VAALCO Energy, Inc.

Good morning and welcome to the ValPAL Energy first quarter 2022 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. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Al Petre, Investor Relations Coordinator. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to Valco Energy's first quarter 2022 earnings 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'd like to point out that we posted a first quarter 2022 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 have 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 follow with the SEC, 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 first quarter 2022 earnings conference call. We continue to execute on our strategic vision built around accretive growth while creating and returning value to our shareholders. Production in Q1 2022 was up 6% and adjusted EBITDA increased by 49% over Q4 2021. We have now successfully drilled, completed and placed on production the first two development wells of our current drilling campaign at Itami. Our first well was a development well, the Itami 8H sidetrack, which was highly successful, came online in February and exceeded our internal forecasts. We then moved the rig from the Itami platform to the Avuma platform, drilled and brought online the Avuma 3H sidetrack development well in late April, also above our internal forecasts. We are now drilling the third well of our four currently planned wells in the 2021-2022 programme. We are also progressing the field reconfiguration and conversion to an FSO at Itami on time and on budget. In March we paid our first quarterly cash dividend and announced that we are paying our second quarterly cash dividend later this quarter. 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 first quarter 2022 operational and financial results, we produced an average of 8,015 net barrels of oil per day. We had two liftings in the quarter, which resulted in total oil sales of 616,000 barrels sold. As we discussed in the last call, due to operational and weather factors, we had some operational issues which resulted in reduced production in February and lower liftings in the first quarter. At the end of March, with the recovery from the downtime and addition of the successful Itami 88 sidetrack well, our production rate increased to 9,500 barrels of oil net per day and is well above that level now. In the first quarter, we saw sustained higher oil prices, which drove revenue significantly higher as well. Our adjusted net income, excluding the impact of unrealized derivatives and deferred income taxes, was a very strong $21.1 million, or $0.36 per share. Our adjusted EBITDAX was $33.5 million in Q1 2022, compared with $22.6 million last quarter. We have currently more than sufficient line of sight to fund our 2021-2022 drilling campaign, FSO conversion capital and dividend from cash on hand and operational cash flow in 2022. We continue to be focused on growing 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 TAMI to maximise the impact of our 2021-2022 drilling campaign. Additionally, we are de-risking future drilling locations and potentially identifying new drilling locations with further 3D processing. In February, we reported that we completed and placed the 8H sidetrack well on line at rates above our initial estimates. In late April, the Avuma 3H sidetrack development well was completed and brought online again with initial rates above our internal estimates. The rig has stayed on the Avuma platform, and we have begun on the third well in the program, the South Jubuela 1HB sidetrack development well. This well is targeting the Gamba reservoir, but is also being drilled deeper to test the dental formation. As a reminder, the dentile is productive in another area of Itamia and if this well has good shows, we can potentially complete and produce from the dentile and the gamba. This well can move 2p gamba reserves to PDP and is exciting as it could also bring contingent resources in the dentile to PDP and potentially de-risk additional dentile resources. For the second quarter 2022 we are estimating our production to be between 10,000 and 10,700 barrels of oil per day net. At the midpoint of guidance this would be 29% increase compared to the first quarter. In addition we are forecasting a significant increase in sales between 10,700 and 11,300 net barrels of oil per day. At the midpoint of guidance this would be a 61% increase compared to the first quarter. This is a particularly opportune time to have significantly increased sales at the prices we are seeing now. Hand in hand with the production increase will be margin expansion and our per barrel cost reductions. As we have previously advised, about 90% of production costs are fixed and as production increases, our 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. For the second quarter, we expect our barrel production costs, excluding workovers, to be between $22 and $25, which represents a 20% decrease at the midpoint of guidance compared to the first quarter. From a capital standpoint, we continue to see our capital expenditures related to the 2021-2022 drilling program, the field reconfiguration at Atami, and the FSO conversion to be in the range of 90 to 110 million for the full year 2022. We expect to spend about 40 to 50 million in capex in the second quarter of this year. We continue to forecast that all of our capital commitments in 2022, as well as our dividend, will be fully funded from cash in hand and cash from operations. With the drilling program at Tatami progressing forward nicely, we are also managing our FSO solution project simultaneously at Tatami, which will reduce costs and improve margins. Last August, we announced that we had signed and received partner approval for the new FSO solution. The new FSO will significantly reduce storage and offloading costs by about 50%, increase effective capacity for storage by over 50%, and lead to an extension of economic field life resulting in a corresponding increase in recovery and reserves at Atami. During this second quarter, we signed a major construction contract with DOF for the field reconfiguration and upgrade. This secured a significant portion of the work scope for the overall FSO project. The field reconfiguration work has begun and the CAP diamond conversion are on schedule and on budget. We are expecting that the vessel will begin sea trials in late June before being mobilised to Gabon. As a reminder, our estimated capital costs associated with the FSO conversion and field reconfiguration in 2022 are expected to be between 25 to 30 million net to Valco and are included in our CAPEX guidance. 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. We will continue to keep our shareholders appraised of the progress of both the field reconfiguration and the FSO conversion through our press releases. In October, we announced exciting new opportunities 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, G12-13 and H12-13, are adjacent to Valco's Itami 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 Itami. Both Intami 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. 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 and potential development. Last summer, we completed our feasibility study for the standalone development of the Venus Discovery in Block P and we are moving forward now with the field development concept. We are in advanced discussions with our partners and government and anticipate making significant progress towards an agreement to allow approval within the second quarter 2022. 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 recruited a full-time ESG manager who will be based in Houston. We are in the process of completing our annual ESG report and it should be published in the second quarter ahead of our annual general meeting. We remain focused on showing progress and improvement in our environmental, social and government metrics. In summary, there is a lot to be excited about as we enter the second quarter of 2022. We are accretively growing production at Atami through our successful drilling campaign while continuing to progress forward exciting projects in Gabon and Equatorial Guinea. I would like to thank our hardworking team here at Valco who continue to operate and execute our strategic vision. As you can see, we are firmly focused on 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.

