VAALCO Energy, Inc.

Good morning and welcome to Valco Energy's first quarter 2025 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key then zero on your telephone keypad. 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. During the question and answer session, we ask that you limit yourselves to one question and one follow-up. Please note this event is being recorded. I would now like to turn the conference over to Chris DeLange, Investor Relations Coordinator. Please go ahead.

Thank you, Operator. Welcome to Valco Energy's first quarter 2025 conference call. After I cover the forward-looking statements, George Maxwell, our CEO, will review operational and financial highlights, discuss our updated operational plans for 2025, and add some closing comments before we take your questions. During our question and answer session, we ask you to limit your questions to one and a follow-up. You can always re-enter the queue with additional questions. I would like to point out that we posted a supplemental investor deck on our website 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 our earnings 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. Let me turn the call over to George.

Thank you, Chris. Good morning, everyone, and welcome to our first quarter 2025 earnings conference call. In Q1 2025, we delivered net income of $7.7 million, or 0.7 cents per share, and adjusted EBITDAX of $57 million. This was driven by NRI production of 17,764 barrels of oil equivalent per day, which was above the high end of guidance. Working interest production of 22,402 barrels of oil equivalent was at the high end of guidance, and NRI sales of 19,074 barrels of oil equivalent per day which was also at the high end of guidance. Prices in Q1 2025 was nearly flat with Q4 2024, but we have seen a decline in pricing thus far in Q2. We also entered into a new reserves-based revolving credit facility in the first quarter to complement our internally generated cash flow and cash on hand from time to time as needed to fund our growth initiatives. As Ron discussed in the last call, we have an initial commitment of $190 million with the ability to grow to $300 million as we look to fund projects across our diverse portfolio. Over the past two years, we have delivered record-breaking operational and financial results while meeting or exceeding our quarterly guidance targets. Maintaining operational excellence and consistent production across our portfolio is essential to expanding adjusted EBITDAX, which has allowed us to grow inorganically and also to fund organic growth initiatives better positioning Valco for the future. We had a strong start to 2025, but I want to remind everyone that this will be a transitional year as we had production come offline in Q1 at Côte d'Ivoire as planned for the FPSO project. and we are not expecting kicking off the drilling campaign in Gabon until Q3, which means meaningful production uplifts should begin at the end of 2025 and into 2026. Before I go into more detail regarding our assets, I would like to discuss the current macroeconomic environment and discuss how Valco is reacting to the uncertainty in the commodity pricing. Given the softening of commodity pricing, in particular oil, we are looking at ways to reduce our discretionary capital spending and delay some smaller projects. We have decided to cut about 10% from our capital budget in 2025, which includes the drilling program in Canada due to pricing, and some smaller projects that can be delayed until we see better commodity pricing stability. Given the strong production performance in Gabon and Egypt thus far in 2025, we believe that the 10% CapEx reduction will not impact our production or sales for the year. Our guidance for the full year 2025 has remained unchanged with the exception of the 10% reduction in capital. Our long-term projects like the FPSO project in Côte d'Ivoire and our drilling campaign in Gabon are continuing as planned, given that these are long-term projects extending economic field life by adding production and reserves. These projects take multiple years of planning and their economics are evaluated on a longer term basis. I would also like to point out that there are fiscal benefits in our African PSCs related to lower commodity prices that offer some protection from lower pricing and allow for additional cost pool recovery to encourage continued investment at lower pricing. Let me now get into the details of some of our assets starting with Cote d'Ivoire. I would like to remind you that a year ago we had no production or interest in Côte d'Ivoire, and then in April 2024 we swiftly and efficiently completed the Swenska acquisition, securing a valuable asset. In line with the project timeline, the FPSO ceased hydrocarbons production as scheduled on January 31st, 2025, with the final lifting of crude oil from the vessel occurring in early February. The vessel is currently on tow to the shipyard in Dubai for refurbishment. Significant development drilling is expected to begin in 2026 after the FPSO returns to service with potential meaningful additions to production from the main Baobab field. The Council of Ministers recently approved a 10-year extension of the licence on CI40, extending it to 2038. We are making a very sizeable investment in this project, but given the licence extension and 125% cost oil return on the capital spent. This investment will provide solid economic future growth. In March 2025, we announced a farming agreement for the CI705 block offshore Côte d'Ivoire, where we will operate with a 