Vaalco Energy Inc /De/ Q1 FY2021 Earnings Call

Good morning everyone and welcome to the VAALCO Energy First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please also note, today’s event is being recorded. At this time, I’d like to turn the conference call over to Al Petrie, Investor Relations Coordinator. Sir, please go ahead.

Thank you, Jamie. Good morning, everyone. And welcome to VAALCO Energy’s first quarter 2021 conference call. After I cover the forward-looking statements, George Maxwell, who was named CEO in April, will review key highlights along with operational results. Jason Doornik, our Chief Accounting Officer and Controller, will then provide a more in-depth financial review. George will then return for more closing comments before we take your questions. During our Q&A session, we ask you 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 Q1 2021 supplemental investor deck on our website this morning that has additional financial analysis, comparisons and guidance that should be helpful. With that, let me proceed with our forward-looking statement comments. During the course of this conference call, the company will be making forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and those actual results or developments may differ materially from those projected in the forward-looking statements. VAALCO 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-Q that was filed yesterday. Please note, the conference call is being recorded. And let me turn the call over to George.

Thank you, Al, for the introduction. Good morning, everyone, and welcome to our first-quarter 2021 earnings conference call. I'm excited to speak with you today as my first call as the new Chief Executive. Before we get into our results, I want to take a moment to thank Cary Bounds for his commitment and valuable years of leadership at VAALCO. He was a key player in our achievements, and we wish him success in his future ventures. Now, let’s review some significant accomplishments Cary helped VAALCO achieve over the past year, which have positioned us well for meaningful long-term growth. Early in 2020, following a successful drilling campaign that resulted in three development wells exceeding expectations and two successful appraisal wells, the world economy and the energy sector were profoundly affected by COVID-19. We experienced a sharp decline in oil prices due to the pandemic and supply-demand imbalances. Nevertheless, VAALCO managed to generate positive free cash flow throughout 2020, largely due to a significant increase in our production. Our production for 2020 was 40% higher year-over-year, thanks to the success of our drilling campaign. We also had hedges that protected us when oil prices dropped significantly. We navigated the challenges of 2020 while maintaining a strong balance sheet and financial flexibility, allowing us to seize an attractive acquisition opportunity that arose late in the year. In February 2021, we completed the acquisition of Sasol's 27.8% working interest in Etame, utilizing our cash reserves. We believe this deal is beneficial for VAALCO as it enhances our margins and significantly boosts our production, with the price we paid for each net barrel of oil around $4.90, which is exceptional pricing. Since we already operate the asset, we anticipate only a small increase in general and administrative expenses with no integration needed, allowing us to benefit from the acquisition immediately. With the additional production from this transaction and the strong recovery in oil prices, we expect significant free cash flow generation going forward. Now, regarding our Q1 2021 results, we had a strong first quarter, producing an average of 5,180 net barrels of oil per day, an 11% increase from the fourth quarter of 2020, largely due to one month of increased production from the Sasol acquisition. Our production in the second quarter of 2021 will include a full quarter with these added volumes, and we expect production to grow by 52% compared to the first quarter 2021 average. We are adhering to Gabonese OPEC production quotas, which we anticipate will continue into Q2. We expect our production to average between 7,600 and 8,200 net barrels of oil per day, slightly lower than earlier estimates due to OPEC procurement quotas rather than any unexpected declines. Our production guidance for the remainder of 2021 includes the full impact of the Sasol acquisition. In the second half of 2021, we plan our annual seven-day maintenance turnaround, and we do not expect any significant production uplift from the upcoming drilling campaign. Considering natural decline, we expect production in the second half of 2021 to average between 7,200 and 8,000 net barrels of oil per day, slightly higher than our previous guidance. On the earnings front, we are pleased to report a net income of $9.9 million or $0.17 per diluted share for Q1 2021, a marked improvement compared to a net loss of $3.6 million in Q4 2020 and a net loss of $52.8 million in Q1 2020. The results reflect higher revenue driven by stronger pricing and sales. It’s also worth noting that our Q1 2021 earnings included a non-cash bargain purchase gain, highlighting the attractiveness of this acquisition. It is unusual to report a gain on an asset purchase, but ours was a result of the lower oil price outlook. A new sale and purchase agreement was signed last November, with prices compared to a higher oil price outlook on our closing date of February 25, 2021, setting the fair value for the reserves associated with the acquisition. We reported adjusted EBITDA of $80 million in Q1, more than five times our adjusted EBITDAX from Q4 2020. This performance was propelled by increased sales volume and improved realized prices. We are pleased with the ongoing strength of the oil price environment and, with increased production, aimed