Good day, and welcome to today's conference call to discuss VAALCO Energy and TransGlobe Energy's strategic business combination call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please also note this event is being recorded. I would now like to turn the conference over to Al Petrie, Investor Relations Coordinator with VAALCO Energy. Please go ahead.
Thank you, Chad, and good morning, everyone. On today's call, George Maxwell, our CEO, and Ron Bain, our CFO, will discuss the company's transformational business combination with TransGlobe Energy. We'll then open the call for questions. During our question and answer session, we ask you to limit your questions to one and a follow-up. You can always re-enter the queue with additional questions. I would like to point out that we posted a presentation deck on our website this morning that has additional information related to the transaction that we will be referring to at times during our call this morning. With that, let me proceed with our forward-looking statement comments. During the course of this call, the company will be making forward-looking statements.
Investors are cautioned that forward-looking statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. VAALCO disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, you should not place any undue reliance on forward-looking statements. These and other risks are described in today's press release, the presentation posted on our website, and in the reports we file with the SEC, including our Form 10-K. Please note, this call is being recorded. Let me now turn the call over to George.
Thank you, Al. Welcome, everyone. We appreciate you joining us today to discuss the transformational and highly accretive combination of VAALCO Energy and TransGlobe Energy. Both companies share similar corporate cultures with firm commitments to financial discipline, adding and returning value to shareholders, operational excellence, and long-term stability. As such, we believe this transaction is mutually beneficial for the broader shareholders, stakeholders of both companies. By building the additional size and scale, we will be able to more efficiently deliver long-term accretive growth. This transaction more than doubles our production reserves and cash flow generation ability. It adds no debt to the merged entity, so we will continue to be unlevered, which further strengthens an already robust balance sheet.
We have shown our ability to grow organically through our projects in Gabon, and have the opportunity in Equatorial Guinea to develop a discovery with additional upside. Now we will have strong free cash flow producing assets in Egypt and Canada as well that will help to fund our robust expanded set of organic opportunities. This immediately transforms VAALCO from a company with a single country, single producing asset into a larger, more diversified company, which reduces risk and expands optionality. On slide 3, you can see the terms of the transaction that was unanimously supported by both companies' boards. This is an all-equity merger with VAALCO shareholders owning 54.5% and TransGlobe shareholders owning 45.5% of the stronger combined group.
Both Ron and I will be staying on in our roles, and we are committed to continuing to create the return value to our shareholders. We are pleased that Randy Neely, Edward Oke, and Geoff Cobert from TransGlobe senior management will remain with us for a transition period. We plan to retain a robust technical team and expertise from both companies, which includes valuable knowledge and relationships in Egypt, Canada, Gabon, and Equatorial Guinea. The new board will be split with three non-executive independent members from each company, and I will be the seventh member of the board. We will continue to trade on New York Stock Exchange and London Stock Exchange under VAALCO's EGY ticker symbol. On slide 5, you can see an overview of our combined assets. Both Gabon and Egypt have similar proved and 2P reserves.
Simply adding Egypt essentially doubles our reserves and adds another all-oil African asset with strong, steady production. We operate both assets and now have onshore and offshore subsurface technical expertise in Africa, enhancing our future business development opportunities. The Canadian position contains strong free cash flowing assets with stable production and impressive long life reserves. In Equatorial Guinea, we have a discovery where we have created a robust development plan and are in the process of getting approved by the Equatorial Guinea government to move forward with activity on Block P. The production profiles of these assets fit very well together. You have offshore assets that have higher initial rates paired with long life onshore assets that produce steadily into the future. This will allow us to generate meaningful cash over long periods of time to fund organic growth opportunities.
