities ............ (1,231) (1,642)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Seismic and exploration costs ........................ (46) (197)
Additions to property and equipment .................. (525) (488)
Proceeds from sale of assets ......................... 4,672 1,825
Other ................................................ (301) 3
------- -------
Net cash provided by investing activities ........ 3,800 1,143
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ............................. -- 1,000
Repayments of debt obligations ....................... (4,918) (700)
Advances from related parties (net) .................. 1,523 4
Proceeds from the issuance of common stock ........... 3,218 --
------- -------
Net cash (used in)provided by financing
activities ..................................... (177) 304
------- -------
NET CHANGE IN CASH AND EQUIVALENTS ..................... 2,392 (195)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD ............ 1,055 701
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD .................. $ 3,447 $ 506
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Net cash paid for interest ........................... $ 290 $ 158
======= =======
Depletion costs previously capitalized in crude
oil inventory ...................................... $ -- $ 541
======= =======
Non-cash items
Redemption of 90,000 shares of $25 par value
preferred stock by issuance of 2.25 million
common shares .................................... $(2,250) $ --
======= =======
Issuance of 490,663 common shares for unpaid
dividends ........................................ $ (491) $ --
======= =======
Issuance of 355,000 common shares for accrued
liabilities ...................................... $ (355) $ --
======= =======
Issuance of 100,000 common shares for lease
acquisition costs ................................ $ (100) $ --
======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
VAALCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(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 which the Company deems
necessary for a fair presentation of its financial position and results of
operations for the interim period. Such results are not necessarily
indicative of results to be expected for the full year. The Balance Sheet
at December 31, 1996 has been taken from the audited financial statements
at that date. 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, 1996.
2. CURRENT DEVELOPMENTS
In October 1997, the Company acquired a 100% working interest in 3,690
acres in Brazos County, Texas at a cost of approximately $450,000. The
Company intends to participate in the drilling of extended reach
horizontal wells in the Georgetown formation underlying the leases.
In September 1997, the Company entered into a three year agreement with
Paramount Petroleum Co., Inc. to fund a $3.0 million exploration prospect
generating program. The agreement entitles the Company to ground floor
participation in 25% of the working interest in a prospect generated by
Paramount, as well as any funds recovered against the prospect cost. In
the event of a surplus of cost recovery, the surplus will be equally
divided between the Company and Paramount.
The prospects will be located onshore in the Alabama/Mississippi and Gulf
Coast Regions. The Company has funded $0.3 million of the commitment and
has until December 31, 1997 to arrange for the balance of the funding. The
Company is not obligated to fund beyond the $0.3 million level if it so
chooses, but then loses its rights to any further prospects generated.
In July 1997, the Company completed a private placement of four million
shares of common stock. Certain selling shareholders accounted for 500,000
of the private placement shares. The private placement resulted in $3.2
million net proceeds to the Company. Concurrent with the private placement
of equity, the Company redeemed all of the issued and outstanding shares
of its 10% Cumulative Series A Preferred Stock. Payment of the redemption
price and payment of accrued and unpaid dividends were satisfied by the
issuance of an aggregate of 2,740,663 shares of Common Stock.
Additionally, the Company issued 355,000 shares to settle $355,000 of
unpaid obligations of the Company. Total shares issued by the Company in
conjunction with these transactions were 6,595,663 shares. In September
1997, the Company issued 100,000 shares of stock to Allegro Investments,
Inc. as payment for certain lease acquisition costs associated with
approximately 1,200 acres in Goliad County, Texas.
6
Also, in July 1997, the Company amended its Certificate of Incorporation
to increase the number of shares of Common Stock it is authorized to
issue. As a result of such amendment, the Company is authorized to issue
50,000,000 shares of Common Stock of which 15,566,527 shares were issued
and outstanding on November 11, 1997.
Effective August 1, 1997, Mr. Robert L. Gerry, III was elected Chairman
of the Board of the Company and will also serve as the Company's Chief
Executive Officer. Mr. Gerry was previously vice chairman of Nuevo
Energy Company. Mr. C. W. Alcorn resigned as Chairman of the Board but
will remain a director of the Company.
