VAALCO Energy, Inc. (NYSE:EGY) Q3 2023 Earnings Call Transcript

VAALCO Energy, Inc. (NYSE:EGY) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Good day. And welcome to the VAALCO Energy Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

Al Petrie: Thank you, Operator. Good morning, everyone. And welcome to VAALCO Energy’s third quarter 2023 conference call. After I cover the forward-looking statements, George Maxwell, our CEO, will review key highlights along with operational results. Ron Bain, our CFO, will then provide a summary financial review. George will then return for some closing comments before we take your questions. Thor Pruckl, our Chief Operating Officer is also with us today and will be available for Q&A. 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’d like to point out that we posted a third quarter 2023 supplemental investor deck on our website this morning that has additional financial analysis, comparisons and guidance that should be helpful.

With that, let me proceed with our forward-looking statement comments. 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 filed with the SEC, including our Form 10-K.

Please note that this conference call is being recorded. And let me now turn the call over to George.

George Maxwell: Thank you, Al. Good morning, everyone. And welcome to our third quarter 2023 earnings conference call. I am very pleased with our ability to deliver exceptional operational and financial results in 2023, exceeding our guidance and expectations following the TransGlobe combination that occurred a year ago. Our focus has been on optimizing production, managing our costs, capturing operational and cost synergies, all while executing capital drilling campaigns to enhance profitability and growth. Through the execution of this strategy, we have significantly grown our cash position even while fully funding our capital program, shareholder dividends and buybacks, all while remaining bank debt free. We are generating the growth in adjusted EBITDAX and cash that will allow us to fund exciting future projects across our diverse portfolio of high returning assets.

We paid our third quarter dividend and announced a fourth quarter dividend, fulfilling the commitment we made to nearly double the dividend that we paid in 2022. Additionally, to-date, we have returned over $20 million through a share buyback program since November 2022 and this program is ongoing. I would now like to point out some key highlights and accomplishments for the third quarter. We are at the high level of our production guidance with 18,844 NRI barrels of oil equivalent per day or 24,430 on a working interest basis. This was driven by record production levels in Egypt from our successful drilling program, as well as high operational uptime in Gabon. As a reminder, we have not drilled any new wells in Gabon since 2022, but our commitment to operational excellence and the new FSO have helped to minimize decline and maintain production uptime at high levels in 2023.

You can clearly see how we have grown when you compare third quarter production this year with third quarter production last year, we are up 106%. Sales were at the high end of guidance as we benefited from a large export cargo in Egypt during the third quarter. We have since had a lifting of 600,000 gross barrels of oil in Gabon that occurred in the first week of October 2023 that will benefit our fourth quarter. The diversity of our asset base has allowed us to grow and generate significant growth in production, cash flow and adjusted EBITDAX. Our third quarter adjusted EBITDAX of $71.4 million was up 9% compared to Q2 2023 and up 68% compared to Q3 2022. In the first nine months of 2023, we have generated almost $90 million of free cash flow and distributed 41% of that free cash flow back to shareholders through dividends and buybacks.

Even after fully funding our capital programs and paying dividends and buybacks, we have still grown unrestricted cash to over $100 million at the end of Q3 2023, up 124% since June 30th. We have a positive momentum as we enter 2024, both operationally and financially, and we are building size and scale to substantially grow VAALCO. I would now like to discuss some key updates across our diverse portfolio of assets. Let’s begin with Egypt where we have invested the largest amount of capital in 2023. Our drilling campaign in Egypt has seen some very positive results. We have completed our 2023 campaign faster and at lower cost than we had originally planned. We finalized the last well in the program in October and in 2023 we drilled 18 verticals including one injector well and two exploration wells, as well as a horizontal well.

In Q3, we had a $1.2 million exploration expense associated with the East Arta 54 vertical well. While the well was not commercially viable, the logs and cores that we took on this exploration well showed oil-bearing formations that we believe will allow us to drill additional economic wells in the future. Overall, we had a very economic drilling program with strong production performance and we are very pleased with our drilling performance in 2023. On the vertical wells, we are seeing significantly faster drilling performance moving from a 2022 average of about three wells drilled every four months to now drilling two wells per month, which is a 60% reduction in cycle time. By drilling the wells faster, we are cutting costs meaningfully and improving the economics of our wells in Egypt.

