Good day, welcome to the VAALCO Energy Conference Call. All participants will be in 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. Please note this event is being recorded. I would now like to turn the conference over to Al Petrie, Investor Relations Coordinator. Please go ahead.
Thank you, Alyssa. Good morning, everyone, and welcome to VAALCO Energy's Conference Call to review the transformational and strategic acquisition of Sasol's Gabon assets. After I cover the forward-looking statements, Cary Bounds, our Chief Executive Officer, will review key highlights, rationale, and terms of the transaction before we take your questions. Liz Prochnow, our Chief Financial Officer, is also on the call and will be available to answer financial-related questions on the transaction. During our question and answer session, we ask you to 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 investor deck regarding the transaction on our website yesterday that has additional information and analyses 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 and presentation posted on our website, and in the reports we file with the SEC, including our most recent Form 10-Q that we filed back on November 5th. Please note that this conference call is being recorded. Let me now turn the call over to Cary.
Thank you, Al. Good morning, everyone, and welcome to our call. Today, I plan to provide a high-level overview of a truly transformational and strategic transaction. Over the past several years, we have worked diligently to build a solid foundation for the future, and the Etame asset has been the cornerstone of our success. We have taken actions to strengthen VAALCO operationally and financially, including eliminating all debt, growing our production base, and reducing our costs at both the group and asset level. Our recent success at Etame has enabled us to focus on generating positive free cash flow and prepare for future drilling campaigns to unlock additional resources and value. All of these actions have allowed us to build cash even in a difficult environment like this year.
We are able to fund this transformational acquisition using the cash we have on hand, thus remaining debt-free and preserving our financial flexibility. The acquisition of Sasol's interest at Etame was a competitive sales process. Our deep knowledge of the field, having been the operator since 1995, was highly beneficial. We have spoken about our Vision 2025 strategy for some time now. This transaction is an important step in implementing that strategy. It expands our position in West Africa, provides us with additional scale, offers both near-term and long-term catalysts for profitable growth. We previously stated that our acquisition criteria is for an asset with a very similar profile to Etame in terms of adding low-risk cash flow with significant upside potential. This value-accretive transaction is wholly consistent with our stated growth strategy.
The acquisition is expected to deliver a step change in both our net production and our reserves, almost doubling both of these key metrics. If you look at Slide 6 of the presentation that Al referenced earlier, you will see that our production for the nine months ended September 2020 would have been 9,300 bbl of oil per day net, when you include the impact of the transaction. Including the impact of the transaction on reserves, we would have seen a significant increase to 2019 year-end proved SEC reserves from 5 million bbl of oil to 9.4 million bbl of oil net. For our 2019 year-end 2P CPR reserves, we would have seen an increase from 9.2 million bbl of oil to 17.5 million bbl of oil net. We expect there to be minimal additions to our overhead costs post-closing.
As a result, this transaction should lower our unit G&A cost per barrel by approximately 40%. Coupled with the increased production, we expect that the acquisition will significantly boost our cash flow profile. If you look at Slide 7, you will see that the transaction reduces our free cash flow breakeven price to under $31. It also provides a significant 23% increase in free cash flow per barrel at $45 realized oil prices, which is about what Brent is trading for today. This slide also shows the significant upside in free cash flow potential associated with increases in oil prices.
Because approximately 90% of our costs at Etame are fixed as we add production or when prices increase, we see significant growth in our ability to generate free cash flow. Without this transaction, each $5 per bbl increase in the price of Brent crude oil drives up our free cash flow by approximately $8 million. However, with the transaction, our free cash flow grows by approximately $15 million with each $5 per bbl increase in the price of Brent crude oil. This is especially important as we look to the future and build on the highly successful drilling campaign that we completed in April of this year, a drilling program that demonstrated the upside potential that resides in this field.
