VAALCO Energy, Inc.

Hello, and welcome to the Valco Energy Third Quarter Earnings Conference Call. All participants will be in the Sonali 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. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. I now would like to turn the conference over to your host today, Al Petrie. Mr. Petrie, please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Valco Energy's third quarter 2021 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 more in-depth financial review. George will then return for some closing comments before we take your questions. During our question and answer session, we ask you to limit your questions to one and a follow-up. You can always re-enter the queue with additional questions. I would like to point out that we posted a Q3 2021 supplemental information 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. Valco 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 the reports we filed with the SEC, including the Form 10Q that was filed yesterday. Please note that this conference call is being recorded. Let me now turn the call over to George.

Thank you, Al. Good morning, everyone, and welcome to our third quarter 2021 earnings conference call. I am very pleased with our ability to execute on our strategic vision, and 2021 has been a banner year for Valco thus far. We nearly doubled our production with the acquisition of Sasol's working interest in Itami in February 2021. In June, we secured a jack-up rig for the upcoming 2021-2022 drilling campaign. In August, we finalised an agreement with World Carrier that will allow us to sustain our operational excellence and robust financial performance at Itami through 2030 with a new FSO solution that reduces costs by almost 50% when compared to the current FPSO and will reduce our overall field operating costs by approximately 17% to 20%. In October, we were provisionally awarded two offshore blocks as part of a consortium with BW Energy and Panoro Energy. This expands our presence and relationship in Gabon, a further indication of our investment commitment in Gabon. All three companies in the consortium are uniquely positioned since we have world-class discoveries in Gabon adjacent to these awarded blocks. We also recently announced that we have completed our feasibility study for the standalone development of the Venus Discovery in Block P in Equatorial Guinea, and we are moving forward now with a field development plan. We have also completed our planned annual full field turnaround maintenance on time and within budget in the third quarter. I'm also pleased to say we have already completed the second shutdown that was needed for maintenance on the FPSO that could not be completed at the same time as the full field turnaround. That second shutdown lasted six days and was started and completed in early October. Finally, we have successfully performed two workovers in September and October, which resulted in an increase to production As you can see, we are delivering on our strategic objectives and, in many cases, exceeding expectations, which has firmly placed Valco in a financially enviable position. Turning to the third quarter, we produced an average of 7,694 net barrels of oil per day, which was near the high end of guidance despite the annual seven-day field-wide turnaround. The third quarter reflected stronger sales and realized pricing, which drove revenue higher. This also helped to grow our adjusted EBIT DAX to $23.3 million in Q3 2021. In fact, we have now generated $63.2 million in adjusted EBIT DAX for the first nine months of 2021, which is almost the same amount as the previous two full calendar years combined. This has allowed us to grow our cash position to £52.8 million at the end of the third quarter in preparation to fund our 2021-2022 drilling campaign from cash on hand and from operational cash flow. We continue to be pleased with the ongoing strength of the oil price environment, and with a significant increase in production, we will continue to hedge opportunistically and lock in free cash flow and adjusted EBITDAX to assure we have the funds for our activities in 2022. Turning our attention to the future, our strategic vision is built on accretive growth through organic drilling opportunities and through acquisitions. We have used the 3D seismic that we acquired over at TAMI to maximise the impact of our upcoming drilling campaign. Additionally, we are de-risking future drilling locations and potentially identifying new drilling locations with further 3D processing. In June, we secured a contract with Board Drilling Limited to drill at least three wells, with options to drill additional wells. We are expecting the rig to begin drilling our first well, the Itami 88 sidetrack, in early December as planned. We will provide details on other planned drilling locations in early 2022, but we are very excited by the production upside of this campaign. As a reminder, assuming a successful drilling campaign, the estimated increase in gross fuel production is 7,000 to 8,000 barrels of oil per day or 3,500 to 4,100 net barrels of oil per day to Valco when the drilling campaign is completed in 2022. Hand in hand with the production increase will be margin expansion and per barrel cost reductions. About 90% of our production costs are fixed, and as production increases, our per-barrel costs will decrease significantly. Every new barrel we bring online is more economic because of the low variable costs, so as we grow production, we are also growing our margin per barrel and reducing our costs per barrel. From a capital standpoint, we estimate the cost of the drilling programme is between $117 and $143 million gross, or $74 to $91 million net to Valco. This is slightly higher than our estimates at the beginning of the year due to inflationary pressures on service and manpower. But given the current sustained higher oil price environment, the upcoming drilling campaign has the potential to generate significant additional free cash flow. In line with our strategy to be a low-cost operator, we are constantly looking at ways to reduce costs and improve margins. In August, we announced that we had signed and received partner approval for a new FSO solution. From an operating cost standpoint, our current FPSO costs are around about 40% of our total