Thank you, George, and good morning, everyone. Let me begin by saying I'm also pleased with our operational financial performance. We remain very well positioned to execute in our strategy of accretive growth while adding and returning value to your shareholders. Turning to our financials, adjusted EBITDAX rose 49% to $33.5 million in the first quarter of 2022, compared with $22.6 million in the prior quarter and nearly double the $18 million in the same period of 2021. We've clearly benefited from sustained higher realized pricing. This has allowed us to fund our strategic initiatives with cash flow and cash in hand, including our 2021-22 drilling campaign capex, FSO conversion, and field reconfiguration costs. We also reported strong net income of $12.2 million or 20 cents per diluted share in the first quarter of 2022, which included a 19.3 million non-cash unrealized derivative loss and a 10.3 million deferred tax benefit. After normalising for the deferred tax benefit and unrealised derivative loss, our adjusted net income for the first quarter of 2022 totalled $21.1 million or $0.36 per diluted share as compared to an adjusted net income of $12.5 million or $0.21 per diluted share for the fourth quarter of 2021. In the first quarter of 2021, Valco reported $8.7 million in adjusted net income, or 15 cents per diluted share. Production for the quarter of 8,051 net barrels of oil per day was higher compared to 7,554 net barrels of oil per day in the fourth quarter of 2021. which was expected due to the first well of the drilling program being brought online in February, but was partially offset by deferred production due to temporary operational issues in February. Production was up 55% from the same period in 2021. Sales volumes in Q1 2022 were down 13% from the fourth quarter but were within guidance and flat over the same period in 2021. The decrease in volumes is primarily due to only having two liftings in the first quarter of 2022. As we discussed in the Q4 earnings call, this was due to timing issues from the temporary operational challenges in February, which resulted in lower lifting volumes. This will be a timing difference with production outstripping sales volumes and will result in higher sales volumes in the second quarter of 2022, which you can see in our Q2 sales guidance of between 10,700 and 11,300 barrels of oil per day. Our crude oil price realisation increased 42% to $109.65 per barrel in the first quarter of 2022 versus $77.31 per barrel in the fourth quarter of 2021 and was up 79% compared to $61.31 per barrel in the first quarter of 2021. At the end of 2021 and the beginning of 2022, we hedged a portion of our expected production in 2022 to lock in strong cash flow generation to assist in funding our capital programme and dividend commitments. As at the 31st of March, we have 954,000 barrels hedged for the remainder of the year, an average price of $76.97. In total, we currently have about one third of our full year 2022 guided production hedged. Our full derivative position can be found in yesterday's earnings release, as well as in our Q1 supplemental information presentation pack on our website. Turning to expenses. Production expense excluding workovers for the first quarter of 2022 was within guidance at $18.4 million. This was slightly lower on an absolute basis compared to the fourth quarter of 2021. Costs were 14% higher than in the same period in 2021, primarily driven by a full quarter of production in Q1 2022 from the acquisition of South Sells Interest and Natami that closed in February 2021, compared with just over one month in Q1 2021. The per unit production expense excluding workovers of $29.83 per barrel in the first quarter of 2022 increased as compared to $26.82 per barrel in the fourth quarter of 2021 and $26.02 in quarter one 2021, primarily due to lower sales volumes. Given the expected increase in sales for the second quarter, our guidance range for production expense excluding workovers for second quarter 2022 is expected to be $23 million to $24.5 million or between $22 to $25 per barrel of oil sales. We're not changing our full year 2022 production guidance of $73 to $83 million or $19.50 to $22.50 per barrel. We had no workovers in the first quarter of 2022, but based on timing, we are forecasting a potential workover towards the end of the second quarter of 2022. Depreciation, depletion and amortization for the first quarter of 2022 was $4.7 million or $7.59 per net barrel of oil sales compared to $4.1 million or $5.83 per barrel on the fourth quarter of 2021. and $4.1 million or 6.70 per barrel in the first quarter of 2021. DD&A expense in the first quarter of 22 on a per net realizable barrel of crude oil sales basis was higher compared to the prior periods presented due to higher depletable costs associated with the 21-22 drilling campaign. We anticipate DD&A to be in the range of 7.75 to 9.50 per barrel for the second quarter of 2022. General and administrative expense for the first quarter of 2022, excluding stock-based compensation expense, was $3.6 million, slightly above our guidance, compared with $2.2 million in the fourth quarter of 2021 and $3 million in the first quarter of 2021. The increase compared to prior periods was the result of higher salary and wages costs and audit-related costs partially offset by lower legal fees. The per-unit G&A rate, excluding stock-based compensation in the first quarter of 2022, of 5.80 per barrel of oil sales, was higher than both the fourth quarter of 2021 and the first quarter of 2021 due to lower sales and higher expense. For the second quarter of 2022, we expect cash G&A to be in the range of $2.5 to $3.5 million. We're not changing our full year 2022 cash G&A guidance of $9.5 to $12.5 million. Non-cash stock-based compensation expense for the first quarter of 2022 was $1.4 million and was comprised of non-SARS-related expense of $400,000 and SARS-related expense of $1 million. For the fourth quarter of 2021, stock-based compensation was $400,000. And for the first quarter of 2021, stock-based compensation expense was $1.6 million. Turning now to taxes. Foreign income taxes are attributable to Gabon and are settled by the government taking their oil in kind. Income tax expense for the three months ended March 31, 2022 was a benefit of $4.6 million. This comprised of a $10.3 million deferred tax benefit and a current tax expense of $5.7 million. Income tax expense for the three months ended December 31, 2021 was a benefit of $10.9 million. This was comprised of a $16.1 million of deferred tax benefit and a current tax expense of $5.2 million. Income tax expense for the three months ended March 31, 2021 was $3.1 million and included $300,000 of deferred tax benefits and a current tax expense of $3.4 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 our supplemental information deck that will be posted to our website. We've updated our net backslide that shows the strong cash flow we're generating at current prices. We've incorporated the midpoint of our 2022 guidance using a $90 realized oil price. We've seen exceptional early results in our drilling campaign and remain on track to deliver our lower cost FSO solution on time, which will result in substantial savings on an absolute and per barrel basis, despite inflationary pressures. On the same slide, we've shown an indicative quarter four 2022 netback, assuming continued success in the drilling campaign and a full conversion of our FSO solution. Our sales guidance for the rest of the year is meaningfully higher than what we realised in the first quarter of 2022. Even with our lower sales volume for this first quarter, our Q1 2022 annualized EBITDA X is about $134 million, or $2.28 per share annualized. With a recent stock price in the range of $6.57, we're trading at a low multiple of EBITDA of about three times, despite paying a dividend and being debt-free. At March 31, 2021, we had an unrestricted cash balance of $18.9 million. This does not include the proceeds from the March lifting of $44.6 million, which were received in April 2022, plus $3.8 million in non-operating joint owner receivables. Working capital at March 31, 2022 was negative $21.3 million compared to $4 million at December 31, 2021. The decrease in working capital is related in large part due to the crude capital costs associated with the drilling program and derivatives. For the first quarter of 2022, net capital expenditures, excluding acquisitions, totaled $23.1 million on a cash basis and $31.8 million on an accrual basis. These expenditures were primarily related to costs associated with the 21-22 drilling program, the FSO conversion, and the Atami field reconfiguration. As George mentioned, for the second quarter of 2022, we estimate our net CapEx to be approximately $40 to $50 million and continue to expect our full-year CapEx to be in the range of $90 to $110 million. As has been the case since the second quarter of 2018, we are cutting no debt. Last week, the Board of Directors approved a cash dividend of 3.25 cents per common share that's payable on June 24, 2022, to stockholders on record at the close of business on May 25, 2022. This equates to a full year 2022 annualised cash dividend of 13 cents per share. With that, I'll now turn the call back over to George. Thanks, Rowan.

