VAALCO Energy, Inc.
Q4 2008 Earnings Call Transcript

Published: 17 Mar 2009

[Operator:]

Ladies and gentlemen, good morning. Thank you for standing by and welcome to the VAALCO Energy's Fourth Quarter Year-End Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions, instructions will be given at that time. (Operator Instructions). As a reminder, today's conference is being recorded. This time I would like to turn the conference over to your host, Chief Executive Officer, Mr. Robert Gerry. Please go ahead.

[Robert Gerry:]

Thank you, Tom and good morning ladies and gentlemen and welcome to VAALCO’s 2008 conference call. Bear with me while I again read our forward-looking statement. This conference call includes forward-looking statements as defined by the US securities laws. Forward-looking statements are those concerning VAALCO's plans, expectations, and objectives for future drilling, completion, and other operations and activities. All statements included in this conference call that address activities, events or developments that VAALCO expects, believes, or anticipates will or may occur in the future are forward-looking statements. These statements include future production rates, completion, and production timetables and cost to complete wells. Investors are cautioned that forward-looking statements are not guarantees of future performance and their actual results or developments may differ materially from those projected in the forward-looking statements. These risks are further described in VAALCO's Annual Report on Form 10-K for the year ended December 31, 2008 and other reports filed with the SEC. Thank you for your patience the format this morning will be I will make a quick remark here in the beginning and then I will turn it over to Greg Hullinger our CFO, and then he will turn it over to Russell Scheirman our President and COO and then he will give it back to me for a wrap up and then we will take questions. I thought I would begin by updating you all before I turn it over to Greg, just quickly on our drilling activity in the North Sea. We are getting close on it, we are running a core barrel currently into the gas formation, we do have gas shows. We are running 170 feet high to the shell well that is whole. This well was really akin to, that’s good news. So keep your fingers crossed and we will see what happens. We should know results of that probably 48 hours from now. So would that be a bit of your dues, I will turn it over to Greg. Go ahead Greg.

[Greg Hullinger:]

