Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the VAALCO Fourth Quarter and Full Year 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question- and- answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now turn the call over to Ms. Elizabeth Prochnow, Chief Accounting Officer. Please go ahead, Liz.
Thanks, Dennis, and on behalf of the management team, I welcome all of you to today's conference call to review VAALCO's fourth quarter and full year 2018 operating and financial performance. After I cover the forward-looking statements, Cary Bounds, our Chief Executive Officer, will review key highlights of the fourth quarter and full year, along with operational results. Phil Patman, our Chief Financial Officer, will then provide a more in-depth financial review. Cary will then return for some closing comments before we take your questions. During our question session, we ask that you limit your questions to one and a follow-up. You can always reenter the queue with additional questions. I would like to point out that we posted an updated investor deck on our website this morning that has additional financial analysis, comparisons, and 2019 guidance that should be helpful. With that, let me proceed with our forward-looking statements.
During the course of this conference call, the company will be making forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance, and those actual results or developments may differ materially from those projected in the forward-looking statements. VAALCO disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, you should not place undue reliance on forward-looking statements. These and other risks are described in yesterday's press release, the presentation posted on our website, and in the reports we file with the Securities and Exchange Commission, including the Form 10-K that we plan to file soon, but no later than March 18th, 2019. Please note that this conference call is being recorded. Let me turn the call over to Cary.
Thank you, Liz. Good morning, everyone, and welcome to our fourth quarter and full year 2018 earnings conference call. I am very pleased with our fourth quarter financial results and operational success. I would like to first reflect on the many accomplishments that VAALCO was able to achieve in 2018. Over the past several years, we have taken the steps necessary to transform VAALCO into a focused and financially strong company. In 2018, we operated efficiently, restored production through a successful workover program, paid off all of our debt, significantly grew our reserves, and meaningfully added to our cash position. Most importantly, we secured the PSC extension at Etame, which establishes a long-term time horizon for continued production and reserve growth in Gabon for up to 20 more years.
With the PSC extension in place, a clean balance sheet, and strong quarterly results, VAALCO is now positioned to create significant shareholder value for many years to come. Turning to operational results, production for the fourth quarter averaged 3,717 bbl of oil per day net, which was within our guidance range, despite being impacted by a two-day field-wide shutdown for normal maintenance that temporarily reduced production in the quarter by approximately 200 bbl of oil per day. For the full year 2018, we maintained strong, consistent production averaging 3,751 bbl of oil per day net. As we look at production estimates for 2019, we expect first quarter production to be in the range of 3,500-3,800 bbl of oil per day net. For the full year 2019, we are estimating production to be between 3,300 and 3,900 bbl of oil per day.
I will speak to the timing of our 2019 drilling program in a minute, but as a reminder, the production impact from the new wells will not boost production until late in the year, and thus will have a significantly greater impact on 2020 production. Our realized oil pricing declined to $64.52 per barrel in the fourth quarter, but we continued to generate significant adjusted EBITDAX of $17 million in the quarter. For the full year 2018, we generated over $56 million of adjusted EBITDAX. Later on, Phil will go into more detail on the financial results. Now, I would like to review our 2018 year-end reserves. Although we did not drill any wells in 2018, our reserves increased significantly at year-end, primarily as a result of extending the Etame PSC in Gabon.
Proved reserves increased by 76% year-over-year to 5.4 million bbl of oil, with our PV-10 value increasing almost fourfold to $80.1 million. We replaced 270% of 2018 production by adding a total of 3.7 million bbl of proved reserves, including 2.2 million bbl of proved reserve additions as a result of extending the Etame PSC in Gabon. We also added 1.1 million bbl of proved reserves as a result of improved reservoir performance and another 400,000 bbl of proved reserves due to higher oil pricing. Our proved and probable reserves increased 144% over 2017 to 9.7 million bbl of oil, with our 2P PV-10 increasing by almost $100 million - $131.9 million at year-end 2018.
As we look toward 2019, our planned development wells are expected to immediately increase production, convert proved undeveloped reserves to proved developed, potentially add more proved reserves, and the appraisal wellbores will help further define opportunities to potentially add significant reserves and production in future drilling campaigns beyond 2019. Now I will spend the next few minutes reviewing our 2018 capital expenditures and 2019 drilling program. In 2018, our cash basis capital investments totaled $14.1 million, which was primarily the $11.8 million signing bonus we paid in connection with the PSC extension. As part of that PSC extension, we committed to drilling two development wells and two appraisal wellbores by September 2020. In 2019, we plan to drill up to three development wells and two appraisal wellbores funded from cash on hand and cash generated from operations.
