VAALCO Energy, Inc.

Good day, and welcome to the Valco Energy Year-End 2021 Earnings Conference Call. All participants will be in listen-only 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. Please note this event is being recorded. I would now like to turn the conference over to Al Petrie, Investor Relations Coordinator. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Valco Energy's fourth quarter and full year 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 Q&A session, we asked you to limit your questions to one and a follow-up. You can always re-enter the queue with additional questions. I'd like to point out that we posted a Q4 2021 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. Falco 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 Securities Exchange Commission, including our Form 10-K. 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 fourth quarter and full year 2021 earnings conference call. Our ability to execute on our strategic vision is evident in our 2021 operational and financial results. This past year was one of the best in Valco's history, and 2022 could be an even better one. Production in 2021 was up by almost 50% over 2020, driven by the acquisition of Sasol's working interest at Itami in February 2021. In June, we secured a jack-up rig for the 2021-2022 drilling campaign, which began in December. Our first well was a development well, the Itami 88 sidetrack, which was highly successful, came online in February and exceeded our internal forecasts. We then moved the rig from the Atami platform to the Avuma platform and are currently drilling the Avuma 3H sidetrack development well. In August, we finalized an agreement with World Carrier for a new FSO solution that costs almost 50% less than the current FPSO and will reduce our overall cost by approximately 17% to 20%, thus allowing us to extend the economic life at Atami while increasing our margins and profitability. We successfully performed two workovers in September and October, which resulted in an increase to production of approximately 1,050 barrels of oil per day gross, or 540 barrels of oil per day net to Valco. In October, we were provisionally awarded two offshore blocks as part of a consortium with BW Energy and Panoro Energy, adjacent to established development fields at Itami and Disafu. We also are moving forward with a standalone field development concept of the Venus Discovery at Block P in Equatorial Guinea. In November, we announced that our board established a quarterly cash dividend policy to return cash to our shareholders, and we are paying our first quarterly cash dividend later this month. We also announced the outstanding results of our year-end reserves, with approved SEC reserves increasing by 250% to 11.2 million barrels of oil, and our 2P CPR reserves increasing by 88% to 19.5 million barrels of oil. 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 our fourth quarter and full year 2021 operational and financial results, we produced an average of 7,554 net barrels of oil per day, which was above the midpoint of guidance. And for the full year 2021, we produced 7,119 net barrels of oil per day, an increase of over 46% over 2020. We continued with strong oil sales in the fourth quarter, reporting 709,000 barrels sold. For the full year 2021, we sold 2.7 million barrels of oil, which was an increase of 67% over 2020, primarily due to the SAS oil acquisition. We continued to see rising oil prices and saw price increases every quarter in 2021, which drove revenue significantly higher as well. Our adjusted EBITDAX was £22.6 million in Q4 2021 and £85.8 million for the full year 2021, which is more than triple what we generated in 2020. These factors enabled us to build a significant cash position, providing more than sufficient line of sight to fund our 2021-22 drilling campaign, FSO conversion capital and dividend from cash on hand and operational cash flow in 2022. We continue to be focused on our production levels through this period of high oil prices. Turning our attention to the future, our strategic vision is built on accretive growth through organic drilling opportunities, expanding our margins and accretive acquisitions. We have used the 3D seismic that we acquired over Atami to maximise the impact of the 2021 and 2022 drilling campaign. Additionally, we are de-risking future drilling locations and potentially identifying new drilling locations with further 3D interpretation. In December, we kicked off our drilling campaign on the Itami platform with the Itami 8H sidetrack development well. In February, we reported that we completed and placed the 8H sidetrack well online with an initial flow rate of approximately 5,000 gross barrels of oil per day or 2,560 barrels of oil per day net to Valco. After these strong results, we choked the well back for reservoir management purposes to just over 4,000 gross barrels of oil per day. The new well will go through a natural decline and we continue to monitor its performance which currently exceeds our initial estimates. We are currently drilling the next well in the programme, the Avuma 3H sidetrack development well and expect to have results on the well in the coming weeks. The rig will stay on the Avuma platform following the 3H sidetrack development well to drill the third development well in the programme. As a reminder, we initially said that with a successful drilling programme, the estimated increase in gross field production could be 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 four-well drilling campaign is complete in 2022. We are well on our way to meeting those initial expectations. Hand in hand with the production increase will be margin expansion and per barrel cost reductions. As we have previously advised, about 90% of our production costs are fixed, and as production increases, our per barrel costs will decrease. Every new barrel we bring online is more economic because of the low variable costs. So as we grow production, we're also growing our margin per barrel and reducing our costs per barrel. From a capital standpoint, the estimated cost of the 2021-2022 drilling programme in 2022 is expected to be between $65 million to $75 million net to Valco. Given the increased oil price environment, the upcoming drilling campaign has the potential to generate significant additional free cash flow and the returns on these investments should be very strong. With the drilling program at Atami progressing forward nicely, we are also managing our FSO solution projects simultaneously at Atami, which will reduce costs and improve margins. In August we announced that we had signed and received partner approval for a new FSO solution. The new FSO will significantly reduce storage and offloading costs by almost 50%, increase effective capacity for storage by over 50%, and lead to an extension of the economic field life, resulting in a corresponding increase in recovery and reserves at Itami. Last week we announced that all of the associated engineering, long-lead equipment, and