The future remains very bright for Valco and this is a very dynamic time in the energy industry. We are creatively growing production and cash flow through organic drilling and continue to evaluate additional opportunities with a focus on providing sustainable return to our shareholders. We've already seen the successful initial results in our drilling campaign with the combined production of Atami 8H sidetrack well and Avuma 3H sidetrack well both exceeding our internal expectations. Additionally, we are on schedule and on budget for the Itami field reconfiguration and the FSO conversion. With the higher sustained commodity pricing, we are confident that our 2021-2022 drilling program, our field reconfiguration and FSO conversion, and the dividend we instituted this year will be fully funded by cash on hand and internally generated cash flow. Itami Block P and potential now for 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. We believe that with our strong cash position and our increasing size and scale, we can evaluate and more easily incorporate accretive acquisitions that meet our stringent investment criteria and strategic vision. Finally, as part of our value creation strategy moving forward, we paid our first quarterly dividend in March and announced our next dividend will be paid later this quarter. We believe that prudently returning cash to shareholders is a great way to complement our accretive growth strategy. As you can see, we are firmly focused on ways to increase total shareholder return while operating with the highest regards towards ESG. We are executing our strategic objectives and are excited about the near-term and long-term opportunities for Valco. Thank you, and with that, Operator, we are ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And our first question will come from John White of Roth Capital. Please go ahead.