As you can see on slide 11, we have significant organic opportunities in Gabon, Egypt, Equatorial Guinea, and Canada, both in the near term and further into the future. We will work hard to identify operating efficiencies across the new combined portfolio through the application of complementary operational and technical skills. We can high grade our organic opportunities and generate cash flow faster to internally funded opportunities. On slide 12, we have outlined the preliminary drilling and development plans in each of the 4 focus areas. Needless to say, this combined work program has significant potential to create substantial additional shareholder value going forward, as VAALCO have done in recent years. In addition, if you look at the appendix, you will find more detailed information on all four of these asset areas.
With that, I'd like to turn the call over to Ron to review the financial benefits of the combination.
Thank you, George. We believe that the combination of two financially strong companies enhances our financial resilience and positions us for enhanced growth and shareholder returns moving forward. If you look at the shares being added and compare them to the growth we will see in production reserves and operational cash flows, you'll see that this is a highly accretive transaction for all shareholders. We're not just creating a bigger company, we're creating a stronger company and one that is better positioned to succeed. If I can draw your attention to slide 6, you can see that we will have significant cash on hand, no debt, and the ability to generate meaningful free cash flow moving forward. This free cash flow will allow us to increase our dividend to nearly double what VAALCO has given in 2022.
We will continue to pay a quarterly dividend, which we will commence the quarter after completion. For 2023, it will be about $28 million or approximately $0.26 per share for the year. On a quarterly basis, that's about $0.065 per share. Despite being larger, we will not lose our strategy of financial and investment discipline. We will maintain our strong balance sheet, optimize our capital allocation, high-grade our organic opportunities, and continue to focus on shareholder returns through the dividend and supplementing it with potential share buybacks and/or special dividends. On slides 9 and 10, you can see the impact of the transaction on our combined 2022 production guidance and combined year-end 2021 reserves.
For perspective, VAALCO's average net production in calendar year 2020 was about 4,850 barrels per day from a net revenue interest perspective, compared to 19,100 net revenue interest barrels per day in 2022 on a combined basis. For reserves from a similar perspective, it's even more impressive. Considering we had 3.2 million barrels of NRI proved reserves at year-end in 2020, and with the combination, we will show 32 million barrels of oil equivalent NRI on a combined basis as of year-end 2021. We will be preparing an expanded investor deck associated with the upcoming shareholder votes that will have more detailed financial information on what the newly combined company will look like going forward.
As you can see in Slide 14, both companies' share prices have meaningfully outperformed the increase in Brent over the past two years and outperformed peers on the greater market. The remarkable amount of value created over the past two years will be combined into a bigger, financially stronger company capable of delivering sustainable and accretive growth to shareholders in any pricing environment. The combined company will also have greater trade liquidity and be listed on the New York Stock Exchange and the London Stock Exchange. It allows for growth across multiple investor bases in North America and in Europe. We'll soon be preparing the necessary filings to secure shareholder approval of this transaction by both VAALCO's and TransGlobe shareholders. Slide 15 provides a preliminary timeline to closing, which we expect to most likely occur in the fourth quarter of this year.
For VAALCO, the transaction requires majority approval of over 50% of our shares outstanding, and for TransGlobe, it requires approval of two-thirds of shares that vote. With that, I'll turn the call back over to George.
Thank you, Ron. In summary, there is a lot to be excited about this transformational combination. We are expanding and diversifying our African-focused assets. This is an all-equity deal, and we're taking on no debt and maintain a very clean and robust balance sheet with significant cash on hand. It is accretive per diluted combined shares for reserves, operational cash flow, and production. We have an enhanced portfolio of organic opportunities with a larger production and reserve base to support its development. We will have size and scale to enhance the broader set of inorganic opportunities, and we'll continue to actively screen opportunities that meet our strict strategic, financial, and operational criteria. Both companies have outstanding teams that we will believe will be complementary and continue to help us achieve our strategic vision.
Most importantly, we will remain firmly focused on maximizing our shareholder returns opportunities and operating with the highest regards towards ESG and HSE. Thank you. With that operator, we're ready to take questions.
