Vaalco Energy Inc /De/ Q3 FY2023 Earnings Call

Good day. And welcome to the VAALCO Energy Third Quarter 2023 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 note this event is being recorded. I would now like to turn the conference over to Al Petrie, Investor Relations Coordinator. Please go ahead.

Thank you, Operator. Good morning, everyone. And welcome to VAALCO Energy’s third quarter 2023 conference call. After I cover the forward-looking statements, George Maxwell, our CEO, will review key highlights along with operational results. Ron Bain, our CFO, will then provide a summary financial review. George will then return for some closing comments before we take your questions. Thor Pruckl, our Chief Operating Officer, is also with us today and will be available for Q&A. During our question-and-answer session, we ask you to limit your questions to one and a follow-up. You can always reenter the queue with additional questions. I’d like to point out that we posted a third quarter 2023 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 our Form 10-K. Please note that this conference call is being recorded. And let me now turn the call over to George.

Thank you, Al. Good morning, everyone. And welcome to our third quarter 2023 earnings conference call. I am very pleased with our ability to deliver exceptional operational and financial results in 2023, exceeding our guidance and expectations following the TransGlobe combination that occurred a year ago. Our focus has been on optimizing production, managing our costs, capturing operational and cost synergies, all while executing capital drilling campaigns to enhance profitability and growth. Through the execution of this strategy, we have significantly grown our cash position even while fully funding our capital program, shareholder dividends, and buybacks, all while remaining bank debt free. We are generating the growth in adjusted EBITDAX and cash that will allow us to fund exciting future projects across our diverse portfolio of high-returning assets. We paid our third quarter dividend and announced a fourth quarter dividend, fulfilling the commitment we made to nearly double the dividend that we paid in 2022. Additionally, to date, we have returned over $20 million through a share buyback program since November 2022, and this program is ongoing. I would now like to point out some key highlights and accomplishments for the third quarter. We are at the high level of our production guidance with 18,844 NRI barrels of oil equivalent per day or 24,430 on a working interest basis. This was driven by record production levels in Egypt from our successful drilling program, as well as high operational uptime in Gabon. As a reminder, we have not drilled any new wells in Gabon since 2022, but our commitment to operational excellence and the new FSO have helped to minimize decline and maintain production uptime at high levels in 2023. You can clearly see how we have grown when you compare third quarter production this year with third quarter production last year; we are up 106%. Sales were at the high end of guidance as we benefited from a large export cargo in Egypt during the third quarter. We have since had a lifting of 600,000 gross barrels of oil in Gabon that occurred in the first week of October 2023 that will benefit our fourth quarter. The diversity of our asset base has allowed us to grow and generate significant growth in production, cash flow, and adjusted EBITDAX. Our third-quarter adjusted EBITDAX of $71.4 million was up 9% compared to Q2 2023 and up 68% compared to Q3 2022. In the first nine months of 2023, we have generated almost $90 million of free cash flow and distributed 41% of that free cash flow back to shareholders through dividends and buybacks. Even after fully funding our capital programs and paying dividends and buybacks, we have still grown unrestricted cash to over $100 million at the end of Q3 2023, up 124% since June 30th. We have a positive momentum as we enter 2024, both operationally and financially, and we are building size and scale to substantially grow VAALCO. I would now like to discuss some key updates across our diverse portfolio of assets. Let’s begin with Egypt where we have invested the largest amount of capital in 2023. Our drilling campaign in Egypt has seen some very positive results. We have completed our 2023 campaign faster and at lower cost than we had originally planned. We finalized the last well in the program in October and in 2023 we drilled 18 verticals including one injector well and two exploration wells, as well as a horizontal well. In Q3, we had a $1.2 million exploration expense associated with the East Arta 54 vertical well. While the well was not commercially viable, the logs and cores that we took on this exploration well showed oil-bearing formations that we believe will allow us to drill additional economic wells in the future. Overall, we had a very economic drilling program with strong production performance and we are very pleased with our drilling performance in 2023. On the vertical wells, we are seeing significantly faster drilling performance moving from a 2022 average of about three wells drilled every four months to now drilling two wells per month, a 60% reduction in cycle time. By drilling the wells faster, we are cutting costs meaningfully and improving the economics of our wells in Egypt. In addition to the drilling efficiencies, we have also spent time and effort in Egypt reviewing the facilities and overall production operations. As I have detailed before, these efforts have resulted in increased production, lower costs, and better safety and environmental performance in Egypt. We continue to set production records in 2023 since we acquired the properties, which is one of the key areas driving our ability to exceed guidance with our total company production. We believe that Egypt has a lot of value and organic drilling opportunities and it will compete for our 2024 capital budget which we are currently working on. In Canada, we drilled two wells in the first quarter of 2023, a 1.5-mile lateral and a 3-mile lateral. Both wells were drilled and completed safely and cost-effectively without incident. The wells were tied in and equipped in April and early May with overall cycle times that were significantly less than historical cycle times. The wells began flowing in May with good production rates and in early July the pumps and rods were installed on both wells. Both well production rates exceeded expectations and we are now monitoring their long-term performance. We also believe that to better optimize our Canadian prospects going forward, we will move to 2.5-mile and 3-mile laterals almost exclusively, which we believe will further improve the economics of our development program. Canada also set production record in 2023, another reason we are performing so well as a company and exceeding our production targets. With our 2023 drilling and completion programs completed in Canada, we are evaluating facility and pad optimization, future development wells, and further refining our completion techniques in anticipation of potential future drilling campaigns in Canada. Turning to Gabon, as you know, we completed our 2021 and 2022 drilling campaign in the fourth quarter of 2022 and invested only minimal new CapEx dollars in Gabon in 2023, primarily related to maintenance CapEx and long lead drilling equipment. Despite no 2023 drilling program, we have seen strong overall production results in 2023 by focusing on operational excellence. Last year’s FSO and field reconfiguration projects have allowed us to operate more efficiently and economically in 2023, while enhancing production uptime and minimizing decline until the next drilling campaign. The impact of the cost savings from the new FSO are helping to offset some other higher costs from inflationary and industry supply pressures. We are pleased to have completed the minor pipeline work on the SEENT gas line last month at a cost of approximately $4 million, which will help lower CapEx in Q4 and beyond as a result of lower diesel costs by more than $0.5 million per month. We are currently evaluating our locations for the next drilling campaign at Etame, which we are currently projecting to be a three-well to four-well program with additional well options. We continue to review rig options for our 2024 drilling program. The market for drilling units remains very tight, and we plan to provide a further update on the planned campaign as our review progresses. We have delivered outstanding results in 2023 and I am excited as we move into 2024 and believe that we will continue to grow production, reserves, and value for our shareholders. I would like to thank our hardworking team who continue to operate and execute our plans. We are bank debt-free and remain firmly focused on our strategic vision of accretive growth while maximizing shareholder return opportunities and operating with the highest regard towards ESG. With that, I would like to turn the call over to Ron to share our financial results.