In addition to the drilling efficiencies, we have also spent time and effort in Egypt reviewing the facilities and overall production operations. As I have detailed before, these efforts have resulted in increased production, lower costs and better safety and environmental performance in Egypt. We continue to set production records in 2023 since we acquired the properties, which is one of the key areas driving our ability to exceed guidance with our total company production. We believe that Egypt has a lot of value and organic drilling opportunities and it will compete for our 2024 capital budget which we are currently working on. In Canada, we drilled two wells in the first quarter of 2023, a 1.5-mile lateral and a 3-mile lateral. Both wells were drilled and completed safely and cost effectively without incident.

The wells were tied in and equipped in April and early May with overall cycle times that were significantly less than historical cycle times. The wells began flowing in May with good production rates and in early July the pumps and rods were installed on both wells. Both wells production rates exceeded expectations and we are now monitoring their long-term performance. We also believe that to better optimize our Canadian prospects going forward, we will move to 2.5-mile and 3-mile laterals almost exclusively, which we believe will further improve the economics of our development program. Canada also set production record in 2023, another reason we are performing so well as a company and exceeding our production targets. With our 2023 drilling and completion programs completed in Canada, we are evaluating facility and pad optimization, future development wells and further refining our completion techniques in anticipation of potential future drilling campaigns in Canada.

Turning to Gabon, as you know, we completed our 2021, 2022 drilling campaign in the fourth quarter of 2022 and invested only minimal new CapEx dollars in Gabon in 2023, primarily related to maintenance CapEx and long lead drilling equipment. Despite no 2023 drilling program, we have seen strong overall production results in 2023 by focusing on operational excellence. Last year’s FSO and field reconfiguration projects have allowed us to operate more efficiently and economically in 2023, while enhancing production uptime and minimizing decline until the next drilling campaign. The impact of the cost savings from the new FSO are helping to offset some other higher costs from inflationary and industry supply pressures. We are pleased to have completed the minor pipeline work on the SEENT gas line last month at a cost of approximately $4 million, which will help lower CapEx in Q4 and beyond as a result of lower diesel costs by more than $0.5 million per month.

We are currently evaluating our locations for the next drilling campaign at Etame, which we are currently projecting to be a three-well to four-well program with additional well options. We continue to review rig options for our 2024 drilling program. The market for drilling units remains very tight and we plan to provide a further update on the planned campaign as our review progresses. We have delivered outstanding results in 2023 and I am excited as we move into 2024 and believe that we will continue to grow production, reserves and value for our shareholders. I would like to thank our hardworking team who continue to operate and execute our plans. We are bank debt-free and remain firmly focused on our strategic vision of accretive growth while maximizing shareholder return opportunities and operating with the highest regards towards ESG.

With that, I would like to turn the call over to Ron to share our financial results.

Ron Bain: Thank you, George, and good morning, everyone. Let me begin by echoing George’s comments about our continued strong operational performance as we execute our strategic plan. With our growing cash position of over $100 million and a clean balance sheet, we are much better positioned today with a growing and diversified asset base than ever before in VAALCO’s history. I will provide some insight into the drivers for our financial results and rather than repeating what you can read in the earnings release or 10-Q, I will focus on the key points. Let’s begin with production and sales, which, along with realized pricing, drives our revenue. Production for the third quarter was indeed strong, at the high end of our guidance with our sales for the quarter also at the higher end of our guidance.

The production performance of our assets remains solid, both with the new wells drilled in 2023 in Egypt and Canada, and a resting decline in Gabon through operating efficiencies. With a diversified portfolio of assets, we will have changes from quarter-to-quarter in the mix of sales from each of our producing areas. In the second quarter, we had a greater weighting to Gabon, but in the third quarter we had more sales in Egypt. This change in mix impacts our realized pricing and ultimately our revenue and earnings. We had nearly identical total sales volumes quarter-over-quarter and overall realized pricing increased from the second quarter, but our revenues were only up $7 million over the second quarter, because the additional sales occurred in Egypt, where our price realizations are lower primarily because of the sulfur content of the oil.

