Vaalco Energy Inc /De/ Q3 FY2021 Earnings Call

Hello, and welcome to the VAALCO Energy Third Quarter Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note today's event is being recorded. I'd now like to turn the conference over to your host today Al Petrie. Mr. Petrie, please go ahead.

Thank you, operator. Good morning, everyone, and welcome to VAALCO Energy's Third Quarter 2021 Conference Call. After I cover the forward-looking statements, George Maxwell, our CEO will review key highlights along with operational results. Ron Bain, our CFO will then provide a more in-depth financial review. George will then return for some closing comments before we take your questions. During our Q&A 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 Q3 2021 supplemental information 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 the reports we file with the SEC including the Form 10-Q that was filed yesterday. Please note that this conference call is being recorded. Let me now turn the call over to George.

Thank you, Al. Good morning, everyone, and welcome to our Third Quarter 2021 Earnings Conference Call. I am very pleased with our ability to execute on our strategic vision and 2021 has been a banner year for VAALCO thus far. We nearly doubled our production with the acquisition of Sasol's working interest in Etame in February 2021. In June, we secured a jackup rig for the upcoming 2021-2022 drilling campaign. In August, we finalized an agreement with World Carrier that will allow us to sustain our operational excellence and robust financial performance at Etame through 2030 with a new FSO solution that reduces costs by almost 50% when compared to the current FPSO and will reduce our overall field operating costs by approximately 17% to 20%. In October, we were provisionally awarded two offshore blocks as part of a consortium with BW Energy and Panoro Energy. This expands our presence and the relationship in Gabon, a further indication of our investment commitment in Gabon. All three companies in the consortium are uniquely positioned, since we have world-class discoveries in Gabon adjacent to these awarded blocks. We also recently announced that we have completed our feasibility study for the stand-alone development of the Venus discovery in Block P in Equatorial Guinea and we are moving forward now with a field development plan. We have also completed our planned annual full field turnaround maintenance on time and within budget in the third quarter. I'm also pleased to say we have already completed the second shutdown that was needed for maintenance on the FPSO that could not be completed at the same time as a full field turnaround. That second shutdown lasted six days and was started and completed in early October. Finally, we have successfully performed two workovers in September and October, which resulted in an increase to production. As you can see, we are delivering on our strategic objectives and in many cases exceeding expectations, which has firmly placed VAALCO in a financially enviable position. Turning to the third quarter, we produced an average of 7,694 net barrels of oil per day, which was near the high-end of guidance, despite the annual seven-day field-wide turnaround. The third quarter reflected stronger sales and realized pricing, which drove revenue higher. This also helped to grow our adjusted EBITDAX to $23.3 million in Q3 2021. In fact, we have now generated $63.2 million in adjusted EBITDAX for the first nine months of 2021, which is almost the same amount as the previous two full calendar years combined. This has allowed us to grow our cash position to $52.8 million at the end of the third quarter in preparation to fund our 2021-2022 drilling campaign from cash on hand and from operational cash flow. We continue to be pleased with the ongoing strength of the oil price environment. And with a significant increase in production, we will continue to hedge opportunistically and lock in free cash flow and adjusted EBITDAX to assure we have the funds for our activities in 2022. Turning our attention to the future, our strategic vision is built on accretive growth through organic drilling opportunities and through acquisitions. We have used a 3D seismic that we acquired over time to maximize the impact of our upcoming drilling campaign. Additionally, we are derisking future drilling locations and potentially identifying new drilling locations with further 3D processing. In June, we secured a contract with Borr Drilling Limited to drill at least three wells with options to drill additional wells. We are expecting the rig to begin drilling our first well the Etame-8H Sidetrack in early December as planned. We will provide details on other planned drilling locations in early 2022, but we are very excited by the production upside of this campaign. As a reminder, assuming a successful drilling campaign, the estimated increase in gross fuel production is 7,000 to 8,000 barrels of oil per day, or 3,500 to 4,100 net barrels of oil per day to VAALCO when the drilling campaign is completed in 2022. Hand-in-hand with the production increase will be margin expansion and per barrel cost reductions. About 90% of our production costs are fixed, and as production increases, our per barrel cost will decrease significantly. Every new barrel we bring online is more economic because of the low variable costs. So, as we grow production, we are also growing our margin per barrel and reducing our costs per barrel. From a capital standpoint, we estimate the cost of the drilling program is between $117 million and $143 million gross or $74 million to $91 million net to VAALCO. This is slightly higher than our estimates at the beginning of the year due to inflationary pressures on service and manpower. But given the current sustained higher oil price environment, the upcoming drilling campaign has the potential to generate significant additional free cash flow. In line with our strategy to be a low-cost operator, we are constantly looking at ways to reduce costs and improve margins. In August, we announced that we have signed and received partner approval for a new FSO solution. From an operating cost standpoint, our current FPSO costs are around about 40% of our total production expense. The new FSO will significantly reduce storage and offloading costs by almost 