Thank you Bob. Good morning it’s my pleasure to take you through VAALCO Energy's 2008 financial results. I would like to start with a couple of superlatives. We increased net income by 56%, 2008 versus 2007, and we also maintained a very strong balance sheet with having $125 million of cash and $5 million of gas as of the end of the year. Now, I will take you through some of the details. For the 12 months ended December 31, 2008, VAALCO reported net income of $29.7 million, or $0.50 per diluted share. This compares to a year ago where we reported net income of $19.1 million, or $0.32 per diluted share. For the full year 2008, we had revenues of $169.5 million. This compares to $125 million from a year ago. And a useful measure of cash flow, called discretionary cash flow, which is a non-GAAP financial measure for the full year 2008, was up 27% to $66.6 million, compared to $41.4 million in 2007. This is a good achievement of generating cash flow. Wanted to talk about more information about our results, we sold last year 1,827,000 net barrels of crude oil equivalent at an average price of $92.81. This compares to a year ago of 1,759,000 net barrels at an average cost of $71.10, plus we all know 2008 was a volatile year for crude oil prices. We had a total of 17 liftings from our FPSO. That's where we have the actual sales take place. If we just look on a quarterly average over 2008, in quarter one, we sold our crude for an average of $95. In quarter two, it was $119, in quarter three, $107. And in quarter four, it dropped all the way to $41. So, quite a bit of volatility there. It certainly reflects in the financial results. Our 2008 operating income was $106.5 million compared to $68.7 million in 2007. We had a fairly aggressive capital expenditure program especially towards the end of the year. We have spent total about $25.7 million and about $15.5 million of that was costs to install the Ebouri platform. This is built in the US and it was placed in Gabon in offshore water in July of 2008, and then the drilling program that we started late in the year, we spent $2.7 million on the appraisal and the development well in Ebouri. We also spent a couple of million dollars on FPSO upgrading their facility there, particularly with, I think, water handling facilities and we spend $2.2 million getting ready for our onshore drilling activities in Gabon. In addition, there were some advance expenses for our share of costs for a well that we are not the operator for in the British North Sea that was $0.8 million that we spent in 2008. Production expenses in 2008 were $18.5 million as compared to $15.1 million in 2007 and the increase in expenses were attributable to a few reasons, one was just the increased volume sold which will raise the expenses. We did have 17 liftings in 2008 versus 14 liftings in 2007. Each lifting attracts costs including marine vessels so that’s another reason. And just over the course of the year, fuel costs were considerably higher and we use a lot of diesel, where we have to take the fuel in the boats, in the helicopter, etcetera. So, this was a significant increase in the production expenses as well. Exploration cost in 2008 were $14.9 million, this was almost identical to a number in 2007 at $15.3 million, we did start off the year by writing off the remainder of another well in British North Sea that was determined being non-commercial in early 2008, this was a $6.4 million write-off that occurred at the beginning of the year. And then actually in early 2009, we had two unsuccessful wells, one in the onshore Gabon block in Mutamba Iroru, and second a well offshore in the North Etame area. We discovered these to be unsuccessful in early 2009 and accounting regulations require that you go back and you write-off any expenses that have been incurred for those wells all the way up to the end of the year. So, we did that, $2.5 million in exploration cost was expensed for the onshore well and $0.3 million for the North Etame well. We go on to explain that we expect to be writing off an additional $9.3 million in the first quarter of 2009 for these wells and the breakout is $5.5 million for the onshore well and an additional $3.8 million for the North Etame. You might remember that the onshore well is 100% owned by VAALCO, the North Etame is 30% owned by VAALCO. Additionally, in exploration cost in 2008, we spent in the fourth quarter $3 million for seismic for acquiring and processing seismic data in Angola. We have had $1.1 million expense for aeromagnetic gravity data and that was shot over the Mutamba Iroru block, and then we had additional seismic costs with the Etame Marin block at $0.7 million. A significant item that is always confusing is around income taxes. In 2008, the company incurred $73 million of Gabonese income taxes compared to $48.1 million paid in 2007; an increase year-on-year was due to higher production rates and oil prices. We do provide quite a bit of supplemental information on this in the 10-K report which shows up on page F-24 where I talked about how you start with the lifting amounts taking away royalty, that then allows for up to 70% of those volumes to be applied to the cost account, but if you had been busy with spending money in capital expenditures, we were able to get those recoveries there and then the remainder becomes profit oil which then is featured with the income tax rates. And I think income tax rates can vary based on production. A little complicated but essentially we benefit overall from the increased prices, but that does have an impact on the income tax and certainly with higher production rates, the same applies. We do get to take the overall amount of income taxes down, however, when we are busy spending money which of course we were doing more of that in the fourth quarter of 2008 and there is more planned in 2009. At the end of the year, we had cash balances of $125.4 million and just that we had funds in ESCROW of $23.1 million. The funds in ESCROW are really there in support of the UK well that was flooded in February of this year, and that’s being drilled by the operator Silverstone, we are the non-operator, and then the remainder of the ESCROW is in support of our Angolan commitments. If we look specifically at fourth quarter 2008, VAALCO reported a net loss of $7.5 million for a loss of $0.13 per diluted share in the fourth quarter, this compared to net income of $2 million or $0.03 per diluted share for the same period in 2007. Fourth quarter 2008 revenues were $16.5 million compared to $37 million in the fourth quarter of 2007. In the 2008, fourth quarter results obviously reflect the overall decline of crude oil prices from the year-ago quarter and also we had increase in production and exploration expenses. In fact our exploration expenses for the year, we spent 44% of that in the fourth quarter alone, and that was primarily with the unsuccessful wells and the acquisition of the seismic in Angola. During fourth quarter of 2008, VAALCO sold 399,000 net barrels of crude oil equivalent and that was at the average price of $41.29, and as compared to 425,000 net barrels of crude oil equivalent at an average price of $86.92 per barrel in the fourth quarter of 2007. Operating loss was $0.1 million in the fourth quarter of 2008 compared to a positive operating income of $17.4 million in the fourth quarter. Discretionary cash flow; this is where we talk about 12 months ended December 2008. The net cash provided by the operating activities was $106.6 million, of which the working capital changes net of non-cash comprised $40 million of that, which left a discretionary cash flow of $66.6 million. And with that I guess the only other item that I would mention, and it shows up in our earnings release and there is always interest in the cost per barrel. But in the table we showed the comparison of production cost for the year ended December 31, 2008 versus 2007. Production costs were $10.11 at year-end 2008 and that was for the entire year versus $8.57 in 2007. It also showed depletion cost and G&A cost, if you add up all three of those components, in 2008, the combination of production cost, depletion cost, and G&A cost was about $26 a barrel and that compares to $23 of barrel from the prior year. That’s sort of a run down of VAALCO's financial information. What I would like to do now is turn over to Russell Scheirman, the President and COO and he is going to take us bit through the reserves information and also our 2009 capital program.