to secure a significant portion of our free cash flow under adjusted EBITDAX. Recently, we added more swaps at a decent average price of $66.51 per barrel for 672,533 barrels of oil from May 2021 to October 2021, achieving 70% of our production hedged through October 2021 at an average price of $62.27 per barrel. This strategy enables us to build enough cash to fully fund our current capital commitments, including our 2021 and 2022 drilling campaigns and any potential capital for the FSO conversion, while still retaining upside from higher oil prices since not all our production is covered by contracts for just the next six months. Looking ahead to our 2021-2022 drilling campaign, our strategic vision focuses on growth through organic drilling opportunities and acquisitions. The success of our 2019-2020 drilling campaign laid a strong foundation for future initiatives at Etame. With the recent acquisition closed, the completion of new 3D seismic over the Etame block, and improved oil pricing allowing us to secure strong cash flow, we believe this is the right time to initiate another drilling campaign to enhance our reserves and production in the coming years. We plan to drill up to four wells starting in Q4 2021 and finishing in 2022, including two development wells and two appraisal wells. There are opportunities for sidetrack re-entries to minimize costs and access low-risk reserves and production. We have appraisal locations that could present significant upside not currently reflected in our reserve reports. The final well locations will be confirmed once we process the new 3D seismic data. If the four-well program is successful, we estimate an increase in gross field production of 7,000 to 8,000 barrels of oil per day, yielding a net increase of 3,500 to 4,100 barrels of oil per day for VAALCO upon completion in 2022. Alongside production growth, we expect margin expansion and reduced per-barrel costs. Approximately 90% of our production costs are fixed, and as production increases, our costs per barrel will decrease significantly. Each new barrel we bring online is more economically viable due to low variable costs, enhancing margins as we grow our production. Capital costs for the drilling program are estimated between $115 million and $125 million gross, or $73 million to $79 million net to VAALCO. The upcoming drilling campaign has the potential to provide substantial additional free cash flow, particularly with sustained higher oil prices and our low-cost operating structure. Moving on to the recent announcement regarding the FSO, in line with our strategy to operate at low costs, we are constantly seeking ways to reduce expenses and enhance our margins. A few weeks ago, we announced the signing of a non-binding letter of intent with Omni Offshore Terminals to provide and operate an FSO unit at VAALCO’s Etame Marin field offshore Gabon for up to 11 years, coinciding with the expiration of the current FPSO contract with BW Offshore in September 2022. Presently, our costs account for about 40% of our total production expenses. The Omni FSO proposal could lower our total operating costs by 15% to 25% compared to our existing FPSO contract during the proposed agreement's term. Following the completion of the drilling campaign in 2022 and the introduction of the new FSO, we anticipate a significant increase in production and a substantial reduction in total costs, leading to considerable improvement in our margin per barrel, enabling us to generate more free cash flow to support future growth opportunities. As a reminder, whether we maintain the current FPSO beyond the existing contract or transition to another option, each development approach would require significant capital investment. Under the FSO plan with Omni, we expect a capital investment of $25 million to $32 million net to VAALCO, which includes necessary field reconfiguration, with roughly 20% allocated for investment in the latter half of 2021 and the remainder in 2022. With substantial cost savings expected, we anticipate a payback period of less than three years for this investment. In the new field configuration, the FSO will handle storage and offloading, while processing will continue on the existing platforms. We are in ongoing discussions to finalize definitive agreements. Next, I’d like to provide a quick update on our activities in Equatorial Guinea. We hold a significant working interest in Block P and are examining several development and exploration opportunities here. We have several promising undeveloped discoveries from previous operators, and given the current oil price outlook, we believe we can economically develop these assets. We are excited about our prospects in Equatorial Guinea and plan to update you with more information in the second quarter. In closing, I want to reiterate that our dedicated employees are effectively executing VAALCO’s strategy of growth and free cash flow generation by maintaining core production in a cost-effective manner. We have a robust balance sheet, and with our enhanced production base and new hedges, we have secured sufficient cash flow to meet our entire upcoming capital obligations while retaining upside potential. In our updated Q1 supplemental presentation available on our website, you'll see that with a realized oil price of $65, we estimate generating around $65 million in free cash flow this year, excluding CapEx. Our current stock price indicates we are trading at 2.5 times our multiple free cash flow for 2021 and in 2022, assuming the continuation of strong pricing and an additional production increase from the drilling campaign alongside potential significant cost savings from the FSO adjustments, we expect to generate even more free cash flow. With that, I’d like to turn the call over to Jason for more details on our financial results. Thank you.