During 1997, the Company completed the restructuring of its international
assets. Certain marketable securities held by the Company in Alcorn
Petroleum and Minerals Corporation ("APMC"), a publicly listed Philippines
company were sold for a gain of $0.7 million. Proceeds of $3.4 million
were used to retire debt. In addition, the Company sold the balance of its
assets in India, consisting of a 4% net profit interest in the PY-3 Field,
and a 20% working interest in the Gulf of Cambay Block CB-OS/1. The assets
were sold to Hardy Oil & Gas (U.K.) Ltd. for a gain of $2.5 million.
In October 1996, VAALCO and the other Service Contract No. 14 and Service
Contract No. 6 consortium members entered into a farmout agreement wherein
the farmee, an Australian company, is required to shoot a $7.0 million 3-D
seismic program over the service contracts during 1997. The Australian
farmee company will earn a 35% interest in the blocks for performing the
work. In addition, the Australian company has the option to drill two
wells, one on each Service Contract, to earn up to an additional 25%
interest in each Service Contract. Seismic acquisition under the farmout
agreement commenced in February 1997 and was 67% completed at July 31,
1997. The balance of the seismic will be acquired beginning in December
1997. No significant capital expenditures are anticipated by the Company
in 1997 for the Philippines operations.
In April 1997, the Company entered into an agreement with Western Atlas
Afrique, Ltd., a subsidiary of Western Atlas, which will perform the
required seismic surveys and pay a disproportionate 80% of the cost, up to
$4.7 million, of the estimated $5.8 million (dry hole cost) commitment
well to earn a 65% interest in the concession. The Company and its
partners will be responsible for 20% of the cost (35% over $4.7 million)
of the commitment well. VAALCO's share of the dry hole cost of the
commitment well is estimated to be $0.7 million. In June 1997, the Company
completed the above mentioned acquisition of seismic data over the
property. These data are currently being processed to determine the best
location for drilling a well. The Company has contracted a drilling rig
for the first quarter of 1998 to drill the well.
7
3. DEBT OBLIGATIONS
In December 1996, the Company issued $0.6 in debt associated with the
acquisition of certain properties in the Gulf of Mexico. The loan was
secured by an assignment of revenue interests ranging from 45% to 65% in
certain properties. The loan was recourse only to the assigned revenue
interests, and was not guaranteed by the Company. The balance on the note
had been repaid in full at September 30, 1997.
The Company retired certain debt of its Philippines subsidiaries in April
1997.
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings
Per Share". SFAS 128 established standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. This statement simplifies the
standards for computing EPS previously found in Accounting Principles
Board Opinion No. 15, "Earnings Per Share," and makes them comparable to
international EPS standards. This statement is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods; earlier application is not permitted. This statement
requires restatement of all prior-period EPS data presented. Considering
the guidelines as prescribed by SFAS 128, management believes that the
adoption of this statement does not have a material effect on EPS and thus
pro forma EPS, as suggested for all interim and annual periods prior to
required adoption, have been omitted.
5. LEGAL PROCEEDINGS
In December 1996, a member of the Service Contract 14 consortium in the
Philippines, Oriental Petroleum & Minerals, Inc. filed an arbitration
action against the Company and the other eight members of the consortium
alleging that it was not responsible for its share of certain expenses
incurred by the consortium in the West Linapacan "A" Field. The consortium
placed Oriental in default in 1995 for non-payment of the contested
expenses. Oriental also seeks a ruling on certain provisions of the joint
operating agreement which Oriental alleges gave it certain veto rights
over operations in the field, and reinstatement into Service Contract 14.
The remaining members of the consortium, including the Company, filed a
response to Oriental's claims seeking, among other things, $1.5 million in
unpaid expenses, plus interest.
Oriental also seeks $1.0 million from the Company for Oriental's share of
a well drilled by the Company in the wrong location during 1993 under
Service Contract 14. It is possible other members of the consortium may
assert claims against the Company for costs of the mislocated well,
although no claims have been asserted to date. The Company cannot
presently estimate the liability, if any, that it may have to Oriental and
the other members
8
of the consortium. However, if Orientals's claims in arbitration are
successful the Company's liability to Oriental and the other members of
the consortium would be approximately $2.0 million, which would have a
material adverse effect on the Company. The Company has put forth a number
of defenses in the arbitration which if successful will substantially
reduce any exposure it may have for the mislocated well, and plans to
vigorously defend itself in arbitration. No assurances can be made,
however, as to the outcome of the arbitration.