In late September, we announced that we are acquiring and processing a continuous 3D seismic survey that will cover the entire Etame license and will allow for a more robust subsurface interpretation than ever before. This full-field 3D seismic will optimize our future drilling locations, provide better imaging of existing satellite and infill locations, as well as identify additional upside opportunities. With the greater working interest in Etame, the seismic is even more critical to our future drilling success. If you take a look at Slide 8 of the presentation, you can see the upside potential of the future opportunities at Etame and how this acquisition will meaningfully increase VAALCO's net reserves and resources in some very good prospects and extensions.
With the acquisition, our net revenue interest reserves and resource potential at Etame would have increased from about 31 million bbl of oil to about 59 million bbl of oil at year-end 2019. Having operated Etame ever since its discovery over 20 years ago and having produced 118 million gross bbl of oil since then, it is safe to say that we know this high-quality asset extremely well, and we see significant value to be exploited going forward. The acquisition includes Sasol's 27.8% working interest in the Etame license, which, combined with our prior working interest, provides us a significant majority interest in the Etame field at 58.8%. The transaction also includes a 40% non-operated participating interest in Block DE-8 that has an existing discovery and a potential appraisal well next year that I will discuss shortly.
In total, the purchase price is $44 million, subject to customary post-effective date adjustments and future contingent payments of up to $6 million. The effective date of the transaction is July 1, 2020, and we hope to close within 90 days. Cash paid at closing is expected to be less than $44 million, as the amount paid at the time will be reduced to account for the net cash flows attributable to the period from July 1 through the date of closing. As a point of reference, interim cash flows from July 1 to September 30th, adjusted for Sasol's ownership interest, were about $5.5 million. Keep in mind that VAALCO's reserves, production, and financial results will not include the benefit of the transaction until after the date of closing.
Our other joint owners at Etame have a 30-day period to exercise their preemptive rights to acquire their proportional share of Sasol's 27.8% working interest. The deal terms include two contingent payments. The first is a $5 million payment to Sasol if Brent averages more than $60 per bbl for 90 consecutive days between July 1, 2020, and June 30, 2022. There's also a $1 million payment if the Block DE-8 appraisal well is successful. The other exciting component of this transaction is the acquisition of a 40% non-operated participating interest in Block DE-8 offshore Gabon that can add meaningful optionality to our portfolio. This block straddles the Gabon shoreline and is 180 miles northwest of Etame. Perenco is the operator of the block and holds the other 60% participating interest in the exploration license.
It has had some successful discoveries in the past, but those producing fields are carved out of what we are acquiring. Nonetheless, those producing fields do indicate prospectivity across the block. The near-term catalyst for Block DE-8 is the Akoum-B discovery and the potential appraisal well in 2021. We are looking forward to getting a better look at the data and leads on the block, but the primary focus for now is the Akoum-B appraisal well that we estimate will cost between $7 million and $9 million net to VAALCO. If the well is successful, it could be tied back to an existing production platform operated by Perenco. Similar to the Etame piece of the acquisition, Perenco could preempt the purchase of Sasol's participating interest in Block DE-8 if they so choose.
This is a great addition for VAALCO as it diversifies our portfolio and adds potential near-term catalyst for us next year. In summary, we are very excited about the future for VAALCO. This acquisition is immediately accretive and nearly doubles our production and reserves while providing material additional working interest for future exploitation. We are completing the acquisition with cash on hand and cash from operations, meaning we are not diluting shareholders nor stretching the company beyond its financial means. We have consistently demonstrated our ability to grow reserves and resources at Etame, and the seismic program we are undertaking will help to identify prospects for the next several drilling programs and refine relatively low-risk development opportunities that we already see on the block. We are increasing our optionality with an interest in Block DE-8 and the potential appraisal well in 2021 on the Akoum -B discovery.