50%, increase effective capacity for storage up by over 50%, and is expected to need an extension of the economic field life, resulting in a corresponding increase in recovery and reserves at Etame. The new FSO agreement requires a prepayment of $2 million gross, $1.3 million net in 2021, which we paid in the third quarter, and $5 million gross, $3.2 million net in 2022. These advanced payments will be recovered against future rentals. Additionally, current total field level capital conversion estimates are around $40 million to $50 million gross, $26 million to $32 million net to VAALCO, with the majority of the CapEx being spent in 2022. This capital investment is projected to save approximately $20 million to $25 million gross per year, $13 million to $16 million net to VAALCO, and operational costs through 2030 giving the project a very attractive payback period of only two to two and a half years. The FSO solution is expected to greatly improve our margin per barrel and allow us to deliver more free cash flow to fund our future activities. In October, we announced an exciting new opportunity in Gabon. VAALCO has entered into a consortium with BW Energy and Panoro Energy. The consortium had been provisionally awarded two blocks in the 12th offshore licensing round in Gabon with two exploration periods totaling eight years, which may be extended by a further two years. The consortium will now commence detailed production sharing contract discussions with the Gabonese government. The bid terms are won on a basis that VAALCO would pay a net $4.6 million signature bonus in total for the blocks when the blocks are officially awarded. BW Energy will be the operator with a 37.5% working interest, VAALCO will have a 37.5% working interest, and Panoro Energy a 25% working interest, and both will be nonoperating joint owners. The two blocks G12 and 13 and H12 and 13 are adjacent to VAALCO's Etame PSC as well as BW Energy and Panoro's Dussafu PSC offshore Southern Gabon. The majority of these two blocks are in water depth similar to Etame. Both Etame and Dussafu have been highly successful exploration, development, and production projects undertaken by the consortium members over the past 20 years with approximately 250 million barrels discovered to date. As you can see, this consortium is uniquely positioned with the knowledge, experience, and expertise of progressing world-class discoveries in Gabon adjacent to these awarded blocks. The consortium bid with the intent to shoot 3-D seismic on Block G and reprocess existing data on Block 8 during the first exploration term and has agreed to drill an exploration well on each block. We don't expect to shoot that new seismic until 2023 with any drilling to occur after that. The existing seismic on both blocks indicate several opportunities and our goal will be to efficiently and effectively explore, develop, and potentially produce additional resources in Gabon. We believe that this opportunity fits perfectly with our strategy to maximize shareholder returns in the area we know best in West Africa. Another area that holds significant future potential for VAALCO is Equatorial Guinea. We have a substantial working interest in Block P and we are evaluating several development step-out and exploration opportunities on our acreage. We are excited about our opportunities on the block and believe it makes sense to move this project forward with a more definable timeline for potential development. This summer we completed our drilling feasibility study for the standalone development of the Venus discovery in Block P and we're moving forward now with a field development concept. As we work through the development concept, we will provide more details about potential timing, capital costs, reserves, and production estimates. We are committed to profitably exploiting the resource potential of our assets, and EG could become a significant operational asset moving forward. Before I turn the call over to Ron, I would like to briefly discuss the workovers that we performed in September and October. We began the workovers in late September and utilized VAALCO's mobile hydraulic workover unit, which was purchased in early 2021, to rapidly mobilize and replace the electrical submersible pump. The ESP units are cheaper and more effective compared to using a drilling rig. Also, by performing the workover sequentially, we saw significant cost savings. The first workover that we completed was on the Ebouri 2-H well to replace and upgrade the longest producing ESP unit at Etame. The successful replacement increased production from 500 barrels per day net prior to the workover to approximately 1,400 barrels a day gross in mid-October. The second workover was to place the upper and lower ESP units and reconfigure the ESP design at the Etame 12H well. Production was restored in late October at a rate of approximately 1,800 barrels a day gross. In October, we completed an additional six-day turnaround to accommodate the necessary FPSO maintenance we discussed last quarter. Taking into account these quarter events we have narrowed the range of our annual guidance to be between 7,000 and 7,200 barrels of oil per day. As a reminder, since our 2021-2022 drilling campaign doesn't begin until December, there is no production uplift from that drilling campaign in 2021, but we should see significant uplift in 2022. For sales volume, we have also narrowed our guidance to between 7,350 and 7,550 barrels per day. As we have discussed before, sales volume does not always equal production volumes due to timing and size of liftings. Going forward, we plan to provide sales volumes guidance on an annual and quarterly basis. In summary, there's a lot to be excited about as we finish 2021 and enter 2022. I would like to thank our hardworking team here at VAALCO who continue to operate and execute on our strategic vision of accretive growth and free cash flow generation. As you can see, we are firmly focused on maximizing shareholder return opportunities. Our sustainable quarterly shareholder dividend policy that we announced yesterday allows us to maintain upside and operate with the highest regard towards ESG while we progress our strategic objectives focused on accretive growth. With that, I would like to turn the call over to Ron to share our financial results.