As we noted, we had a lifting occur in the first week of October in Gabon and this did not fall into the third quarter, but will benefit the fourth quarter sales, revenue, and earnings. Brent increased 10% quarter-over-quarter with natural gas pricing improving by 32% and NGL pricing up 5%. You will note in our earnings release yesterday, we provided a detailed breakout of sales volumes along with commodity pricing by country. Regarding hedging, as shown in our earnings release, we continue to implement a hedging program that helps mitigate risk and protect our commitment to shareholder returns. We have costless collars in place for Q4 2023 and we entered into costless oil collars indexed to dated Brent for Q1 and Q2 of 2024. All our collars have a floor price of $65, for around 15% of our production with upside in the collars to between $90 and $100.

It’s worth noting we have 85% of our production unhedged in a period of high commodity pricing, whilst protecting our commitment to our dividend. Turning to costs, our production costs were below the low end of guidance on an absolute basis and at the bottom end of guidance on a per barrel basis. We remain focused on capturing synergies and keeping our costs low to enable us to maximize margins and increase our cash flow. While absolute costs were up 71% year-over-year primarily due to higher sales volumes, our production costs per barrel are 31% lower year-on-year. This demonstrates that we are delivering on capturing synergies and cost savings initiatives like the FSO project last year. I would also like to point out that in the first week of October, we successfully restored the feed gas pipeline to the FSO and will benefit from lower diesel consumption from Q4.

G&A costs were also in line with guidance. When compared to the combined G&A costs seen in 2022 by both VAALCO and TransGlobe, we have seen meaningful reductions in costs well ahead of our targeted synergies. The final integration and reorganization of the business is behind us, and we have commenced a back-office process improvement project with the implementation of a single cloud-based ERP across the whole company. Sequentially, we grew our adjusted EBITDAX by 9% to $71.4 million in Q3 2023. Our solid sales coupled with good commodity price environment, as well as our ongoing commitment on controlling costs led to our adjusted EBITDAX growth. Non-cash DD&A costs decreased slightly quarter-over-quarter, primarily due to the higher mix of Egyptian and Canadian sales.

Compared to the prior year in 2023, we have seen an increase in DD&A due to the step-up of the TransGlobe asset valuation and because of the additional new wells being brought online for both Egypt and Canada. We started our reserve evaluation process in all our locations and will align our year-end 2023 reserves with our competent persons’ report in our year-end results. We are encouraged by the new wells drilled in 2023 and the high operating efficiencies, and our expectation is this will be more than sufficient to cover any decline in SEC pricing over 2022 levels. Targeted reserve additions for the wells completed together with the SEC 2023 pricing will be reflected in our CPR as of the end of the year and will most likely lead to a change in our DD&A rate per barrel at that time.

Tax costs in the quarter of about $25.8 million resulted in an effective tax rate of about 81% in the quarter. This was unusually high and driven by the revaluation of tax oil barrels held for Gabon. Outside of this discrete event, our effective tax rate was 64% in the quarter and aligns with our effective tax rate for the year. In Gabon, our foreign income taxes are settled by the government through an in-kind oil payments. At the end of each quarter, we have to mark-to-market the in-kind oil. So when prices rise as they did from Q2 to Q3, it has a negative impact on our accrued taxes. The impact was $5.3 million in Q3. This impacts earnings and earnings per share. If prices continue to fall as they have since the end of the third quarter, when we mark-to-market the oil in-kind we will see a benefit, thus reducing our tax liability and all things equal, increasing our earnings and earnings per share.

We cannot control the movement of the underlying commodity price to which this in-kind oil is marked to. We continue to guide that 60% to 65% effective tax rate is the correct effective tax rate over the long-term excluding discrete items. But as commodity prices rise, we may see increases in that tax rate, and as they fall, we will see decreases in that tax rate. We reported adjusted net income of $7.5 million or $0.07 per diluted share. If you back out the mark-to-market $5.3 million tax impact and our appraisal exploration expense, you would have seen earnings in line with consensus estimates. Turning now to the balance sheet and to cash flow statement for Q3. Unrestricted cash more than doubled to $103.4 million as of September 30th. We are collecting our receivables and have seen our Egyptian accounts receivable decrease by $17.7 million to just $18.8 million.