Good morning, and congratulations on these very nice results. Everything's going so smoothly at the time. I'll skip that and go to the new blocks at Gabon, blocks G12-13 and H12-13. Can you update us on that in terms of the official awarding of the blocks? the PSC and your seismic program?

Yes, John, I can. I mean, at the moment, we continue to be in negotiations with the Gabonese government around the commercial terms of both of these blocks with our partners. So those discussions have been taking place through Q1 and are continuing into Q2. We are hopeful to see a resolution towards a formal award of the blocks on completion of the commercial discussions. I'm hoping we can see that in Q2, but it may stretch into Q3. If it does come into Q3, then the seismic acquisition will definitely not happen in 2022. And in Q3, it's probably getting too late to even get some of the reprocessing done in 2022. So most of that will slip into 2023.

Okay. Well, thanks very much, and good luck with all of that. And any updates on EG Block P?

Yes. On EG Block P, we've been in discussion with the partners, and we are, I think – I'm confident we can get to a resolution on an arrangement with the partners in Block P during Q2. And certainly that's what we're planning. And I think as soon as we come to that resolution, I'm confident that the position with the minister, that we'll get the approval that we require to move Block P forward. For the POD draft that we have at the moment, as we mentioned previously, we've completed the feasibility studies. We've looked at how we're going to execute this first well. And from a planning standpoint, we're looking at that first well in early 2024, probably the January, February 2024, subject to the POD approval.

