VAALCO Energy, Inc.

Good morning, everyone, and welcome to the Valco second quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please say no to 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 and then one on your touch-tone telephones. To draw your questions, you may press star and two. Please also note today's event is being recorded. And at this time, I'd like to turn the floor over to Al Petrie, Investor Relations Coordinator. Sir, you may begin.

Thank you, Operator. Good morning, everyone, and welcome to Valco Energy's second quarter 2023 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 summary financial review. George will then return for some closing comments before we take your questions. Thora Prekel, our Chief Operating Officer, is also with us today and will be available for Q&A. 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 2023 Supplemental Information 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 SEC, including the 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 second quarter 2023 earnings conference call. We have continued to deliver exceptional results in 2023, bolstered by our expanded asset base following the trans-globe combination. Our focus has been on optimising production, managing our costs, optimising our operations and allocating capital to drilling and development future growth plans. Through the execution of this strategy, we continue to generate the growth in EBITDA that has allowed us to increase the dividend and buy back shares, thus increasing total shareholder returns. We paid our second quarter dividend and announced the third quarter dividend, and we are on track to pay out nearly double the dividend that we paid in 2022. Additionally, to date, we have returned $15 million through a share buyback programme since November 2022 and this programme continues through 2023 at current pricing levels. We have also fully funded our capital programme, remain bank debt free and expect to build meaningful cash in the second half of 2023 to fund exciting future projects across our diverse portfolio. I would now like to point out some key highlights and accomplishments for the second quarter. We were above the high end of our production guidance and saw a quarterly increase of 7% to 19,676 NRI barrels of oil equivalent per day, or 24,863 barrels on a working interest basis. This was driven by record production levels in Egypt and Canada from our successful drilling programs in both areas. Additionally, we saw less decline in Gabon than anticipated due to better operational uptime at Atami and operational enhancements due to the new FSO. You can clearly see how we have grown when you compare second quarter production this year with second quarter last year, we are up 114%. Sales were up 47% compared to Q1 2023, due to the timing of a lifting in Gabon that was pushed from Q1 into Q2, and we also experienced higher production and sales volumes in Gabon, Egypt, and Canada. Our increased sales allow us to grow adjusted EBITDAX by 37% to $65.3 million, which was $17.5 million higher than Q1, despite lower realized pricing. We also generated $77.6 million in cash from operation, which allowed us to fund $27.1 million in CAPEX and maintain our strong cash balance at quarter end of $46.2 million with no bank debt. We have positive momentum as we enter the second half of 2023, both operationally and financially, and we are building size and scale to sustainably grow Valco. With a diverse portfolio of assets across four countries, including Gabon, Egypt, Equatorial Guinea and Canada, I will now spend a little time detailing our positive operational activity in each area. Let's begin with Egypt, where we have invested the largest amount of capital in 2023. Our drilling campaign in Egypt thus far has included the drilling of 12 vertical, including one injector well and one exploration well, as well as a horizontal well. We are very pleased with the drilling performance in 2023. On the vertical wells, we're seeing significantly faster drilling performance, moving from a 2022 average of roughly 38 days per well to eight to 15 days per well in 2023, which is a 60% reduction in cycle times. By drilling the wells faster, we're cutting costs meaningfully and improving the economics of our wells in Egypt. We believe this step change in drilling allows us to consistently drill future vertical wells in under 15 days. In addition to the drilling efficiencies, we have also spent time and effort in Egypt reviewing the facilities and overall production operations. This effort has resulted in two meaningful changes that were enacted recently. The first is that we took steps to relieve pressure bottlenecks and back pressure, which resulted in a 500-barrel-per-day improvement in oil production. The second was to improve our ability to prevent and capture potential spills by improving well sites with secondary containment measures and increased use of composite, spoolable pipe for replacement of old lines and on the installation of new lines. We believe that this will make a significant move towards eliminating uncontained spills. These actions not only improve well performance, but also enhance our commitment to being good environmental stewards as part of our ongoing ESG initiatives. We continue to set production records in 2023, which is one of the key areas driving our ability to maintain and grow total company production. Our drilling and completions program in Egypt is a significant part of our 2023 capital program as we continue to develop one of our core assets. We still have several wells that need to be fracked in the third quarter, but the vast majority of our capital spend in Egypt for 2023 has been completed. In Canada, as you recall, we drilled several wells in Q4, but completions were delayed and these wells came online in late December 2022 and January 2023. We also drilled two additional wells in the first quarter, a 1.5 mile lateral and a three mile lateral, which were also required for land retention purposes. Both wells were drilled and completed safely and cost effectively without incident. The wells were tied in and equipped in April and early May with overall cycle times that were significantly less than historical cycle times. The wells began flowing in May and produced very well, and in early July, the pump and rods were run on both wells. Both wells' production rates have continued to exceed pre-deal expectations, which is a very positive sign. We also believe that to better optimize our Canadian prospects going forward, we will move to 2.5 and 3-mile laterals almost exclusively, which we believe will further improve the economics of our development program. Canada also set a production record in 2023, another reason we are performing so well as a company and exceeding our production targets. With our 2023 drilling and completions program completely finished in Canada, we are taking the rest of 2023 to evaluate facility and pad optimization, future development wells, and further refine our completion techniques. After we completed our combination with Transglobe last year, we said we would look closely at Canada in the short term to see how we could improve efficiencies and increase the valuation and optionality of that acreage position. And we are very pleased with the results thus