Thank you, George, and good morning, everyone. Let me begin by echoing George’s comments about our continued strong operational performance as we execute our strategic plan. With our growing cash position of over $100 million and a clean balance sheet, we are much better positioned today with a growing and diversified asset base than ever before in VAALCO’s history. I will provide some insight into the drivers for our financial results, and rather than repeating what you can read in the earnings release or 10-Q, I will focus on the key points. Let’s begin with production and sales, which, along with realized pricing, drives our revenue. Production for the third quarter was indeed strong, at the high end of our guidance with our sales for the quarter also at the higher end of our guidance. The production performance of our assets remains solid, both with the new wells drilled in 2023 in Egypt and Canada, and a resting decline in Gabon through operating efficiencies. With a diversified portfolio of assets, we will have changes from quarter to quarter in the mix of sales from each of our producing areas. In the second quarter, we had a greater weighting to Gabon, but in the third quarter we had more sales in Egypt. This change in mix impacts our realized pricing and ultimately our revenue and earnings. We had nearly identical total sales volumes quarter-over-quarter, and overall realized pricing increased from the second quarter, but our revenues were only up $7 million over the second quarter because the additional sales occurred in Egypt, where our price realizations are lower primarily because of the sulfur content of the oil. As we noted, we had a lifting occur in the first week of October in Gabon, and this did not fall into the third quarter, but will benefit the fourth quarter sales, revenue, and earnings. Brent increased 10% quarter-over-quarter with natural gas pricing improving by 32% and NGL pricing up 5%. You will note in our earnings release yesterday, we provided a detailed breakout of sales volumes along with commodity pricing by country. Regarding hedging, as shown in our earnings release, we continue to implement a hedging program that helps mitigate risk and protect our commitment to shareholder returns. We have costless collars in place for Q4 2023, and we entered into costless oil collars indexed to dated Brent for Q1 and Q2 of 2024. All our collars have a floor price of $65, for around 15% of our production with upside in the collars to between $90 and $100. It’s worth noting we have 85% of our production unhedged in a period of high commodity pricing, whilst protecting our commitment to our dividend. Turning to costs, our production costs were below the low end of guidance on an absolute basis and at the bottom end of guidance on a per-barrel basis. We remain focused on capturing synergies and keeping our costs low to enable us to maximize margins and increase our cash flow. While absolute costs were up 71% year-over-year primarily due to higher sales volumes, our production costs per barrel are 31% lower year-on-year. This demonstrates that we are delivering on capturing synergies and cost savings initiatives like the FSO project last year. I would also like to point out that in the first week of October, we successfully restored the feed gas pipeline to the FSO and will benefit from lower diesel consumption from Q4. G&A costs were also in line with guidance. When compared to the combined G&A costs seen in 2022 by both VAALCO and TransGlobe, we have seen meaningful reductions in costs well ahead of our targeted synergies. The final integration and reorganization of the business is behind us, and we have commenced a back-office process improvement project with the implementation of a single cloud-based ERP across the whole company. Sequentially, we grew our adjusted EBITDAX by 9% to $71.4 million in Q3 2023. Our solid sales coupled with a good commodity price environment, as well as our ongoing commitment to controlling costs led to our adjusted EBITDAX growth. Non-cash DD&A costs decreased slightly quarter-over-quarter, primarily due to the higher mix of Egyptian and Canadian sales. Compared to the prior year in 2023, we have seen an increase in DD&A due to the step-up of the TransGlobe asset valuation and because of the additional new wells being brought online for both Egypt and Canada. We started our reserve evaluation process in all our locations and will align our year-end 2023 reserves with our competent persons’ report in our year-end results. We are encouraged by the new wells drilled in 2023 and the high operating efficiencies, and our expectation is this will be more than sufficient to cover any decline in SEC pricing over 2022 levels. Targeted reserve additions for the wells completed together with the SEC 2023 pricing will be reflected in our CPR as of the end of the year and will most likely lead to a change in our DD&A rate per barrel at that time. Tax costs in the quarter of about $25.8 million resulted in an effective tax rate of about 81% in the quarter. This was unusually high and driven by the revaluation of tax oil barrels held for Gabon. Outside of this discrete event, our effective tax rate was 64% in the quarter and aligns with our effective tax rate