We also still have future potential at Equatorial Guinea with multiple discoveries and strong leads. We are well on our way to delivering profitable growth through both acquisitions and operational execution in line with our Vision 2025 strategy. We're excited for the future and believe that we are even better positioned now to capture value and continue to profitably grow VAALCO into a leading West African E&P company. Thank you. With that, operator, we are ready to take questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are 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 the roster. The first question today comes from Garrett King of Truffle Hound. Please go ahead.
Hi, guys. Congratulations on the deal.
Thank you, Garrett.
I have a couple questions. My first one is regarding the liquidity. Assuming this transaction goes through as you have illustrated, it looks like the company has the $44 million payment for the acquisition, the $5 million seismic. These are both due in the next 90 days. That they'll obviously be reduced by the cash generated by VAALCO's interest and Sasol's interest. Just working through the numbers on my end, it looks like the liquidity gets fairly tight. Maybe not if crude stays at these levels or goes up. If Brent did decline significantly, it seemed like it was tight. Can you just talk through the way you think about that, if you're considering hedging any of the near-term production or if you're in any talks regarding a credit facility to support the liquidity positions?
Right. We do not have any hedges in place at the moment. Let me answer that question first. We're continuously evaluating the market and our cash needs, and we will hedge when we believe the time is right. For now, we are not hedged. You're right, this transaction will utilize a good portion of our cash when it closes. We are still debt-free following the closing, and we still maintain our financial flexibility. Once the transaction closes, we expect to be generating significantly more positive free cash flow post-closing due to higher production and lower unit cost per barrel. At current oil pricing of around $45 a barrel and cash flow breakeven of less than $31 a barrel, we expect to grow our net cash position significantly.
Yeah, Garrett, let me just add to that. For the three-month period from July through September, we had $5.5 million worth of cash flow related to this interest. Thinking about it in terms of the closing, we're expecting that to be around 90 days. You've got six months to eight or nine months of cash flows that's going to come in before you have to make the payment. That $44 million will get reduced by the cash flows during that time period. If that makes sense.
The $5.5 million, that's just related to Sasol's interest, not.
Correct.
VAALCO's.
That's correct. That's only for that three-month time period. We could share with you some information based on historically what's happened, because we've already released our September results. We wanted to give you that as a frame of reference. We've done our own forecasting, obviously carefully, to make sure we have plenty of cash to complete the transaction, and we feel comfortable that we can do that with cash and cash on hand.
Got it. The company does not have a credit facility in place at the present time, correct?
We do not.
Okay. Just in, I would say, the very unlikely sort of doomsday scenario that we have these lockdowns and Brent goes to $20 for a month or two. How do you think about that? What happens in that scenario?
Well, I think both of us need to answer your question, but I'll talk about from the operational side. We will react very quickly and suspend all non-essential activities and make sure our costs are as low as possible, which is what we did earlier this year.
Yes.
That will take us through part of the way.
Yep. As Cary mentioned, we do look at hedging periodically, and we're evaluating that in the context of our cash requirements. Because this one is so close in the near term, we're a little bit less concerned if it was something that we had to make an obligation payment, say, the middle of next year, we'd be a little more concerned about something happening and not having the cash on hand between now and then.
Right.
Because we expect this to close so quickly, we may put some hedges in place for other things, but this one probably not.
Got it. This is my last question. The 30-day opportunity for the partners to acquire their pro -rata share, that's just at the same price as you guys are paying now? Potentially, if they did take up their full share, I'm just running the numbers now, but I could be wrong, would that reduce your combined interest from 58% to 47% in Etame, if they did exercise that right in full?
Something Yes, you're close. Yes. I was doing the math in my head. Yes, you're very close at 47%.
Got it. The Block D, if the partner there exercised this right in full, would they be able to buy the whole thing or only a piece?
They would take the entire 40% interest, no. They have the opportunity to. I would doubt that they would take just a part of it.
I can't speculate on what Perenco would do.
Got it. Okay. All right. Thank you guys so much, and again, congratulations. I think you guys have laid out the plan in the presentations for a while, so I think this is certainly in line with that.