Thank you, George, and good morning, everyone. Let me begin by saying I'm also very pleased with our operational and financial performance as well as all of the strategic accomplishments that we've been able to enact over the past few months. Turning to our financials, adjusted EBITDAX totaled $23.3 million in the third quarter of 2021 compared with $21.9 million in the prior quarter and more than triple the $7 million in the same period of 2020. We've benefited from increased sales volumes and higher realized pricing. In fact, thus far in 2021, we generated $63.2 million in adjusted EBITDAX which, as George mentioned, is almost equal to the full years 2019 and 2020 combined. This has allowed us to fund our strategic initiatives with cash flow while building our cash position to $52.8 million as of September 30, 2021, in preparation for the 2021-2022 drilling campaign. Additionally, we reported strong net income of $31.7 million, or $0.53 per diluted share in the third quarter of 2021, which included a $22.7 million non-cash deferred tax benefit that I will discuss in more detail shortly. After normalizing for the deferred tax benefit on unrealized derivatives loss, our adjusted net income for the third quarter of 2021 totaled $10 million, or $0.17 per diluted share, as compared to an adjusted net income of $8.4 million, or $0.14 per diluted share for the second quarter of 2021. In the third quarter of 2020, VAALCO reported $2.3 million in adjusted net income, or $0.04 per diluted share. Daily production for the third quarter was 7,694 net barrels of oil per day down compared to 8018 net barrels of oil per day in the second quarter of 2021, which was as expected due to the annual planned seven-day field-wide maintenance turnaround. Third quarter 2021 production was up 75% from the third quarter 2020. Sales volumes in Q3 2021 were up 15% from the second quarter and up 80% compared to the same period in 2020. The increase in volumes year-over-year is again primarily due to the additional Sasol interest. Our crude oil price realization increased 5% to $73.02 per barrel in the third quarter of 2021 versus $69.61 per barrel in the second quarter of 2021 and was up 67% compared to $43.63 per barrel in the third quarter of 2020. Our hedging strategy for 2021 has been to lock in production volume at attractive prices to protect cash flow and assure funding of our capital program in 2021-2022, but still allow for additional upside. We took similar action in 2019 before we began our last program and we will continue to assess our needs to mitigate price risk and process cash flow in the future as we consider any additional future derivative contracts. Our full hedge position can be found in yesterday's earnings release as well as in our Q3 supplemental information presentation on our website. Turning to expenses, production expense excluding workovers for the third quarter of 2021 was $21.4 million. The third quarter was higher than the second quarter of 2021 primarily due to the planned annual full field maintenance turnaround. Costs were more than double the third quarter of 2020 due to 80% higher sales and the increase in working interest associated with the Sasol acquisition. The per-unit production expense excluding workovers of $28.85 per barrel in the third quarter of 2021 increased as compared to the $25.02 per barrel in the second quarter of 2021 and $20.21 in Q3 2020 with some inflationary pressures seen on our marine expenses. Given these inflationary pressures, we are now renewing our guidance range from production expense excluding workovers for the full year 2021 to the high end of the previous range at $72 million to $74 million or up $0.90 at the midpoint on a per barrel of oil sale. As George mentioned, we had one workover in process at the end of the third quarter and completed the second workover in October. As a result, the workover costs are now spread over the third and fourth quarters. In the third quarter, we recorded $3.8 million for workovers and our full year guidance is between $9 million and $10 million. DDA for the third quarter of 2021 was $7 million or $9.41 per net barrel of oil sales compared with $5.8 million or $9.05 per barrel in the second quarter of 2021 and $2.2 million or $5.37 per barrel