far. Turning to Gabon, as you know, we completed our 2021-2022 drilling campaign in the fourth quarter of 2022. and have only minimal new CAPEX dollars in Gabon in 2023, primarily related to maintenance CAPEX and long-lead drilling equipment. Despite no 2023 drilling program, we have seen strong overall production numbers in 2023 with both the first and second quarters at the high end or exceeding the high end of our production guidance. In the fourth quarter of last year, we completed the FSO and field reconfiguration project which is allowing us to operate more efficiently and economically while focusing operational excellence, including production uptime and enhancement in 2023 to minimise decline until the next drilling campaign. We are seeing multiple benefits from the FSO already. The impact of the cost savings from the new FSO are helping to offset some other higher costs from inflationary and industry supply pressures. In addition, the FSO has greater storage and handling capacity, which is one of the reasons why our second quarter sales were so strong. As things stand today, the minor pipeline work on the Scent grass line we had in Q2 is now scheduled to be completed in September, which should help lower OPEX due to less diesel costs once completed. Our subsurface team have been working on the evaluation of our drilling prospects for our next drilling campaign at Itame. We are ready to progress the planning of our 2024-2025 drilling programme which we are currently projecting to be a three to four well programme with additional well options. All of this is dependent on rig availability and last week we issued an expression of interest to the market in search for a rig that meets our requirements to begin the programme in mid 2024. We believe that we will be further along with the planning and have a better understanding of rig availability and program timing and plan to discuss it in more detail at our next earnings call. Additionally, in Gabon, we are engaged in the final PSC negotiations with the government and their partners regarding blocks G and H. We remain excited about the upside potential of these blocks as they expand our acreage in Gabon and we will update the market when we have more details. Let me now turn to a discussion on Equatorial Guinea, another area that holds significant future potential for Valco. Valco owns a working interest in Block P offshore Equatorial Guinea, where there were previously discovered but undeveloped resources, as well as additional exploration potential. In March 2023, we held a productive meeting with the MMH and our partners. During these meetings, we finalized multiple substantive documents for Block P, which includes the Venus development relating to the production sharing contract. The GOA still has outstanding signatures in place and we will be able to accelerate the project forward following approval by all stakeholders. We have an approved POD and we will continue working with all stakeholders to move it forward towards FID. We have a proven operating track record for a development of this kind and we look forward to demonstrating these capabilities as we progress the Venus discovery into production. There are a lot of exciting projects and developments in 2023 and moving into 2024 that will continue to help Valco grow production, reserves and value for our shareholders. I would like to thank our hard-working team who continue to operate and execute our plans. We have captured meaningful synergies and cost reductions of the TransGlobe acquisition already and continue to make progress towards capturing more efficiencies while continuing to build size and scale. We are bank debt-free and remain firmly focused on a strategic vision of accretive growth while maximising shareholder return opportunities and operating with the highest regards towards ASG. 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 echoing George's comments about our continued strong operational performance as we execute our strategic plan. With the integration of the business substantially behind us, we are much better positioned today with a growing and diversified asset base than ever before in Volco's history. Rather than rattling off a lot of numbers and verbiage that you can review in the earnings release or 10Q, I'll give you some high-level numbers that dive into explanations and drivers for our financial results this morning. Let's begin with production and sales, which along with realized pricing, drives our revenue. Production for the second quarter was very strong, above the high end of our guidance and up to 7% compared to Q1 2023. Sales for the quarter were up considerably, with all assets production performance resulting in increased sales, and as highlighted last quarter due to the timing of a cargo lifting in Gabon shifting from Q1 to Q2. This was possible with greater storage and handling capacity within the FSO. We had said previously that the FSO not only help us reduce costs, but it also allows us to have larger listings and provides much greater flexibility when we have weather or tidal events. Our strong sales led to a 36% increase in quarterly revenues or up nearly $30 million from the first quarter. Our strong volumes were partially offset by commodity pricing declines. Rent dropped about 4% quarterly and our oil pricing held up in line with the benchmark softening, with the largest reduction sequentially in Egypt. This was the result of all our Q2 Egyptian sales being sold domestically compared with 100% export sales cargo in Q1. We were also impacted by the significant declines in natural gas liquid and natural gas pricing in Canada. Benchmark natural gas pricing was down 39%, but we were able to slightly buck this trend and realise gas prices were down 31% and NGL pricing was down 25% sequentially. You will note in our earnings release yesterday, we provided a detailed breakdown of sales volumes along with commodity pricing by country in an effort to increase transparency. Regarding hedging, as shown in our earnings release and in our investor deck, we continue to implement a hedging program to help us mitigate risk and protect our commitment to shareholder returns. We've protected via costless oil callers indexed to Brent a floor price of $65 for about 15% of our production hedged through the end of the year with upside to between $90 and $96. Turning to costs. Production costs included a one-time cost for removing and disposal of normally occurring radioactive material of 5.7 million from the decommissioned FPSO. This happens whenever a storage unit gets decommissioned and under typical lease contracts is deemed the responsibility of the leasee. Excluding this one-time charge or production costs were within guidance and production costs per barrel came in at the midpoint of guidance. While absolute costs were up quarter over quarter due to higher sales, our production costs per barrel are actually lower sequentially and year on year. G&A costs were also in line with guidance. For year-to-date 2023, G&A costs are higher by about £1 million from one-time charges for the reorganisation and integration of Transglobe. But this is more than offset by removing duplicate functions, reorganising functional activities, and taking advantage of our combined scale. When compared to the combined G&A