Great. All right. Thanks for the questions, Garrett.
The next question today comes from Bill Dezellem of Tieton Capital. Please go ahead.
Thank you. Congratulations. Looks like an outstanding transaction. What additional overhead costs are going to be required if the transaction stands as is, and none of your partners make any changes? You made reference to minimal overhead costs, additional overhead costs required. What are those minimal costs?
This is Liz. It's not a whole lot. Essentially, we have a little bit of overhead that is charged to all the joint owners in connection with the transaction. I mean, not the transaction, but just normal operations. Our G&A will go up just a little bit for that, but it's not significant.
Great. Thank you. Then the Block DE-8 appraisal well, I think the presentation implied that it needs to be drilled by the middle of next year. Why would that well not be drilled?
Well, it relates back to the COVID-19 issues and moving equipment and people in and out of Gabon. All of the operators in Gabon are considering whether if they had drilling plans for this year, late this year or early next year, are going back and reconsidering their plans because it is still difficult to get equipment and people in and out of Gabon.
If as a result of COVID, that well was not drilled, what implications are there from that, and to what degree is the Gabonese government inclined to provide some grace to that situation?
Do you mean provide grace to the COVID-19 and the ability for operators to change or extend their drilling programs?
That's exactly right. If there was a, I guess I'll call it a penalty or some negative for not drilling, is there some indication that the government would give a pass and say, "Nope, we understand that you had good intentions, but couldn't actually get things done because of the pandemic, therefore we'll extend the period." Or just trying to understand that full picture, if you can lay that out, please.
We're an operator in Gabon, and we have a good relationship with the government, so I can speak to our relationship with the government and what the government's response, I think, would be to VAALCO. I really don't know any details on Perenco's relationship with the government. I believe they are the largest producer in the country, so I assume they have a very strong relationship. Yes, we as VAALCO have encountered flexibility with the government on timing of projects that have been, I guess, the timing extended because of COVID-19. Earlier in the year, the government did work with us when we were trying to move people in and out, I've found the government I say I, VAALCO has found the government to be very cooperative under the circumstances. Again, I can't speak to Perenco's relationship with the government.
Great. Thank you. Just doing a little bit of math, $44 million purchase price, you are going to have one quarter of cash flow already of roughly $5.5 million into Q3. The Q4 cash flow sounds like will be roughly consumed by the seismic survey. That would leave, it seems like roughly another, we'll call it a year and three quarters or so to pay back the remaining purchase price. Is that essentially the way that you're looking at this?
I think in terms of the seismic, the payments for that are stretched over a period of time, not all of those would hit in Q4. There would be some that would hit in Q1. In addition, we've got processing, and that will happen throughout next year as we evaluate that seismic. It doesn't all hit in Q4, is the bottom line. I would say, generally, you're right. This should be paid back quickly in terms of just recouping the $44 million that we're incurring.
Oh, thanks, Liz. In the 10-Q, when you referenced $4 million - $5 million seismic cost to VAALCO, is that specific to the Q4 or is that the entire program including the processing that'll extend out through next year?
That is the entire program.
Great. Thank you, and congratulations on a real solid deal.
Yeah, thank you.
Thank you.
Thank you, Bill.
The next question comes from Charlie Sharp of Canaccord. Please go ahead.
Yes, good morning to both of you. May I offer my congratulations to you, following the other callers. Very good deal. If I may just clarify one or two things and perhaps extend the discussion to the new license as well that you have, the Block DE-8. It's not entirely clear to me whether that well is a commitment well or an option well. I understand that the license currently expires in June 2021. Is it a commitment or not? Secondly, if Perenco did want to preempt, how would they and you determine the value that is assigned to your participation through the Sasol transaction in Block DE-8 specifically?
Thirdly, if I may, Akoum-B the discovery well, can you sort of flesh that out a little bit in terms of the size that you think it might be and whether there's enough capacity in those Perenco production facilities for an easy and quick tieback? Thank you.