Well, okay. Thanks very much, and I'll pass it along.

The next question comes from Charlie Sharp of Canaccord. Please go ahead.

Thank you very much, gentlemen. Appreciate your time this afternoon or your this morning U.S. time. Just a question actually on the current well and the dental formation and the plans to test that. How important do you think the test results from this well is in trying to determine what you think the license-wide potential is of the dentile?

That's a good question, Charlie. I don't think it's not a make or break position on the dentile for this well, so I don't think it gives us a benchmark for the overall performance of that particular sand. What this does do for us, though, and this is why we're doing the test, is it does give us that opportunity to convert the contingent resource direct into 1P reserves. When we looked at this option, the original well was only going to go down as far as the But we like what we see in the deeper position in the dental. With these commodity prices, it made sense to increase that well cost at this time and take that opportunity. So we deliberately took the position to test and case down to the dental so that if we find what we hope to find is a good oil bearing sand, that we can immediately make it a producer product. and then at some point in the future come back shallow and then produce from the gamba.

I see. Thank you. And if this is a successful well, do you think that there are, in the near term, opportunities for you to pursue the dental?

There are. I mean, the next well in the program is also going to look at a dental target. Okay. Great. Thank you.

The next question comes from Steven Sukard of Octus. Please go ahead.

Good morning, Jensen. Thanks for taking my question. Bidding upon the question from Charlie, so if we look at this ongoing dental well, how much do you think contingent resources might be converted in a success case to 2P? And then Again, on this ongoing well, if we look at the Gamba, would you expect that the Gamba reservoir would deliver flow rates similar to the first well of this year, the second well of this year, or something else? Just wondering what would be the expectations. Thank you.

Okay. With regard to what the prospectivity is in the dental, I mean, we have one well producing from the dental at the moment for the same platform. I think this opportunity will start to increase our knowledge of the dental area, and the next well will expand that even more. How much we can move from contingent resource into 2P, obviously, that is purely going to be based on the well results. But, I mean, we're hopeful and we're encouraged by the opportunity to go into an additional sand over and above the Gamba. So I don't have an exact number for you, Esteban, because it would be based on what we see from the... from the logs and the results we get from this first well we're drilling now and the second well that we're drilling next in the North Tabula. With regard to what we expect from this well, do we expect the kind of results we saw on 8H or do we expect the kind of results we saw on 3H? Again, looking at the location and what we've seen in the past, I would I would align it more towards the 3H position. However, if we're successful in the dental, we won't know what that's going to be until sometime in the future because we'll be producing from the dental before we come shallow in the Gamma. But if the dental is unsuccessful when we come shallow, we would expect rates similar to what we're seeing on 3H. Thank you.

The next question comes from Bill Deselman of Titan Capital. Please go ahead.

Thank you. Let me start with the two wells of this program that you have completed. Both came in better than expectations. Is that because the rock is just of higher quality than you recognized, or were your expectations just simply being modest?

We always want to be modest, but no, I think there's two factors that gave us better results than we anticipated. Obviously, we announced in the wells both the permeability and the porosities were better than anticipated. So we did see better reservoir characteristics than we initially forecast. But in addition to that, we've got to also thank our drillers because we've also seen excellent well placings, both on Itami and on Ahuma. So the well placing position is also critical to well performance, as you know.

Right, okay, thank you. And can we read anything into that permeability and porosity being better than anticipated with your remaining locations? or is there enough of a difference between the locations that we shouldn't be reading too much into it too early?

I certainly wouldn't read too much into the next two wells too early, primarily because both wells are initially targeting the dental, which is completely separate from the sands we're producing from in the first two wells. So there's not a direct read across there. But certainly, you know, there is obviously a a degree of some correlation between 3H and this well if we were in the gamba.

And what is your suspicion just relative to the dental sands versus the gamba sands in terms of their flow rates, production potential for the field, et cetera, et cetera? Similar, less than? or more than or unknown, truly, and you need to figure it out?

