Page 8 of 13 – SEC Filing The Reporting Persons strongly believe that a sale of the Issuer to a larger industry player is the best outcome for shareholders, thus LSV became concerned by management listing five potential outcomes for its strategic alternatives process with four such outcomes implying a going concern and only one involving a sale or merger of the Issuer (this outcome was listed as fourth out of five alternatives). In addition, the Reporting Persons strongly advise the Issuer not to engage in any new issuances of debt or dilutive equity offerings as implied by options one and two – LSV strongly believes doing so would lead to further destruction of shareholder value. Given the high cost of drilling offshore exploration wells and the Issuer’s poor exploration drilling track record, the Reporting Persons believe any exploration drilling is likely to further destroy shareholder value. The Issuer’s long track record of poor exploration drilling failures is evidenced by the five dry holes it has drilled in the last three fiscal years2. In addition, the Issuer spent more than $223.4 million3 in capital expenditures during this time, which equates to approximately three times the Issuer’s current market capitalization4. Based on these factors, we strongly believe option five, as listed above (continuing to execute the Issuer’s existing operating plan), is untenable. To be clear, the Reporting Persons do support the Issuer drilling development wells in its core area because we believe these wells are lower risk and lower cost than drilling exploration wells; however, LSV does not believe a company as small as the Issuer should have entered into Angola and committed to drill three exploration wells with a penalty payment of $15 million due in the near future if such wells are not drilled. LSV also encourages the Issuer to further reduce its excessive corporate costs. The Issuer has consistently paid its CEO and COO in excess of $1 million each in total compensation for the last three fiscal years (2013, 2014 and 2015)5 and the Issuer’s total corporate G&A expenses represent more than 20% of its market capitalization. 6 LSV reminds the Board of its fiduciary duties to the Issuer’s shareholders and LSV intends to hold the Board and management team accountable for any actions that result in further erosion of shareholder value. Although LSV is encouraged by the recent additions to the Board, if the recently announced strategic alternatives process does not result in a material benefit to the Issuer’s shareholders, LSV may be forced to conclude that further changes to the Board are necessary for shareholder value to be maximized. No Reporting Person has any present plan or proposal that would relate to or result in any of the matters set forth in subparagraphs (a) – (j) of Item 4 of Schedule 13D except as set forth herein or such as would occur upon or in connection with the completion of, or following, any of the actions discussed herein. The Reporting Persons intend to review their investment in the Issuer on a continuing basis. Depending on various factors including, without limitation, the Issuer’s financial position and strategic direction, actions taken by the Board of the Issuer, the price levels of the Shares, conditions in the securities markets and general economic and industry conditions, the Reporting Persons may in the future take such actions with respect to their investment in the Issuer as they deem appropriate including, without limitation, engaging in communications with management and the Board of the Issuer, engaging in discussions with shareholders of the Issuer and others about the Issuer and the Reporting Persons’ investment, making proposals to the Issuer concerning changes to the capitalization, ownership structure, Board structure (including seeking Board representation) or operations of the Issuer, purchasing additional Shares, selling some or all of their Shares, engaging in short selling of or any hedging or similar transaction with respect to the Shares, or changing their intention with respect to any and all matters referred to in Item 4.
2 Source: Issuer’s Form 10-K filed on March 16, 2016; see “Drilling Activity” section on page 11. 3 Source: Issuer’s Form 10-K filed on March 16, 2016; see “Capital Expenditures” section on page 34 – “During 2015, our capital expenditures (on an accrual basis), including dry hole costs (“Capital Expenditures”) expended in the period, were $87.3 million compared to $65.9 million and $70.2 million in 2014 and 2013.” 4 Source: Bloomberg; market capitalization as of 4/29/2016 was $71.95 million. 5 Source: Issuer’s Schedule 14A filed on April 22, 2016; see “Executive Compensation” section on page 23 – note change in COO on June 3, 2015. 6 Source: G&A (excluding G&A related to shareholder matters) from Form 10-K filed on March 16, 2016; Bloomberg: market capitalization as of 4/29/2016 was $71.95 million. Follow Vaalco Energy Inc (NYSE:EGY)
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No Reporting Person has any present plan or proposal that would relate to or result in any of the matters set forth in subparagraphs (a) – (j) of Item 4 of Schedule 13D except as set forth herein or such as would occur upon or in connection with the completion of, or following, any of the actions discussed herein. The Reporting Persons intend to review their investment in the Issuer on a continuing basis. Depending on various factors including, without limitation, the Issuer’s financial position and strategic direction, actions taken by the Board of the Issuer, the price levels of the Shares, conditions in the securities markets and general economic and industry conditions, the Reporting Persons may in the future take such actions with respect to their investment in the Issuer as they deem appropriate including, without limitation, engaging in communications with management and the Board of the Issuer, engaging in discussions with shareholders of the Issuer and others about the Issuer and the Reporting Persons’ investment, making proposals to the Issuer concerning changes to the capitalization, ownership structure, Board structure (including seeking Board representation) or operations of the Issuer, purchasing additional Shares, selling some or all of their Shares, engaging in short selling of or any hedging or similar transaction with respect to the Shares, or changing their intention with respect to any and all matters referred to in Item 4.