costs seen in 2022 by both Valco and Transglobe, we've seen meaningful reductions in costs well ahead of our target synergies of 5 million per annum. The full integration and reorganisation of the business is being completed as we speak. We will continue to focus on the costs we can control to help improve our margins and the ability to generate operational cash flow. We generated adjusted EBITDAX of $65.3 million, an increase of 37% or $17.5 million sequentially. Our strong sales and continuing work and controlling costs led to solid EBITDAX growth despite declines in commodity pricing as discussed earlier. Non-cash DD and A costs increased in the second quarter on an absolute basis, and in large part due to the incremental sales achieved compared to the first quarter. Costs were also higher due to accelerated capital spending in Egypt with the near completion of the 2023 drilling campaign, which has been highly successful and completed in record time. For 2023, we have seen an increase in DD&A due to the step-up of the trans-globe asset valuation. As a result, on a go-forward basis for the balance of 2023, we believe that DD&A costs will range between $20 and $22 per barrel, in line with the Q1 and Q2 of this year. Targeted reserve additions for the wells completed will be reflected in our CPR as of the end of the year and will most likely lead to a change in our DD&A rate per barrel. Tax costs in the quarter of about $11.6 million resulted in an effective tax rate of about 63%. Corporate expenditures in the USA result in no foreign tax benefit, and we do not have sufficient US domestic income to offset these trapped costs. Additionally, we incurred about $600,000 of costs for our EG business, as we continue to progress that project. This currently provides us with no ability to obtain a foreign tax credit. It's not operational, but does count towards our recoverable costs when we achieve first oil, which is expected in 2026. Tax is paid in both Gabon and Egypt with the respective states taking entitlement to their barrels. And in Canada, we still have sufficient net operating losses to cover any tax calculated. We reported adjusted net income of $11.9 million or 11 cents per diluted share after removing one-time items. Overall, we saw strong sales, lower pricing, lower per barrel production expenses, higher DD&A per barrel and an effective tax rate that remains around 65%. Turning now to the balance sheet and cash flow statement for Q2. Cash was $46.2 million on June 30, but we did receive about $20 million in cash receipts in July. Our June 30 accounts receivable balance was $57.4 million, and nearly two-thirds of that is in Egypt with eGPC. Concurrently, within accrued liabilities, our liability for excess cost all stands at $8 million and will likely be used as an offset for some of our eGPC receivables. We continue to work with eGPC on both collections and offsets. We can also confirm that we've successfully arranged a Q3 export cargo of about 500,000 barrels that will likely occur in late August. Crude oil inventory is flat sequentially and includes 206,000 barrels in underlift in Egypt which will be used against the upcoming export cargo. The remaining inventory is within the FSO in Gabon. With completion of drilling in Canada and near completion in Egypt, we will start to see a reduction of the outstanding accounts payable and accruals. Sequentially, it is flat to £131 million. As has been the case since the third quarter of 2018, we are carrying no bank debt and have credit facilities available to utilise for additional accretive acquisition opportunities to continue to build value. In Q2 2023, Valco paid quarterly cash dividends of 6.25 cents per common share, or $6.7 million, and our share buyback was $6 million. As stated previously, growing our dividend and the share buybacks are a direct result of our expanded asset base and cash flow generation ability as a result of the Transglobe acquisition. Aside from fully funding our shareholder returns, we also fully funded net capital expenditures of $27.1 million on a cash basis. These expenditures were primarily related to our drilling programs in Egypt and Canada. Let me now turn to guidance where I'll give you some key highlights and updates. I want to remind you that our full guidance breakout is in the earnings release and in our supplemental slide deck on our website. Also, we report all our production with both working interest and net revenue interest with a difference representing the royalties paid or taken in barrels. As we have discussed, our highly successful capital programmes in Egypt and Canada coupled with our operational focus on uptime to mitigate decline in Gabon, is leading to a meaningful increase in production. For the full year 2023, we are raising production guidance for all our operational areas, leading to a total company production increase of about 7%. For the third quarter of 2023, we're expecting our production to decline slightly in Gabon, but hold flat to slightly up in Egypt and Canada, compared to the second quarter. Additionally, looking at our sales volumes, we are expecting to see strong sales, particularly in Egypt, where we are forecasting an export cargo in the third quarter, which should increase our sales volumes and realize pricing. Our costs have gone up slightly, both sequentially and for the full year guidance, primarily due to the scent pipeline work expected to be completed in the third quarter. But our per barrel, equivalent costs are virtually unchanged due to the increased production and expected sales finally looking at capex we have said in the past that our 2023 capital spend is weighted towards the front half of the year you can see that in the reduction from q2 to q3 on our expected capital spend furthermore due to the improvements in drilling and completion cycle times our Egyptian and Canadian teams are coming in quite a bit below their expected capital spending ranges for the full year. As a result, we're reducing our full year capital spending by about $10 million at the midpoint. Coupled with higher expected production and sales, we believe that Valco is very well positioned to grow cash flow in the third and fourth quarters of 2023. I'd like to point out that we have an updated supplemental earnings deck that is a good analysis key highlights and detailed overviews of our assets and performance. Additionally, we are detailing sales, pricing, production at the country level in an effort to be more transparent and help our stakeholders better understand our strong assets that generate our cash flow. I'd also like to announce that we've recently agreed in principle a resolution to the historic age TVA debt as well as our domestic market obligations in Gabon. that is now in the process of sign-off by the various ministries. Despite the recent increase in our stock price driven by higher commodity pricing, we continue to trade at a very low multiple of EBITDAX, despite paying a strong dividend yield and being bank debt free. We continue to believe right now is an excellent opportunity to buy our common shares that are trading at a discount to their intrinsic value, which is the reason why we have decided to accelerate our chair buyback program over the past few months. With that, I will now turn the call back over to George.