We have identified a rig that will be available in the third quarter of 2019 to begin drilling these wells and plan to continue drilling through the end of 2019 and into 2020. We are currently planning the first well to be completed and online in the fourth quarter, with the remaining wells online in the first quarter of 2020. In our most recent presentation posted to the VAALCO website, we have detailed the 2019 drilling campaign, which includes the wells we plan to drill to meet our commitment under the extension agreement. These development drilling locations are easily drilled off of our existing platforms with a jackup rig, and the wells can be placed on production quickly with minimal increase in operating and overhead costs. The appraisal wellbores we are drilling are to assess the Dentale potential in Etame and evaluate a step-out area in southeast Etame.
If the appraisal wellbores prove up resources in these areas, there is the potential to access two to five additional well locations in a future drilling campaign. Our vision is to repeat this type of drilling program multiple times over several years and continue adding reserves and production. Again, and I can't emphasize this enough, we expect our estimated 2019 net capital investment budget of $20 million-$25 million will be funded by cash on hand and cash flow from operations. We don't expect to spend much of our capital budget in the first quarter of 2019 except for some maintenance capital and some long lead items for our drilling program. While not included in our capital budget, we are considering two potential workovers in 2019 that are designed to add production and reserves. However, these workovers are not planned until mid-year at the earliest.
Let me now provide a brief update on Equatorial Guinea and Angola. As we have discussed in prior calls, our 31% interest in Block P has been in suspension for several years. However, in September 2018, the Equatorial Guinea Ministry of Mines and Hydrocarbons lifted the suspension. We are still awaiting Ministry approval of VAALCO being appointed operator for Block P. As a reminder to everyone, GEPetrol is the state-owned oil company and one of our partners in Block P. Under the agreed-upon terms to lift the suspension, a new joint owner must assume GEPetrol's working interest obligations by March 28th, 2019. If a new joint owner is approved to replace GEPetrol, VAALCO intends to seek a partner on a promoted basis that will cover all or substantially all of our cost to drill an exploratory well also required by the agreement.
While there is no monetary penalty for failing to meet the terms to lift the suspension, we would lose our interest in the license, and we would have to write off $10 million on our books for the value of our undeveloped leasehold costs, but only if a new joint owner is not approved to replace GEPetrol or an exploration well is not drilled. In Angola, we continue to negotiate with representatives of Sonangol E&P to resolve the liability associated with our exit from Block 5. Finally, I would like to discuss our new Vision 2025, which expands on our current strategic direction. Our Vision 2025 is focused on building a robust future from the strong foundation we have established.
We are striving to become a premier African operator with a more diversified portfolio, and we are targeting five times growth in production, reserves, and value over the next six years. We want to accomplish all of this while also realizing top-quartile total shareholder return from now until 2025. Our foundation is solid with a producing asset in Gabon generating significant cash and a 20-year runway to add production and increase reserves. We have a clean balance sheet with no debt and ample working capital, a high-performing team, capacity for growth, and a strong track record of operating responsibly. The pillars to achieve success are rooted in stakeholder engagement, operational excellence, and maintaining strong financial flexibility to achieve transformational growth. Our key stakeholders include our top-tier employees, our host governments, and the communities where we operate.
We will maintain our high HSE and ethical standards and stress operational excellence at all levels. From a financial perspective, we want to maintain strong cash flow, liquidity, and financial flexibility while maintaining access to new capital resources if needed for future growth opportunities. Our goal is to demonstrate transformational growth both organically and through M&A activity, as we believe we have a clearly differentiated African expertise, and we plan to keep our geographic focus in Africa. We are looking to the future, and we are very excited about the opportunities that lie ahead for VAALCO. Our focus is on profitable and accretive growth that will add value for our shareholders. With that, I will turn the call over to Phil to discuss our financial results.
Thank you, Cary. Good morning, everyone. Our financial results for the fourth quarter were once again very strong. We reported income from continuing operations of $10.5 million, or $0.17 per diluted share. The quarter benefited from strong crude prices and production that was within our guidance range. These amounts included the impact from approximately $5.6 million, or $0.09 per diluted share, for non-cash mark-to-market gains related to our crude oil swaps, as well as primarily non-cash gains for employee SARs of approximately $1.5 million, or $0.02 per diluted share. Adjusted income from continuing operations for the fourth quarter of 2018 totaled $19.8 million, or $0.32 per diluted share after adding back $9.3 million in non-cash deferred income tax expense. For the full year 2018, we reported income from continuing operations of $98.7 million, or $1.63 per diluted share.