We continue to work closely and have a strong relationship with EGPC. With completion of drilling in Canada and Egypt completed, we expect to also see a reduction in the outstanding accounts payable in accruals. We saw a decrease of about $8 million from Q2 to Q3. As has been the case since the third quarter of 2018, we are carrying no bank debt and have credit facilities available to utilize for additional accretive acquisition opportunities to continue to build value. In Q3 2023, VAALCO paid a quarterly cash dividend of $0.0625 per common share or $6.7 million and our share buyback was about $6 million. As stated previously, growing our dividend and the share buybacks are a direct result of our expanded asset base and cash flow generation ability as a result of the TransGlobe acquisition.

We have generated almost $90 million in free cash flow year-to-date in 2023 and we have returned 41% of that directly to our shareholders through dividends and share buybacks. Aside from fully funding our shareholder returns, we also fully funded our Q3 net capital expenditures of $22.5 million on a cash basis. These expenditures were primarily related to our drilling program in Egypt and some maintenance CapEx and long lead items for Gabon. Let me now turn to guidance, where I will give you some key highlights and updates. I want to remind you that our full guidance breakout is in the earnings release and in our supplemental slide deck on our website. Also, we report all our production with both working interest and net revenue interest with a difference represented in the royalties paid or taken in barrels.

As we have discussed, our successful capital programs in Egypt and Canada, coupled with our operational focus on uptime to mitigate decline in Gabon is leading to meaningful increases in production. Last quarter, we raised our full year 2023 production guidance for all of our operational areas, leading to a total company production increase of about 7%. With our solid production in the third quarter, we are now further raising our full year production range to be between 18,200 barrels of oil equivalent per day and 18,900 barrels of oil equivalent per day. This is an additional 2.5% increase at the midpoint. For the fourth quarter of 2023, we are expecting our production to decline slightly in all areas compared to the third quarter, as we have completed all of our capital drilling for the year.

Looking at our sales volumes, we are expecting to see a solid increase in our fourth quarter sales with a guidance range of 19,800 NRI barrels of oil equivalent per day to 22,000 NRI barrels of oil equivalent per day. At the midpoint, this is an increase of 6% compared to the third quarter. Our absolute operating costs are expected to increase in line with additional sales, but we are projecting our per barrel of oil equivalent costs to remain in line with the third quarter. Finally, looking at CapEx, our 2023 capital spend was first half weighted and we have seen a decline every quarter in 2023. For the fourth quarter, we are expecting a range of between $9 million and $12 million for our CapEx. As a result of higher sales and lower CapEx spend, we believe that VAALCO is very well positioned to grow cash flow in the fourth quarter of 2023.

In closing, we continue to trade a very low multiple of EBITDAX despite having a strong dividend yield and being bank debt free. We believe right now is an excellent opportunity to buy our common shares that are trading at a discount to their intrinsic value, which is also a reason why we decided to accelerate our share buyback program over the past few months. Our sales continue to increase, we are generating and building a significant amount of cash, and we are poised to execute and fund an expanded 2024 drilling campaign. With that, I will now turn the call back over to George.

George Maxwell: Thanks, Ron. As you have heard this morning, we continue to have success in 2023 driven by strong production performance, we believe that we are very well positioned to continue building cash as we head into 2024. We have generated $183 million in adjusted EBITDAX year-to-date, up 34% over the first nine months of 2022, while funding all of our CapEx, quarterly dividends and share buybacks with cash flow and cash on hand. We ended the third quarter with over $100 million in cash on hand and with minimal projected CapEx costs in the fourth quarter, we expect to continue to grow our cash position in the fourth quarter. While our realized commodity pricing in 2023 has been lower than in 2022, we have seen strengthening pricing in the second half of this year.

In addition, our ability to capture synergies, enhance production and increase margins have positively impacted our 2023 results to-date and position VAALCO very well for the future. We have delivered on our commitment to the market and to our shareholders, and we are in an enviable financial position with no bank debt and a growing cash balance. Our strategy remains unchanged, operate efficiently, invest prudently, maximize our asset base and look for accretive opportunities. In addition to funding our capital program and our growing cash position, we have remained focused on returning value to our shareholders. In 2023, we nearly doubled our quarterly dividend and have paid or announced all four quarterly dividends for 2023 at an increased rate.