production expense. The new FSO will significantly reduce storage and offloading costs by almost 50%, increase effective capacity for storage by over 50%, and is expected to need an extension of the economic field life, resulting in corresponding increase in recovery and reserves at Itami. The new FSO agreement requires a prepayment of $2 million gross 1.3 net in 2021, which we paid in the third quarter, and $5 million gross $3.2 million net in 2022. These advanced payments will be recovered against future rentals. Additionally, current total field-level capital conversion estimates are around $40 to $50 million gross, $26 to $32 million net to Valco, with the majority of the capex being spent in 2022. This capital investment is projected to save approximately $20-25 million gross per year in operational costs through 2030, giving the project a very attractive payback period of only 2-2.5 years. The FSO solution is expected to greatly improve our margin per barrel and allow us to deliver more free cash flow to fund our future activities. In October, we announced an exciting new opportunity in Gabon. Valco has entered into a consortium with BW Energy and Panoro Energy. The consortium had been provisionally awarded two blocks in the 12th offshore licensing round in Gabon, with two exploration periods totalling eight years, which may be extended by a further two years. The consortium will now commence detailed production sharing contract discussions with the Gabonese government. The bid terms were won on a basis that Valco would pay a net $4.6 million signature bonus in total for the blocks when the blocks are officially awarded. BW Energy will be the operator with a 37.5% working interest. Valco will have a 37.5% working interest and Panora Energy a 25% working interest and both will be non-operating joint owners. The two blocks G12 and 13 and H12 and 13 are adjacent to Valco's Itame PSC as well as BW Energy and Panoro's Disafu PSC offshore southern Gabon. The majority of these two blocks are in water depth similar to Itame. Both Itame and Disafu have been highly successful exploration, development and production projects undertaken by the consortium members over the past 20 years with approximately 250 million barrels discovered to date. As you can see, this consortium is uniquely positioned with the knowledge, experience and expertise of progressing world-class discoveries in Gabon adjacent to these awarded blocks. The consortium bid with the intent to shoot 3D seismic on Block G and reprocess existing data on Block H during the first exploration term and has agreed to drill an exploration well on each block. We don't expect to shoot the new seismic until 2023, with any drilling to occur after that. The existing seismic on both blocks indicates several opportunities and our goal will be to efficiently and effectively explore, develop and potentially produce additional resources in Gabon. We believe that this opportunity fits perfectly with our strategy to maximise shareholder returns in the area we know best in West Africa. Another area that holds significant future potential for Valco is Equatorial Guinea. We have a substantial working interest in Block P and we are evaluating several development step out and exploration opportunities on our acreage. We are excited about our opportunities on the block and believe it makes sense to move this project forward with a more definable timeline for potential development. This summer we completed our drilling feasibility study for the standalone development of Venus Discovery in Block P and we are moving forward now with a field development concept. As we work through the development concept, we will provide more details about potential timing, capital costs and reserves and production estimates. We are committed to profitably exploiting the resource potential of our assets and EG could become a significant operational asset moving forward. Before I turn the call over to Ron, I would like to briefly discuss the workovers that we performed in September and October. We began the workovers in late September and utilised Valco's mobile hydraulic workover unit, which was purchased in early 2021, to rapidly mobilise and replace the electrical submersible pump, the ESP units, cheaper and more effectively compared to using a drilling rig. Also, by performing the workover sequentially, we saw significant cost savings. The first workover that we completed was on the Aburi 2H well to replace and upgrade the longest producing ESP unit, Atatame. The successful replacement increased production from 500 barrels per day, 294 net, prior to the workover to approximately 1,400 barrels a day gross, 730 barrels net in mid-October. The second workover was to replace the upper and lower ESP units and reconfigure the ESP design at the TAMI 12 H well. Production was restored in late October at a rate of approximately 1,800 barrels a day gross. In October, we completed an additional six-day turnaround to accommodate the necessary FPSO maintenance we discussed last quarter. Taking into account these quarter events, we have narrowed the range of our annual guidance to be between 7,000 and 7,200 barrels of oil per day. As a reminder, since our 2021-2022 drilling campaign doesn't begin until December, there is no production uplift from that drilling campaign in 2021, but we should see significant uplift in 2022. For sales volume, we have also narrowed our guidance to between 7,350 and 7,550 barrels per day. As we have discussed before, sales volume do not always equal production volumes due to timing and size of listings. Going forward, we plan to provide sales volumes guidance on an annual and quarterly basis. In summary, there's a lot to be excited about as we finish 2021 and enter 2022. I would like to thank our hardworking team here at Valco who continue to operate and execute on our strategic vision of increased growth and free cash flow generation. As you can see, we are firmly focused on maximising shareholder return opportunities, our sustainable quarterly shareholder dividend policy that we announced yesterday, all while maintaining upside and operating with the highest regards towards ESG, while we progress our strategic objectives focused on accretive growth. With that, I would like to turn the call over to Ron to share our financial results.