Well, I think from what we know with the producing well at the moment, we would say similar to, but the key areas where we're going into right now is whether we're going into a prolific hydrocarbon area or whether we're going into a water wet area. and there's not sufficient hydrocarbons there to make it work, especially in this first opportunity. So I think it's the overall sands that we experience between the Gamba and obviously we've got other producers in the area that produce them from the Gentile. I think we're certainly excited by the opportunity to test the dentile, or we wouldn't be doing it. So our position is subject to the hydrocarbon position on the dentile not being water wet. I think it's good to see we would expect similar characteristics.

That's very helpful. Allow me to shift, if I may, to your tanker. offloadings or loadings. As your production increases, what are you, just philosophically, considering the normal cadence of offloads to be? Is it two a quarter? Is it three a quarter? Or does it go back and forth between two and three? I'm trying to get my head wrapped around this higher production and what that ultimately means.

Hey Bill, it's Ron here. I'll step in on this one. On the scheduling, generally we would schedule one lift per month. Outside of obviously the GOC, the government's profit oil, they take that once a year generally. But that will all depend on production volumes and quantities as the year progresses. Generally, that lifting has happened at the end of Q3 in the last year or two. So we're looking at something similar in 2022. The other part and the other variable on this is that as we get through Q3 and the new FSO comes into play, it has a much larger capacity, which allows us to look at, let's say, better optimization of loadings. from that vessel. It allows us also to ensure that there's no stoppage from a production point of view due to the tanks being filled too soon. The capacity goes up quite considerably from the existing FPSO to FSO. So what I would say is in Q2, we're looking at a little bit over one per month because the last listing kind of slipped into April 2nd from Q1. So you'll definitely see from our sales guidance, our sales guidance is way up on Q1. I think it's about 60% up on Q1. And that really reflects, I would say, an extra listing in there.

So basically, the starting point is one offloading per month, and then you have to bring operational realities into it. It'll adjust that up or down, depending on. Exactly. That's helpful. And then one additional question, please. Earlier on, the question was asked about the BW Energy Gabon block, and And I'd like to take that question one step further. With what you know today, when would you anticipate production coming from that block benefiting Valco?

Well, okay, what we know today, and I'll go back to my earlier answer, that it's unlikely we'll even get reprocessing of existing parts of seismic down in 22. So we're looking at... capture and interpretation in 2023, and then the commitment of an exploration well in 2024 or 2025. Depending on the location of the exploration well and its proximity to existing infrastructure, there may be an opportunity for a tieback on a production well in 2025 or 2026. But, you know, it's really down to the location of a commercial find and how that locates to each of our infrastructures. But certainly nothing I would say in my mind before 25. And even 25 would be looking at a single well tie back to either Disafu or Itami if something more substantive is found that justifies separate structures inside each of the blocks, then that will push the production date further out.

Great. That's very helpful. Thank you. Thank you both, and congratulations on a great quarter. Thanks, Bill.

The next question comes from Jamie Willen of Willen Management. Please go ahead.

Yes, fellas. One more question about the new drilling. Could you tell us about the timing for How long will it be to test the gamba, and then how much longer to go to the dentile? And will you issue the results from the gamba prior to, or will you do that all at one time?

Okay, we're looking to drill through, I believe it's mid-June, towards the end of June, sorry. We will be issuing the results all at the same time, so we'll be drilling through the Gamba, where we know we've got proven oil-bearing sands, and then deeper into the Dental. Obviously, the current well designs are looking for us to basically perforate in the Dental should we find commercial volumes of hydrocarbons. we would immediately announce that, or we would then announce that there's not commercial volumes of hydrocarbons in that particular location of the dentile, and we would be pulling back to perforate in the Gamma and complete there.

Gotcha. As I look at the chart that you provided for your net backs for 2022, the first layer is the 2022 margins at $90 realized oil. Is that for the fourth quarter or is that for the entire year when you talk about the $53.83 per barrel of free cash flow?

Again, that's a full year, so it's not Q4. What we wanted to do in there was demonstrate some of the pricing, how 2022 is lining up now versus 2021 at a $90 pricing level.