6. RESTATEMENT
Subsequent to the issuance of the financial statements, the Company's
management determined that a receivable payment in the first quarter was
inadvertantly recorded to revenues net of operating expense, and in the
third quarter, an entry was erroneously recorded to wells, platforms and
other production facilities. The accompanying financial statements have
been modified accordingly.
Additionally, the 100,000 shares issued to Allegro were recorded in the
third quarter.
A summary of the effects of the adjustments follows:
(In thousands of dollars except per share amounts)
AS PREVIOUSLY
REPORTED AS ADJUSTED
------------ ------------
As of September 30, 1997
Accounts Receivable - Trade ........... $ 588 $ 766
Wells, platforms and other
production facilities ............... 47,319 46,961
Accumulated deficit ................... (16,984) (17,163)
For the three months ended
September 30, 1997
Oil and gas sales ................... 294 472
Net income (loss) ................... (446) (268)
Net income (loss)
attributable to
common stockholders ............... (446) (268)
Income (loss) per common share
Primary ........................... (0.03) (0.02)
Fully diluted ..................... (0.03) (0.02)
For the nine months ended
September 30, 1997
Oil and gas sales ................... 2,009 1,734
Production expenses ................. 1,127 1,032
Net income (loss) ................... 2,639 2,459
Net income (loss) attributable to
Common stockholders ............... 2,583 2,403
Income (loss) per common share
Primary ........................... 0.23 0.21
Fully diluted ..................... 0.22 0.21
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
CAPITAL RESOURCES AND LIQUIDITY
Historically, the Company's primary source of capital resources has been from
its production operations in the Philippines, asset sales and the issuance of
debt. The Company continues to produce the Nido and Matinloc fields in the
Philippines at approximately 675 BOPD.
Through a diversification program undertaken by management, the Company acquired
producing assets in the Gulf of Mexico and two interests in Gabon. The Company
has also accumulated approximately 1,600 acres in the Wilcox trend of Goliad
County, Texas and 3,690 acres over the Georgetown trend in Brazos County, Texas.
In order to execute the diversification program, the Company has, among other
activities, been actively seeking farmout partners to progress the development
of its prospects. In this regard, the Company has successfully entered into
farmout agreements in one of its Gabon blocks and in its Philippines blocks in
exchange for carried work programs. For the domestic acquisition program, the
Company has relied on the private placement of equity and issuance of debt to
raise capital for these acquisitions. A more detailed description of the
Company's activities is described below.
In October 1997, the Company acquired a 100% working interest in 3,690 acres in
Brazos County, Texas at a cost of approximately $450,000. The Company intends to
participate in the drilling of extended reach horizontal wells in the Georgetown
formation underlying the leases.
In September 1997, the Company entered into a three year agreement with
Paramount Petroleum Co., Inc., to fund a $3.0 million exploration prospect
generating program. The agreement entitles the Company to ground floor
participation in 25% of the working interest in a prospect generated by
Paramount, as well as any funds recovered against the prospect cost. In the
event of a surplus of cost recovery, the surplus will be equally divided between
the Company and Paramount.
The prospects will be located onshore in the Alabama/Mississippi and Gulf Coast
Regions. The Company has funded $0.3 million of the commitment and has until
December 31, 1997 to arrange for the balance of the funding. The Company is not
obligated to fund beyond the $0.3 million level if it so chooses, but then loses
its rights to any further prospects generated.
In July 1997, the Company completed a private placement of four million shares
of common stock. Certain selling shareholders accounted for 500,000 of the
private placement shares. The private placement resulted in $3.2 million net
proceeds to the Company. Concurrent with the private placement of equity, the
Company redeemed all of the issued and outstanding shares of its 10% Cumulative
Series A Preferred Stock. Payment of the redemption price and payment of accrued
and unpaid dividends were satisfied by the issuance of an aggregate of 2,740,663
shares of Common Stock. Additionally, the Company issued 355,000 shares to
settle $355,000 of unpaid obligations of the Company. Total shares issued by the
Company in conjunction with the transaction was 6,595,663 shares. In September
1997, the Company issued 100,000 shares of
10
stock to Allegro Investments, Inc. as payment for certain lease acquisition
costs associated with approximately 1,200 acres in Goliad County, Texas.