70% working interest and a 100% paying interest under a commercial carry arrangement through the seismic reprocessing and interpretation stages and a potentially drilling up to two exploration wells. We invested $3 million to acquire our interest in the new block, and we are partnering with Ivory Coast Exploration Oil and Gas, SAS, and PetroC. We plan to conduct a detailed integrated geological analysis to assess and mature our understanding of the block's overall prospectivity. We believe the block is favorably located in a proven hydrocarbon system the prolific Tano Basin, and is approximately 70 kilometres to the west of our CI40 block. We have demonstrated our ability to acquire, develop and enhance value through accretive acquisitions, and we are excited about the prospects in Côte d'Ivoire. In Egypt, in the fourth quarter of 2024, we contracted a rig and drilled two wells, starting a drilling campaign that has carried into the first half of 2025. In the first quarter of 2025, we drilled the further five wells and completed four of them with an average 30-day initial production rates of about 120 barrels of oil per day. We are continuing to drill and expect a further three to four wells to be drilled in the second quarter of 2025 with strong results from the first well in quarter two. Both the drilling program and the workover program in Egypt add solid production and are economic even in lower priced environments. I'm also very proud of our continued performance from a safety standpoint in Egypt. We have not had a lost time incident in 2024, and thus far in 2025, we have not had a lost time incident, which means that we have now gone over 4.3 million man hours without an incident, which is a testament to our ongoing commitment to safety. Moving to Gabon. Given that we haven't drilled a well in Gabon for over two years, we are pleased with the positive overall production results with strong production uptime and improved decline curves on the wells. We secured a drilling rig in December 2024 for our 2025-2026 drilling program, which is planned to begin in Q3 2025. But the timing of when we start the drilling program is dependent on when the rig will become available from its current commitments. The contract we signed for the rig is for a firm commitment of five wells with an option for five additional wells. We are targeting two wells to be drilled and one completed in 2025 with the remainder of the program to occur in 2026. We have options to drill additional wells if information gathered during the program results in high grading and de-risking of already identified well locations. Since the last call, we have continued to review the well sequencing of the program and the testing of the Iburi shut-in wells. We are pleased that the extended flow test on the Iburi 4H well has continued into the second quarter, with the well producing at a rate of around about 1,000 barrels of oil per day. We originally wanted to gather information on the H2S concentrations at this location to aid in equipment design and to evaluate our chemical crude sweetening process. The well has now flowed for over four months with the H2S concentration within our modelling expectations, demonstrating our assessment to chemically treat the oil. The well's production has also helped us to exceed guidance in Q1 2025 by adding some additional production costs for chemicals. This well will be worked over during the programme and should provide a further boost to oil production. Regarding our exploration blocks in Gabon, the Niossi Marine and the Gaduma Marine, we are working with our partners and the operator BW Energy on plans for the two blocks moving forward. A seismic survey to fulfill a work commitment on Niossi is being planned for acquisition in late of 2025 or early 2026. Given the proximity of these blocks to the prolific producing fields of Itame and Disafu, we are excited about the future possibilities for these blocks. Turning to Canada, we successfully drilled four wells with lateral lengths of 2.75 miles in early 2024. These wells helped to improve the liquid mix of our production in Canada, adding to the financial performance. As I mentioned in the last call, we also drilled a well in the southern acreage in Q4 2024. Because we have minimal horizontal subsurface information across a southern acreage, this well was drilled to help us better understand the acreage and potentially add reserves. The well floated around 200 barrels of oil per day in its initial testing phase, and we have shut the well in while we evaluate options to tie in the well into production. This positive result could lead to future reserves and resources for our southern acreage. While we remain optimistic, about the drillable inventory in Canada, we did decide not to drill wells this year due to the current commodity price uncertainty. We will continue to monitor the performance of our wells and plan for future drilling opportunities. In the current Equatorial Guinea, we are currently conducting our front-end engineering design or feed study. We continue to anticipate the completion of the feed study will lead to an economic Final Investment Decision, or FID, in 2025, which will enable the development of the Venus Discovery. We remain excited to proceed with our plans to develop, operate, and begin producing from the Discovery in Block P, offshore Equatorial Guinea, over the next few years. I would now like to discuss some of our financial results. In the first quarter, we spent $58 million in capital expenditures on a cash basis, which was below our guidance