[Russell Scheirman:]

Yes, I will start with the reserves. We started our drilling campaign in the fourth quarter of 2008 with two rigs running offshore Gabon. They were both drilling in the vicinity of the Ebouri discovery, the first rig Adriatic VI was drilling a development well on the platform to bring the Ebouri field online. The rig second rig Pride Cabinda was drilling an exploration well, although, it was within the development area, so it was called an appraisal well to determine if the structure was larger than what was originally mapped based on the discovery well. That well was successful. We actually drilled two penetrations with that rig and found oil, full to base in the thickest sand, thickest section of the Gamba sand that we found anywhere on the block. It's about 22 meters thick. We then proceeded after drilling the first development well on Ebouri to drill a second development well to develop the northern portion of Ebouri that we had found with Pride Cabinda, we used the Adriatic VI to drill that second well. As a result of that, we were able to book 1.8 million net barrels of additions to the Ebouri field, giving us total reserves in Ebouri of just under 3 million barrels. In addition, we also, based on the performance of Etame and Avouma, booked an additional 1.2 million of revisions for a total of 3 million barrels of reserve adds for the year. Our production for the year was 1.8 million barrels. So, we ended up with the net increase in reserves of about 19% and a 166% replacement in production to 7.4 million barrels oil equivalent total for the company. We do not report it any of our SEC data, but our proved plus probable is now 12.1 million barrels. The P2 number, that's up from 10.4 million in year-end 2007. In 2009, we have a $56.7 million non-discretionary capital budget if you will, i.e. wells and projects that we’ve committed on. Some of which we already know the results of. We had three wells offshore Gabon plans, we drilled exploration wells. We drilled two of them, one was successful, one was dry. We drilled two Ebouri wells, both of which are successful. We should have a second Ebouri well online. It looks like it's going to slip into the first week in April now. We actually drilled that well 30 days faster than we thought we were going to be able to drill it, and at considerably lower cost. It was originally budgeted as a $35 million growth well and we got it down to $22 million. The reason, we were in the salt and salt drills much quicker, and so we were able to get that well done. We have some problems with the pumps on that well and we may have to use a coiled tubing unit to bring the well in; although we are trying a procedure to try and mitigate the issue with pumps. If we have to do the coiled tubing job, then it will be first or second week in April, if we are able to get the pumps to kick off, then we will have it on two, three days after we finish our lifting that's scheduled on March 30th and 31st. The third exploration well, we are taking advantage of this softening rig market. We wouldn’t have to release the Pride Cabinda, because we have satisfied the minimum number of days that we were committed as we have made a deal to get the Adriatic VI back after it finishes two wells for another operator in Gabon at a day rate that's about $70,000 day less than what we were paying for it when we were drilling the Ebouri development wells. So, it means the deferral of a couple two, three months on that third exploration well, but we felt like since we could save at least $2 million on the exploration well, that was justified. The other capital expenditure program that's ongoing in Gabon is onshore, where we drilled the first of two wells. The first well was unsuccessful. Second well is expected to start March 20th and should be about a 20 to 25-day well to get back to total depth. In North Sea, Bobby mentioned, we are in the objective zone right now, coring the well, and we should be able to log that well in the next few days and hopefully report the results of that. But it's encouraging, we are 170 feet high, the objective there was, there are better sands in the lower section of the reservoir and the reason Shell did not develop Discovery is, the time they were drilling on 2-D seismic and the sands that they encountered that had gas in them were not particularly high quality. But at the base of the gas water contact in that well, there are some very good sands and we were based on 3-D hoping to get high and pulled those good sands up into the reservoirs, so that we can get good rate out of the well. The last area where we have planned capital expenditures is in Angola. We have a well planned for the fourth quarter. It will be dependant on rig availability. It could slide in to next year. We actually have a leading schedule with the Angolans this week to try and get that planned out, sort it out. With that, Bobby, I will turn it over to you.