Thank you, George, and good morning, everyone. Let me begin by saying I'm also very pleased with our operational and financial performance, as well as all of the strategic accomplishments that we've been able to enact over the past few months. Turning to our financials, adjusted EBITDA X totaled £23.3 million in the third quarter of 2021, compared with £21.9 million in the prior quarter, and more than tripled the £7 million in the same period of 2020. We've benefited from increased sales volumes and higher realised pricing. In fact, thus far in 2021, we've generated 63.2 million in adjusted EBITDA X, which, as George mentioned, is almost equal to the full years 2019 and 2020 combined. This has allowed us to fund our strategic initiatives with cash flow, while building our cash position to £52.8 million as at 30 September 2021, in preparation for the 2021-22 drilling campaign. Additionally, we reported strong net income of £31.7 million, or 53 cents per diluted share, in the third quarter of 2021, which included a £22.7 million non-cash deferred tax benefit that I will discuss in more detail shortly. After normalising for the deferred tax benefit on the unrealised derivatives loss, our adjusted net income for the third quarter of 2021 totalled £10 million or 17 cents per diluted share, as compared to an adjusted net income of £8.4 million or 14 cents per diluted share for the second quarter of 2021. In the third quarter of 2020, Valco reported £2.3 million in adjusted net income or 4 cents per diluted share. Daily production for the third quarter was 7,694 net barrels of oil per day, down compared to 8,018 net barrels of oil per day in the second quarter of 2021, which was as expected due to the annual planned seven-day field-wide maintenance turnaround. Third quarter 2021 production was up 75% from the third quarter 2020. Sales volumes in Q3 2021 were up 15% from the second quarter and up 80% compared to the same period in 2020. The increase in volumes year over year is again primarily due to the additional SASL interest. Our crude oil price realisation increased 5% to 73.02 per barrel in the third quarter of 2021 versus 69.61 per barrel in the second quarter of 2021 and was up 67% compared to 43.63 per barrel in the third quarter of 2020. Our hedging strategy for 2021 has been to lock in production volumes at attractive prices to protect cash flow and assure funding of our capital programme in 2021 and 2022, but still allow for additional upside. We took similar action in 2019 before we began our last programme, and we will continue to assess our needs to mitigate price risk and protest cash flow in the future as we consider any additional future derivative contracts. Our full hedge position can be found in yesterday's earnings release as well as in our Q3 supplemental information presentation on our website. Turning to expenses, production expense excluding workovers for the third quarter of 2021 was £21.4 million. The third quarter was higher than the second quarter of 2021, primarily due to the planned annual full-fuel maintenance turnaround. Costs were more than double the third quarter of 2020 due to 80% higher sales and the increase in working interest associated with the SASL acquisition. The per unit production expense excluding workovers of $28.85 per barrel in the third quarter of 2021 increased as compared to the $25.02 per barrel in the second quarter of 2021 and $20.21 in Q3 2020 with some inflationary pressures seen on our marine expenses. Given these inflationary pressures, we are narrowing our guidance range from production expense, excluding workovers for full year 2021, to the high end of the previous range at 72 to 74 million, or up 90 cents at the midpoint on a per barrel of oil sales. As George mentioned, we had one workover in process at the end of the third quarter and completed the second workover in October. As a result, the workover costs are now spread over the third and fourth quarters. In the third quarter we recorded $3.8 million for work overs and our full year guidance is between $9 and $10 million. DDA for the third quarter of 2021 was $7 million or $9.41 per net barrel of all sales compared with $5.8 million or $9.05 per barrel in the second quarter of 2021 and $2.2 million or $5.37 per barrel in the third quarter of 2020. DD&A was higher comparable to the prior year due to the higher depletable costs associated with the SASL acquisition. Our asset base for the SASL acquisition was valued at fair market value in a stronger pricing environment than which we negotiated the deal price. While we haven't given DD&A guidance in the past, the rate you saw in the past two quarters at about $9 to $10 per barrel is not likely to change much until we get into our next ruling campaign and add capital costs and potentially more reserves. General and administrative expense for the third quarter of 2021 excluding stock-based compensation expense was £2.9 million compared with £4.2 million in the second quarter of 2021 and £2.4 million in the third quarter of 2020. The decrease in Q3 2021 compared to Q2 2021 was a result of additional severance costs associated with changes in key personnel recorded in the second quarter. The per unit G&A rate excluding stock-based compensation in the third quarter of 2021 of $3.93 per barrel of oil sales was significantly lower than both the second quarter of 2021 and the third quarter of 2020 due to lower costs and higher sales. For the full year, given the severance cost experience, we are forecasting G&A excluding stock-based compensation to be between $12 million and $13 million. Non-cash stock-based compensation expense for the third quarter 2021 was not material. For the third quarter 2021, the stock-based compensation expense, excluding expense related to SARs, was £0.3 million, which was mostly offset by SAR's stock-based compensation benefit of £0.3 million. For the second quarter of 2021, the stock-based compensation expense was 0.5 million and was comprised of non-SARS-related expense of 0.1 million and SARS-related expense of 0.4 million. For Q3 2020, the stock-based compensation expense was a benefit of £0.2 million, which included non-SARS stock-based expense of £0.2 million and SARS-related benefit of £0.6 million. Turning now to taxes. Income tax was a benefit for the three months ended September 30, 2021 of £17.2 million. This comprised of a £22.7 million of a deferred tax benefit and a current tax expense of £5.5 million. In the third quarter of 2021, we determined a partial release of the valuation allowance on our deferred tax assets was warranted due to improving oil prices and other factors that indicate that Valco will utilise a portion of its deferred tax assets. Income tax expense for the three months ended 30 June 2021 was £2.8 million. This was comprised of £3.3 million of deferred tax benefit and a current tax expense of £6.1 million. Income tax benefit for the three months ended 30 September 2020 was a benefit of £2.8 million and included £5.3 million of deferred tax benefit and a current tax expense of £2.5 million. For all three periods, the overall effective tax rate was impacted by non-deductible items associated with operations and deducting foreign taxes rather than crediting them for United States tax purposes. I'd like to refer you to a slide in our supplemental information deck that we posted to our website this morning. We've updated our netback slide that reflects strong cash flow we are generating at the current prices. At September 30, 2021, we had unrestricted cash balance of £52.8 million, an increase of almost £30 million over the prior quarter. This was a result of operating income and a trade receivable as of June 30 that converted to cash during the quarter. Working capital at September 30, 2021 was £0.8 million compared with £-9 million at June 30, 2021, while adjusted working capital at September 30, 2021 totalled £13.5 million compared to £4.3 million at June 30, 2021. For the third quarter of 2021, net capital expenditures excluding acquisitions totaled £4.2 million on a cash basis and £6.7 million on an accrual basis. For the first nine months of 2021, Valco has invested £8.5 million on a cash basis and £11 million on an accrual basis. These expenditures were primarily related to early costs associated with the 2021-2022 drilling programme, the purchase of a mobile workover unit, equipment and enhancements, as well as general maintenance capital expenditures. With that, I'll now turn the call back over to George. Thanks, Ron.