The full year numbers included a $56.9 million, or $0.95 per diluted share, non-cash deferred tax benefit and a $3.3 million, or $0.06 per diluted share, non-cash benefit from the deferral of asset retirement obligations associated with the PSC extension. Excluding these two non-cash items totaling $60.2 million, adjusted income from continuing operations for the full year 2018 was $38.5 million, or $0.64 per diluted share. Adjusted EBITDAX for the fourth quarter was $16.9 million, which was up 6% versus the third quarter of 2018 and up over 400% from the same quarter in 2017. For the full year 2018, VAALCO generated $56.2 million in adjusted EBITDAX, nearly double the $28.5 million we reported in 2017. Fourth quarter oil sales totaled 401,000 net bbl compared with 280,000 net bbl in the same period a year ago and 329,000 net bbl in the third quarter of 2018.
For the full year 2018, we sold 1.4 million bbl of oil, essentially the same level as in 2017. Our realized oil price for the fourth quarter of 2018 averaged $64.52 per bbl , up 8% from $59.89 in the fourth quarter of 2017 and down 14% from $75.40 in the third quarter of 2018. In June 2018, VAALCO executed a crude oil swap at a Dated Brent weighted average price of $74 per bbl for the period from and including June 2018 through June 2019 for a quantity of approximately 400,000 bbl . As of December 31, 2018, there were 172,000 bbl of commodity price swaps remaining for 2019.
These are the only derivative contracts that the company currently has in place. We will continue to evaluate ways to mitigate risk, ensure future cash flows for our drilling programs, and allow for upside to rising commodity prices through our hedging program.
In the fourth quarter, we recorded a non-cash mark-to-market gain related to our crude oil swaps of $5.6 million. Turning to expenses, total production expense, excluding workovers, for the fourth quarter of 2018 was $9.6 million, or $23.84 per bbl of oil sales, compared with $8.2 million, or $29.12 per bbl in the same quarter of 2017, and $7.5 million, or $22.93 per bbl in the third quarter of 2018. For the fourth quarter of 2018, our per bbl costs were below the low end of guidance, primarily due to higher than expected sales volumes.
For the first quarter of 2019, we expect production expense, excluding workovers, to be between $9 million and $10 million, or $26 to $30 per bbl , and for the full year to be between $36 million and $42 million, also between $26 and $30 per bbl . As Cary explained, we do have workovers planned in 2019, which we expect to range in total from $3 million to $6 million net to VAALCO, but none are expected in the first quarter of 2019. DD&A for the fourth quarter of 2018 was $2.3 million, or $5.75 per bbl of oil. This compares to $0.9 million, or $3.28 per bbl in the 2017 fourth quarter, and $1.1 million or $3.43 per bb l in the third quarter of 2018.
This year-over-year increase in DD&A per barrel of oil reflects an increase in depletable costs associated with the PSC extension, offset by a favorable impact of the upward revisions to reserves as of December 31, 2018. We estimate our DD&A for 2019 to be between $5.50 and $6.50 per bbl . General and administrative expense for the fourth quarter of 2018, excluding non-cash compensation, was $2.5 million, or $6.23 per bbl of oil, as compared to $1.5 million or $5.36 per bbl of oil in the fourth quarter of 2017, and $1.8 million or $5.47 per bbl of oil in the third quarter of 2018.
Non-cash Stock Appreciation Rights, or SARs, compensation expense relating to Stock Appreciation Rights, or SARs, was a credit of $1.5 million during the three months ended December 31, 2018, as compared to an expense of $0.2 million in the comparable 2017 period, and $1.0 million in the third quarter of 2018. SARs are revalued quarterly based on the closing stock price at the end of the quarter, which was $1.47 on December 31 versus $2.73 per share on September 30. Stock price variability greatly impacts the fair value of the SARs, and there will be an expense or a credit booked every quarter associated with the market-to-market value of the SARs. Total G&A for 2018 was $11.4 million, which was below our guidance range of $12 million-$16 million.
For 2019, we estimate our total G&A will be in the range of $12 million-$15 million, of which $9 million-$10 million will be cash and $3 million-$5 million non-cash. Income tax expense for the fourth quarter of 2018 was $11.3 million, compared with $1.3 million in the same period in 2017, and a tax benefit of $62.2 million in the third quarter of 2018. Income tax expense for the fourth quarter of 2018 includes a $9.3 million non-cash deferred tax expense. The $62.2 million benefit in the third quarter of 2018 includes a $66.2 million non-cash deferred tax benefit, primarily related to the recognition of deferred tax assets and the reversal of valuation allowances on other deferred tax assets.