Also, in July 1997, the Company amended its Certificate of Incorporation to
increase the number of shares of Common Stock it is authorized to issue. As a
result of such amendment, the Company is authorized to issue 50,000,000 shares
of Common Stock of which 15,566,527 shares were issued and outstanding on
November 11, 1997.
United States
In December 1996, the Company issued $618,000 in debt associated with the
acquisition of certain properties in the Gulf of Mexico. The loan was secured by
an assignment of revenue interests in certain of the properties. The loan was
recourse only to the assigned revenue interests, and was not guaranteed by the
Company. The balance of the note was repaid in full as of September 30, 1997.
The Gulf of Mexico properties consist of interests in seven offshore fields in
ten lease blocks. Four of the platforms in three of the fields, High Island
blocks A-313, A-314 and A-280, are being operated by VAALCO. The balance of the
package consists of non-operated interests in the West Cameron, Vermilion and
Ship Shoal areas of the Gulf of Mexico. No significant capital expenditures are
anticipated in 1997 for these properties. During October 1997 the production
from High Island A-280 ceased. This property represented approximately one third
of the production of the Company in the Gulf of Mexico. The Company is
evaluating the feasibility of restoring the platform to production.
In October 1994, the Company acquired a working interest in approximately 1,200
acres in Goliad County, Texas, in exchange for cash and warrants to purchase
shares of the Company's Common Stock, $.10 par value per share (the "Common
Stock"). The warrants which had a term of three years and consisted of the right
to purchase 200,000 shares of Common Stock at an exercise price of $2.50 per
share and 200,000 shares of Common Stock at an exercise price of $5.00 per share
expired unexercised in October 1997. Through a combination of lease expirations
and new acquisitions, the Company has accumulated an additional 403 net acres as
of September 30, 1997. The Company has an average 76% net revenue interest in
the acreage and plans to seek a farm-in partner for the leases in 1997. The
three year lease has no drilling obligation requirements. Capital expenditures
for 1997 or 1998 will depend upon the outcome of the Company's farmout efforts.
Gabon
In July 1995, the Company acquired two blocks offshore Gabon, the Equata block
and the Etame block. Both blocks contain previous discoveries that the Company
is currently evaluating to determine their commercial viability. The Company and
its partners had an obligation to the Government of Gabon to obtain
approximately 1,500 line kilometers of seismic data and to drill one well on the
Etame block during the three-year term of the license.
11
In April 1997, the Company entered into an agreement with Western Atlas Afrique,
Ltd., a subsidiary of Western Atlas, which will perform the required seismic
surveys and pay a disproportionate 80% of the cost, up to $4.7 million, of the
estimated $5.8 million (dry hole cost) commitment well to earn a 65% interest in
the concession. The Company and its partners will be responsible for 20% of the
cost (35% over $4.7 million) of the commitment well. VAALCO's share of the dry
hole cost of the commitment well is estimated to be $0.7 million. In June 1997,
the Company completed the above mentioned acquisition of seismic data over the
property. These data are currently being processed to determine the best
location for drilling a well. The Company has contracted a drilling rig for the
first quarter of 1998 to drill the well.
Philippines
In October 1996, VAALCO and the other Service Contract No. 14 and Service
Contract No. 6 consortium members entered into a farmout agreement wherein the
farmee, an Australian company, is required to shoot a $7.0 million 3-D seismic
program over the service contracts during 1997. The Australian farmee company
will earn a 35% interest in the blocks for performing the work. In addition, the
Australian company has the option to drill two wells, one on each Service
Contract, to earn up to an additional 25% interest in each Service Contract.
Seismic acquisition under the farmout agreement commenced in February 1997 and
was 67% completed at July 31, 1997. The balance of the seismic will be acquired
beginning in December 1997. No significant capital expenditures are anticipated
by the Company in 1997 for the Philippines operations.
Other Activities
In March 1997, the Company sold its Gulf of Cambay concession and its 4% net
profits interest in the CY-OS/2 concession, both in India, to Hardy Oil & Gas
(UK) Limited for $2.5 million. The Company applied $1.0 million of the proceeds
from the sale to complete the payment of the non-recourse loan made to the
Company by Hardy in 1996. The remainder of the note was paid in April 1997.