Sure. Let me start with your first question. Let's see. You asked, is the Akoum-B a commitment well? Yes, it is. It is a commitment well, and if the well is not drilled, there's a penalty. Drilling the commitment well is less than the penalty, so our objective is to drill the Akoum-B commitment well. In terms of value allocation of Block DE-8 versus Etame, we're not ready to release the specific numbers that are allocated to Etame versus Block DE-8. We need to go through the partner process on both assets before we can release those allocations. Then again, the allocation will change depending on the date that we close the transaction and some other factors. Once we close, we will report the allocation of the value assigned to each of the assets. Then your last question was the resource potential at Akoum-B.
We've studied the resource potential very carefully. We are pleased with what we have found so far. Now, as we do more technical work, as we take on more information and become a true partner, we will start issuing our guidance on the resource range. We're just not ready to do that today. We have studied the resources. We think there's very real potential there, and let us get our arms around the asset a bit and we'll start talking about ranges of resources. I think your last question was Charlie, tell me if I'm wrong, but your last question was about tieback. Perenco operates platforms all through the license, and so if there's a discovery, we could very quickly tie back the well to an existing Perenco facility. That's one of the strengths of Block DE-8, is there's quite a bit of infrastructure in place.
Your first view of that license, is there further running room for additional discoveries if Akoum-B proves successful?
Yes, there is. Absolutely. It is a very large license with many opportunities across the license.
Great. Thank you very much.
You're welcome. Thank you, Charlie.
The next question comes from John White of ROTH Capital. Please go ahead.
Good morning. No questions at this time. I just wanted to tell you congratulations on what looks like a very fine deal.
Well, thank you very much, John. We appreciate that. Thank you very much.
Hope to see you soon.
Yes. Yes.
The next question is a follow-up from Bill Dezellem of Tieton Capital. Please go ahead.
Thank you. Would you talk to us about the existing wells on Block DE-8? First of all, in terms of the production that's coming off of those wells, what's happening with those wells since they're not included in this transaction? How about the discovery well? Would you talk about that one that is leading to this now appraisal well or maybe it's all these other wells. Can you tie all that together for us, please?
Sure. There are, on the block, like I said, there are several existing fields or producing areas that are carved out that we don't have an interest in. Those fields were discovered 10, 15 years ago. They've been on production many years now, produced millions of barrels of oil. Again, we're not part of those fields. I guess my point, Bill, and I think this is your question, there is good, strong production in the area nearby, which increases the prospectivity. Your other question, talk about Akoum-B and the discovery of what it is. There was a well drilled in 2003 that there was oil, there were shows of oil in the well, but the water saturation was too high.
The prospect has been remapped and what we're trying to do is get up dip of what we think is the water level in the reservoir, get up dip, drill on the top of the structure and find oil there.
Great. That is helpful. Relative to the wells that have been producing for 10-15 years that are excluded, what is the production level of those wells?
The production level of the existing wells?
Yes, I'm just trying to frame it up relative to your production that you experienced off the wells off of Etame, and just trying to get my arms around whether these are small wells, massive wells, somewhere in between.
Well, right. Thinking about it, this could be several million barrels. Like I said, we're not ready to release the range of resources, the production could be very strong, 5,000 bpd-10,000 bpd. Maybe the range is 3,000 bpd-10,000 bpd . In general, that's the type of well in the area.
When you say 3,000 - 10,000, that's total production gross. That's not taking into anyone's interest, correct?
Correct. That is gross production. Correct.
Okay, great. Thanks, Cary. Appreciate it.
As a reminder, if you do have a question please press star then one. As there are no further questions, this concludes the question and answer session. I would like to turn the conference back over to Cary Bounds for any closing remarks.
Well, this is a transformational moment for VAALCO, and I really do appreciate everybody participating in the call, and I appreciate your support. Thank you. With that, I'll sign off. Goodbye.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.