in the third quarter of 2020. DD&A was higher compared to the prior year due to the higher depletable costs associated with the Sasol acquisition. Our asset base for the Sasol acquisition was valued at fair market value and a stronger pricing environment than which we negotiate the deal price. While we haven't given DD&A guidance in the past, the rate you've seen in the past two quarters at about $9 to $10 per barrel is not likely to change much until we get into our next drilling campaign and add capital costs and potentially more reserves. General and administrative expense for the third quarter of 2021, excluding stock-based compensation expense, was $2.9 million compared with $4.2 million in the second quarter of 2021 and $2.4 million in the third quarter of 2020. The decrease in Q3 2021 compared to Q2 2021 was a result of additional severance costs associated with changes in key personnel recorded in the second quarter. The per-unit G&A rate excluding stock-based compensation in the third quarter of 2021 of $3.93 per barrel of oil sales was significantly lower than both the second quarter of 2021 and the third quarter of 2020 due to lower costs and higher sales. For the full year, given the severance cost experience, we are forecasting G&A excluding stock-based compensation to be between $12 million and $30 million. Noncash stock-based compensation expense for the third quarter of 2021 was not material. For the third quarter of 2021, the stock-based compensation expense excluding expense related to SARs was $0.3 million, which was mostly offset by SAR stock-based compensation benefit of $0.3 million. For the second quarter of 2021, the stock-based compensation expense was $0.5 million and was comprised of non-SARs-related expense of $0.1 million and SARs-related expense of $0.4 million. For Q3 2020, the stock-based compensation expense was a benefit of $0.2 million, which included non-SAR stock-based expense of $0.2 million and SARs-related benefit of $0.6 million. Turning now to taxes, the income tax was a benefit for the three months ended September 30, 2021, of $17.2 million. This comprised of a $22.7 million deferred tax benefit and a current tax expense of $5.5 million. In the third quarter of 2021, we determined a partial release of the valuation allowance on our deferred tax assets was warranted due to improving oil prices and other factors that indicate that VAALCO will utilize a portion of its deferred tax assets. Income tax expense for the three months ended June 30, 2021 was $2.8 million. This was comprised of a $3.3 million deferred tax benefit and a current tax expense of $6.1 million. Income tax benefit for the three months ended September 30, 2020 was a benefit of $2.8 million and included $5.3 million of deferred tax benefit and a current tax expense of $2.5 million. For all three periods, the overall effective tax rate was impacted by nondeductible items associated with operations and deducting foreign taxes rather than crediting them for United States tax purposes. I'd like to defer you to a slide in our supplemental information deck that we posted to our website this morning. We have updated our net backslide that reflects strong cash flow we are generating at the current prices. At September 30, 2021, we had an unrestricted cash balance of $52.8 million, an increase of almost $30 million over the prior quarter. This was a result of operating income and a trade receivable as of the June 30 that converted to cash during the quarter. Working capital at September 30, 2021 was $0.8 million compared with negative $9 million at June 30, 2021, while adjusted working capital at September 30, 2021 totaled $13.5 million compared to $4.3 million at June 30, 2021. For the third quarter 2021, net capital expenditures excluding acquisitions totaled $4.2 million on a cash basis and $6.7 million on an accrual basis. For the first nine months of 2021, VAALCO has invested $8.5 million on a cash basis and $11 million on an accrual basis. These expenditures were primarily related to early costs associated with the 2021-2022 drilling program, the purchase of a mobile workover unit equipment, and enhancements as well as general maintenance capital expenditures. With that, I'll now turn the call back over to George.