Okay, so let me run through some numbers and tell me how far off I am. If you're going to do, let's just say, a million barrels in the fourth quarter, and you're going to be realizing $55 to $60 per barrel of free cash flow, we're looking at somewhere in the neighborhood of a dollar per share of free cash flow just in that fourth quarter alone.

Again, I've got to really point to the guidance there, Jimmy. But I would say Q2, where we've given you the guidance for sales, that's probably going to be one of the strongest cores we've ever seen at Volco. And if you look at that on the basis of a million barrels, which is about the midpoint for our forecast for Q2, that's going to be not a million miles off of what you're talking about on a per share basis based on 59 million shares, 59 to 60 million shares. Okay.

And then, lastly, could you talk about your hedging strategy? Obviously, you needed to secure your drilling program. That's now very well secured, but you have hedged a portion of your – of your production, are you looking to hedge any or do we not need to do that since we are kind of playing offense as opposed to defense?

That's a great analogy. At the moment, Jimmy, we've got about a third of our production hedged for this year. Our forecasts are basically saying that we're well covered for our commitments. So there's been no approach from us to go into Q4. Obviously, we take a look at the hedge position at any point in time. There's obviously still a large degree of volatility in the marketplace overall, which impacts obviously forward positions. We've taken a look at Q4, we've taken a look into Q1 2023, but as you're aware, a lot of our capital expenditures and commitments fall off through Q3 of this year. Q4 will have some, but not the level of spending that we've got through the first three quarters of this year. So we've not, you know, we've not felt the necessity or the need to go in and hedge in at these prices. I mean, Q4 hedges at this point in time, if we're doing the simple swaps that we've done in the past, you know, you're talking about the hiatus to 90 buck oil. And I don't want to, you know, we're not speculating, but we don't want to rush in and lock into that when there's not necessarily a need. But it's certainly something, Jamie, that we'll always keep a look at. And as you're aware, our commitment's always to look at our overall cash flow to meet our capital and operational requirements as well as our dividend position. And one of the things I would say is, you know, we have had a look at commerce and certainly If we've got a bottom number there from a put position that covers our commitments, that allows us to get as much of the upside as possible, that may well be something that we look at going into 2023. Okay.

And then also, another lastly, when you first announced your dividend program, the price of oil was obviously much, much lower. And this was prior to two successful runs with the drill bit. What is your policy with raising that dividend, given the cash flow that you're looking at moving forward is monstrously higher than what you were achieving when you initially announced the formation of the dividend policy?

Yeah, I mean, I think we commit with our inaugural dividend just this Q1, and policy was derived from a Q4 position on a 2023, sorry, 2022 budget. And if you recall what we said with that dividend is that we put a dividend in place that we regard as fully sustainable and we committed to that through 2025 at this particular level. Obviously, we as a board continue to monitor opportunities to amend that position through additional windfall cash accretion that we've seen with the higher commodity prices, and that's balanced with other opportunities that we may consider where that cash can be deployed partly through dividends, partly through additional programme activities, partly through trying to increase production for others. So there's a balance to be had. The question is, have we as a board directly reviewed and addressed that? As of this point, no, we have not. But I think it's obviously what we said when we put the inaugural dividend in place was that there was always scope for that to be amended, but that was most likely to be in a position once we got through the two significant capex expenditures we have in the first three quarters.

Okay, thank you. Phenomenal results, fellas. Thank you. Thank you.

The next question comes from Robert Carlson of JANI. Please go ahead.

Yeah, thanks for taking the call. You covered my question on hedging in the last call. So congratulations and keep up the good work. You're doing great.

Thanks, Robert. Thank you, Robert.

The next question comes from Kenneth Pounds of Castleberry Advisory. Please go ahead.

Yes, good morning. Are you putting together a drilling plan for next year yet, and is that going to be Gabon also in addition to Black Pea?