Thanks, Ron. As you have heard this morning, we continue to have tremendous success in our 2023 and believe that the second half of the year will continue to be very strong. We have generated $113 million in adjusted EBITDAX while funding all of our CAPEX quarterly dividends and share buybacks with cash flow and cash on hand and expect to meaningfully grow our cash position in the second half of 2023 from the current level of around $50 million. We accomplished all of this with lower realized commodity pricing to date in 2023, which shows our continued efforts towards capturing synergies and decreasing margins have begun to positively impact 2023 results already. We are delivering on our commitment to the market and to our shareholders, and we are in a solid financial position with no bank debt and growing cash balance. Our strategy remains unchanged. Operate efficiently, invest prudently, maximise our asset base and look for accretive opportunities. Additionally, we have remained focused on returning value to our shareholders. In Q1 2023, We nearly doubled the quarterly dividend and paid that same increased dividend in Q2 2023 and announced the same amount for Q3. We are on track to deliver 25 cents per share annual dividend for 2023 that we promised last year. We have also continued to repurchase common shares through the buyback program approved in 2022. Through the first 10 months of the program, we have returned $15 million to shareholders and repurchased 3.1 million common shares through buyback. Our highly successful 2023 capital programmes in Egypt and Canada substantially completed, the lower capital spend profile in the second half of 2023 should allow us to build meaningful cash. The plans for the significant cash flow generation throughout 2023 above our existing obligations are to build a cash reserve for future drilling campaigns and developments. In addition, we will look to enhance or accelerate the return to shareholders, as well as evaluating potential accretive opportunities. We are working with our partners in EG on the exciting development plan for the Venus Discovery on Block P, as well as evaluating locations and planning for the next drilling campaign, Atatami. We are taking the successes in Egypt and Canada in both drilling efficiency gains and facility optimisation and applying it to our next planned drilling campaign. We should see significant increase in activity in 2024 across our entire portfolio, which will continue to grow production reserves and cash flow generation. We are very excited for the future of Valcor and remain confident that we will continue to deliver superior long-term value to our shareholders. Thank you, and with that, operator, we are ready to take questions.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then one to ask a question. We'll pause momentarily to assemble the roster. And our first question today comes from John White from Roth Capital. Please go ahead with your question.