for the year. In Gabon, our foreign income taxes are settled by the government through in-kind oil payments. At the end of each quarter, we have to mark-to-market the in-kind oil. So when prices rise as they did from Q2 to Q3, it has a negative impact on our accrued taxes. The impact was $5.3 million in Q3. This impacts earnings and earnings per share. If prices continue to fall as they have since the end of the third quarter, when we mark-to-market the oil in-kind, we will see a benefit, thus reducing our tax liability and all things equal, increasing our earnings and earnings per share. We cannot control the movement of the underlying commodity price to which this in-kind oil is marked to. We continue to guide that 60% to 65% effective tax rate is the correct effective tax rate over the long-term excluding discrete items. But as commodity prices rise, we may see increases in that tax rate, and as they fall, we will see decreases in that tax rate. We reported adjusted net income of $7.5 million or $0.07 per diluted share. If you back out the mark-to-market $5.3 million tax impact and our appraisal exploration expense, you would have seen earnings in line with consensus estimates. Turning now to the balance sheet and to cash flow statement for Q3. Unrestricted cash more than doubled to $103.4 million as of September 30th. We are collecting our receivables and have seen our Egyptian accounts receivable decrease by $17.7 million to just $18.8 million. We continue to work closely and have a strong relationship with EGPC. With completion of drilling in Canada and Egypt completed, we expect to also see a reduction in the outstanding accounts payable and accruals. We saw a decrease of about $8 million from Q2 to Q3. As has been the case since the third quarter of 2018, we are carrying no bank debt and have credit facilities available to utilize for additional accretive acquisition opportunities to continue to build value. In Q3 2023, VAALCO paid a quarterly cash dividend of $0.0625 per common share or $6.7 million, and our share buyback was about $6 million. As stated previously, growing our dividend and the share buybacks are a direct result of our expanded asset base and cash flow generation ability as a result of the TransGlobe acquisition. We have generated almost $90 million in free cash flow year-to-date in 2023 and we have returned 41% of that directly to our shareholders through dividends and share buybacks. Aside from fully funding our shareholder returns, we also fully funded our Q3 net capital expenditures of $22.5 million on a cash basis. These expenditures were primarily related to our drilling program in Egypt and some maintenance CapEx and long lead items for Gabon. Let me now turn to guidance, where I will give you some key highlights and updates. I want to remind you that our full guidance breakout is in the earnings release and in our supplemental slide deck on our website. Also, we report all our production with both working interest and net revenue interest with the difference represented in the royalties paid or taken in barrels. As we have discussed, our successful capital programs in Egypt and Canada, coupled with our operational focus on uptime to mitigate decline in Gabon, is leading to meaningful increases in production. Last quarter, we raised our full year 2023 production guidance for all of our operational areas, leading to a total company production increase of about 7%. With our solid production in the third quarter, we are now further raising our full year production range to be between 18,200 barrels of oil equivalent per day and 18,900 barrels of oil equivalent per day. This is an additional 2.5% increase at the midpoint. For the fourth quarter of 2023, we are expecting our production to decline slightly in all areas compared to the third quarter as we have completed all of our capital drilling for the year. Looking at our sales volumes, we are expecting to see a solid increase in our fourth quarter sales with a guidance range of 19,800 NRI barrels of oil equivalent per day to 22,000 NRI barrels of oil equivalent per day. At the midpoint, this is an increase of 6% compared to the third quarter. Our absolute operating costs are expected to increase in line with additional sales, but we are projecting our per barrel oil equivalent costs to remain in line with the third quarter. Finally, looking at CapEx, our 2023 capital spend was first half weighted and we have seen a decline every quarter in 2023. For the fourth quarter, we are expecting a range of between $9 million and $12 million for our CapEx. As a result of higher sales and lower CapEx spend, we believe that VAALCO is very well positioned to grow cash flow in the fourth quarter of 2023. In closing, we continue to trade at a very low multiple of EBITDAX despite having a strong dividend yield and being bank debt free. We believe right now is an excellent opportunity to buy our common shares that are trading at a discount to their intrinsic value, which is also a reason why we decided to accelerate our share buyback program over the past few months. Our sales continue to increase. We are generating and building a significant amount of cash, and we are poised to execute and fund an expanded 2024 drilling campaign.