[Robert Gerry:]

Thank you, Greg and Russell. Needless to say, the oil market or energy market in general is somewhat in disarray. I don't have to tell any of you that. But VAALCO remains very strong. Our cash position remains very strong. Our balance sheet remains very strong. We had a good year. Unfortunately the fourth quarter, we showed a loss. I think we were probably a very good company. I think everybody showed a loss. But adjusting some of the pitfalls of being a successful efforts company, we have to write-off everything, but then it is associated with dry holes. In fact, we write-off everything that associated with drilling to a great extent. Probably the first quarter of this year will not be our best quarter either, because of write-offs. But with our cash position, we remain very viable. In fact, we are quite excited here at VAALCO. Opportunities are coming our way, we remains as one of the very few small cap energy companies with a robust balance sheet. VAALCO is slowly beginning to look at volume production. We always felt that when the commodity price was high, we ought drill forward, now the commodity price is low, so we have dealers out looking to buy production. We would prefer to buy it in West Africa, where we have a good knowledge, but we are looking at other areas. And I would mention if there is ever a time where we would consider coming in United States if the right deal comes our way, we would perhaps consider that. The lifting that Russell mentioned, we should lift 750,000 barrels at the end of this month. Hopefully that will fall in the first quarter, and not the second quarter, but that’s up to Total who we sell to. So, as far as our overall exploration program goes, the jury is still out, really on four of our prospects, as has been mentioned, the North Sea the second well onshore Mutamba, Southeast Etame and of course Angola. We have shot seismic, we have previously in Angola and we are just beginning to process that preliminarily. It looks like that may be a very interesting area. It’s a little bit north of where we currently are planning to drill, but again very preliminarily there are some interesting potential prospects. So, Angola may turnout to be something that we all expected. Again, I think it's important for you all to recognize that we are really only halfway through our exploration program, some of it has been very good, some of it obviously is disappointing, but that’s the business that VAALCO is in. And again we are looking at a number of transactions none of which are in the fruition stage yet, but a couple of them look very interesting to our analysts. So we will proceed diligently but aggressively and trying to now to add some reserve through the purchase of our production, hopefully to go with some additional reserves that we hope we will find in our exploration program. So, we remain excited. We think it’s a good opportunity, again having cash is putting us in a category that there aren’t many people in, in our size of company and we fully expect to be able to capitalize on that. So, I will now open it up to questions from anyone that wants to ask. Tom I will turn it back to you.

[Operator:]

I appreciate that, thank you. (Operator Instructions). And we will open today’s questions. First question is from Steve Berman representing Pritchard Capital Partners. Please go ahead.

[Stephen Berman:]

Good morning gentlemen. First question, historically on your realized price, you’ve been within a couple of dollars of the benchmarking close to rent in your case. I mean what happened in the fourth quarter, it wasn’t even close, why so far off in a plan which I think averaged in mid-to-high 50s.

[Robert Gerry:]

We did not get a lifting in October, so basically we got all our liftings in the fourth quarter in November and December. And rent averaged, I think about $68 in October, so if you take that out of the mix, you will see what happened.

[Stephen Berman:]

Okay, so going forward if it’s a smoother number spread out evenly say over a quarter you should be, there is no reason to say you won’t still be, I mean normal basis within that couple of dollars.

[Robert Gerry:]

Right.

[Stephen Berman:]

And in terms of capacity on the FPSO as you bring the development wells on, I think you talked about growing the capacity on the FPSO. Is there anything in the CapEx budget to deal with that? Can you talk a little bit about that?

[Robert Gerry:]

Well we actually did that work this year to ensure we could get 30,000 barrels of fluids through that FPSO. For the first time we are going to have the ability to have surplus oil production capacity such that we will probably have to do some balancing acts with some of the higher water cut wells to maximize oil production.

[Stephen Berman:]

Alright. I mean is there a need – shall we start thinking about bringing in a bigger platform with some plan.

[Robert Gerry:]

I think that’s going to depend on Southeast Etame.

[Stephen Berman:]

Okay. And in terms of the balance sheet, one reason, it seems like cash went up so much with the payables went up a lot. Is that just a timing thing, can you talk a little bit about that?

[Robert Gerry:]

Yeah we picked up two rigs.

[Greg Hullinger:]

Late November.

[Robert Gerry:]

In November, and so the builds were just starting to pour in on crude those two offshore rigs.

[Stephen Berman:]

And so any sense what that cash position might look like say at the end of first quarter, where we get back to a normal payables level.

[Greg Hullinger:]

It's probably near a $100 million.

[Stephen Berman:]

$100 plus the ESCROW.

[Greg Hullinger:]

That’s correct.

[Stephen Berman:]

Okay. Alright, I will let somebody else.

[Robert Gerry:]

The North Sea portion of the ESCROW will be gone. So you will see the Angola ESCROW.

[Stephen Berman:]

Okay, alright. I will let somebody else jump in. Thank you.

[Operator:]

And next we will go to [Kenneth Pounds] with Nutmeg Securities. Please go ahead.