We are delivering the $0.25 per share annual dividend for the 2023 that we promised last year, which at our current share price is a yield of nearly 6%. We have continued to repurchase common shares through the buyback program approved in 2022. Since the inception of the program, a year ago, we have returned over $20 million to shareholders and repurchased 3.5 million common shares through the buybacks. With our highly successful 2023 capital programs in Egypt and Canada completed, we are now focused on our 2024 capital campaign. We are planning our 2024 drilling campaign at Etame, our 2024 drilling program in Egypt and in Canada, and we will discuss those in detail during our next call in March. We are taking the successes in Egypt and Canada and both drilling efficiency gains and facility optimization and applying it into our next planned drilling campaigns.

With a diverse portfolio and high performing assets that generate robust rates of return, we are evaluating our 2024 budget and high grading opportunities. We have multiple producing areas and future prospects that are competing for capital and we will remain disciplined in our approach to maximize value for our shareholders in delivering growth in production, reserves and cash flow. The substantial cash we are building in 2023 should allow us to fund future drilling campaigns and developments, as well as fund our cash returns to shareholders. We are very excited for the future of VAALCO and remain confident that we will continue to deliver superior long-term value to our shareholders. Thank you. And with that, Operator, we are ready to take questions.

Operator: [Operator Instructions] The first question today comes from Stephane Foucaud with Auctus Advisors. Please go ahead.

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Q&A Session

Stephane Foucaud: Yes. Hi, guys. Thanks for taking my question. I was wondering whether you could provide — is there any update worthwhile to give about Equatorial Guinea and where you are with regard to Venus and so forth? Thank you.

George Maxwell: Good afternoon, Stephane. Yes. Of course, we have been continuing the progress on the discussions on Block P. In the last — during Q3, the companies had a number of meetings, both with the MMH and the Minister and with their partners. So, as I mentioned in previous quarters, I think, from our position, we have got a trajectory to move this project forward, particularly into feed for 2024 to review both the capital spend and the execution profile that we have in the plan of development. We are working closely with our partners to align their desires with what we are trying to do in Block P. But as I stated previously, we are still outstanding at least one signature on the GOE and it’s not prudent for us to move forward and commit funds and spend money when we don’t have alignment.

That just will potentially lead us towards a dispute in the future. I will say that the discussions we had with our partners as early as just two weeks ago have been fruitful and we look forward to a successful outcome of those discussions and be able to confirm the move forward on this project at the next call.

Stephane Foucaud: Thank you. Great. And it’s not exactly a follow-up for my second question. It’s for Ron. With regards to the cash CapEx for Q4, I noticed that the full year cash CapEx runs quite a bit ahead, sorry, the accounting CapEx is above the cash CapEx. If I am not wrong, there is a bit of mismatch. Can we expect the $9.5 million to $12 million CapEx in the guidance [Technical Difficulty]?

Ron Bain: …CapEx, right? So that’s effectively what we can basically, we know what we have committed to and we know that we will account for that. With regards to cash, obviously, it’s a timing of those invoices coming in and then paid out. The $9.5 million to $12 million from an accrued point of view, it will come through at that level. I think the cash CapEx is going to be slightly higher than the guidance, the midpoint and the guidance on the cash CapEx, which I believe is about $73 million for the year. I would expect the cash CapEx number to be somewhere around about $80 million.

Operator: The next question comes from Charlie Sharp with Canaccord. Please go ahead.

Charlie Sharp: Yes. Thank you very much for taking my question and at the risk of sounding sycophantic, congratulations on a very good operational and financial quarter. And I know that you talked about capital allocation and that hasn’t yet been settled and you talked about the potential in Gabon, and I think, Egypt in particular, after good drilling results this year. I just wondered if you could, without sort of identifying exactly, flesh out a little bit how you see the allocation approximately in terms of geography. And in Gabon, in particular, have you done all of the work that you need to do to ensure as best as possible that your program next year delivers all of the results that you anticipate?

