Good day, and welcome to the VAALCO Energy conference call. All participants will be in listen only mode. 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, Carrie 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 5. Please note that this conference call is being recorded. Let me now turn the call over to Carey.
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. As a result, 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, and 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, and this transaction is an important step in implementing that strategy.
It expands our position in West Africa, provides us with additional scale, and 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. So 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 six 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 barrels 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 5,000,000 barrels of oil to 9,400,000 barrels of oil net. For our twenty nineteen year end 2P CPR reserves, we would have seen an increase from 9,200,000 barrels of oil to 17,500,000 barrels 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 and 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 seven, you will see that the transaction reduces our free cash flow breakeven price to under $31 It also provides a 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 a time are fixed, we add production are are fixed. As we add production production or when prices increase, we see significant growth in our ability to generate free cash flow. Without this transaction, each $5 per barrel increase in the price of Brent crude oil drives up our free cash flow by approximately $8,000,000 However, with the transaction, our free cash flow grows by approximately $15,000,000 with each $5 per barrel increase in the price of Brent crude oil.
This is especially important as we look to the future and build on a highly successful drilling campaign that we completed in April, 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 three d seismic survey that will cover the entire Etame license and will allow for a more robust subsurface interpretation than ever before. This full field three d seismic will optimize our future drilling locations, provide better imaging of existing satellite and infill locations, as well as identify additional upside opportunities. And 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 eight 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 and some very good prospects and extensions.
With the acquisition, our net revenue interest reserves and resource potential at would have increased from about 31,000,000 barrels of oil to about 59,000,000 barrels of oil at year end 2019. Having operated Etame ever since its discovery over twenty years ago and having produced 118,000,000 gross barrels 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% nonoper nonoperated participating interest in block d e eight that has an existing discovery and a potential appraisal well next year that I will discuss shortly. In total, the purchase price is $44,000,000 subject to customary post effective date adjustments and future contingent payments of up to $6,000,000.
The effective date of the transaction is 07/01/2020, and we hope to close within ninety days. Cash paid at closing is expected to be less than $44,000,000 as the amounts 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 30, adjusted for Sasol's ownership interest, were about $5,500,000 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 thirty day period to exercise their preemptive rights to acquire their proportional share of Sasol's 27.8% working interest. Lastly, the deal terms include two contingent payments.
The first is a $5,000,000 payment to Sasol if Brent averages more than $60 per barrel for ninety consecutive days between 07/01/2020 and 06/30/2022. There's also a $1,000,000 payment if the DEH appraisal well is successful. The other exciting component of this transaction is the acquisition of the 40% nonoperated participating interest in block DEH offshore Gabon that can add meaningful optionality to our portfolio. This block straddles the Gabon shoreline and is 180 miles northwest of the town. Gorenco 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 DE 8 is the Acunbee 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 Acumbi appraisal well that we estimate will cost between 7,000,000 and $9,000,000 net to VAALCO. If the well is successful, it could be tied back to an existing production platform operated by Perenco.
Similar to the Atom piece of the acquisition, Perenco could preempt the purchase of Sasol's participating interest in Block DEA if they so choose. This is a great addition for VAALCO as 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 d e 8 and the potential appraisal well in 2021 on the Okumbi discovery. And 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 and P company.
Thank you. And 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 touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2.
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 of questions. My first one is regarding the liquidity.
Assuming this this transaction goes through as you have, illustrated, it looks like the company has the $44,000,000 payment for the acquisition, the $5,000,000 seismic. These are both due in the next ninety days, and that they'll obviously be reduced by the cash generated by DAPA's interest and Sasol's interest. But just working through the numbers on my end, it looks like, you know, the liquidity gets fairly tight. Maybe not if if crude say that these levels are goes up, but, you know, if if Brent did decline significantly, It seemed like it was tight. So can you kind of 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 despite the lower the liquidity positions?
Right. Right. We we are we are we do not have any hedges in place at the moment. So let me let me answer that question first. And so we're continuously evaluating the market and our cash needs, and we will hedge when we when we see when we believe the time is right.
And, but for now, we are we are not hedged. And so, I mean, you're right. This purchase will or this transaction will utilize a good portion of our cash when it closes, but we are still debt free following the closing, and we still maintain our financial flexibility. Now 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. So at current pricing of around 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.