Good morning, and congratulations on a very strong quarter. Sure, sure. I'm wondering, is it too early to talk about potential CapEx or range of potential CapEx associated with the 2024-2025 Gabon drilling program?

Well, I mean, what I mentioned earlier in the call is in order to solidify the CapEx position, that's why we've went out for an expression of interest for the rig. We obviously have seen an increase in the day rates over the 21-22 campaign. And we've also seen much higher utilization of the jack-up rigs in general in that market. So we do have, obviously, preliminary numbers that we work with and estimates, both on the drilling side. One thing I think is worth pointing out for some of the positions already, we do have some long-lead rigs. items and inventory, so not everything associated with the drilling campaign will be a cash cost because we purchased that previously. But, yeah, I mean, we're basically taking the next quarter, John, to get the market information, pull things together, both for well locations, the types of wells that we're going to drill versus accelerants, step-outs, et cetera, and then the cost of that. And we'll be able to talk a lot more about that in the Q3 call.

Okay, thank you. And what are you doing in Egypt that's resulting in such a dramatic decrease in drilling times?

Good question. We've had, and I think when we started the integration, and I'll go back to, I think, the Q3 call last year, we were asked the question of what are the plans, and our plans were always to look at how we can improve the efficiency. Now, that's resulted through a number of step measures. One is we've changed a number of policies and procedures there as to how we operate. Secondly, we've had a greater degree of coordination on equipment delivery. In some cases in the past, we've seen the rig on standby for quite a long time waiting for equipment in order to proceed. We've solved that blockage. We have had a significant change out of personnel running these programs and are focusing on both drill efficiency and completion efficiency. So it's a mixture of all three. I can't put my finger on any one, but the change out in personnel, the coordinated effort between supply chain and drill is one of the major issues, and then obviously making sure we have a good performing drilling unit at the same time. But our levels, I think what's more important, yes, we've seen a step change in efficiency. Our commitment is that we can maintain that level of efficiency because we're confident that we can.

Thanks for all that detail. I appreciate it, and I'll pass it back to the operator.

Thank you, John.

Our next question comes from Charlie Sharp from Canaccord. Please go ahead with your question.

Thank you very much, and thanks for taking my question. And if I can echo the previous questioner's comments about such a good quarter, congratulations. Just two, I think, fairly short questions, if I may. One, on the GAF line fix on SENT, can you quantify what you think the impact will, the positive impact will be in terms of costs once that is working again? And secondly, Is it too soon to have some idea about the split of Gabon Wells, the next campaign between Gamber and then Farr?

I'll share the first question with Rowan, but on the efficiency, obviously we utilize a lot of the field gas for infield power at Itami. At certain pressure levels, the line is bubbling, so we're trying to maintain a pressure equilibrium in the line right now so it doesn't leak and also it doesn't get flooded. We're trying to, by maintaining that equilibrium, it's allowed us to not immediately go and repair the line and wait for an opportunity when a die spread will be in Gabon rather than commissioning a die spread through mobilization to come to Gabon, and that reduces the cost. I'll let Ron talk about the efficiency of that and what it does for us.

Yeah, thanks, George. Charlie, yeah, with the sent gas line being down, we haven't got the fuel for the feedstock for the FSO at the moment, so we are burning that diesel supply. And that diesel is based on a bunker cost coming in from Gabon. So it is quite high crude pricing. Essentially, that means that we're probably burning between $500,000 and $600,000 a month more than we should be due to not having that feed gas. So we see that dropping out effectively in Q4. We see the pipeline repair itself basically happening in Q3. We are in a lot of discussions at this point in time in getting a suitable vessel in to perform that repair. It will require a simulation vessel and dive team. And we've got the cost of that built into Q3. What I'd say is if we look at the saving between Q3 and Q4 in relation to the project, Essentially, it's about the price of it. We're burning on the diesel each month for the quarter. Essentially, if we get this done in Q3, we should see a big drop-off in diesel costs in Q4, and the cost of that repair is somewhere between, we estimate at this point in time, between $2 million and $3 million. Okay, that's great. Thank you.

And to get to your second question on the 2024 drilling program, we are obviously, our subsurface team have been working hard on looking at the opportunities both in the gamba and in the subcrop dental and in the step-out opportunities. So whilst there are quite a number of wells currently in the portfolio, the selection of the wells and the sequencing of the wells, again, hopefully be able to talk in a lot more clarity in Q3. But there are, as I said in my statement, at least a three to four-wheel program with a number of options. Thank you so much.

Thanks, Charlie. Our next question comes from Chris Wheaton from Stiefel. Please go ahead with your question.

Thank you. Good morning, guys. And let me add something to say that it's great to see good operational discipline turning into really good numbers on the screen this morning. So very well done. First question for you, George. Given the good drilling performance you've seen in Egypt and Canada, were you not tempted to maintain capex but do a bit more drilling and therefore accelerate that growth in production and that growth in free cash flow we could see into next year and I'm interested in why you chose to stop rather than spend that extra money you'd spend the money you'd originally budgeted and then secondly a question for Ron if you look in absolute terms costs 2Q versus 1Q were up about 10 minutes and I'm interested in breaking that down into sort of inflationary effect, activity, and then any one-off costs like, for example, the diesel burn you've identified in relation to the lack of fuel gas and so on. Thank you very much.