significant contracts for the FSO are proceeding in line with the projected timelines, which has the expected deployment of the FSO in the third quarter of 2022. Field reconfiguration activities are expected to begin later this month, as planned. The Cap Diamond, a double-hulled crude tanker built in 2001 that is being re-engineered as the new FSO, arrived at a shipyard in Bahrain in late February for the final modifications and certifications. We are expecting that the vessel will begin sea trials in late June before being mobilised to Gabon. Current estimated capital costs with the FSO conversion and field reconfiguration in 2022 are expected to be between $25 to $30 million net to Valco, which are in addition to our 2021 and 2022 drilling campaign costs. This capital investment is projected to save approximately $13 to $16 million net to Valco in operational costs through 2030, giving the project a very attractive payback period of only about two years. Turning to reserves, we are very pleased with the substantial growth of our reserve base. The approved reserve increase resulted from a combination of positive factors including improved well performance, Hitami Field Life Extension, resulting from our changeover to a more cost-effective FSO this year, HUD additions, positive oil pricing revisions and acquisitions. SEC-approved reserves at year-end increased 250% to 11.2 million barrels, with 7.2 million barrels improved developed reserves and 4 million barrels improved undeveloped reserves. Three main factors for the increase in our SEC-approved reserves were the acquisition of Sasho's interest at Itami, which added 2.6 million barrels, positive pricing revisions, which added 3 million barrels, and 5 million barrels due to positive well-performance revisions and FSO-related field life extension. As in prior years, we continue to see positive reserve revisions due to well-performance, which demonstrates the strength of our premier Itami asset. These additions were partially offset by 2.6 million barrels due to full year 2021 production. The PV10 value of approved reserves utilizing SEC pricing at $69.10 per barrel of crude oil increased to 99.3 million, more than 6.5 times of PV10 of 14.7 million as at December 31, 2020. That pricing used in the 2021 calculation is still significantly below the current STRIP pricing. We're also pleased with the increases we saw in our 2P CPR estimate, which includes proven and probable reserves using Valco's management's assumptions for future Brent escalated crude oil pricing and cost reported on a working interest basis prior to deductions for government royalties. The year-end 2021 2p CPR increased 88% to 19.5 million barrels compared to 10.4 million barrels as at December 31, 2020. The PV10 value of Valco's 2p CPR reserves at year-end 2021 is 183.7 million, up 117% from 84.4 million as at December 31, 2020. In October, we announced an exciting new opportunity in Gabon. Valco has entered into a consortium with BW Energy and Panoro Energy. The consortium has 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 two blocks, G12 and 13 and H12 and 13, are adjacent to Valco's Itami PSE, as well as BW Energy and Panora's Disafu PSE offshore southern Gabon. The majority of these two blocks are in water depths similar to Itami. Both Itami and Asifu 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. The consortium is working through detailed production sharing contract discussions with the Gabonese government. 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. Last summer we completed a feasibility study for the standalone development of the 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. Turning to our ESG efforts, we recently hired a full-time ESG manager who will be based in Houston. We will begin drafting our annual ESG report shortly, which will continue to show the progress we're making towards improving our environmental, social and governance metrics. Let me now review our production and sales volume guidance before I turn the call over to Ron. In the first quarter, we had a TAMI 8H sidetrack well come online in February, which boosted production ahead of our planned production levels for this well. Unfortunately, we had some operational issues in February that temporarily impacted our production. Abnormally strong currents caused a short delay in the planned lifting from the FPSO as the crude oil tanker could not get moored safely. This caused us to reduce production for a few days since the FPSO was at near capacity. Additionally, to accommodate the drilling of the Avuma 3H sidetrack development well, we had to shut in production from the platform to allow the rig to move into position and begin drilling. This occurs whenever a jack-up rig is mobilised to drill a well and happened when we began the Itami 8H sidetrack well on the Itami platform. As a result of the shortening at Avuma, oil flow from the pipeline that transmits oil from the Avuma and Scent platforms to the FPSO operated at a lower volume than usual. This, in combination with a chemical imbalance in the fluids in the pipeline, caused a paraffin buildup, resulting in a temporary blockage in the pipeline. We had to shut in production at the Avuma and Scent fields for more than a week. we were able to restore production after running some chemicals to remove the power from build-up. These are the major factors as to why our first quarter 2022 production guidance is between 8,000 and 8,300 NRI barrels of oil per day, or 9,200 to 9,550 working interest barrels of oil per day. I would like to point out that the Q1 midpoint is still an increase of 8% over our Q4 2021 production number, despite the issues faced in the quarter. Because of a temporary lifting delay in a second lifting schedule for the end of March, our sales for the first quarter will be lower than production. For the first quarter, our sales are expected to be between 6,600 and 6,900 NRI barrels of oil per day, or 7,600 to 7,950 working interest barrels of oil per day. If oil prices continue to rise, this could be beneficial as we may receive higher prices on the lifting in Q2 than we would have received in Q1. For the full year, we are guiding production to be between 9,500 and 10,500 NRI barrels of oil per day, or 10,900 to 12,050 working interest barrels of oil per day. Also for the full year, we are guiding sales to be in the same ranges as production, so we're expecting that the lower sales in Q1 will be made up in Q2 and Q3 in 2022. As you can see, we're projecting strong growth in production in 2022, an increase of about 40% year over year at the midpoint of our 2022 guidance range. In summary, there is a lot to be excited about as we enter 2022. I would like to thank our hardworking team here at Valco who continue to operate and execute on our strategic vision of accretive growth and free cash flow generation. 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 strategic objectives focused on accretive growth. With that, I'd like to turn the call over to Ron to share our financial results.