[Kenneth Pounds:]

Hi gentlemen. Given the extremely low level of oil and gas prices, especially gas, are you contractually obligated to pump oil in Gabon now, or could you basically run a small amount until prices came back up given the fact that you are not hedged?

[Robert Gerry:]

Well, we certainly could shut it if one wanted to and I made a point out before, we have no gas effect so.

[Kenneth Pounds:]

The North Sea will be gas, right?

[Robert Gerry:]

North Sea will be gas, but it is still fairly robust in the UK and somehow I want to be still profitable. But we do not have any intention of shutting in Gabon. The price of rent, I believe is somewhere around $45 currently and that's very profitable to VAALCO. So, we will continue production to generate cash flow. I mentioned earlier that we would look at buying production. VAALCO could conceivably hedge in that case, hedge some of the production that we may be able to buy, but we will just have to wait and see.

[Kenneth Pounds:]

Is there a price that it does not make sense to pump out your limited supply of oil, is it $35, $38?

[Robert Gerry:]

I do not think we are going to shut in.

[Kenneth Pounds:]

I understand that you preferred not to, I am just saying is there number that's out there that it just does not make sense for you guys to deplete your recruits there.

[Robert Gerry:]

Got to be low 20s, our cash looking cost, exclude even if you drill everything in G&A etcetera, Greg mentioned we were around $23 a barrel, and SG&A there in the low teens. So, G&A includes all the geologists and geophysics people we have working on Angola and North Sea and offshore etcetera. And we can certainly trim that number if we had to, but there are no plans to do so.

[Kenneth Pounds:]

I understand. I was just trying to see what that is. I know some people are saying natural gas could even go into the [2s] this year with the increased L&G production around the world, and so forth. So, there potentially could be some delays in actually producing that North Sea well even if it comes into your expectation?

[Robert Gerry:]

We will be on production probably until the first quarter of 2010.

[Kenneth Pounds:]

Okay. That's a good number to know on productions. Okay.

[Robert Gerry:]

And that's at the earliest. That's going to depend on how fast we can get a tree if that well is successful.

[Kenneth Pounds:]

Great. And I guess, finally, with the share price back down, is the company considering any share buybacks this year?

[Greg Hullinger:]

Not currently.

[Kenneth Pounds:]

Okay, great. I will give someone else a chance.

[Operator:]

And next we will open up to TJ Schultz's line representing RBC Capital. Please go ahead.

[TJ Schultz:]

Hey guys. Can you give me the production just from the Etame field, whether it is fourth quarter or currently?

[Russell Scheirman:]

It is running between 10,000 and 11,000 barrels a day, I believe.

[TJ Schultz:]

Okay. Well, on your reserves, I know you said the revisions were for Avouma and Etame. Can you just talk a little bit more about what went into that, you know any detail what on the revisions was attributable to kind of better performance from Avouma versus the Etame field?

[Russell Scheirman:]

Yeah that 1.2 million, 0.5 million was associated with Etame and about 740,000 barrels was associated with Avouma. This is a pattern that we have seen before, at Etame we started out with something like on a gross basis, 16 million barrels from three wells and we produced over 40 million barrels from that field with five wells. At Avouma, they raised the reserves by over 50% after receiving years of production performance. Their model shows that there is probably another 50% to go if their calling proved probable right now. So that's kind of the break down.

[TJ Schultz:]

Okay.

[Russell Scheirman:]

And I will tell you that the Ebouri numbers that we booked is about 55% of what our model projects for Ebouri. So I would hope that a year from now after Ebouri, we have shown some decent performance will get some revisions from the reserve engineers as well.

[TJ Schultz:]

Okay just moving over to exploration, can you just talk a little bit more about North Etame and what happened there and kind of differences you have seen there versus in the other wells?

[Russell Scheirman:]

The North Etame well was a little bit of an anomaly, it was out of the fair way of the Avouma, Etame and Ebouri discoveries. It was an attempt to open up kind of a new trend to the north, in a little bit shallower water, and it just didn't work. The issue with these wells is always the velocities through the various strata that we penetrate, and specifically the carbonate that sits on top of the salt and salt itself. And the salt in this case turned out to be a faster velocity, and faster velocity pushes the structure back down in terms of what you see when you are viewing your interpretation, slow velocity pulls things up, so we were using the same velocity for the salt that we have seen in the Ebouri and Etame areas, and it turned out there faster and the structure wasn't there.

[TJ Schultz:]

Okay. On Angola, I know you said that could be pushed to 2010. Right now, is that included in your $56.7 million CapEx budget?

