VAALCO Energy's Offshore Production Set to Bounce Back Amid Planned Repairs

Vaalco Energy's production hit "rock bottom" in Q2 as planned, with one FPSO undergoing repairs. Despite this, the company is focused on growth, with plans to increase production by 15% in 2024. Vaalco has a strong balance sheet and is well-positioned to capitalize on opportunities in the offshore oil and gas market.

Vaalco Energy (NYSE: EGY) reported that its production hit "rock bottom" in Q2 as planned, with one FPSO undergoing repairs. Despite this temporary setback, the company remains focused on growth, with plans to increase production by 15% in 2024. Vaalco has a strong balance sheet and is well-positioned to capitalize on opportunities in the offshore oil and gas market.

The company's CEO outlined that 2025 is a transitional year, which is important to keep in mind as this year’s number will likely be much weaker than the last. The company expects significant CAPEX in 2025, with about half going into the Ivory Coast project developments, even with a 10% reduction announced earlier. This is expected to reach between $250 million to $300 million excluding acquisitions [1].

Vaalco Energy's strong balance sheet includes $511.5 million in equity on a market cap of only $406.6 million, resulting in a PB of around 0.80. This is not bad, especially considering the balance sheet's health and the lack of current value of their assets. However, the company faces significant jurisdiction risks, as the governments they are exposed to can even nationalize these assets overnight. This is a much higher level of risk than an average American/Canadian/etc. company [1].

The company started paying a dividend in 2022, which now stands at ~6.4%, returning ~$100 million to shareholders. However, the company has recently issued $60 million in debt at a 10.8% per annum interest rate. It may be beneficial for the company to pause dividends and focus on their projects instead, as they can rapidly deteriorate the company’s financial health this way [1].

Vaalco Energy's growth potential is significant, with several projects in late stages of development. The company expects production to more than double from 2024 levels to over 50,000 BOEPD by 2027. This growth is expected to be driven by strong organic growth and value-accretive mergers and acquisitions. However, the company must navigate the risks associated with operating in Africa, where political instability and changes in policy can impact their operations [1].

The company's CAPEX plans and growth prospects make it an attractive target for larger players. A recent Dallas Fed Energy Survey showed that to profitably drill a new well in the Permian Basin, companies needed prices of ~$64 per barrel. This is very close to the level we are at today, which can already result in issues for many US oil companies. Vaalco Energy's growth potential and strong balance sheet make it an attractive acquisition target [1].

References:
[1] https://seekingalpha.com/article/4817623-vaalco-energy-high-risk-huge-reward-bet-on-african-oil