VAALCO Energy, Inc.

Good day, and welcome to the Valco Energy Second 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. Please note, this event is being recorded. I'd 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 second quarter 2022 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 second 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 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 in the reports we filed with the SEC, including our Form 10-K. Please note that this conference call is being recorded. And now let me turn the call over to George.

Thank you, Al. Good morning, everyone, and welcome to our second quarter 2022 earnings conference call. We had a very strong second quarter which included record sales volumes of almost 1 million barrels. We also benefited from substantial high Brent pricing over $113 per barrel. This combination allowed us to generate significant cash flow, execute our accretive growth strategy and fully fund our capital commitments. We continue to pay out dividends to our shareholders, and with a debt-free balance sheet, we are clearly in a very strong financial position. We delivered record-adjusted EBITDAX, which grew 81% over the prior quarter to $60.8 million. To put this in perspective, we generated $79 million in all of 2021 and $22 million in 2020. We have now generated over $94 million in adjusted EBITDAX in the first six months of 2022, nearly as much as in the full year 2021 and 2020 combined. We have used this to pay two quarterly dividends thus far in 2022, and the Board approved a third dividend for the third quarter of this year. Our strong balance sheet remains debt free, and our unrestricted cash balance grew to $53.1 million which does not include $70.3 million in proceeds from May and June liftings that were received in July and August. We are also progressing the field reconfiguration and conversion to an FSO at Itami. The new FSO is arriving in offshore Gabon this week, and we are planning the full field turnaround and hookup in the third quarter. As we have said before, we expect to realize substantial and sustainable operating cost savings from this project that will begin in the fourth quarter and carry on through the remainder of the decade. We also announced that we are exercising our options on the rig in Itami to add two additional wells to the 2021-2022 drilling programme. We believe maintaining the rig at its current favourable pricing was the right decision to allow us to continue to maximise the value potential of our Itami resource. In July, we submitted a plan of development in Equatorial Guinea for Block P, We look forward to receiving approval from the Minister of Mines and Hydrocarbons, and once the development plan is approved, we expect to add new 2P reserves for the discovery on Block P. As you can see, we are delivering on our strategic objectives and delivering strong financial results, which has firmly placed Valco in a financially enviable position. Before I get into more detail about our second quarter results, I would like to briefly discuss the transaction with Transglobe. which I will discuss in more detail following Ron's review of our excellent financial results. On Monday, we put out an additional announcement about strategic and accretive combination with Transcode. LALCO's board has approved a share buyback program of up to $30 million, which is equivalent of up to $0.27 per diluted share that will come into effect subject to the combination transaction being completed. The proposed share buyback is an addition to the $28 million or 25 cents per diluted share annually that we have targeted as shareholder dividends payable on a quarterly basis following the transaction closing. We believe this further enhances the value of the transaction to both sets of shareholders and demonstrates the strength of the cash flows that we expect the combined company to generate. We also posted an updated presentation and podcast on our website that provided updated and supplemental information further demonstrating the value to both sets of shareholders. Q2 2022 operational and financial highlights. Turning to our record-setting second quarter 2022 operational and financial results, we produced an average of 9,211 net barrels of oil per day, which was an increase of 14% over the first quarter of 2022. We had four listings in the quarter, which resulted in record oil sales of 958,000 net barrels sold. In the second quarter, we also saw sustained higher oil prices, which resulted in significantly higher revenue. Our adjusted EBITDAX was $60.8 million in Q2 2022, a record high for Valco, driven by record sales and higher realized oil pricing. These factors enable us to fully fund our 2021-2022 drilling campaign, FSO conversion and related field reconfiguration costs, and continue to pay dividends from cash on hand and operational cash flow. We remain focused on maximizing our ability to generate cash flow and execute on our strategic objectives. On the FSO, we are well on target with the timing of our FSO solution project and field reconfiguration at ATAMI. The FSO is arriving at Itami this week and we are planning for the changeover later in the third quarter. As we have noted, we expect to realise substantial and sustainable operating cost savings from this project that will begin in the fourth quarter and carry through the remainder of the decade. The new FSO provides us with additional flexibility and has an effective capacity for storage that is 50% larger than our current FPSO. The lower overall cost will also lead to an extension of the economic fuel life, resulting in a corresponding increase in recovery and reserves at Itami. From a cost standpoint, like all other EMP companies, we have seen higher costs driven by inflationary pressures that are impacting the project. There's a lot of pressure on fuel prices, services and equipment prices, availability of equipment and consumable and global logistic costs and delays. We have also had to employ additional engineering as well as increased supply chain and inspection costs. I would like to put this into perspective for you. We have about five times the number of personnel in the field right now with additional boats, equipment and operational responsibilities, all working to ensure that we coordinate and complete the substantial project on time with minimal downtime to our production. A project of this magnitude with regards to ATAMI occurs once every 20 years, and we are doing all that we can to manage and minimize the risk associated with such a large and complex project. Nonetheless, until we fully complete the decommissioning of the FPSO, bringing the FSO online, and completing the full field reconfiguration, we will continue to have uncertainty and risk that is being actively managed. To reduce project risk exposure, we elected to use a larger offshore installation vessel that we mobilized from Europe. This vessel brought the flexible pipe reels with it instead of us shipping the reels from Europe. This increased project costs but eliminated the use of a dedicated heavy list transportation vessel or double handling of the pipe in a West African port. We calculated that this decision reduced the number of interface points by as much as 30%, helping to mitigate overall project risk. These factors have increased our estimated capital costs associated with the FSO conversion and field reconfiguration by about $10 million net to Valco. We expect the related capital spend in 2022 to be between $30 to $40 million net to Valco, which is in addition to our 2021-2022 drilling campaign costs. This capital investment is projected to save approximately $13 to $16 million net to Valco in operating costs through 2030. Equatorial Guinea. 