Thank you. We will now begin our question-and-answer session. To ask a question, you may press Star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star then two. At this time, we will pause momentarily to assemble our roster. The first question will be from John White with Roth Capital Partners. Please go ahead.
Good morning, gentlemen, and congratulations on your transaction.
Thank you, John.
Thanks, John.
I notice TransGlobe reports heavy oil category. Is that mostly Egypt? Looks like mostly Egypt. Could you confirm that? Again, do you know the API gravity off the top of your head?
Okay, I'll take the question. I think you're correct. It is Egypt. I don't know the exact API. I was in Egypt last week, but due to the nature of the transaction, I was unable to visit the field until we had went public. But one thing I will say that the Egyptian crude, to the best of my knowledge is used as a blending crude, which is very, very beneficial for the production there in Egypt. It's also very beneficial for the monetization of that particular production.
Okay, thank you. It doesn't look like any significant natural gas production in Egypt.
That is correct. The small amount of gas production is taking place in Canada.
The Canadian natural gas is sold on a monthly spot basis?
I believe there are some hedges in place for that gas, but I don't know the details of that at this time.
Okay.
Yeah, I could provide a little bit of color there, George. You know, the gas, and it is a small amount overall. I think it's something between 25%-30% of the Canadian production, which is about 2,000 barrels a day. There is some hedges that TransGlobe have got in place. I think the combined hedges are probably between 55,000-60,000 barrels per quarter, for Q3 and Q4, both put and called. It's color perspective for the natural gas. Yeah, they're protected on a small amount that's there.
I appreciate that. I guess to be more clear, there's no long-term gas contracts in place.
Not that I'm aware, John.
Okay. Thanks very much. I'll pass it on.
Thank you. The next question will be from Charlie Sharp with Canaccord Genuity. Please go ahead.
Thank you very much, and congratulations, gentlemen, on the transaction. If I may just roll two questions into one, and then I will vacate the line. Firstly, are there any in-country approvals required, either in Gabon or in Canada or Egypt? Secondly, do you foresee any shift in capital allocation for the NewCo versus the two separate companies? Will there be an increased focus on any one set of assets? What do you see the role of Canada in this African-weighted story going forward? Thank you.
Thank you, Charlie. Yes, we do not believe there are any required in-country approvals for this transaction that's been represented to us. We have obviously communicated with the respective ministries in respective countries that we operate in, with the exception, I think directly of Canada. When we look at the larger combined company, one of the benefits really is to have the opportunity to really stress test the investment scenario on organic opportunities. That allows us to really make sure that we are investing in the highest quality return opportunities across the portfolio. At this time, you know, we've currently got both companies have their plans for the drilling plans of 2023 and their investment plans of 2023.
You can see that outlined a little bit in one of the slides in the deck. We aren't planning to start drilling again in completion of this phase until Q3 at the earliest of 2023. They are planning the end of Q4 this year and Q1 and Q2 next year. There's a complementary cycling of capital at that time. Obviously, when we, you know, subject to the approval of our shareholders, you know, when we get into Q4, there will be a review of the 2023 program and looking at where the most robust returns can be achieved for the invested dollar.
With regard to the Canadian operation, you know, also that is the heartland of the TransGlobe headquarters. It's where the full operational suite that manages the whole business, not just the Canadian operation, resides. At the moment, we're looking at these operations. As I mentioned in my earlier commentary, there is not an overlap on the technical side. There are complementary skill sets. There are some key skill sets that reside inside TransGlobe, such as the experience they have on fracking technology with the types of fracs they do in Egypt and in Canada. That is complementary to what we are trying to do with some of the fracking that we're undertaking right now in Gabon.
In addition to that, you know, there are growth opportunities for both companies in for us onshore, where they have considerable experience or technical experience and for them offshore, but obviously that is our heartland that we play in. I think at the moment, we'll be taking time to look at where the key skill sets should reside, how they operate with regard to Canada. It is the operation is as it is at the moment, significantly cash generative and contributing towards the overall benefits to the combined group then. We'll continue to monitor that and see how we can maximize the value of that particular operation for the shareholders.