range. Our unrestricted cash balance at March 31, 2025, was $40.9 million, which is down about $40 million from year-end 2024. This was driven by the elevated capital spending and the state listing and bond to settle our in-kind taxes of about $30 million. We believe that this will likely be our only state listing in 2025 in Gabon. As we have previously stated, our foreign income taxes are settled by the government through oil listings in Gabon and Côte d'Ivoire, and the government taking their share in Egypt. The state listing in Gabon in Q1 also drove our outflow in our working capital. While we had an outflow in working capital, the good news is that we did reduce our Egyptian receivables balance, which marginally offset the state listing impact. We completed the first quarter bank debt-free with an undrawn $190 million credit facility available to fund our capital projects. Let me now turn to guidance. I would like to point out that our full guidance breakout is in the earnings release and in our supplemental slide deck on our website with production breakout of both working interest and net revenue interest by asset area. As I stated earlier, we are reducing our full-year capital budget from $270 to $330 million down to $250 to $300 million, and our full-year production and sales guidance will remain unchanged. For the second quarter, we expect to spend between $65 and $85 million in capital expenditures. NRI production is expected to be between 15,400 and 16,800 barrels of oil equivalent per day, and sales are expected to be from 17,800 to 19,300 barrels of oil equivalent per day. In Q2, we expect three liftings to occur in Gabon, which is why our sales guidance is higher than our production guidance. As a reminder, the FPSO project in Côte d'Ivoire began in Q1, and the production and sales for the Baobab field are not expected until the FPSO return in 2026. Production expenses for Q2 are expected to be in line with Q1 2025 when normalized for one-time expenses. Given the current commodity price uncertainty, we are continuing to watch every dollar we spend, and just like with our capital spending, we are looking to defer discretionary spending in operating and G&A expenses as well. Turning to hedging, we have added some additional hedges and we now have 70,000 barrels of oil per month hedged in Q2 with a floor of $65. In July, we have 160,000 barrels of oil per month hedged with a floor of about $65. And in August and September, we have 60,000 barrels of oil per month with a floor of $65. In addition, we have gas hedges amounting to 75% of our anticipated gas production in place from May through October of this year. Our hedging program has always looked to help mitigate risk and protect our commitment to shareholder returns. As you have heard this morning, we have a track record over the past several years of not only delivering strong operational and financial results at or above expectations every quarter, but also making highly accretive acquisitions that have materially grown vocal. We have an exciting array of organic projects that we are executing over the next few years and that we expect will double our size and scale and enhance our ability to generate even more cash flow in the future for growth. Next week we have our Capital Markets Day where we will go into additional details about the upside capabilities across our diversified asset portfolio. and I want everyone to come away from our capital markets day, is that Valco is on the right trajectory with multiple high-quality upside opportunities across our portfolio. Additionally, we have an outstanding team whose operational, technical, and financial acumen will be on full display during the presentation. This, coupled with our track record of meeting or exceeding expectation, should instill the investment community with confidence that we can deliver on our commitments that will drive our valuation to a level more in line with the cash flows and NPV potential Valco can deliver in the future. Our strategy remains unchanged to operate efficiently, invest prudently and maximize our asset base and look for creative opportunities. We are in an enviable financial position with a much stronger and diverse portfolio of producing assets with significant future upside potential. Our entire organization is actively working to deliver sustainable growth and strong results to continue funding our capital programs, whilst also returning value to our shareholders through a top quartile dividend yield. In Q1 2025, we paid a quarterly cash dividend of 6.25 cents per common share, or around $6.5 million. We also announced the second dividend payment of 2025, which will be paid later in June. and we remain on pace to deliver another 25 cents per share annual dividend for 2025, which at our current share price is a dividend yield of over 7.5%. After paying the second quarter 2025 dividend, Valco will have returned over $100 million to our shareholders through dividends and share buybacks since 2022 when the first dividend payment was made. We are truly excited about the future and Valco now has multiple producing areas and future prospects that have diversified our risk profile and our sources of income for many years to come. Our disciplined approach to maximising value for our shareholders by delivering growth in production, reserves and cash flow has not been reflected in our stock price, but we believe that we will see the market begin to properly value Valco as we execute on our organic opportunities. Thank you, and with that, operator, we are ready to take questions.