As discussed in detail last quarter, our ability to realize tax benefits has improved significantly, resulting in the recognition of the deferred tax benefit in the third quarter of 2018. In addition to the deferred taxes, the company had a current tax provision of $2.0 million and $2.6 million during the fourth quarters of 2018 and 2017, respectively, and $4.0 million during the third quarter of 2018. The current tax provision for the fourth quarter of 2018 includes a credit of $0.3 million for alternative minimum tax, as well as the benefit of the higher cost recovery in Gabon due to the PSC extension. Offsetting this is higher income in Gabon as a result of higher revenues.
As a result of differences between the book basis attributable to leasehold costs incurred in connection with the PSC extension and the tax basis in those costs, a deferred tax liability of $18.6 million should have been recorded in the third quarter of 2018. To correct this error, VAALCO recorded an adjustment as of September 30, 2018, through a restatement, which resulted in an increase in capitalized oil and gas property costs of $18.6 million and a decrease in deferred tax assets of $18.6 million. While this correction had no impact on our income statement or cash flow statements for September 30, 2018, nor on cash, total assets, or working capital in that same balance sheet, it nonetheless was an accounting error that came to light in our year-end review and needed to be corrected.
Based on our evaluation, we concluded that the error resulted from a material weakness in our internal controls pertaining to the accounting for income taxes related to new or infrequent transactions of a complex nature, of which clearly the PSC extension was one. Management, with the help of our audit committee, intends to promptly develop a plan to remediate that material weakness, which will be discussed further in our 10-K that will be filed soon. Beginning with the second quarter of 2018, the government of Gabon elected to lift its share of oil, which we report as income taxes separately from the Etame joint interest owners. As a result, Gabon income taxes are being settled when the government of Gabon lifts its share of production. These settlements are expected to occur once or twice per year, depending on production levels.
The government of Gabon took its first lifting of oil since making its election in September 2018. At December 31, 2018, VAALCO had $3.3 million of foreign taxes payable, which will be settled the next time Gabon takes its oil lifting, which we currently anticipate will be during the month of April 2019. As detailed on slide 19 in the presentation deck posted this morning on our website, we currently estimate that VAALCO's operational breakeven price in 2019 is approximately $37 per bbl of oil sales, and our free cash flow breakeven price in 2019 is approximately $47 per bbl of oil sales, with both amounts including workover expense. Despite this, we still generated significant free cash flow.
In general terms, we estimate that each $5 increase in realized oil price increases our annual adjusted EBITDAX by about $6 million. This clearly shows our strong leverage to higher oil prices. Slides 20 and 21 illustrate the further strengthening of our financial position during 2018. Slide 20 shows several key metrics and how they looked in each quarter of the year. At the end of the fourth quarter, we had an unrestricted cash balance of $33.4 million, which included $0.3 million in cash attributable to non-operating joint venture owner advances. This does not include an additional $0.8 million in restricted cash related primarily to deposits in Gabon, which is classified as current assets, or the additional $0.9 million of restricted cash, which is classified as long-term assets.
Slide 21 shows the $29.7 million in working capital from continuing operations that we had at December 31, 2018, which included an $11.6 million trade receivable due from December oil sales. This receivable had not yet been converted to cash at year-end but was settled in the ordinary course during January 2019. VAALCO's cash position remains very strong, and we currently expect our 2019 capital expenditures, which will include up to three development wells and two appraisal wellbores, will be funded by cash on hand and cash flow from operations. The current estimated net capital expenditure range for 2019, primarily associated with this drilling program, is $20 million-$25 million. For the first quarter of 2019, VAALCO expects to spend minimal capital expenditures on some long lead items and maintenance capital with a range of $3 million-$4 million.
As you can see, we have had a successful year in 2018 and have been able to build a strong financial foundation with no debt. We will remain focused on continuing to build cash, and we will maintain financial flexibility to fund our 2019 development opportunities. With this, I will now turn the call back over to Cary.
Thanks, Phil. In 2018, we established a long-term time horizon for continued growth in Gabon by extending the PSC for up to 20 more years. We paid off all of our outstanding debt, successfully completed three workovers on the Avouma platform, and generated $56 million in adjusted EBITDAX. We are focused on optimizing production and containing costs to grow our cash position in preparation for the 2019 drilling program. We are currently forecasting that any capital expenditures made during 2019 will be funded by cash on hand and cash flow from operations. As we continue to deliver on our guidance and strengthen our balance sheet, we remain confident in the opportunities on our Etame asset. With the PSC extension, we have an extended runway of opportunities at Etame where we see significant upside, which we have highlighted in our investment presentation on slides 13 through 16.