Thanks, Ron. The future is very bright for VAALCO and this is a very exciting time for VAALCO. We remain focused on growing VAALCO and providing sustainable returns to our shareholders. We have a strong asset base at Etame that is generating meaningful free cash flow and adjusted EBITDA in the current pricing environment, which is evidenced by our results. Sustained operational excellence and robust financial performance at Etame serves as the foundation for growing VAALCO through organic drilling and future accretive acquisition opportunities in line with our strategy. We have grown our cash position in anticipation of the next drilling program and to fund our FSO conversion at Etame, both of which will enhance our ability to generate cash flows in the future. But we are not simply looking to maintain production in Gabon. There are meaningful development opportunities across our assets. In December, we will begin another drilling campaign at Etame. And with our recent additional hedges, we have locked in sufficient cash flow generation from operation to fund this program and desensitize the risk of oil price movement. We're very excited to have been awarded the new blocks in Gabon as part of the consortium with BW Energy and Panoro. The blocks are adjacent to our existing Etame field and we believe they hold tremendous potential to help us establish sustainable long-term production in Gabon. We have completed our drilling feasibility study for the standalone development of the Venus discovery at Block P in Equatorial Guinea and we are moving forward now with our field development concept. Etame Block P and potentially now the new blocks in Gabon can enhance our business and provide a strong platform for organic growth allowing VAALCO to build size and scale in West Africa. As we continue to generate significant free cash flows to fund our capital expenditures, we continue to evaluate ways to return some of that free cash flow to our shareholders. Our Board considered several alternatives to providing a meaningful return to our shareholders and believes the implementation of a sustainable quarterly cash dividend is the right approach for VAALCO based on our strong balance sheet and ability to generate meaningful free cash flow. We feel that it is important for E&P companies to return cash to shareholders, and the Board's decision to initiate this dividend policy reflects the strength of our business and their confidence in VAALCO's future. We believe that prudently returning volume to shareholders can complement our growth strategy and offer shareholders multiple ways to create volume. As you can see, we are firmly focused on maximizing shareholder return opportunities and operating with the highest regards towards ESG while we progress our refreshed strategic objectives focused on sustainable and accretive growth. Thank you. And with that operator, we're ready to take questions.