[Greg Hullinger:]

Right now we are carrying two wells and we are saying there is a kind of a 50-50 probability that either one or the other will get drilled. We need to replace one of the Etame wells, we have one vertical well in there. And the Etame discovery well, the 1B well. And we know that it's still producing water free, and we know that it's in a separate block and we need to put a horizontal well in there. But if there is no room in the tanker, we will have wait until Ebouri goes on decline. So we are carrying it and the Angola well in that $56 million number, kind of half of each figuring that one of the other may get drilled this year.

[TJ Schultz:]

Okay. I know you said $100 million maybe at the end of Q1, what is your CapEx that you already spent this year? That assumes 7.4 in the ESCROW has been spent by the end of first quarter in the North Sea. I am just trying to figure out, at the end of Q1, how much is really left in CapEx?

[Greg Hullinger:]

Well, at the end of Q1, we will have the Southeast Etame, which is about $7 million. We will have a little bit of the onshore well, and then we will have about another $15 million for Angola, so that come up to $25 million or so.

[Robert Gerry:]

Yes.

[Greg Hullinger:]

24, so we have been through.

[TJ Schultz:]

Right.

[Greg Hullinger:]

32 of the 33.

[TJ Schultz:]

I understand. Okay, one last thing, just real quick, just kind of a modeling question here, what's a good DD&A rate or completion rate for us to use here going forward? I know you are at 10.37 for 2008, kind of a drop off in Q4 just on a normalized level?

[Greg Hullinger:]

I don't think it's going to change a lot, because the DD&A rate comes way down in Avouma as a result of the ads. It has dropped from $18 a barrel to $8 a barrel or something. The Ebouri rate is going to be up around 20, but it's right now in the first quarter, we will only have the one well that came on January, 25th. So I don’t think in the first quarter you will see much of change.

[TJ Schultz:]

And that's changed from Q4?

[Greg Hullinger:]

From Q4, yeah.

[TJ Schultz:]

Okay. Great, guys, appreciate it.

[Operator:]

Yeah, next we will go to [Carol Kennel] with [Kennel Capital]. Please go ahead. Mr. [Kennel] your line is open.

[Carol Kennel:]

Hi, can you hear me now?

[Robert Gerry:]

Yes.

[Carol Kennel:]

Can you please give us a little bit more detail on the allocation of the drilling budget between the North Sea, Angola, onshore offshore Gabon, I think you mentioned.

[Robert Gerry:]

Hold on just a minute. Well, of the $57 million or $56.7 million, roughly $25 million of that is offshore. These are 2009 numbers.

[Carol Kennel:]

Okay.

[Robert Gerry:]

Roughly.

[Carol Kennel:]

And when you say offshore, you mean both Gabon and North Sea?

[Robert Gerry:]

No, it’s Gabon offshore on the Etame block.

[Carol Kennel:]

Got it.

[Robert Gerry:]

Onshore, it's about 11. And then the Angola well, the North Sea well is 8 and the Angola well will be about 17. And then we have got some miscellaneous CapEx associated with our operations in offshore Gabon of about 3.

[Carol Kennel:]

Okay. And what would you say the company has spent on the North Sea during the entire history of its exploration there.

[Robert Gerry:]

I think it will be up around $20 million.

[Carol Kennel:]

And has the company found any oil there in the North Sea.

[Robert Gerry:]

Well I mean the well we are drilling right now in the formation of 170 feet high to a gas discovery that Shell made, and we should have logged out of that well later this week and we will see where we are.

[Carol Kennel:]

Alright. So will the company devote more shareholder assets to the North Sea, less, or about the same going forward?

[Robert Gerry:]

It depends what deals come our way. It’s very hard to put a hard number on that. We have looked at some other transactions in the North Sea and have turned them all down. At the moment, I don’t believe we have any active considerations, if you want for any additional work in the North Sea at the moment.

[Carol Kennel:]

Okay. So where would the energies and focus and resources of the company be directed in the next couple of years. I mean, is the North Sea a stepping stone to Russia or Australia or more global domination or is the company more inclined to focus its focus on Africa?

[Robert Gerry:]

We certainly prefer Africa and to reduce it even further, we prefer West Africa. There are transactions in other areas. We are not limited just to West Africa. Again, VAALCO is primarily an exploration company, but we are now spreading our wings somewhat to see what we can uncover in the way of buying production. And it's difficult to pin down exactly where those opportunities might come to fruition. It could be Canada, it could be Europe, it could be Africa, in some other areas and West Africa. So, we are not going to rush it, we probably will not go to China. Haven't seen anything in Australia, we turned down a deal in New Zealand. But I can’t exactly put a fence around where we will go or we won’t go. We just have to see what comes our way and there is some very interesting opportunities including United States.