The future is very bright for Valco and this is a very exciting time for Valco. We remain focused on growing Valco and providing sustainable returns to our shareholders. We have a strong asset base at Itami that is generating meaningful free cash flow and adjusted EBITDAX in the current pricing environment, which is evidenced by our results. Sustained operational excellence and robust financial performance at Itami serves as the foundation for growing Valco through organic drilling and future accretive acquisition opportunities in line with our strategy. We have grown our cash position in anticipation of the next drilling programme and to fund our FSO conversion at Tatami, both of which will enhance our ability to generate cash flows in the future. But we are not simply looking to maintain production in Gabon. There are meaningful development opportunities across our assets. In December, we will begin another drilling campaign at Itami, and with our recent additional hedges, we have locked in sufficient cash flow generation from operation to fund this program and desensitize the risk of oil price movement. We're very excited to have been awarded the new blocks in Gabon as part of the consortium with BW Energy and Panoro. The blocks are adjacent to our existing Itami field, and we believe they hold tremendous potential to help us establish sustainable long-term production in Gabon. We have completed our drilling feasibility study for the standalone development of the Venus Discovery at Block P in Equatorial Guinea, and we are moving forward now with a field development concept. Itami, Block P and potentially now the new blocks in Gabon can enhance our business and provide a strong platform for organic growth, allowing Valco to build size and scale in West Africa. As we continue to generate significant free cash flows to fund our capital expenditures, we continue to evaluate ways to return some of that free cash flow to our shareholders. Our board considered several alternatives to providing a meaningful return to our shareholders and believe the implementation of a sustainable quarterly cash dividend is the right approach for Valco, based on a strong balance sheet and ability to generate meaningful free cash flow. We feel that it is important for E&P companies to return cash to shareholders and the Board's decision to initiate this dividend policy reflects the strength of our business and their confidence in Valco's future. We believe that prudently returning value to shareholders can complement our growth strategy and offer shareholders multiple ways to create value. As you can see, we are firmly focused on maximizing shareholder return opportunities and operating with the highest regards towards ESG while we progress our refreshed strategic objectives focused on sustainable and accretive growth. Thank you, and with that, operator, we're ready to take questions.

Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, Please pick up your handset before pressing the keys. To try your question, please press star then two. At this time, we will pause momentarily to assemble the roster. And the first question comes from John White with Roth Capital.

Good morning.

Morning, John.

Morning, Joe.

Well, congratulations on the very nice results. Production was in line with what I was expecting. You put up a nice – you beat me in a nice margin on EBITDA, and I really applaud you for initiating the cash dividend. You've put up a real robust amount of dividend that reflects a very generous annual yield, as you mentioned, certainly in line with current industry trends. It looks like you're all set on the 2021-2022 drilling campaign. You've got your jack up rigged. So good luck on that. On the new blocks in Gabon, the G12-13 and H12-13, has the reprocessing of seismic started there yet?

No, it hasn't. So where we are, we've got on one of the blocks, we've got seismic coverage, which would start with reprocessing. And that's what we anticipate will be the majority of the work through 2022. We don't anticipate until late 2022, early 2023 to look at any further seismic acquisition. So it's really just a reprocessing activity in 2022 post the negotiation of the block awards.

Okay, that's very helpful. That was going to be my next question. And is Valco going to be the primary lead on evaluating the reprocess size?

It will be in conjunction with our partners. BW Energy are the operator at the moment, and we will review that as and when the opportunities and discoveries are made on each of these blocks. But we will have a very, very active participation in the interpretation. Okay. Go ahead. Sorry, John. I was just going to say, and you can see that the level of our activity in the equity percentages of the blocks where we are level with BW. So we're standing shoulder to shoulder on these two.

Okay. Okay. Thank you for that. I know you've done a lot of work in Africa. Have you been in wells with BW before?