Thanks, Ron. As you have heard this morning, we continue to have success in 2023 driven by strong production performance. We believe that we are very well positioned to continue building cash as we head into 2024. We have generated $183 million in adjusted EBITDAX year-to-date, up 34% over the first nine months of 2022, while funding all of our CapEx, quarterly dividends, and share buybacks with cash flow and cash on hand. We ended the third quarter with over $100 million in cash on hand and with minimal projected CapEx costs in the fourth quarter, we expect to continue to grow our cash position in the fourth quarter. While our realized commodity pricing in 2023 has been lower than in 2022, we have seen strengthening pricing in the second half of this year. In addition, our ability to capture synergies, enhance production, and increase margins has positively impacted our 2023 results to date and position VAALCO very well for the future. We have delivered on our commitment to the market and to our shareholders, and we are in an enviable financial position with no bank debt and a growing cash balance. Our strategy remains unchanged: operate efficiently, invest prudently, maximize our asset base, and look for accretive opportunities. In addition to funding our capital program and our growing cash position, we have remained focused on returning value to our shareholders. In 2023, we nearly doubled our quarterly dividend and have paid or announced all four quarterly dividends for 2023 at an increased rate. We are delivering the $0.25 per share annual dividend for the 2023 that we promised last year, which at our current share price is a yield of nearly 6%. We have continued to repurchase common shares through the buyback program approved in 2022. Since the inception of the program, a year ago, we have returned over $20 million to shareholders and repurchased 3.5 million common shares through the buybacks. With our highly successful 2023 capital programs in Egypt and Canada completed, we are now focused on our 2024 capital campaign. We are planning our 2024 drilling campaign at Etame, our 2024 drilling program in Egypt and in Canada, and we will discuss those in detail during our next call in March. We are taking the successes in Egypt and Canada and both drilling efficiency gains and facility optimization and applying it to our next planned drilling campaigns. With a diverse portfolio and high performing assets that generate robust rates of return, we are evaluating our 2024 budget and high grading opportunities. We have multiple producing areas and future prospects that are competing for capital, and we will remain disciplined in our approach to maximize value for our shareholders in delivering growth in production, reserves, and cash flow. The substantial cash we are building in 2023 should allow us to fund future drilling campaigns and developments, as well as fund our cash returns to shareholders. We are very excited for the future of VAALCO and remain confident that we will continue to deliver superior long-term value to our shareholders. Thank you. And with that, Operator, we are ready to take questions.