Yes. And Garrett, let me just add to that. So for the three month period from July through September, we had $5,500,000 worth of cash flow related to this interest. So thinking about it in terms of the closing, it's probably going to be we're expecting that to be around ninety days. So you've got six months to, you know, eight or nine months of cash flows that's gonna come in before you have to make the payment.
So that 44,000,000 will get reduced by the cash flows during that time period, if that if that makes sense.
And the 5.5, that's just related to Sasol's interest, not not VAALCO's?
That's correct. And that's only for that three month time period. We we like, we could, you know, share with you some information based on historically what what's happened because we've already released our September results. And so that we wanted to give you that as a as a frame of reference. I mean, we've done our own forecasting, obviously, carefully to make sure we had plenty of cash to to complete the transaction, transaction, and we feel comfortable that we can do that with cash and cash on hand.
Got it. And the company does not have a credit facility in place at the present time. Correct?
We do not.
Okay. So just and I would say, the very unlikely sort of doomsday scenario that, you know, we have these lockdowns and Brent goes to, like, $20 for a month or two. What, I mean, how do you kind of think about that? You know, what happens in that scenario?
Let me let me, I think both of us need to answer your question, but I'll I'll talk about from the operational side. We will react very quickly and, suspend all nonessential activities and make sure our costs are as low as possible, which is what we did earlier this year.
Yeah.
And and so that that will take us through part of the way. So
and Yep. And and, I mean, as Carrie mentioned, we do look at hedging periodically, and we're, you know, 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, you know, we had to make an obligation payment, say, the middle of next year, we would you know, we'd be a little more concerned about something happening and not having the cash on hand between now and then. So but that's you know, because we expect this to close so quickly, we we may put some hedges in place for for other things that this one probably not.
Got it. Got it. And then just the thirty day this is my last question. The the thirty day opportunity for the partners to acquire their pro rata share, that's just at the same price as as the val as as you guys are paying now. And, you know, and that potentially, if they did take up their full share, I'm just running the numbers now, but it could be I could be wrong.
Like, would that reduce your combined interest from 58 to 47 in Etame if they did exercise that right in full?
Something yes. You're you're close. Yes. I was doing the math in my head. Yes.
You're very close at 47.
Got it. And then the block d, would if the partner there exercised this right in full, would, would they be able to buy the whole thing or or only a piece?
They they would take the entire 40% interest. No. I or they have the opportunity to. I'm I would doubt that they would take just a part of it. Mhmm.
But I can't I can't speculate on what Perenco would do. I but I've
Got it. Okay.
Alright. Well, thank thank
you guys so much. And, again, congratulations. I mean, I I think, you know, this is you know, you kinda you guys have kinda laid out the plan in in the presentations for a while, so I think this is certainly in line with that.
Great. Great. All right. Well, thanks for the questions, Garrett.
The next question today comes from Bill Dezellem of Titan Capital.
Thank you. So congratulations. Looks like an outstanding transaction. So what additional overhead costs are going to be required if the if the transaction stands as is and none of your partners make any any changes? You made reference to minimal overhead costs, the additional overhead costs required.
What are those minimal costs?
Yeah. It's this is Liz. And it's 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. And so I mean, not the transaction, but just normal operations.
And so our G and A will go up just a little bit for that, but it's it's not significant.
Great. Thank you. And and then the block DE8 appraisal well, 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 it relates back to the COVID nineteen issues and moving equipment and people in and out of Gabon. And so, you know, all all of the operators in Gabon are considering whether if they had drilling plans for, you know, this year, late this year, 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.
And 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-nineteen 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 kind of 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.
Sure. Sure. Now we're an operator in Gabon, and we have a good relationship with the government. And so I can speak to our relationship with the government and you know, what the what the government's response, I think, would be to VAALCO. I really don't know the 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. But, yes, they're they we have we, as VAALCO, have encountered flexibility with the government on timing of projects that that have been, I guess, the timing extended because of COVID nineteen. Earlier in the year, the government did work with this when we were trying to move people in and out. And so I I've I've found the government I say aye.
VAALCO has found the government to be very cooperative under the circumstances. And again, I can't speak to Perenco's relationship with the government.
Great. And then just doing a little bit of math. Dollars 44,000,000 purchase price,
you
are going to have one quarter of cash flow already of roughly $5,500,000 into Q3. The Q4 cash flow sounds like will be roughly consumed by the seismic survey. And then that would leave, it seems like roughly another, I'll call it, year and three quarters or so to pay back the remaining purchase price. Is that essentially the way that you're looking at this?