That's great. Thank you.
Once again, if you'd like to ask a question, please press star then one. The next question is from Bill Dezellem with Tieton Capital Management. Please go ahead.
Thank you. That's Tieton Capital. I have a group of questions. I'd like to start first of all, if we could, with the accretion or dilution on a cash flow per share basis of VAALCO. Can you give us some perspective there, please?
Well, I-
George, you want me to take that one?
Yeah.
You wanna take it?
No, I'm more happy that you take that one, Ron. You get, you're better with the numbers than me, so.
No, hey, Bill. Bill, looking at this, certainly looking at the 2021 historic operating cash flows on a per share basis, this is accretive about just under 5% on operating cash flow basis. That's bearing in mind that TransGlobe, one of the key things that TransGlobe have done in the last two years is the merging of their PSCs, three PSCs into one, which gives some significant benefits. That really wasn't there in that 2021 cash flow. We'll see incremental cash flow to that coming through in 2022.
Even on a look back on 2021 numbers, based on what we've projected for the enlarged share count, we're seeing a positive accretive cash flow per share.
Thank you, Ron. I'm gonna dive into that just a little bit further. First of all, that does not, am I hearing you correctly, does not take into account any cost savings, which presumably there will be some since it appears as though the management of TransGlobe will not be staying on long term.
You are correct in what you're saying because I'm looking back at 2021 numbers here, Bill. As you know, this is not primarily done for cost reduction. Yes, there will be synergistic savings that will come from this transaction. We don't intend to keep the TSX listing. We don't intend to keep the NASDAQ listing. We won't have the AIM listing in London. We will have some synergistic savings there. There's gonna be some head office savings too, going forward. You know, the deal itself is primarily bought for the scale and the diversity and growth platform that it provides us. We'll take any incremental savings or too, of course.
Understood. I just wanted to be super clear that when you said 2021 results, it really was based on the actuals and you weren't incorporating any pro forma into it. Thank you for that. That'll be more than the 5% accretive then. You also said something about the PSCs. They had three that combined to one. I'm not familiar with that whole concept. Why that is ultimately a benefit. Would you walk through kind of the implications of that and I guess facetiously why we should care, what that does for us?
George, you want me to start and you come in or would you?
Yeah.
Do you wanna handle that?
Yeah. You start and I'll jump in.
No problem. Okay. Well, the TransGlobe team have worked over the last few years in getting these, what we call, three separate PSCs merged into one. In doing so, and really, you know, this is a great thing that they did because, you know, as one of the smaller oil and gas companies in Egypt, they really took the lead with the government here. They managed to go in and negotiate new revenue share in the contract, which in a way cherry-picked a lot of the benefits from each individual one of the PSCs into one single PSC going forward. That was put in place, I believe, last year with a backdated date on there of 2022.
Sorry, 2021. Now, one of the things it also gives them is the ability to actually increase their acreage because due to the rules there, if you get too close to the lease line, I think George will correct me right here, if it's within a couple of kilometers of the lease line, they can't drill. But by merging the three together, obviously that overlap disappears, and therefore they've actually got some more acreage purely by merging these PSCs. But the revenue sharing contracts themselves certainly take a cherry pick of the best things that they had individually and take them into one PSC going forward. George, is there anything you want to add?
I mean, I think it, you know, hats off to Randy and his team for this because it was groundbreaking in Egypt. It hadn't been done before. The best compliment we can give them is that some of the majors in Egypt are now rapidly following suit. It's clearly a benefit not just to the investing company to get uniformity of terms and conditions, and particularly the royalty position, but it also gives clarity. Rather than trying to deal with multiple terms and conditions inside the PSCs, we're dealing with a single PSC, a single position to government.