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, asset sales and cash flows from
operations to provide the required capital for funding future operations. While
there can be no assurance that the Company will be successful in raising new
financing, management believes that the prospects the Company has in hand will
enable it to attract sufficient capital to fund required oil and gas activities.
Cash Flows
Net cash used in operating activities was $1.2 million for the nine months
ending September 30, 1997. This compares to net cash used in operating
activities of $1.6 million for the comparable period in 1996. Net cash was used
in both periods to reduce accounts payable, advances and accrued liabilities.
12
Net cash provided by investing activities for the nine months ended September
30, 1997 was $3.8 million, an increase of $2.7 million, as compared to $1.1
million for the same period in 1996. The 1997 amount reflects cash received from
the sale of marketable securities and the sale of the Company's interest in
India. This is partially offset by additions to property and equipment in 1997
of $0.5 million.
Net cash used in financing activities for the nine months ended September 30,
1997 was $0.2 million, as compared to net cash provided by financing activities
of $0.3 million for the same period in 1996. The 1997 amount includes the
payment of $4.9 million of debt, collection of $1.5 million of advances from
related parties and the proceeds of $3.2 million from the issuance of new common
shares in July 1997.
Item 2 of this document 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. Although the Company believes that
the expectations reflected in such forward looking statements are based upon
reasonable assumptions, the Company can give no assurance that these
expectations will be achieved. Important factors that could cause actual results
to differ materially from the Company's expectations include general economic,
business and market conditions, the volatility of the price of oil and gas,
competition, development and operating costs and the factors that are disclosed
in conjunction with the forward looking statements included herein.
13
RESULTS OF OPERATIONS
Amounts stated hereunder have been rounded to the nearest $100,000, however,
percentage changes have been calculated using actual amounts.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
REVENUES
Total oil and gas sales for the three months ended September 30, 1997 were $0.5
million, an increase of $0.2 million, as compared to $0.2 million for the same
period in 1996. The 1996 revenues relate to the Company's oil production in the
Philippines. The 1997 revenues include revenues relating to the Philippines, as
well as oil and gas revenues relating to the Company's Gulf of Mexico
operations.
OPERATING COSTS AND EXPENSES
Production expenses for the three months ended September 30, 1997 were $0.3
million, an increase of $0.2 million, as compared to $0.1 million for the same
period in 1996. The increase is primarily due to production costs incurred in
1997 relating to the Gulf of Mexico operations.
General and administrative expenses for the three months ended September 30,
1997 were $0.4 million, comparable to $0.4 million for the same period in 1996.
No preferred dividends were paid or accrued in the three months ending September
30, 1997. The preferred stock was redeemed in July 1997.
Other expense decreased by $0.1 million to $0.06 million for the three months
ending September 30, 1997 from an expense of $0.1 million for the comparable
period in 1996. Certain inventory adjustments in 1996 accounted for the
increase.
NET INCOME
Net loss attributable to common stockholders for the three months ended
September 30, 1997 was $0.3 million, compared to a net loss attributable to
common stockholders of $0.6 million for the same period in 1996. Both losses
were primarily operating losses.
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NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
REVENUES
Total oil and gas sales for the nine months ended September 30, 1997 were $1.7
million, a decrease of $0.7 million, or 27%, as compared to $2.4 million for the
same period in 1996. The 1996 revenues relate to the Company's oil production in
the Philippines, and included a final crude oil sale from the West Linapacan "A"
Field. The 1997 revenues include revenues relating to the Philippines, as well
as oil and gas revenues relating to the Company's Gulf of Mexico operations.
The gain on sale of assets of $3.4 million, recognized in the nine months ended
September 30, 1997, was associated with the sale of marketable securities and
the sale of the Company's interest in India. The gain on sale of assets of $1.1
million, recognized in the nine months ended September 30, 1996, was associated
with the sale of the Company's interest in the PY-3 field in India.
OPERATING COSTS AND EXPENSES
Production expenses for the nine months ended September 30, 1997 were $1.0
million, a decrease of $0.5 million, or 33%, as compared to $1.5 million for the
same period in 1996. The decrease is primarily due to reduced operating costs in
the Philippines, offset by production costs incurred in 1997 relating to the
Gulf of Mexico operations.