Thank you, George, and good morning, everyone. We reported strong net income of $9.9 million or $0.17 per diluted share in the first quarter of 2021, which included a $7.7 million non-cash bargain purchase gain, which was offset by a $6 million loss on derivative instruments. $4.2 million of the loss on derivative instruments was an unrealized loss. As George mentioned, the first quarter reflected significant increase in sales and realized pricing. For comparison purposes, in the fourth quarter of 2020, we reported a net loss of $3.6 million or $0.06 per diluted share, which included the impact of $3.6 million in exploration expense related to the Etame seismic program during the quarter and $2.2 million of expense related to stock based compensation. For the first quarter of 2020, we reported a net loss of $52.8 million or $0.91 per diluted share, which included $30.6 million non-cash impairment charge due to lower crude oil prices, and non-cash deferred income tax charge of $35.6 million. Our adjusted net income for the first quarter of 2021 totaled $8.7 million or $0.15 per diluted share, as compared to an adjusted net loss of $5.6 million or $0.10 per diluted share for the fourth quarter of 2020. The increase in earnings was mainly due to higher revenues as a result of higher oil prices and higher sales. In the first quarter of 2020, VAALCO reported $6.9 million in adjusted net income or $0.12 per diluted share. Adjusted EBITDAX totaled $18 million in the first quarter of 2021, compared with $3.5 million in the prior quarter and $6 million in the same period of 2020. Adjusted EBITDAX for the first quarter of 2021 was higher than both prior periods, primarily due to increased sales volumes and higher realized prices. Production for the first quarter 5,180 net barrels of oil per day increased 11% from 4,662 net barrels of oil per day in the fourth quarter of 2020, driven by the Sasol acquisition volumes being included in the company's results after the closing date of February 25th, 2021. First quarter of 2021, production was at 5% from the first quarter of 2020. Sales volumes in the first quarter of 2021 were up 113% in the fourth quarter and up 111% compared to the same period in 2020. The increase in volumes in the first quarter of 2021 is primarily due to additional interest acquired and thus higher sales following the closing of the Sasol acquisition as well as three listings in Q1 2021 versus two listings in both the first and fourth quarter of 2020. Our crude oil price realization increased 46% to $61.31 per barrel in the first quarter of 2021 versus $42.07 per barrel in the fourth quarter of 2020 and was 3% compared to $59.54 per barrel in the first quarter of 2020. In January, we entered into new crude oil commodity swap agreements for a total of 709,262 barrels at a Dated Brent weighted average price of $53.10 per barrel for the period from and including February 2021 through January 2022. These swaps settled on a monthly basis. Additionally, in May, we added more crude oil swaps of 672,533 barrels at a Dated Brent weighted average price of $66.51 per barrel for the period from and including May 2021 through October 2021. As George mentioned, we hedge a significant portion of our production volumes to lock in strong cash flows, which will enable VAALCO to fund our 2021, 2022 drilling program, FSO capital program, any potential future stock buyback program and still allow for some additional upside. We took similar trends actions in 2019 before we began 2019, 2020 program, and will continue to assess our needs to mitigate price risk and protect cash flow in the future as we consider any additional future derivative contracts. Turning to expenses, production expense excluding workovers for the first quarter of 2021 was $16 million, which is higher than the $6.6 million in the fourth quarter of 2020 and $6.9 million in the first quarter 2020, primarily due to higher sales and an increase in working interest associated with the Sasol acquisition. The per unit production expense excluding workovers was $26.06 per barrel in the first quarter of 2021, an increase compared to $22.26 per barrel in the fourth quarter of 2020 and $23.39 in Q1 2020. The per unit production expense excluding workovers increase was primarily due to higher crude oil inventory cost as a result of the Sasol acquisition and FPSO charter costs. Included in total production expense are COVID-19 related costs incurred to protect the health and safety of the company’s employees, which totaled approximately $0.6 million in the first quarter of 2020 and $0.4 million for the fourth quarter of 2020. Production expense for the second quarter of 2021 is projected to be between $15 million and $17 million or $24.50 to $27 per barrel of oil sales. Keep in mind that all of the guidance we're providing today includes the positive impact from the additional volumes we acquired from the Sasol effective on the day we closed February 25th, 2021. So for the second quarter of 2021, we will include all three months of financial results with Sasol interest included. Our production expense guidance excludes any potential future impacts from COVID-19 pandemic, not currently being experienced. DD&A for the first quarter was $4.1 million or $6.70 for net barrel of oil sales, compared with $1.3 million or $4.37 per barrel in the fourth quarter of 2020 and $3.1 million or $10.55 per barrel in the first quarter of 2020. DD&A was higher compared to the fourth quarter of 2020 due to higher depletable costs associated with the Sasol acquisition and increased sales. The Q1 2020 DD&A rate was lower in the first quarter of 2020 due to the added costs associated with the 2019, 2020 drilling campaign being included in the depletable base in 2020. General and administrative expense for the first quarter of 2021 excluding stock based compensation expense was $3 million compared with $2.5 million in the fourth quarter of 2020 and $3.4 million in the first quarter of 2020. The increase in Q1 2021 compared to Q4 2020 results from increased quarter taxes and increased 401 contributions to the larger employee contributions in their 401k, increased salaries, increased legal fees, and higher accounting and audit related fees. The per unit G&A rate excluding stock based compensation expense in the first quarter of 2021 was $4.83 per barrel of oil sales, which was significantly lower than both the fourth quarter and the first quarter of 2020 due to increased sales volumes. For the second quarter, we are forecasting G&A, excluding stock based compensation to be between $3.5 million and $4.5 million or $5.50 to $7.20 per barrel. Noncash stock based compensation expense was impacted by the change in product liability as a result of changes in the company's stock price during the quarter. For the first quarter of 2021, stock based compensation expense related to SARS was an expense of $1.2 million compared to a benefit of $2.7 million for the first quarter of 2020. For the fourth quarter of 2020, there was an expense of $1.9 million related to SARS. Turning now to taxes. Income tax expense for the three months ended March 31, 21 was $3.1 million. This is comprised of a $0.3 million of deferred tax benefits and a current tax provision of $3.4 million. The deferred income tax expense for the 3 months ended March 31, 2021 included a $2.2 million income tax benefit associated with the Sasol acquisition. Income tax expense for the fourth quarter of 2020, including a $2.8 million deferred tax benefit and a current tax provision of $2 million. Income tax expense for the first quarter of 2020 included a $35.7 million of deferred tax expense and a current tax benefit of $2.2 million. Since March of 2020, VAALCO’s overall effective tax rate was impacted by non-deductible items associated with operations and deducting foreign taxes rather than crediting them for US tax purposes. At March 31, 2021, we had an unrestricted cash balance of $19.3 million, which included $1.7 million in net joint owner advances. Working capital at March 31, 2020, was a negative $15.8 million compared with a positive $11.4 million at December 31, 2020. While adjusted working capital at March 31, 2021 totaled a negative $2.7 million compared with a positive $24.3 million at December 31, 2020. For the first quarter of 2020, net capital expenditures excluding acquisitions totaled $1.2 million on a cash basis and $2.5 million on an accrual basis. These expenditures were primarily related to equipment enhancements, as well as early costs associated with the next drilling program. As has been the case since the second quarter of 2018, we are carrying no debt. With this, I will now turn the call back over to George.