And the first question comes from John White with ROTH Capital.

Good morning.

Good morning, John.

Good morning, John.

Congratulations on the excellent results. Production met my expectations, and you exceeded my margin on EBITDA. I commend you for starting the cash dividend, which is a substantial amount reflecting a generous annual yield, aligning well with current industry trends. It seems you are well-prepared for the 2021-2022 drilling campaign with your jack-up rig. Best of luck with that. Regarding the new blocks in Gabon, has the reprocessing of seismic in the G12-13 and H12-13 begun yet?

No, it hasn't. Currently, on one of the blocks, we have seismic coverage that we are starting with reprocessing. We expect this to be the main focus of our work throughout 2022. We do not expect to consider any additional seismic acquisition until late 2022 or early 2023. Therefore, the primary activity for 2022 will be reprocessing following the negotiation of the block awards.

Okay. That's very helpful. That was going to be my next question. Is VAALCO going to be the primary lead on evaluating the reprocessed seismic?

It will be in conjunction with our partners. And BW Energy are our operator at the moment and we will review that as and when the opportunities and discoveries are made on each of these blocks, but we will have a very, very active participation in the interpretation.

Okay. And I think that …

And…

…go ahead.

Sorry John, I was just going to say, and you can see that the level of our activity in the equity percentages of the blocks, where we are level with BW. So we're standing shoulder-to-shoulder on these two.

Okay. Thank you for that. I know you've done a lot of work in Africa. Have you been in wells with BW before?

No. I haven't. I've worked with BW previously in Africa on the service side, where they have supplied equipment to companies that I've run, but I've never worked with them directly on the E&P side. I think when looking at BW Energy, they've got this asset in Africa and they've got an asset over in Brazil. So this will be the first time we've worked in partnership but the companies are closely linked. We know all the same people.

Well, that's going to have the rest of the works, isn't it?

Yeah.

Everything is running smoothly. That's my question. I have no further questions. Congratulations on the excellent results.

Thank you, John.

Thanks John.

Thank you. The next question comes from Charlie Sharp with Canaccord.

Good morning, gentlemen. Thank you for the updates; they were very comprehensive. I have two questions. First, about the CapEx for the upcoming drilling program. The lower end of the range has hardly changed, but the upper end has increased significantly. What factors determine where you'll actually land within this range? Is it based on the work program or an expectation of rising costs? Second, regarding the dividend, are you considering it as a percentage of free cash flow? How should we view that moving forward?

I will address the question regarding the drilling program, and then Ron will handle the topic of the dividend. In our guidance for the drilling program, we are focused on making the most of our current opportunity with the drilling rig. We have a contractual obligation for three wells and options for five more. We are working to balance our capital expenditure guidance with the possibility of extending the program beyond the planned four wells. This is reflected in the higher end of our guidance. There are some cost pressures but also the potential for an additional well.

Yeah. I mean I'll just add a little bit more color to that as well George. What I would say as well Charlie is that, I don't think any of us expected that we'd still be in a COVID quarantine situation going into 2022, when we first looked at the CapEx program a while back. But Gabon is quite a bit behind on the vaccination, which means that at the moment we're still quarantining all our personnel, contractors, and staff which adds cost to the CapEx campaign as well. But yes, we are also seeing some inflationary pressure as we mentioned. Moving to the dividend, I think on the dividend side, we're more interested in a sustainable long-term dividend that we know we can pay out rather than directing a composite of percentage of free cash flow. I think that would be something that we'd consider, if commodity prices are remaining high and we get into our drilling program and we've got line of sight in our production. That may be something we take a look at. But we feel that what we've got on the table at this point in time is a long-term sustainable dividend that we've committed to.

Okay. That’s great. Thank you.

Thank you. And the next question comes from Matt Dhane with Tieton Capital Management.

Great. Thank you. Wanted to discuss the workovers that you folks tackled here. The first the 2H well where production jumped up to 1400 barrels per day versus the 500 prior to workover, is this a steady-state production now at this current time? And then what allows such a dramatic step over in production with this workover?

Okay. I mean we've quoted the mid-month position of 1400. We will expect to see some decline on that Matt. So it will gradually go down towards the end of the year down towards 1100. And the real benefit of this was – on the workover was the improved access into the reservoir where we thought we perhaps had a skin issue in the workover initially, and going down and performing that workover and the re-perforation is increasing those rules. We've also booked to take into consideration that this particular well will be shutting for some time and we have some reservoir build up and get the cost production out of that.