George Maxwell: Again, Charlie, thanks for the question. A good question. I guess, when we look at the subsurface work, I am sure everyone would have expected us to have more or less fully completed the subsurface work at this time for the targeted opportunities both in Gabon and in Egypt and in Canada for next year. So that is correct. We have done that. And as everyone’s aware, the market at the moment for service providers is exceedingly tight and that’s where the key evaluation is, is looking at the opportunity to match the op — subsurface opportunities we have with the available activities that we require in Gabon and in Egypt and also in Canada. So without going into the numbers which we haven’t landed on yet. I think we are a bit firmer — quite a bit firmer on the Egyptian program, because we have a rig contracted, we will have a workover schedule running concurrently through Q4, right through the first half of 2024 and we know that rig is coming back to us at the end of June to commence the drilling program at the second half of 2024.

So whilst we can’t yet be specific and give you information on targets and volumes, we can more or less confirm, we will have a second half drilling program in Egypt in 2024. With Gabon, with the assets required to execute that program, the timing of that remains uncertain and we remain in negotiations. We know we have a number of firm targets to drill and we know we also have a number of contingent targets to drill. We have some top side technical work ongoing at the moment, which we expect to have a study complete by Q1, which may rearrange the sequencing of wells. But it’s going to be probably late this year, early next year before we can give you more details on the exact sequencing and timing of that Gabonese program.

Charlie Sharp: Well, that’s great. Thank you. And just as a sort of mini follow-up, if you like. I guess then it looks like first half is going to be a very light program, perhaps, Canada weighted and then the second half will be particularly busy in Gabon and Egypt. Is that right?

Ron Bain: That’s more or less right. The first half, again, subject to securing drilling rigs, Canada will be weighted with potentially up to four wells drilled in the first half, and Gabon and Egypt are looking more towards the second half at the moment.

Operator: The next question comes from Jeff Robertson with Water Tower Research. Please go ahead.

Jeff Robertson: Thanks. George, can you just talk about how you think about the share repurchase authorization, since you have got, I think, roughly $9 million left on the original $30 million authorization and how that factors into your thought process around 2024 capital outlays?

George Maxwell: Yeah. I mean, obviously, we have got, as I mentioned in the response to the last question, we are seeing a very tight market as the service side of the business catches up with the higher commodity prices and that’s looking at significant increase in the cost for executing the drilling programs on each of the wells. We are committed to the program that we authorized — the Board authorized at the end of last year. We will follow that program through to its completion. We — as you — as we have demonstrated and we commented already, we do have excess cash balances at the moment, but we are building for quite an extensive program in the second half of next year. Once we have landed on what that program looks like and what that program will cost us in order to arrest decline and increase production back up again towards the end of 2024, that will then allow us to what excess cash is available that we are producing over and above our commitment to the dividend to be able to allocate back into some form of potential buyback program.

All that will be dependent on where the stock is, and obviously, as Ron mentioned in his narrative, the stock remains at a very low multiple, and therefore, very competitive for us to repurchase to get the prices up there. But, again, that will be a determination that we will discuss with the board early Q1.

Jeff Robertson: How do you weigh the merits between the share repurchase and potentially increasing the dividend?

George Maxwell: At the moment, I don’t think there would be any plans to increase the dividend. I think our dividend from an income position, provides a reasonable return to the stock, particularly at the depressed levels for the stock at the moment. So the focus, I think, would be fully on stock repurchase with the excess cash that would be available.

Operator: [Operator Instructions] The next question comes from Bill Dezellem with Tieton Capital. Please go ahead.

Bill Dezellem: Thank you. I’d actually like to ask two questions right out of the gates, if I may. Number one, what did you learn from the drilling campaign in Egypt with the horizontal wells that you drilled and what will those learnings do in terms of the next drilling campaign and your ratio or split between vertical and horizontal wells? And then the second question is, acquisition field or pipeline update, please?

George Maxwell: Okay. I will start this conversation, but Thor may finish it when it comes to the wells. I mean, we have really only completed one significant horizontal well in Egypt, which was the Arta-77. As you are aware, in the previous calls we didn’t get the results in that well that we anticipated. The well continues to produce. I mean it — I think, I am remembering numbers now, I think, we started around 200 barrels a day, the last call it was down to about 120 and right now it’s around 80 barrels a day. So it continues to produce. It is one of our workover candidates. But I will let Thor jump in if we are planning to do more horizontal wells there, I think.