[Carol Kennel:]

You made a comment regarding opportunities and acquisitions. Is there a price at which the safest and most attractive acquisition is in fact VAALCO and acquiring shares of VAALCO at this price?

[Robert Gerry:]

We think it's undervalued, but we are not going to add much reserve buying VAALCO. I think if we don’t find transactions within three months or four months or so, we would consider buying VAALCO’s stock.

[Carol Kennel:]

Okay. And then the final question is, when is the blackout period lifted for directors and officers where they do want to purchase shares?

[Robert Gerry:]

Doesn’t look like it's going to be lifted soon. We got a lot of drilling activities ongoing, so when we have to get through all of that.

[Carol Kennel:]

Well, I have got from the notes, you said North Sea could be later this week, imminent, and then Ebouri maybe first, second week of April. And then second onshore well Gabon, March 28. So, were they reasoned after the first or second week of April where the blackout would still be in place?

[Robert Gerry:]

I think when we get through drilling of the wells onshore Mutamba, which will probably take 20 days, so we are well in April. There we just have to see where we stay and as far as first quarter.

[Russell Scheirman:]

First quarter earnings, Southeast Etame.

[Carol Kennel:]

Okay, great. Thank you.

[Operator:]

And next we will go to line of Jamie Wilen with Wilen Management. Please go ahead.

[Jamie Wilen:]

Hi, fellas. I heard what you said about buying back stock, but from my money as a shareholder I would think it would be well said if you took $25 million of these prices and you could buyback only 10% of the outstanding shares. I don’t think you impact your ability to buy reserves and I think it could be a good thing for the company. You don't have to comment on that. On Mutamba, is there anything about the second structure that's very different from the first place where you drilled?

[Robert Gerry:]

The second structure is larger and it's on the edge of the Gabon that sets up these other structures that have been successful on the block to North of this and actually on our block. It is actually more interesting of the two to me. So, I am anxious to get it drilled.

[Jamie Wilen:]

Okay. Right now your plan is to put 25,000 barrels a day into the FPSO. What would cause you to alter that plan and move to 30?

[Russell Scheirman:]

We would have to put an additional train on the FPSO, by that I mean set of separators and water treatment facilities. There is room on the FPSO to do that. But we have to be thinking we were going to 35 or 40 before we, let's just say, 35 before we consider doing something like that. Because it would be a substantial capital expenditure to do that or trade up the tanker, but we do have a contract through 2015 on that tanker and that probably means you will be negotiating with the owner. And you would not be able to necessarily go out to bid, because you couldn’t afford to to pay off that lease just to get an extra 5,000 to 10,000 barrels a day from some other tanks. So, I think if Southeast Etame came in strong, we have to review that.

[Jamie Wilen:]

Okay. So you know that you have the capability now of probably going to 30, you would not, 30 is not the number you are thinking about, it's 35 to 40 to make that next step?

[Russell Scheirman:]

Yeah. I am not sure how much we could get to 30 given the high 20s, once we get second Ebouri well on.

[Jamie Wilen:]

Okay. It cost you a little bit extra money, because you had additional liftings in 2008 versus 2007. And a number of lifting were smaller ones. How much control do you have over the quantity that they are going to take out with each lifting and it seems like, why do a $300,000 barrel lifting when we can wait and do an $800,000 barrel lifting?

[Russell Scheirman:]

Well we did in this latest contract, increase the minimum lifting size to 400,000 barrels from 300,000 barrels in an attempt to mitigate this issue. But you are walking a path here, the less flexibility you give the purchaser, the less they are going to pay you for your oil versus the more flexibility wanted to pay for the oil. So, if we had said the minimum lifting has to be 600,000 barrels, I suspect they would have turned around and offered us couple of bucks less a barrel for it. Because they are co-lifting our oil with other cargos and to the extent we force them to take larger quantities, I mean they got to balance that against their co-lifting obligations. And so we just have to be a little bit careful there. Shell was trying to develop some additional markets for our crude last year when they were lifting. And they took some small partials that they sent to some other refineries. [Otavo] is co-lifting us with theirs and they have their customers for that and I think they reduced increases in number of liftings they get.

[Jamie Wilen:]

Okay. And again the price that we get is the average price during the month that lifting takes place, not the date on which lifting takes place, is that correct?

[Russell Scheirman:]

Correct.