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 development. Last month, we submitted a plan of development in Equatorial Guinea for Block P to the Minister of Mines and Hydrocarbons. Once the development plan is approved, we will hold an 80% working interest as a result of a joint venture owner opting not to participate. We look forward to receiving the approval soon so that we can continue to move forward with our discovery at Block P, which is expected to add meaningful 2P reserves upon approval of the POD and provide another strong operational asset to the portfolio. As we work through the approval process, we will provide more details about potential timing, capital cost, reserves and production estimates. We are committed to profitably exploiting the resource potential of all our assets and are pleased with our progress at Equatorial Guinea. 2021-2022 Drilling Campaign Turning our attention to the drilling campaign at Itami, we have exercised options on the current rig to extend the programme by two additional wells. We have had tremendous success at Itami drilling and developing the vast resource over the past 20 years. In February, we reported that we had completed and placed the 8HST well online at rates above our initial estimates. In late April, the Avuma 3HST development well was completed and brought online again with rates above our initial internal estimates. The third well, South Tubela 1HBST, encountered two potential dental producing zones, the D1 and the D9. While we had initially planned to produce the Gamba interval in this well, it was thin and not economic in this wellbore. We build a deeper exploration phase of this well targeting the D1 sand for production and targeting the D9 sand. The D1 was a new Itami interval in which we had not previously produced and it presented us with some challenges with permeability and porosity. We completed the zone using a small frack pack. We knew we had the option to come back in the future and complete a very attractive dental D9 zone which we are currently producing at North Tubuela. The D1 completion came in at the low end of our expectations with an average production rate of 150 to 200 net barrels per day. These production rates are below the minimum recommending operating range for the ESP. And as a result, we have had to cycle the well, which means we shut in, allow pressure to build, and then flow the well, shut it in again, and repeat the process to prevent ESP damage. We will continue to cycle the well to project future reserve recovery expectations and better understand this D1 interval. We're planning to return to the well in our next drilling campaign to complete the D9 Dental interval that had 15 meters of net hydrocarbon shows and has an estimated original oil in place range of 4 to 15 million vals of oil. Following the South Chubwela 1HBST well, the rig was mobilized to the Southeast Itame North Chubwela Scent platform to drill the ETB-SM 2HST well, targeting the dental formation, which is productive in other areas of the ATAMI license. We had some delays in the rig move as a result of waiting on weather to calm down while moving the rig from the Avuma platform to the SENT platform. This caused a two-week delay, and we began operations on the well in late July. As a reminder, this is a sidetracked well, so we are reentering an existing well bore, which requires time to remove production equipment and drill out the plugs. This is, however, substantially cheaper than drilling a new well, and we have utilized this method in the past to minimize capital expense. After setting up the equipment and completing operations to re-enter the well, we began drilling the ETBSM2HST well on August 8, 2022. We expect to reach TD and beginner completions in September. This is targeting a dental sand that is already productive in other areas of the TAMI license and is a separate geology from the D1 sand in South Tubela. Following the ETBSM 2HST well, we are planning to perform some workovers and drill two additional wells. Both of the new wells will be targeting the Gamba Formation with the Buri 4H development well and the North East of Ooma near-field exploration well. If successful, only the Buri 4H well will provide production uplift in the near term. The northeast of Ooma well is a near-field exploration play that could unlock significant reserve additions of between 4 and 22 million barrels. If successful, we will have to come back to this well in a future drilling campaign to complete it and bring it online because it will require a subsea tieback. For the third quarter of 2022, due to the full field turnaround FSO conversion and field reconfiguration causing temporary downtime, we're guiding production to be in the 8,000 to 8,700 net barrels of oil per day. Earlier this month, we modestly lowered our full year production guidance due to the South Tobela well results. Our updated guidance for the full year is between 9,000 and 9,500 net barrels of oil per day. With the additional new wells coming online in the fourth quarter, if successful, and the expected uplist of plus production following the FSO conversion from wells being shut in, we expect a meaningful increase in fourth quarter production. Depending on the timing and success of the new drill wells, we expect our December exit rate this year to be between 10,500 and 11,500 net barrels of oil per day, which would be a new quarterly record for Volco. This would set us up for a very strong opening 2023 and with continued strong oil pricing, additional cash flow and adjusted EBITDAX generation potential. In addition, we are forecasting sales to be in line with production, which would potentially be another record high in quarterly sales for Velco. We also expect the production costs in the fourth quarter to be significantly lower on a per barrel basis due to the lower cost of the FSO and the higher expected sales. From a capital standpoint, we're now including costs associated with the two new wells we added to the drilling program, as well as some inflationary and engineering increases related to the field reconfiguration of the TAMI and the FSO conversion. For the full year, we are increasing our capital guidance to between $130 and $150 million. We continue to forecast that all of our capital commitments in 2022 are being fully funded from cash on hand and cash from operations. All of our guidance for the third quarter and full year of 2022 can be found in the supplemental presentation deck we posted to our website this morning. In closing and in summary, there is a lot to be excited about as we enter the second half of 2022. We are accretively growing production at Hitami through our successful drilling campaign while continuing to progress the exciting plan of development at Equatorial Guinea. I would like to thank our hardworking team here at Valco who have continued to operate and execute on our strategic vision. We are firmly focused on maximizing shareholder value 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.