Okay, thanks, Chris. There's a couple of, I guess, nuances in what we said in our earlier statement when we said our CAPEX spend is almost complete, so So let me talk about Egypt in the first instance. Right now, we are, I think just today, completing our firm programme. Has it been very successful? Yes, it has. It's clearly been successful. We're clearly excited by it. Are we taking a position that we will lay the rig down? Right now, we're looking at at least up to three contingent opportunities. And that is within our CAPEX guidance range, so it doesn't change our guidance that we've provided. It's within the range. We've contingently allowed for those wells. So, yes, there is a... Whilst we say we've completed the FIRM campaign, there is a very high probability that we will continue the drilling programme for at least another two to three wells in... in Egypt, and then we will be working up the wells for the 2024 campaign in order to arrest decline. When it comes to Canada, it's slightly different. One of the things we said in Canada, we need to look at how we can develop the longer lateral wells and how we can make sure we have a land footprint that allows us to do that. So whilst we had those planned in the first half of this year, As we said, the second half of this year is looking at how we can come up with a number of drill-ready 2.75 to 3-mile lateral wells, and do we need to make any additional land acquisition opportunities in order to do that. So that, again, is the preparation for a 2024 campaign up in Canada.

Yeah, and Chris, just going back to your course.

Sorry, go ahead. Go ahead. Sorry, Ron, can I just interrupt and have just one follow-up on yours? Just to be clear, is your production guidance revised today? Does that include those two to three additional opportunities or are those on top of what you've said on guidance?

It will be on top. It does not include our existing guidance because these wells, I mean, we know what we're targeting and we know we're planning for success, but we've We've been conservative. We've included the CAPEX position within the CAPEX guidance range. We have not included the production.

That's very clear. Thank you, George. Sorry to interrupt you, Ron.

Not a problem at all, Chris. The first part of your question, I'd really like to point out on a per barrel equivalent, we're actually down quarter to quarter. So a lot of this is volumetric driven, as you can understand. But yes, there are a couple of one-off costs obviously in there. We pulled out the enormous cost, and you can see that in those production costs, there was about 5.6 million as a one-off in relation to the waste disposal from the old FPSO. We've obviously got inventory crude adjustments as we've sold out of inventory in Q2, which obviously when you look at that, that's a a consequence of the high sales in the period. And what I'd say is around one-off costs really impacting Q2 for inflationary and other things like the sent gas pipeline, I think you would be looking at $2.5 to $3 million, Chris, within there. So I'd hope that $2.5 to $3 million, once the sent pipeline is fixed, is largely negated and removed. But we do have inflationary pressure. We have seen it, as we said, many times on our marine, on our boat expense, on our helicopters. These contracts have seen some rateable increases as they've come to renewal.

That's great. Thank you very much indeed. No problem.

Our next question comes from Bill Desalem from Teton Capital. Please go ahead with your question.

Thank you. We have seen a number of news stories indicating that majors are looking to divest African offshore assets. I know that you all have historically had an interest in continuing the acquisitions. I think you even have referenced that in the call here today. To what degree are you seeing a higher level of interest in divestitures and therefore more opportunity than the past, or is it similar to what you've been seeing? Would you characterize the dynamics there, please?

Okay. Well, thanks, Bill. And of course, we've been saying for the last few years that that's been a focus where we we see opportunities where there's a strategic divestiture for core areas that we focus on for growth. What we've seen more recently, and I'd say for the bulk of 2023, is actually a significant reduction in opportunity from IOC divestitures. We talk about two of the majors, both BP and Shell, have reversed policies from divestiture to investment and growing the oil and gas positions. Whilst we have participated in quite a number of programmes in 2022 and early 2023 for divestiture opportunities, I can honestly say that there are a lot more rare or less opportunities than there were 12 months ago. In addition to that, we're also seeing increasing competition in our areas of focus. particularly from European oil and gas companies and particularly in the UK where the high tax regime at the moment in the UK is forcing the UK oil companies to spread their wings south into Africa and we've seen a lot of interest. So we're kind of finding it much more complex now where there's less meaningful step change opportunities and more competition. Now that doesn't mean to say that we completely change our focus But before where we would have in any quarter eight to 10 potential projects that we would be evaluating, I would say that's now probably down to four or five.

And understanding that you only need one or two to make a difference. But let me flip the question upside down. If the competition is increasing to purchase and there are fewer assets for sale, Does that lead to you all thinking about instead of being an acquirer, let someone take you out, particularly at a premium, given that you are currently trading at a discount?

As a public company, the best thing we can do is also make sure that our company is operating as efficiently as it can and producing as much oil as it's possible to produce. As many of the callers here today will know, this company was potentially on the market a number of years ago. Are we an acquisition target? Potentially, yes, because we operate in the areas that are becoming attractive for others and, as you say, we are trading a discount to our current NAV. Does that change our strategy? No, I don't think it does. I think we have the capabilities both in the experience set that we have inside the company as individuals as our core skill sets for shallow water offshore and onshore production in Africa and the contacts in the region to give ourselves an opportunity for continued growth and you're absolutely correct we may only have a reduced amount of opportunities that we're evaluating at any one point in time but some of those are step change opportunities so you do only need one or two to come through

That's helpful. And then one additional question, please, relative to the contiguous property in Gabon with BW, what's the update on that opportunity?