It's also it does give an indication of how Egypt itself as an investment platform has changed and much more receptive to the free flow of capital coming in than it has been maybe 20 years ago.
That's very helpful. Thank you. Relative then to organic drilling opportunities or infill drilling opportunities, it sounds like that has opened up somewhat meaningfully as a result of combining these 3 PSCs.
Yeah. No, that would be correct.
Great. Thank you. Since we're talking about drilling, I know it doesn't relate to this transaction, but recently you VAALCO put out a press release detailing where you're at with your drilling program offshore Gabon, and it included two additional wells that kind of weren't contemplated by investors. I guess I'll ask you to share whatever details and additional insights you can relative to the original drilling program, and then if you would please walk us through the implications of the two additional wells, that would be appreciated.
Okay. I'll touch on that briefly, if I may, Bill. Obviously we've had a successful drilling campaign to date with 8H being higher than expectation, 3H being again slightly higher. Both wells, 3H and 8H, meeting their profiles now and contributing more or less as expected on the original program. On 1HB, we are still, as we mentioned last week, bringing that well up carefully. This kind of is relevant to the transaction because 1HB was the first time we've done in a long time a significant frack operation in Gabon. As I mentioned earlier, the technical team in TransGlobe have significant fracking experience.
that we find complementary to what we're doing on this well and what we're planning to do on the North Tchibala well that the rig's currently en route to, which is, again, will be a fracking operation. That would be the final well in the original program. This one that we're just moving on to now. However, there are two things that really drove the decision-making on extending the program. I'm sorry, there's three things really. One was logistics. Do we have the equipment to add wells to the program? Do we have locations that we're confident in will add value to our longer term strategy for organic growth?
Thirdly, do we actually have the opportunity in extending and taking the options on the rig? When we contracted the rig last year, we contracted it with this foresight to say we need to look at containing options as well in addition to committed programs. We had options to extend the rig. Those options were priced at last year's rates and are still at last year's rates. From an economic standpoint, anywhere we add today is basically being computed on rig rates of 2021.
Given where the rig rates have moved, and I'm sure you all have heard about the announcements of the Saudis looking to get as many jackups as possible, this really makes it economically beneficial in this oil price to see if we can exercise those options. The next condition was, do we have the equipment available? As you know, it's the lead times on our equipment are up to nine months on some parts of the kit. We confirmed that for these two particular wells, we do have the equipment. And the third thing was, you know, what exactly where do these wells rank and what can they contribute?
One is an open water exploration well that will open up an interesting fairway play that could really be again a bit of a game changer for Etame should the exploration well be successful. The Avouma well is one that we will also do. It's again coming into a structure that's known to us, and it won't contribute a huge amount of production this year, but it certainly will set us up for an exit rate and a Q1 position that is stronger with that well in the profile than without it. Does that
Great.
Does that give you your answer, Bill?
It does. Thank you both for the time, and congratulations on the transaction.
Thanks, Bill.
Thank you.
Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to George Maxwell for any closing remarks.
Thank you very much, operator. Well, I would like to just make the statement that the opportunity that we're presenting to our shareholders today falls exactly inside the mantra that we've been articulating to the market in over the past 12-18 months. We are looking for opportunities to grow the business that on their own merit are accretive, and can stand financially strong without diluting the economic viability of an existing asset base, and this fits that criteria perfectly.
The position on the larger expanded business, should the shareholders choose to approve it, puts the company and its relative shareholder base in an excellent position, far stronger than many of our peers in the marketplace with an unlevered position, with strong cash flow, with diversity of assets and ranking of investment opportunities. It is exactly what we have articulated to our shareholders for many months now. We are still primarily focused on building a debt-free cash generative platform that provides return with sufficient cash to also invest for long-term growth and maintain that sustainability of return.
I hope that the shareholders, when we are able to send them the additional information, including the pro formas can really see the merits of this deal as clearly as we can. Thank you very much for that.
Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.