[Jamie Wilen:]

Okay. And lastly could you give us any guess as to what the tax rate might be for VAALCO in 2009?

[Greg Hullinger:]

It will be less than it was in 2008, let me see, I have got the projections here. Bear with me, I have got them, it was about $40 case versus $50 case. And likely that the prices of the commodity will be lower, so that will have a trailing effect. We have spent more money and have put a lot of money into our cost accounts that will reduce the amount that goes into cost of oil. So that will reduce the amounts as well. I am hoping that it goes down quite a bit. Plus we are doing some calculations here.

[Jamie Wilen:]

Okay.

[Russell Scheirman:]

Okay. I have something in the range of 40% of revenues, $40 oil.

[Jamie Wilen:]

Okay. Very good thanks so much. I appreciate it.

[Operator:]

And next we will go to the line of Steve Berman with Pritchard Capital Partners. Please go ahead.

[Stephen Berman:]

Earlier you mentioned that the Angola drilling was subject to rate availability, how much of that is the actual availability of a rig versus, rig rates are coming down. So, let’s wait and, just like you gave the example on the Adriatic getting at 70,000 less and I think the rig you need to drill out would be a lot more expensive. So can you talk about that availability versus just biting your time and waiting for rig rates to keep coming down?

[Russell Scheirman:]

There is a little of both going on there. I would tell you that when we were looking at committing to their rig, and we need a semi to drill this prospect. The rates were in the low 400s and now we are being offered the same type rigs in the low 200s. So we need to get in a hurry when we see that much change in just three months. But on the other hand, these are rigs that are working in the theater, and if they go away and you are talking about having to bring one in from Singapore or something. Even if you say $250,000 a day, you will leave that all upon your load costs. So, we are playing the game little bit.

[Robert Gerry:]

And Steve, Russell mentioned our Angolan partners, and the partner will be here tomorrow and we will have, Thursday, Friday, we will have clear picture of what we want to do after that.

[Stephen Berman:]

Okay. The new administration has a whole bunch of proposals to tax the heck out of our industry, and I am just wondering since all of your producing assets are outside of the United States. If you can -- much thought as to how this will or will not affect you. The one getting the most attention is the inability to expense intangible drilling costs or at least the proposal to eliminate that, any thoughts on, and I just want is 8 or 9 or 10?

[Russell Scheirman:]

In totally offshore, probably it's not going to affect VAALCO in any real major way. It's another reason perhaps that some people will have -- some US companies will move totally offshore, and VAALCO is already there. So, it really shouldn't affect VAALCO. Again, it's not a great thing for our industry obviously. So, I don't know why he has to pick only energy, but he is, so we will see what happens.

[Stephen Berman:]

Okay. Thank you.

[Operator:]

And our next question is from Neil Nelson with Turbines Incorporated. Please go ahead.

[Neil Nelson:]

I was curious if the partner who opted out on North Ebouri clock has a limited amount of time that they can buyback in, and how do you envision that transaction as your working interest would go up in the North Ebouri well?

[Russell Scheirman:]

You are right, there is a time period. The clock is running, I don't want to get absolutely specific that when that might be, but it's coming very soon. And I think I don't want to speculate on what we would do, what well, I know what we do. I would like to participate obviously, our interest in being the same as it is in the rest of the concession. But again we aren’t going to speculate. Let's wait and see what happens and we don't have very long to wait.

[Neil Nelson:]

And if you drill the horizontal well in Etame to replace the vertical well, do you envision that you will have more production or more potential production using the gravel-pack method that you have refined?

[Russell Scheirman:]

It will be more production. Yes. And that's the reason, we are going to just sort of have to see how Ebouri performs to decide when we need that additional production. No point drilling if there is no room in the tanker, but if Southeast Etame works and we are looking at another platform and a couple of two, three wells in there, and then other vertical wells then you are talking about needing to expand.

[Neil Nelson:]

Is there any possibility if Angola were successful like you could swap the FPSO to Angola and then bring up another FPSO into Etame to handle the higher rates?

[Russell Scheirman:]

Sure that would be possible. In fact, we got that FPSO from Angola, so it has worked in Angolan waters in fact.

[Neil Nelson:]

Okay. Thank you very much.

[Operator:]

And gentlemen, there are no other participants queuing up at this time.

[Robert Gerry:]

Okay. Well, thank you all very much, and I appreciate your attention and we will see you in another quarter. Thank you, Tom.

[Operator:]

Thank you. And ladies and gentlemen that does conclude our conference for today. We thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.