Yeah, well, actually, there was quite a lot of progress and activity actually in Q2 on that. And we had some meetings scheduled with the ministry and their partners. As you know, there's the It's coming to the election time in Gabon right now, and there was a kind of a frenzy, can we get this over the line before the election? And everyone tried to. It now appears that we probably won't get it over the line before the election. But we're keen to do so at the earliest opportunity. We're very, very pleased that the engagement from both the DGH and our partners has recommenced. And whilst we don't talk a lot about G&H, and we haven't in the last couple of calls, I'm quite encouraged that we'll be adding that acreage with BWE towards the end of this year or beginning of next year, straight after the elections.

Great. Thank you for taking the questions. Congratulations on the production growth, and good luck, whether it be with an acquisition or becoming the acquired.

Thanks, Bill. Our next question comes from Richard from Longport Partners. Please go ahead with your question.

Good morning. Could you explain where you are in figuring out the geology of the dental?

That's a good question. So as most of the listeners will be aware, we had a couple of dental wells last year that were, in some cases, technical successes, and in other cases, the permeability was far lower than we had anticipated, given what we'd experienced previously. So, we spent some time, and we haven't come to a landing on this yet, and this is why it's difficult to say what the sequencing of wells and where the wells will be for the 24 drilling program, but we started to break up the dental between the upper dental, which you'll hear perhaps the terminology coming up in the future called the subcrop dental, and the deeper dental where the permeability is much, much lower. The studies about how we can effectively and efficiently extract from the deeper dental, I mean, that's a study that's going to take us quite some time to understand and come to a resolution on. It's also, you know, we've still got those two dental wells. They are still producing, albeit at low levels. So we are getting some data from that. But right now we're focusing on that particular study for the future. And for the drilling campaign coming up, we're focusing on the shallower dental, which is much, much higher permeability, which we do have a lot of experience in. And that's... If we're looking at next year's drilling program, is there a possibility of a subcorp dental well? Yes, there is. Have we got that worked up and ready to discuss in detail? Not yet, but that's where we are with the dental study at the moment, Richard.

Okay, thank you.

Okay, Jamie, we've got two questions that came in from Stefan Foucault with Octus. who's having some issues with his telephone line right now. So let me go ahead and ask those for him. The first one is with Gabon drilling starting now sometime next year, maybe mid-year or whenever that might be, do we see the chance for any production growth in 2024 versus 2023 for Gabon?

Okay, so obviously as I mentioned earlier, we've put the expression of interest out for the drilling unit. I also mentioned that when it comes to long lead items for the info wells, we have the equipment. So the timing of the drilling program is dependent on the cost and the availability of the drilling unit. So it's all subjected to when we get these quotes back and when this availability is. Of course, if it comes in, and also, sorry, the sequencing of the wells. So if it comes in in Q2 for 24 and we start drilling and the first well we drill is one of the info wells, then the answer is absolutely correct. It will have a production impact in 2024. But as I say, it's down to rig timing and well sequencing. will be the key. And again, we'll be able to talk more about that in the Q3 conference call.

Okay, great. Thanks, George. And the next one is, are any of the costs that we may incur with drilling on blocks G and H, are those in those exploration blocks, are those ring fenced, or can those costs get included with the ATOM costs?

Those costs are absolutely ring-fitting because the commercial terms in blocks G and H will not be the same as the commercial terms in the TAMI. There are potential opportunities where there are accumulations that may straddle the lease line, and in that case, the costs and issues will be split in accordance with unitization, but this is too early to talk about anything like that. The simple answer is, the ring fencing of G&H and the costs around that will be absolutely subject to the terms and conditions that we finally negotiate on those blocks.

Okay, George, that sounds good. I'm going to turn it back to you, Jamie.

And our next question on the audio side comes from Carter Dunlop from Dunlop Equity. Please go ahead with your question.

Hi, when you spoke to the fiscal year production number of 7%, you then went into Q3 with puts and takes, but I didn't come away understanding what the total for Q3 should be.

I don't necessarily follow that question. Carl, can you repeat it?

Sorry, you spoke to a forecast of production growth for fiscal year of 7%, and then you spoke to, you started to talk about Q3 with Gabon Downs, and you did put some takes, but I don't know what the total for Q3 is for a production forecast.

Yeah, again, it's in the guidance, Carter, but the Q3 guidance that we've got out there on a working interest basis is low side 23,000 and the high side 24,800. So effectively a midpoint there about 24,000 barrels. So you will see obviously Gabon continuing at this point in time to decline because we haven't got an active drilling campaign. We've got some maintenance projects on the go. The optimizations worked extremely well in the first half of the year. Certainly on Egypt, as George mentioned there, we're really coming to the end of the firm and budgeted drilling campaign, although there are some other opportunities over and above. And we've also got a number of workovers planned in Egypt, both through Q3 and Q4, that continue to arrest decline there. So that's where we see Q3 in relation to production.