We are pursuing M&A opportunities where we can utilize our operational expertise to maximize value creation. I am optimistic that we will create substantial value for our shareholders by executing on our drilling program at Etame, and we believe we can repeat similar drilling programs multiple times, adding reserves and production in 2019 and for many years to come. We have positioned VAALCO financially and operationally to succeed in the near term and long term, which will allow us to grow profitably and add meaningful value to our shareholders. Thank you and w ith that, operator, we are ready to take questions.
At this time, I would like to remind everyone, in order to ask a question, simply press star, then the number one on your telephone keypad. Again, that was star to ask a question. We will pause for just a moment to compile the Q&A roster. Your first question's from the line of Matt Dane with Titan Capital Management. Please go ahead.
Thank you. I want to discuss the workovers that you are considering doing here mid-year. What is the dynamic behind this deciding whether or not you're going to execute on those? Can you delve a little deeper into the benefits possible to both production and reserves with those as well?
Right. There are two workovers we're considering. These are proactive workovers, Matt. We see an opportunity to increase production from these wells, anywhere from 500 bbl a day for an individual well, up to maybe 1,500 bbl a day for the second well. The reserve forecast we're still working on. I'm not ready to release those numbers, but we do expect reserve additions to come along with these workovers. The workovers are not driven by ESP issues. These are, again, proactive workovers to increase production and ultimately reserves.
With that in mind, Cary, what would be the reason you would not do it? It seems with the production increases, that'd be pretty straightforward. What would be the reason you would not execute those?
Right. The reasons for not executing is operational. The workovers are a very complex procedure that require simultaneous operations in the field production and workover activities happening simultaneously. It's really a question around when is it the right time to execute operationally. It's not necessarily that we're still trying to understand the value of the added production. We do believe we will add value. The question is, operationally, when is it the right time to execute?
Great. Also the additional lifting that you had in December, what led to you squeezing into that month?
The answer to that really is that we had oil in the tank, and we scheduled liftings to take advantage of that situation and move as much product as we could during the month.
Okay, there was nothing special other than it just was full and time to take care of it.
Yes.
Okay, great. Well, thank you both.
All right. Thank you, Matt.
Your next question is from the line of Jamie Weiland with Weiland Management. Please go ahead.
Hi, fellas. Congratulations on an outstanding year with so much progress on a lot of fronts. Just wanted to ask you about the drilling rig. Has it been secured? What kind of rates, and when would you expect it to be on-site?
Right. We expect it to be on site September timeframe. We are still in the final stages of negotiating the contract. Jamie, I can't give any details just yet. As soon as we have the contract signed, we can talk more about the details. Right now, I'm just not in a place where I can give you those details. I expect to sign the contract imminently.
Okay, given September timeframe, we shouldn't really expect much in the way of additional production till 2020.
Well, there will be one well that's brought online in the fourth quarter, then a couple more wells possibly in the first quarter of 2020. That's the way to view it, Jamie.
Okay. You'd mentioned something about the negotiations for Angola, the exit fee. I didn't quite hear that. Is that ongoing at this point?
It is still ongoing. We have not finalized the negotiations in Angola, I'm not ready to speak to any of the details, it is certainly still ongoing.
Okay. Lastly, could you talk a little bit about the political situation in Gabon and what's happening there?
Sure. I can tell you our experience in Gabon. We have a staff of 80 in Gabon, what we're seeing is it's very calm. There is no signs of civil unrest. As everybody knows, if you've read in the press, the president did suffer a stroke late last year. The messages we're receiving directly from high-level government officials are that the president is recovering nicely and everything is very stable in Gabon.
Okay. Lastly, follow up on the question earlier about the workovers. You talked about timing is a function of operational issues. Are there your people directly who are working on the workovers as well as everything else, or is that an outsourced operation?
No, it is our people. We have a group that focuses on workovers and drilling, we have that in-house staff.
Okay. Timing-wise, even though we're not going to be drilling till the latter part of the year, we can't get the workovers done sooner. It sounds like a great opportunity. I'm not quite sure why we'll put that one on the back burner.
Well, no, Jamie, it's certainly not on the back burner. I don't want to leave anybody with that impression. Again, it's operational planning. We will execute the workovers as soon as possible. Our best estimate of timing on the workovers is mid-year. It's certainly a priority for us. I mean, we do see the value in the workovers.
Okay, that could indeed happen before the drilling program actually begins.
I hope so. Yes. It could indeed. Yes. It's certainly a possibility.
Okay. All right. Thanks, fellas.
Okay. Thank you, Jamie.