Thank you, Jason. I'll provide some closing remarks. As we look to 2021 and the future, this is an exciting time for VAALCO. I believe we have a sustainable business model that benefits all stakeholders while focusing on growth and investor returns. This principle has guided me in my previous executive roles, and I am motivated to build a strong foundation and lead our teams to elevate VAALCO. Our board has empowered the management team to foster a workplace that ensures our success as a reliable operator, a generous partner in the communities we serve, and a responsible custodian of the environment. We are enhancing our presence in the UK and international markets, which we believe will support VAALCO’s growth strategy and maximize returns for our shareholders. Our asset base at Etame is strong and generating significant free cash flow in the current pricing environment, as reflected in our Q1 2021 results. Our commitment to operational excellence and strong financial performance at Etame provides a solid foundation for VAALCO’s growth through organic drilling and future acquisitions, aligned with our strategy. To demonstrate our commitment to operational excellence, we have signed a letter of intent for a new FSO unit that will lower our operating costs by 15% to 25% and give us more operational flexibility. In April of this year, we also acquired a hydraulic workover unit for under $2 million, which is stationed in Gabon and can be deployed immediately. This will allow us to swiftly address any downtime issues, saving significant time, production, and cash flow if an ESP unit is required in Gabon. Moreover, it enables us to proactively change ESPs and conduct workovers, further boosting our operational uptime at Etame. We are not merely looking to sustain production in Gabon and EG; there are substantial development opportunities in our blocks in both countries that can strengthen our business and foster organic growth and increased cash flow. As we enhance cash flows, we will also explore ways to return some of that free cash flow to shareholders, having previously developed share repurchase programs and considering similar initiatives in the future, including potential dividends to support our growth strategy. We are actively executing our strategic vision and expanding VAALCO's profitability. Later this year, we will initiate another drilling campaign at Etame, and with our recent hedges, we have secured enough cash flow from operations to fully fund this program, irrespective of the oil price context. We believe VAALCO has a promising future, and we remain dedicated to growing sustainably through strategic acquisitions and successful drilling operations at Etame. Thank you, and now I will turn it back to the operator for questions.