Thor Pruckl: Yeah. So, the well — as George mentioned, the well is still on production and it seems to be flattening out the curve. We did have some issues with the drilling of the well, as well as the completion of the well with the pump placement and a tangent section in a well. So, we originally had two wells planned, we delayed that second well and now we are looking at potentially doing some more or additional, I guess, technical work on drilling, potentially another well, a horizontal well late in 2024 with the learnings that we have got out of that well.

George Maxwell: Sorry, Bill. The second part of your question on acquisition updates. Well, obviously, we have said and in relation to the strategy, I know we got a shareholder question, what does VAALCO’s future look like? In the last three years, we have each year doubled the size of the company, doubled production and we are starting to reap the benefits of having that derisking of a single asset company, and that I think, was clearly demonstrated to our benefit in Q3, having multiple areas of production when certain areas are going through some areas of difficulty. So when we look at the field of M&A opportunities, that field is extremely narrow. It was very wide 12 months ago with the IOCs mainly deciding that they are no longer divesting and with — at the top of the price curve, the divested opportunities are the opportunities that we see in Africa at prices where we would not want to compete.

There are still fields where accretive opportunities are available and we do continually review these. It’s not always in our primary jurisdiction. So we are actually having to deviate and look at opportunities for value rather than just geography, but the market is exceedingly tight. We are no different from some of our peers other than we are debt free and that, all of our peer companies are performing well under the higher commodity prices and they are all seeking the same opportunities. So we tend to try and drive towards bilateral positions where possible, because process positions can tend to become uncompetitive very quickly. But the market is still there, we are still reviewing opportunities. It’s not completely dead to us.

Bill Dezellem: Great. Thank you, both.

Thor Pruckl: Thanks, Bill.

Operator: The next question comes from Jamie Wilen with Wilen Management. Please go ahead.

Jamie Wilen: Hi, fellas. Given the large amount of cash you were able to put on the balance sheet between the second and third quarters, as you look forward with limited capital expenditures, are you looking to similarly bulk up the balance sheet by $50 million each quarter over the next few?

George Maxwell: That’s a reasonable good question. I think it’s — we can’t hide the fact. We have got limited CapEx in Q4. We are forecasting at least two to three liftings out of Gabon. So, yes, our projected position for Q4 would be another strong cash performance. We have yet to land on the allocation of capital for 2024. But as I said, we do expect to commence the drilling in Canada very early January, February and they are coming in roughly at $4 million to $6 million per well, yeah, is that?

Ron Bain: Yeah.

George Maxwell: And so, we will still be — in terms of where we have been before, Jamie, with the drilling in Gabon, we are going to have a pretty light CapEx in Q1 and Q2.

Jamie Wilen: Got you. Given the progress you have made in Canada, what are your thoughts on monetizing that asset and devoting a good bit of that to — for the next drilling campaigns, as well as a share buyback and what do you think Canada would really be worth?

George Maxwell: Well, we have a valuation of Canada because we carry on the books. So the valuation on the books, I think, rest between $80 million and $100 million. Ronald, tell me if I have got that number wrong.

Ron Bain: You are probably near the upper range.

George Maxwell: All right. What I will say, I will repeat what I said last quarter. I mean, the turnaround in the Canadian operation has been exceedingly impressive. The team up there have done a tremendous job. They have delivered to us a five-year plan that is cash positive and returns cash every single year. The focus on the change of drilling techniques to the longer reach laterals, the focus on adding the land in order to achieve that has been extremely successful. Thor’s just reminding me, the — how we drill and complete the cycle times have also been reduced considerably, I think, 68 days, something ridiculous.

Thor Pruckl: Roughly half.

George Maxwell: Half. So we now have a valuable, very efficient operation, but to be frank, to be big in Canada, we need scale. So there’s always a consideration of whether that scale exists and whether the best use of capital is to continue to grow and invest or look at other opportunities. So we do consider that all the time and when we look at the 2024 position, that will be part of that consideration.

Operator: The next question comes from Jeff Robertson with Water Tower Research. Please go ahead.

Jeff Robertson: Thanks, George. Just to follow up, has there been any change in anybody you deal with the Hydrocarbon Ministry in Gabon in light of the [inaudible] back in August?