Okay, thank you.

Thank you.

And ladies and gentlemen, our next question comes from Jeff Robertson from Water Tower Research. Sir, please go ahead with your question.

Thank you. George, you talked a lot about the capital return program. In between the 25-cent dividend and I think you have about $15 million remaining on the original $30 million share repurchase authorization. When you look ahead into 2024 with the prospects for the drilling campaign in Gabon and going into 25 and also ultimately spending money at EG for Venus, how do you think about the combination of the share repurchase, the dividend, and making sure that Valco can fund the capital program as you build cash?

That's a good question. When we first initiated the dividend, we ran the numbers on our projections through 2025 because one of the key things we wanted to do was being able to show that the dividend was affordable and we could sustain it. We did that at certain parameters. Ron might remind me, but I think it was around about $60 or $65 oil for the dividend, and we had a certain capital program included in that. When we look at where, and that's why we're testing the market right now to see where are the capital programs going to be predominantly around the rig costs on the jackups for Gabon. And at the moment, we don't see a significant impact to that forecast for the dividend based on our estimates of the capital program that we've got in-house. When it comes to the buyback, I mean, that's slightly different. We initiated a buyback campaign, again, based on a higher oil price, I think somewhere north of 70. And we said we find that sustainable through that $30 million program at that level. And as you've seen, we continue to reconfirm that position as we go through the first $30 million. When it comes to whether we will continue to extend that program, there are a number of factors that we have to consider. First and foremost, the one you've raised is the available free cash flow to do that. And secondly, it's obviously determined, as I think Bill mentioned earlier, on where the stock price is and whether that stock price remains depressed.

Thanks. And just to follow up, Ron, you said you all have a domestic cargo to be sold out of Egypt in the third quarter. Can you just remind me, what dictates whether cargoes in Egypt are sold into the, I'm sorry, international cargo. Who dictates or what dictates whether or not oil in Egypt is sold domestically versus going into the international market where I believe you get exposure to a higher price?

Yes, good question again, Jeff. Yes, we have got a cargo confirmed for the end of August. That cargo is 500,000 barrels plus or minus 10%. So we're working to that. Obviously, it's always our preference to get those export cargoes, and our PSC allows us to get those export cargoes. Now, we have to work with our partner, EGPC, in doing that. And we do have a domestic obligation, too. So you saw us fulfill that domestic obligation through Q2. But yes, we've got one for Q3, and we're working at this point in time for a cargo for Q4-2. And in both cases, we would see the differential that we can achieve in getting an export cargo versus the domestic cargo can be as much as $5 per barrel. So it's certainly our preference to go down that route. Thank you.

And ladies and gentlemen, with that, we'll be concluding our question and answer session. I'd like to turn the floor back over to George Maxwell for any closing remarks.

Thank you very much, operator. I think we've had some very strong indicators for our performance in Q2. Those indicators weren't just driven from the performance in Q2. They were driven by the activities we commenced upon Q4 last year when we started to restructure and reorganise the business. We're seeing it contribute to our earnings profile and we're seeing it contribute to our cash flow generation in operations and also through the synergy efficiencies that Ron mentioned earlier, which are substantive. We are able to talk a lot more confidently on future programmes in all three of our current producing areas. With Egypt, we know we're going to have a programme next year and we'll outline that towards the end of this year. We know we'll have a programme in Canada and we've outlined the steps we're taking to get to define that programme. And we know we're already starting to look at the market to execute the planning position for the programme in Gabon next year. We have continued to make progress on the opportunity to go and drill in Equatorial Guinea, and again, I hope to speak more about that in Q3. We had some ministerial meetings very recently to move that project forward. We have meetings with the Egyptian government later this month to try and progress, as Ron mentioned, the Q4 cargo and confirm the cargoes for 2024 so we can confirm our investment plans. So when we look at, we don't just want to be looking backwards at the performance that was achieved in Q2, because like I said, that was contributed by all the efforts that came from Q4 and Q1 to get there. We also have opportunities to now talk about having the stable platform base that is generating these types of returns for the company and for its shareholders, and what we're going to do with that point forward to continue to grow the production base. I think it's been a very successful second quarter, a very successful first half. What I'm more pleased about is when we went through the acquisition with Transglobe and to some of the shareholders on this call, we had one-on-one discussions. We told them exactly what we planned to do with the assets we were acquiring. We told them how we were planning to do it. And I'm very pleased to say we've realised those plans coming through in Q2. So with that, I'd like to thank everyone for the call and thank everyone for attending. I look forward to talking to you in Q3.

Ladies and gentlemen, that will conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.