Ladies and gentlemen, at this point, we'll begin the question-and-answer session. And our first question today comes from John White from ROTH Capital. Please go ahead with your question.

George, let me offer my congratulations on your appointment as CEO of VAALCO.

Thank you, John.

My first question is about the potential switch from the FPSO to the FSO. You've discussed the reduction in operating costs and touched on capacity, but could you elaborate more on the capacity and the new FSO's ability to accommodate higher production in the future?

Yes, I can certainly do that. The proposed floating storage and offloading unit that we signed a letter of intent for has SUEZMAX capacity, which allows for storage of over 1 million barrels. This gives us the ability to handle larger parcel sizes for crude oil fields, reducing the risk of reaching tank capacity, a challenge that sometimes affects operations with smaller storage options like our current FPSO. Additionally, this vessel is much newer than the one currently in use, by at least 20 years, providing us with the advantages and technology that come with a modern vessel. When considering the economics, there will be a significant reduction in lease costs, both for charters and the final position, which is one of the main reasons we announced our plans a few weeks ago. Furthermore, there’s potential to explore larger cargo options, which could enhance our oil pricing efficiency when we look at sales values. I hope that answers your question.

Yes. Thank you for that detail. With production about 70% hedge for most of the year, is there any consideration to start to new drilling program sooner, or do you still need some time to work on the new seismic that was shot latter part of 2020 in early 2021?