George Maxwell: Good question. Obviously, yes, there have been some change, because I think, the previous Minister was removed. But as I stated, I guess, the day after that event, we have seen — we were out of the office for one day. We have seen no interruptions to our operations whatsoever. We continued to work diligently with the government, both on our investment profile and on our backdated positions where we are looking to make some recoveries on receivables. Ron mentioned about the tax event that exists and causes us movements in our tax position because of the mark-to-market. We are also working with the government to see how we can improve the position between their unlifted barrels and our outstanding receivables.

And that’s something, I am down in Gabon later this month and that’s one of the topics of discussion. But, again, from a relationship standpoint, some of the players have changed, but at the same time, our business has been completely uninterrupted.

Thor Pruckl: Yeah. If I could just add to that. If anything, I would suggest that it’s become a more positive climate and a more active climate with more engagement with ministries.

Jeff Robertson: Thank you.

Operator: The next question comes from Bill Dezellem with Tieton Capital. Please go ahead.

Bill Dezellem: Thor, I’d like to follow up on your last comment and does that improvement or positive relationship include a desire, a recognition, an interest, I don’t know what the right term would be to stay more current on their payables to you?

Thor Pruckl: Yeah. I mean, I think, there’s a — the government is — has changed and I think there’s a significant drive to, I guess, streamline and to get their books in order and that means that, they are looking to clean up their payables, they are looking to clean up their accounts receivable and get processes in place so that that doesn’t happen in the future.

Bill Dezellem: Great. Thank you and congratulations on great operational results.

Thor Pruckl: Thank you.

Operator: We will now take some questions from email.

Al Petrie: Okay. The first question that I have got here is, bear with me one second. Can you confirm the amount of $33.3 million in foreign income taxes payable in the balance sheet corresponds to the value of the pending in payment kind — in-kind payment?

Ron Bain: Okay. I will take that one, Al. Yes, is the short answer. The foreign tax payable is accrued in the balance sheet at the effective tax rate together with a foreign income tax adjustment and that’s a discrete item where we mark-to-market the Brent pricing at the end of the period. I think, there’s a question out there in relation to the amount of barrels and is it calculated at the end of each quarter or is it pending the lifting? I mean, what we do is the calculation is made each period and it’s calculated in barrels per the PSC. The period barrels are then added to the brought forward position and if the state is no lifting in the period, the last lifting that the state took was back in Q4 2022. So it’s been about a year since the state took a lifting.

Al Petrie: Okay. And the next one I have, the lifting that was done in early October, was that just for VAALCO or the Gabonese Government or both?

Ron Bain: That lifting in October was for the Etame JV partners and not for the state. Traditionally, the state elects to lift on their own.

Al Petrie: Okay. And I think that’s all that I had.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to George Maxwell, CEO, for any closing remarks.

George Maxwell: Thank you very much. I think it’s always good as it was in Q2 to come to the end of Q3 with a strong set of results, a strong set of performance, both in the production, operational side, driven in part by higher and increasing commodity prices. As we are more than halfway through Q4, our confidence levels for that performance continuing through Q4 are very high, and as I answered one of the questions previously, we look to continue to increase cash balances through this quarter. We are starting to see some of the benefits of the diversification of our asset base, the ability to overcome slight bumps in the roads in one jurisdiction supported by the others. As Ron mentioned, we have significantly allowed and included the synergies of the amalgamation that took place in Q4 of last year and the combined operation now is one of much greater efficiency than the two independent organizations were previously, but that also presents some challenges.

As Ron mentioned, we now have completed the integration and now we have to move forward as a larger organization, that means investment in some people, it means investment in systems and processes in order to ensure we overcome some of the difficulties that we had in our reporting structure in Q1. And that plan is in place and we will move forward with a much more integrated system that facilitates, one would hope, a faster reporting position into — by midyear, third quarter 2024. I still like to thank all of our staff. This doesn’t happen just because Ron, myself and Thor are sitting here talking. It happens because we have got a couple of hundred people to work 24×7 to give us the opportunity to present these results and I’d like to thank them and I look forward to talking to you again at the 10-K.

Thank you very much.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.