Depletion for 1997 of $0.4 million relates to the Gulf of Mexico properties. The
1996 amount represents depletion of the Philippine properties which were fully
depleted during that year.
General and administrative expenses for the nine months ended September 30, 1997
were $1.1 million, a decrease of $0.3 million, or 22%, as compared to $1.5
million for the same period in 1996. The decrease is primarily due to reduced
overhead costs in the Philippines and overhead reimbursements in Gabon and the
United States.
Preferred dividends decreased from $0.2 million to $0.06 million due to the
termination of dividend payments at March 31, 1997. This was followed by the
redemption of the Preferred Stock in July 1997.
Other expense decreased by $0.3 million to $0.02 million for the nine months
ending September 30, 1997 from an expense of $0.3 million for the comparable
period in 1996. Certain inventory adjustments in 1996 accounted for the
increase.
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NET INCOME
Net income attributable to common stockholders for the nine months ended
September 30, 1997 was $2.4 million, compared to net loss attributable to common
stockholders of $0.9 million for the same period in 1996. The 1997 income
results from the recognition of a gain associated with the sale of marketable
securities and the sale of the Company's interest in India.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1996, a member of the Service Contract 14 consortium in the
Philippines, Oriental Petroleum & Minerals, Inc. filed an arbitration action
against the Company and the other eight members of the consortium alleging that
it was not responsible for its share of certain expenses incurred by the
consortium in the West Linapacan "A" Field. The consortium placed Oriental in
default in 1995 for non-payment of the contested expenses. Oriental also seeks a
ruling on certain provisions of the joint operating agreement which Oriental
alleges gave it certain veto rights over operations in the field, and
reinstatement into Service Contract 14. The remaining members of the consortium,
including the Company, filed a response to Oriental's claims seeking, among
other things, $1.5 million in unpaid expenses, plus interest.
Oriental also seeks $1.0 million from the Company for Oriental's share of a well
drilled by the Company in the wrong location during 1993 under Service Contract
14. It is possible other members of the consortium may assert claims against the
Company for costs of the mislocated well, although no claims have been asserted
to date. The Company cannot presently estimate the liability, if any, that it
may have to Oriental and the other members of the consortium. However, if
Oriental's claims in arbitration are successful, the Company's liability to
Oriental and the other members of the consortium would be approximately $2.0
million, which would have a material adverse effect on the Company. The Company
has put forth a number of defenses in the arbitration which if successful will
substantially reduce any exposure it may have for the mislocated well, and plans
to vigorously defend itself in arbitration. No assurances can be made, however,
as to the outcome of the arbitration.
ITEM 2. CHANGES IN SECURITIES
In July 1997, the Company completed a private placement of four million shares
of common Stock at a price of $1.00 per share to certain accredited investors.
Certain selling shareholders accounted or 500,000 of the private placement
shares. The private placement resulted in $3.2 million net proceeds to the
Company. The Company also issued warrants to purchase 345,325 shares of Common
Stock at an exercise price of $1.00 per share to the placement agent for
services rendered in connection with the private placement.
Concurrent with the private placement of equity, the Company redeemed all of the
issued and outstanding shares of its 10% Cumulative Series A Preferred Stock.
Payment of the redemption price and payment of accrued and unpaid dividends were
satisfied by the issuance of an aggregate of 2,740,663 shares of Common Stock.
In September 1997, the Company issued 100,000 shares of stock to Allegro
Investments, Inc. as payment for certain lease acquisition costs associated with
approximately 1,200 acres in Goliad County, Texas.
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The Company claimed exemption from registration under the Securities Act of
1933, as amended, of such warrants and shares issued by the Company under
Section 4(2) of such Act as a transaction by an issuer not involving any public
offering.
In July 1997, the Company amended its Certificate of Incorporation to increase
from 15,000,000 to 50,000,000 the number of shares of Common Stock authorized
for issuance. See Item 4, "Submission of Matters to a Vote of Security Holders".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By written consent dated July 10, 1997, in lieu of a special meeting of
stockholders, holders of an aggregate of 6,042,750 shares of Common approved an
amendment to the Company's Certificate of Incorporation to increase from
15,000,000 to 50,000,000 the number of shares of Common Stock authorized for
issuance.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly 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
Dated March 2, 1998
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