Yeah, well, we haven't landed on a drilling plan as of yet, but what we're trying to get to in Gabon with the TAMI is get to a plateau level of production that fully utilizes our oilage, and That means that we have to look at a more continuous drilling program rather than a cyclical drilling program where we're selecting opportunities that will increase the overall production to utilize the early, but at the same time, a rest decline that we see in the existing well inventory. So we're closely looking at the targets for 2023. We're closely looking at opportunities that we have within existing contractual positions in 2022. And we're also very conscious that the pricing of the drilling units and the long lead equipment is currently increasing substantially, both in terms of cost and in terms of time frame to secure these. So that's something we are very focused on. And we'll be looking Block P, I think I heard you mention Block P. Block P would be if we can secure a drilling program for 2023. Block P would be at the end of that program in January 2024. But as of right now, we're continuing to mature targets for those programs.

That was my next idea. I'm sure our day rates are starting to go up. I suppose there's an opportunity if you locked in some rigs now for next year that that might be better.

Yeah, that's certainly on our agenda as well. And as we answered in the last question regarding the excess cash generation that we possibly will see in Q4 as commodity prices hold, there's a lot of opportunity to perhaps utilize that at existing drilling rig rates as opposed to having to look at the higher rates.

Great. Maybe you could remind us again that the FPSO sounds like a great advantage. Is there some production limiting factor to that down the road?

Absolutely not. There's no production limiting factor moving from the the FPSO to the FSO. We currently have between 26,000 to 30,000 barrels of olives, and that will not change with the FSO coming in. We're putting additional equipment and deck space onto Itami to allow that processing to continue. We're reversing the flow of a couple of the lines to make sure they're directed back towards the platforms instead of the existing FPSO. And the FSO itself is located in a different location from the FPSO, more central in the field between the existing platforms. So there will be no constraint point forward on a knowledge position with the FSO.

Great. Well, great job, and thank you very much. Thank you. Thank you.

The next question comes from Richard Durnley of Long Partners. Please go ahead.

Good morning. What is the IP of the DENTEL for BW and Panoro? And is that a guide for what you're looking for in your well?

Yeah, so hopefully I got that right. I mean, right now, I don't think the distance is too far, and I'd have to defer to my geoguides, but I think the distance is too far for a correlation between the dental that's being produced in Desafu and the dental sands that we have in Itami. So I don't think there's an opportunity to correlate IPs in that one. And I'm sorry, forgive me, I missed the second part of your question.

Oh, no, that answers it. Thank you.

Okay.

Thank you.

Our next question is a follow-up from Stefan Foucault of Octus. Please go ahead.

Yes, I had picking up of some of the comments you made about ongoing negotiation for the exploration of Gaboningsbrook. and on the P block with energy with a partner. Could you perhaps give me a sense of what are the sticking points in both situations on basically what needs to be resolved? For instance, for the Gabonese block, is it a question about cost recovery that you're discussing? It's something else. And likewise with the partner for the P block, are there any really salient sticking points that need to be resolved? Thank you.

I'll start with the Gabonese blocks. I'm not going to go into the detail of what the commercial discussions are with the government and our partners, but they cover a suite of fiscal and costal terms. In the licensing round in Gabon, or this particular licensing round, you have the opportunity to bid both the signature price and the terms around which you wish to operate in the block. It's slightly different from some other jurisdictions where you get the terms through legislation and you just bid a signature bonus. It is the suite of PSC conditions that are being negotiated. Some may be we concede on with our partners in view of attaining others, but I can't really go into the specifics of which points we're negotiating on. With regards to block P, there's no real sticking point at all. The real issue around block P with our partners is more about project ranking in portfolios as opposed to specific issues of economic viability in Block P. So as in any oil company operation where you have partners and we have multiple assets and multiple blocks, we all have projects being ranked in different ways that have demands on our cash. And it's just coming to an equilibrium where we can balance those rankings between our portfolio, and our partners' portfolio.

Understood.

Thank you.

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

Thank you, Operator. I think the Q1 has been a very strong quarter for Velco. I think that You know, we've come across a couple of operational issues in Q1, which we've already highlighted, which allows us to really come out of the gate in Q2 and blow Q2 away, which, you know, all indications are that we will. I'm increasingly pleased with the attendance on our calls and the quality of questions that we're receiving, which encourages me that, you know, we're getting an investor base and an analyst base that's really getting into questions the activities of the company and following along with us. So thank you for the quality of questions and thank you for listening to us today.

The conference is now concluded. Thank you for attending.