Great. Thank you. I also wanted to touch on the drilling program really quickly here. With the first well expected to be spud here early next month, I was curious with that in mind, what is your current expectations for the first well to come online for production from that drilling program?

Yes. We'd expect that first well to be working around – coming on to completion and hookup by towards the end of January early February.

Okay. Okay. And then the factors that are playing a role in your decision to drill more than four wells. Can you walk us through what are some of the key factors that you'd look at that would lead you to drill more than four? And yes, some additional color there would be great.

Yes. I mean they're relatively simple. I mean we've put a budget together at a certain price. And if the commodity prices stay high and the available cash flow is there to the company, we'll look at opportunities beyond that for well locations that we have worked up. The reason we contracted the position in with the rig was to give us that optionality. So if we can look at options of wells that are ready to drill, where we have the equipment, and obviously you'd expect us to be in that position already and the payback on those wells. So is there cash-generative in 2022 at the higher commodity prices and that gets into almost the no-brainer category for me. What we've done and completed in the 2022 budget is try to put together a balanced portfolio between investment and returns. And in that balanced portfolio we're – as we have today made certain commitments and statements to the market that we are confident and sure that we can deliver. If we have a position of sustained higher commodity prices then obviously we have opportunities to readdress that balance portfolio either through additional investment or additional returns.

Great. Thank you, George.

And the next question comes from James Wilen with Wilen Management.

Hi, fellow. Nice job out there. A couple of different areas. I don't know if you discussed Equatorial Guinea and when you'd expect to begin that. And any expectations for the cost to drill over in that area?

Yes. I mean we are – as we've said before we've been spending a lot of time on the drilling campaign and the feasibility of the drilling study because it's doing – the long-reach drilling that we're doing we wanted to spend a lot of time making sure that it was achievable before we started to talk about the Venus development as a reality. We continue to refine these processes. So as I said in my earlier statement, we're looking to get to a proof-of-concept or field development plan before the end of this year. That takes a number of forms. So – and we can look at what we're looking at right now is engineering challenges we've set in place to try and target F&D costs at a level where we can have a robust development at lower oil prices. And we're looking to get a robust development that can be more than economic at sub $50 oil. And that's the challenge we've got in the engineering section. So we continually look at how many wells will we need, the timing of the wells, the efficiency of the wells to see if we can stagger those CapEx investments over a multi-year period rather than having to put multiple wells upfront prior to production. And those kinds of analysis are still out there and we're still working on that and we haven't come to a landing. But we certainly still hope to be there before the end of this year. With regard to the cost of the drilling wells, they're more or less in the same region as they are in Gabon with similar water depths and we're looking at around about $30 million per well.

Okay. And in the block that you were just provisionally awarded in Gabon and it's kind of surprising it's right in between two incredibly productive fields. It's surprising that this block has been sitting there vacant and unawarded for a long time. Any particular reason why it was now offered and you were able to secure it?

It goes back to history. Initially, much of the acreage was part of the existing block for Dussafu and VAALCO. When we turned the block commercial and renewed the licenses, we had to give up certain acreage. This area we had to relinquish was crucial for advancing the Etame development and renewing licenses. We've always been interested in this area, particularly regarding the reprocessed seismic data. The geology between our operations and Dussafu is promising, and we genuinely want to be in this area because we are enthusiastic about its potential and have a deep understanding of it. This isn't a case of this area being neglected; it resulted from our relinquishment. A couple of years ago, the Gabonese DGH attempted to auction it but didn't receive satisfactory bids and canceled. They reintroduced the area for bidding last year, and we decided to join a consortium rather than go solo for economic reasons. As shown in Slide 8 of our deck, the consortium allows us to maximize evacuation opportunities while reducing costs.

Excellent. And also on the new FSO, could you go over a little bit of the accounting for that the capital cost I assume are amortized, but the expense reduction obviously is a direct bottom line cost saving is that correct?