Yes, no, that's a good question. Whenever you're embarking on these types of campaigns, there are three key elements that you have to consider before you make a commitment on timing. The first and most obvious key consideration is financial. So, have you put yourself in a position where you can commit to the campaign without putting the company in any sort of financial stress? And we've done that. The second point that you touched on is, are we comfortable with the surface and subsurface location targets for both the step out wells and the appraisals with relation to the processing that's currently underway? And for the timing of the wells, we're very comfortable with that position right now. And the probability of success on these wells will not change in any substantive form based on the reprocessing, when we move the subsurface target by a meter or two, but nothing more than that. But the third and most important thing to consider when you're looking to execute a program such as ours is making sure that you have all the assets in place at the right time. And that those assets are available to you and ready and able to execute the program when you're ready to commit to it. And currently, we're looking at assets that fit into that time horizon that we're considering. And it would really be a little bit of a stretch to move that forward. So that's really the pacing item for us with regard to the timing of the program; right now is asset availability.

And when you talk about asset availability, you're talking about drilling rigs that meet your requirements?

Absolutely. Looking at, I mean, of course, globally, there are lots of drilling rigs available, but we tried to optimize both with drilling rig capability and geographical location that can reduce the costs. So that's really the pacing item for us.

Okay. Thank you for that and I'll pass it along, and I may jump back in the queue.

Our next question comes from Stephane Foucaud from Auctus Advisors. Please go ahead with your question.

Hi, everyone. This is Stephane Foucaud. I appreciate the chance to ask my questions. First, regarding the FSO Letter of Intent, when do you anticipate turning that into a committed agreement? Why is it currently just a letter of intent instead of something binding? Are you expecting to find a more favorable opportunity? My second question is about accounting. I believe I saw in the press release that the final payment for the acquisition was $29.6 million, but the cash flow statement only reflects $18 million. Could you clarify whether there's a delay in the payment or if I may have misunderstood something? Thank you.

Thank you, Stephane. I'll address the first question and pass the second one to Jason for the accounting regarding the acquisition. Regarding your first question about the non-binding letter of intent and whether we anticipate any changes, it's quite similar to John's inquiry about drilling rigs. We conducted a thorough analysis of the market to identify options that fit our needs when transitioning from an FPSO to an FSO. We focused particularly on infield enhancements, including increased storage capacity and operational capabilities that a new FSO could offer. As we refined our search for available assets that met our criteria, we quickly realized that there were few options that satisfied our requirements. The primary reason we proceeded with a Non-Binding LOI was to secure our position on this asset. It wouldn’t make sense to invest in detailed engineering and finalize our contractual position without certainty that this is the asset we will deploy. That was the key reason for the Non-Binding LOI. Regarding the cost structure, we are currently confirming that, but we haven't encountered any information so far that suggests the estimated costs we've provided will not be met. Jason, would you like to address the question about the acquisition?

Thank you, George and good morning, Stephane. So on the cash flow statement for the Sasol acquisition, I believe you see there's total cash out the door of roughly $17.9 million. And indeed you're correct, that this year, we paid $29.6 million to Sasol. But as part of the business combinations, we definitely also got $11.8 million in restricted cash. So if you take the $29.6 million that we pay Sasol and you subtract from that the $11.8 million of funds that we received in this, you get to the $17.9 million, which is what's included in a cash flow statement.

That's great and very clear. Thank you.

Our next question comes from Bill Dezellem from Tieton Capital. Please go ahead with your question.

Hi. Thank you. That's Tieton Capital I have a group of questions. And I'd like to start also with the FSO. And very specifically, what is the capacity relative to the current FSO on a daily production basis, as opposed to the total storage basis, which I believe you gave up earlier?

Okay. That's your first question. Processing capacity is completely different from storage capacity, as you've alluded to. Our processing capacity on the current FPSO is circa 25,000 barrels per day of liquids. That processing capacity will not change but the processing been moved to the platform. So we will maintain 25,000 barrels per day of liquids processing capacity within the field.