No, I haven't. I've worked with BW previously in Africa on the service side where they have supplied equipment to companies that I've run, but I've never worked with them directly on the E&P side. I think when looking at BW Energy, You know, they've got this asset in Africa, and they've got an asset over in Brazil. So this will be the first time we've worked in partnership. But the companies are closely linked. We know all the same people.

Well, that's kind of how the West Africa works, isn't it?

Yeah.

Okay, well, everything is, you know, you're running on all cylinders, so... Those are, that's my question. I'm finished with my questions. Very nice results. Congratulations.

Thank you, John.

Thanks, John.

Okay, thank you. And the next question comes to Charlie Sharp with Canaccord.

Yes, good morning, gentlemen. Thank you very much for the update. That was very comprehensive. Two questions, if I may. The first one is on the CAPEX for the upcoming drilling program. Obviously, the bottom end of the range has barely moved, but the upper end of the range has shifted quite a lot upwards. In fact, there's an increased range that you've given. What is it that determines where you will actually fall in that range? Is it the work program involved, or is it just an anticipation of further cost pressure? Secondly, on the dividend, are you thinking about dividend in terms of, for example, a percentage of free cash flow? How should we think about that going forward?

I'll take the question on the drilling program, and I'll let Ron answer the one on the dividend. The drilling program, what we've tried to show in the guidance is maximizing the opportunity we have with the drilling rig at this time. So at the moment, we have a contractual commitment for three wells, and we have options for a further five. And we've tried to balance our CAPEX guidance in with the opportunity of perhaps extending. We've said we're going to do a four-well program, but perhaps extending that. So that's where the upper end of the of the guidance is there that is a little bit of cost pressure and a little bit of potential of an additional well.

Yeah, I mean, I'll just add a little bit more color to that as well, George. What I would say as well, Charlie, is that I don't think any of us expected it would still be in, you know, COVID quarantine situation going into 2022 when we first looked at the CAPEX program a while back. But Gabon's quite a bit behind on the vaccination, which means that at the moment we're still quarantining all our personnel, contractors and staff, which adds cost to the cap that's come in as well. But yet we're also seeing some inflationary pressure, as we've mentioned. Moving to the dividend, I think on the dividend side of it, we're more interested in a sustainable long-term dividend that we know we can pay out rather than directing a composite of percentage of free cash flow. I think that would be something that we would consider if commodity prices are remaining high and we get into our drilling program and we've got line of sight in our production, that would be maybe something we take a look at. But we feel that what we've got on the table at this point in time is a long-term sustainable dividend that we've committed to.

Okay, that's great. Thank you.

Thank you. And the next question comes from Matt Dane with Teton Capital Management.

Great, thank you. I wanted to discuss the workovers that you folks tackled here. The first, the 2H well where production jumped up to 1,400 barrels per day versus the 500 prior to the workover. Is this steady state production now at this current time? And then what allows such a dramatic stepover in production with this workover?

Okay. I mean, we've quoted the mid-month position of 1,400. We will expect to see some decline on that, Matt. So it will gradually go down towards the end of the year, down towards 1,100. And the real benefit of this on the workover was the improved access into the reservoir where we thought we perhaps had a skinning issue in the work over initially and going down and performing that work over and the re-perforation is increasing those flows. We've also got to take into consideration that this particular well will be shut in for some time and we'd have some reservoir build up and get the cost production out of that.

Great, thank you. I also wanted to touch on the drilling program really quickly here. With the first well expected to be spread here early next month, I was curious, with that in mind, what is your current expectations for the first well to come online for production from that drilling program?

Yeah, we'd expect that first well to be working around coming on to completion and hook up by towards the end of January, early February. Okay, okay.

And then the factors that are playing a role in your decision to drill more than four wells, can you walk us through what are some of the key factors that you'd look at that would lead you to drill more than four? Yeah, some additional color there would be great.