Yes. I think in terms of the seismic, that the payments for that are kind of stretched over a period of time, so not all of those would hit in in q four. There would be some that would hit in in q one. In addition, we've got processing, and and that will happen throughout next year, you know, as we evaluate that seismic. So so it doesn't all hit in q four
And then I'm but I would say, generally, you're right. I mean, this is this should be paid back quickly in terms of just, you know, recouping the 44,000,000 that we're incurring.
Thanks, Liz. And so in the 10 Q, when you referenced 4,000,000 to $5,000,000 seismic cost to VAALCO, is that specific to the Q4? Or is that the entire program, including the processing that will extend out through next year?
That is the entire program.
Great. Thank you, and congratulations on a real solid deal.
Thank you. Thank you, Bill.
The next question comes from Charlie Sharp of Canaccord. Please go ahead.
Yes. Good morning, to both of you, and, may I offer my congratulations to you, following the other callers? Very good deal. If I may just clarify one or two things and and perhaps extend the discussion to the new license as well, that you have, the DE8. 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, but, is it a commitment or not? Secondly, how 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 d e eight specifically? And then thirdly, if I may, Acumbi Discovery World, can 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. Sure. So let me let me start with your first question. Let's see. Is you asked, is the Macombi a commitment well?
Yes. It is. It is a commitment well. And if the well is not drilled, there's a penalty. The drilling the commitment well is less than the penalty.
So our objective is to drill the Acumbi commitment well. In terms of value allocation, DE eight versus Etame, we're not ready to, release the the specific numbers that are allocated to Etame versus DE eight. We need to go through the partner process on both assets before we can release those allocations. And then, again, the allocation will change depending on the date that we close the transaction and and some other factors. So once we close, we will, we will report the allocation of the the value assigned to each of the assets.
And then, your your last question was, the resource potential at Acumbi. We've studied the resource potential very carefully. We believe that there are we are pleased with what we have found so far. Now as we do more technical work, as we, you know, take on more information and become a a true partner, we will start, issuing our our guidance on the on the resource range. We're just not ready to do that today, but we have studied the resources.
We're we think there's very real potential there. And let us get our arms around the the the the asset a bit, and we'll start talking about, you know, ranges of of resources. And then I think your last question was, Charlie, tell me if I'm wrong, but your last question was about tieback. There are 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.
So that's that's one of the strengths of BEH is there's quite a bit of infrastructure in place.
And and your first, view of that license, is there further running room for additional discoveries if a Coon 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. 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. So thank you very much.
Hope to see you soon. Yes. Yes.
The next question is a follow-up from Bill Dezellem of Titan Capital. Would
you talk to us about the existing wells on Block DE8, 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? And then also, 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. 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 those fields were discovered, you know, ten, fifteen years ago. They've been on production many years now, produced millions of barrels of oil.
And so those, you know, again, those we're not part of those fields. And so but I guess my point, Bill, and I think this is your question, you know, there is good strong production in the area nearby, which increases the prospectivity. So and so and and then, you know, your other question, you know, talk about Acumbi and the discovery of what it is. Well, there was a well drilled in 2003 that, there was oil. There there were shows of oil, in the well, but it was the water saturation was too high.
And so the the prospect has been remapped. And what what we're trying to do is get up dip of what we think is the the the water level in the reservoir, get up dip, drill on the top of the structure, and find oil there.
Great. That that is helpful. And relative to the wells that have been producing for ten to fifteen years that are excluded, what what is the production level of 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 you experience off the wells off of Etame. And just just trying to get my arms around whether these are are, you know, small wells, massive wells, somewhere in between.
Well, right. These so we're thinking about it. This could be several million barrels. Like I said, we're not ready to there and just, you know, several million barrels, but we're not ready to release the range of resources, and the production could be very strong, you know, five, ten thousand barrels a day. Or maybe the range is three to 10,000 barrels a day.
But in general, that's the type of well in the area.
And when you say 3,000 to 10,000, that's total production gross that would, that's not taking in into anyone's interest. Correct?
Correct. That is gross production. Correct.
Okay. Great. Thanks, Carrie. Appreciate it.
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 transformational moment for VAALCO, and I really do appreciate everybody participating in the call, and I appreciate your support. So thank you. And with that, I'll sign off. Goodbye.
Well, The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.