Yes. So when we're looking at the cash savings that's what we've reiterated out there. They're quite right in raising the point that our team are actually looking at the accounting aspects right now but it's likely to be a financing lease. So it will be treated differently, with the right-of-use asset onto the balance sheet and DD&A. But when we look at any comparison with the FPSO and the operating lease that we have there, we've always looked at this on a cash basis.

Got you. And lastly, I applaud the dividend. Just wanted to ask one question. How did you arrive at the uneven rate like that?

There was extensive discussion regarding the best approach for shareholder returns. We aimed to present a balanced portfolio to the Board from 2021 to 2023 at a specific price. We are confident that our balanced portfolio will comfortably achieve the expected returns without exerting pressure on cash balances, while also retaining the potential benefits of current pricing if commodity prices rise. The focus was on a straightforward allocation of cash rather than calculating a composite rate of return.

Got you. And lastly, as I look at the presentation and current oil prices without adding any benefit to the drilling program that's expected to begin, I come up with $90 million to $100 million of income for VAALCO somewhere north of $1.50 a share in that ballpark. And am I reading all this correctly?

I'll pass that one to, Ron.

Yes, I think if we look at that, I'd really just point back to the guidance that we've been giving and we've provided. I'm happy to take that one offline with you and go back through in our guidance. But that's the areas that we're seeing at this point in time, we basically reiterated our netbacks were provided. We're on guidance and we have been on guidance now for the year on both production and sales. So yes, I really can't see any more than that.

Okay. Great strategic plan, you guys have articulated and well presented in your presentation that you put online today. Thanks George.

Thank you.

Thank you.

And next we have a follow-up from John White with ROTH Capital.

Thank you. With the initiation of this robust dividend does that take the place of the possibility of a stock buyback program?

No, it doesn't. I have consistently expressed my commitment to growing the company using its existing cash flow and returning value to investors in various ways. This does not rule out the chance to explore forms of shareholder returns next year.

Okay. I have two questions that were emailed to us from our analyst Stephane Foucaud at Auctus. And the first one is incorporating better visibility of the timing of the 2021-2022 drilling program, the impact of recent workovers and natural decline, where would you see production next year?

Yes. Well, I think we're not giving 2022 guidance at this time because obviously the drilling program is dependent on a success case. And we've given a range of where we see the success of that drilling program and we see that is between 7,000 to 8,000 barrels gross. And I think that's about as much guidance as I could give on that kind of activity.

Okay. The second and last question. Do you see additional CapEx items in the 2022 activity program in addition to the FSO and the 2021-'22 drilling program detailed today? If yes, where would this be and what would be the associated CapEx?

I don't anticipate any additional capital expenditures in the FSO. We've signed the contracts and are confident in our execution. We have established three project teams to oversee the FSO, the FPSO change-out, and the infield modifications related to capital expenditures. For that transition, we believe we have the right team and contracts in place for effective execution. Regarding drilling capital expenditures, we've allowed some flexibility to expand the drilling program if we identify a near-term economic benefit. However, I don't foresee going beyond that at this time, and there won’t be any significant capital expenditures in drilling for Etame at the moment. As we've previously indicated for Blocks G and H, the only capital expenditure involved is the signature bonus, which is set at $5 million for both blocks. This makes the consortium deal between VAALCO, BW Energy, and Panoro Energy very favorable, as we are collaboratively reducing exploration costs. Overall, I believe this agreement is very advantageous and could lead to significant benefits for VAALCO as proposed.

Thank you. And this concludes the question-and-answer session. Now I would like to return the floor to George Maxwell for any closing comments.

Thank you very much, Keith. I appreciate everyone's questions and their attendance. I'd also like to acknowledge the staff. We have moved this meeting forward by one week, and our finance and technical teams in Houston have worked diligently to adjust the program timeline, which allows us to communicate with the market sooner. I believe we are seeing a positive shift in the company's direction and how we convey our plans. We are committed to sharing what we intend to do, and we are confident in our ability to execute those plans thanks to our dedicated staff, our assets, and the forecasts and cash flows we have established. Thank you all for joining us today, and I look forward to our next conversation in the near future.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.