Yeah, I mean, they're relatively simple. I mean, we've put a budget together at a certain price, and if the commodity prices stay high and the available cash flow is there for the company, we'll look at, opportunities beyond that for well locations that we have worked up. The reason we contractually put the position in with the rig was to give us that optionality. So if we can look at options of wells that are ready to drill where we have the equipment and obviously you'd expect us to be in that position already and the paybacks on those wells. So if they're cash generative in 2022 at the higher commodity prices then that gets into almost the no-brainer category for me. What we've done and completed in the 2022 budget is try to put together a balanced portfolio between investment and returns. And in that balanced portfolio, as we have today, made certain commitments and statements to market that we are confident and sure that we can deliver. If we have a position of sustained higher commodity prices, then obviously we have opportunities to re-address that balance portfolio either through additional investment or additional returns.

Great.

Thank you, George.

Thank you. And the next question comes from Jamie Weiland with Weiland Management.

Hi, fellas. Nice job out there. A couple different areas. I don't know if you discussed Equatorial Guinea and when you'd expect to begin that and what Any expectations for the cost of drill over in that area?

Yeah, I mean, we're, as we said before, we've been spending a lot of time on the drilling campaign and the feasibility of the drilling study because it's doing a, the long reach drilling that we're doing, we wanted to spend a lot of time making sure that it was achievable before we started to talk about the Venus development as a reality. We continue to refine these processes. As I said in my earlier statement, we're looking to get to a proof of concept or field development plan before the end of this year. That takes a number of forms. What we're looking at right now is engineering challenges we've set in place to try and target F&D costs at a level where we can have a robust development at lower oil prices and we're looking to get a robust development that can be more than economic at sub 50 oil and that's the challenge we've got in the engineering section so we continually look at how many wells would we need the timing of the wells the efficiency of the wells to see if we can stagger those capex investments over a multi-year period rather than having to put multiple wells up front prior to production. Those kinds of analysis are still out there, and we're still working on that, and we haven't come to a landing. But we certainly still hope to be there before the end of this year. With regard to the cost of the drilling wells, they're more or less in the same region as they are in Gabon, because similar water depths. So we're looking at around about $30 million per well.

And in the block that you were just provisionally awarded in Gabon, it's kind of surprising. It's right in between two incredibly productive fields. It's surprising that this block has been sitting there vacant and unawarded for a long time. Any particular reason why it was now offered and you were able to secure it?

It goes back to history. If we look at what the blocks originally were, a lot of that acreage was originally within the existing blocks for Dasapu and for Valco. On turning the blocks commercial, on renewing the licenses, we're forced to relinquish certain acreage. So a lot of that area was previously ours that we had to relinquish to move forward with the family development and move forward with license renewal. So it's never been an area that we've said we're not interested in. It's always been an area where, particularly when we've been looking at the reprocessed seismic and when you look at the geology between ourselves and Dasafu, again, it gets into the category We wouldn't want anyone else to be in that area because we're excited about it and we understand the area very well. So it's not a case of it's been sitting around for a while. It came out of the existing structure and our relinquishment. The Gabonese, the DGH, did try to do a bid round on this a couple of years ago. They didn't get the kind of pricing that they were looking for and they cancelled it. They came back and put that big round back up again last year, and we participated. And the decision to go in a consortium rather than a loan was more one of economics, because as you can see in the slide that we have on the slide deck, I think it's slide eight, if you look at the opportunities that exist in those two blocks with the developments that we have and the developments that BWE have, We're giving ourselves maximum evacuation opportunity and minimizing the cost structure for evacuation if we're in a consortium.

Excellent. And also on the new FSO, could you go over a little bit of the accounting for that? The capital costs, I assume, are amortized, but the expense reduction obviously is a direct bottom line cost savings. Is that correct?

Yeah, so when we're looking at the cash savings, that's what we've reiterated out there. They're quite right in raising the point that our team are actually looking at the accounting aspects of it now, but it's likely to be a financing lease. So it will be treated differently with a right of use asset onto the balance sheet and DD&A. But when we've been looking at any comparison with the FPSO and the operating lease that we have there, we've always looked at this on a cash basis.

Gotcha. And lastly, I applaud the dividend. Just wanted to ask one question. How did you arrive at, was there a little board discussion to arise at an uneven rate like that?