Okay. Thank you. And…

And when we look at the storage capacity, the storage capacities, I think, have increased by about 400,000 barrels with the FPSO that namely sales.

Great, thank you. Second question is relative to your production guidance. You raised the second half production guidance, as you noted in your opening remarks. What led to that increase?

The main cause or the main position behind that increase, Bill, is moving forward the work over from Q4 into Q3.

Great, thank you. And then, lastly, would you please repeat that production impact from the drilling program? I think you were mentioning that in your opening remarks. And I just missed it.

Yeah. The impact of the drilling would be between 7,000 and 8,000 barrels per day growth and I think the NRI from VAALCO would be 3,800 to 4,100 barrels per day.

And just for perspective, that's on top of the guidance that you've given for the second half of 7,200 barrels per day to 8,000 barrels per day, literally adding another 4,000 barrels a day on top of that are roughly a 50% increase?

Yes. That would be correct left over to the decline curve point forward from December through to them you have all those four wells on screen.

I chose three different areas. First on the FSO, given the favorable economics that the new storage vessel will have, are there only clauses in the existing contract that we could not terminate sooner to take advantage of the sooner? Is there some termination fee that we'd have to pay if we decided to move quicker?

To answer your question, there would be termination fees if we were to terminate the FPSO contract early. While a termination fee can sometimes be appealing due to the expected operating expenses during that time, it isn't an option available to us. When we examine the project timeline with Omni from the point of contractual commitment, the vessel will need to go into dry dock for several months to ensure it meets class certification for the next five years, and this certification can be extended for another five years. We are ensuring that this vessel is prepared for operation from 2022 to at least 2032. Therefore, there isn't a significant opportunity to expedite the refurbishment process in dry dock and deploy the vessel to the field sooner. Additionally, we have some infield modifications to carry out on the platforms and some of the flow lines, which will also be done while the vessel is in dry dock. Thus, from an engineering perspective, we don't have the window you are hoping for to accelerate that process.

Okay. And when this transition occurs, is there a shutdown time that we will have to endure in 2022 to accommodate the new vessel?

Yes, we will have a shutdown period that may last one to two weeks. We aim to coordinate this with our annual maintenance program, so we do not anticipate any additional shutdown during the winter.

Okay. And George on the drilling program. Obviously, oil prices have been all over the map in the last 12 months. What are the current rig rates, or what kind of daily rig rate would you expect to pay?

Indicatively the rig, I mean, we’re in discussions to sell. So I'm probably not going to mention what rate I would happily pay, that might prejudice to some of the discussions we're having. But what we're seeing indicatively right now it's not out of the market from where the campaign was performed in 2019, 2020.

You mentioned that this year you expect to have free cash flow of $65 million. However, you also stated that the free cash flow over the next 12 months would be enough to cover the FSL, the drilling campaign, and any future buyback program. I estimate that amount to be between $98 million to $110 million over the next 12 months, compared to your projection of $65 million for free cash flow in 2021. Can you clarify the discrepancies in these figures?

Yes. I mean, the main differences, but we're not recording our free cash flow position for this year on existing production. We're taking the wells that are on-stream right now, in order to get to a position where we're confident that we cover all of our CapEx expenditures. That's a success based scenario, taking wells on-stream next year from the upcoming drilling campaign and an increase in the production. And that's what bounces that particular delta. So if you look at where we are, with a $65 million position right now, and if you roll that forward into the end of potentially, the end of the drilling campaign in April 2022, or April-May 2022. You can extrapolate that to a better $85 million position, but that's going to be enhanced by the additional production coming on-stream from these wells.

Excellent. Thanks, George and I wish you continued success. Thank you.

Thank you very much.

Ladies and gentlemen, at this point, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to management for any closing remarks.

Yes. I'd like to as my first call as Chief Executive. I'd like to thank everyone for the questions. I think we are as a company very excited by the opportunities we have in front of us. And we have an excellent producing asset. And we have some key upside assets, in EG that has development potential. And I think given the turbulence that we saw in 2020, the 2021 and beyond into 2022 look an exciting growth period for VAALCO certainly.

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