Well, as you can imagine, there was a lot of discussion as to what was the most appropriate method of shareholder return. And I think As I said in answer to one of the earlier questions, what we tried to present to the board in the look forward from 2021 to 2023 was a balanced portfolio, and we did that at a certain price. We're confident in that balanced portfolio that we can more than achieve that return comfortably without putting any kind of stress pressure on cash balances, but we've maintained the upside of the current strip pricing if we see the higher commodity prices. So, it wasn't, it was more looking at an absolute allocation in the cash balances rather than coming up with a composite rate of return.

David Morgan And lastly, as I look at the presentation and current oil prices without adding any benefit to the drilling program that's expected to begin, I come up with $90 to $100 million of income for Valco somewhere north of $1.50 a share or in that ballpark. Am I reading all this correctly?

I'll pass that one to Ronan. Yeah, I think I need to look at that. I really just point back to the guidance that we've been given, we've provided out there. I'm happy to take that one offline with you and go back through in that guidance. But, you know, the areas that we're seeing at this point in time, you know, we've basically reiterated our netbacks that were presently provided. We're on guidance, and we have been on guidance now for the year on production and sales. So, yeah, I really can't see any more than that.

Okay. Great strategic plan you guys have articulated and well presented in your presentation that you put online today. Thanks, fellas.

Thank you. Thank you. And next we have a follow-up from John White with Roth Capital.

Thank you. With the initiation of this robust dividend, does that take the place of the possibility of a stock buyback program?

No, it doesn't. I've stated ever since I took this role my commitment to growing the company with its existing cash flow and returning value to investors in whatever form that takes. So it doesn't, this is not excluding the opportunity to go in and give other forms of shareholder returns next year.

Thank you very much.

Okay, I have two questions that were emailed to us from our analyst, Stefan Foucault at Octus. And the first one is incorporating better visibility of the timing of the 2021-2022 drilling program the impact of recent workovers and natural decline, where would you see production next year?

Yeah. Well, I think we're not giving 2022 guidance at this time, because obviously the drilling program is dependent on a success case. And we've given a range of where we see the success of that drilling program. And we see that as between 7,000 to 8,000 barrels gross. And I think that's about as much guidance as I could give on that kind of activity.

Okay. The second and last question, do you see additional CapEx items in the 2022 activity program in addition to the FSO and the 2021-22 drilling program detailed today? If yes,

would this be and what would be the associated capex again um i don't see any additional capex in the fso and i think that's um what i'd like to say there is we've signed the contracts we're confident on our execution uh we've set up three project teams to manage the the fso to manage the fpso change out and to manage the infield modifications on the capex site so For that changeover, we're very confident that we've got the right team in place and the right contracts in place for execution. I guess I already kind of answered that when we gave John Charlie's question with regard to the drilling topics, we have given ourselves a little bit of flexibility there to increase the scope of the drilling program insofar as we can see a near-term economic benefit. I don't see us going beyond that at this time, but there wouldn't be, I don't see any more significant topics in drilling for Itami at the moment. The only, as we mentioned earlier on block G and H, the only thing we've got there on topics is basically the bonus, which is signature bonus. And this is why, again, I think it's a, It's a really good deal for Valco and for BW Energy and for Panoro Energy to go into a consortium. Basically, it's in our backyard and going in together. We're reducing the exploration cost risk. So the signature bonus for us is down to $5 million for both blocks, which is an exciting price. So I think that whole deal is a very accretive deal, could be an exceptionally accretive deal, for Valco and the method we've posted.

Thank you. And this concludes the question and answer session. I now would like to return the floor to George Maxwell for any closing comments.

Keith, thank you very much. I thank everyone for the questions and their attendance. I'd also like to thank the staff. We've pulled this forward one week earlier, so our finance group and our technical staff in Houston have have worked hard to take a week out of this program, and I'm very pleased for that, and it gets us our ability to communicate to market earlier. I think we're, and I hope you're seeing a resurgence and a redirection of where the company is planning to go and how we communicate, and we always communicate on the basis that, you know, we tell you what we plan to do, and we certainly plan to execute it, and we do that with a level of confidence and comfort, both from the staff we have the assets we have, and the forecasting cash flows that we're putting in place. So I'd like to thank everyone for their attendance today, and I look forward to talking to you again in the near future.

Thank you. The conference has now concluded. Thank you for attending today's presentation. Renatus