The first question today comes from Stephane Foucaud with Auctus Advisors. Please go ahead.

Hi, everyone. Thank you for taking my question. Could you provide an update on Equatorial Guinea and your progress with Venus? Thank you.

Good afternoon, Stephane. Yes, we have been making progress in our discussions regarding Block P. During the third quarter, we held several meetings with MMH, the Minister, and our partners. As I mentioned in previous quarters, our position is that we are on a path to advance this project, particularly towards the front-end engineering design for 2024, where we will review both the capital expenditure and the execution plan. We are collaborating closely with our partners to align their interests with our objectives for Block P. However, I want to emphasize that we are still waiting for at least one signature on the government approvals, and it would be unwise to proceed and allocate funds without that alignment, as it could lead to potential disputes in the future. I can report that discussions with our partners just two weeks ago were productive, and we are optimistic about a positive outcome that will allow us to advance this project in our next update.

Thank you. Great. And it’s not exactly a follow-up for my second question. It’s for Ron. With regards to the cash CapEx for Q4, I noticed that the full year cash CapEx runs quite a bit ahead, sorry, the accounting CapEx is above the cash CapEx. If I am not wrong, there is a bit of mismatch. Can we expect the $9.5 million to $12 million CapEx in the guidance?

...CapEx, right? So that’s effectively what we can basically, we know what we have committed to and we know that we will account for that. With regards to cash, obviously, it’s a timing of those invoices coming in and then paid out. The $9.5 million to $12 million from an accrued point of view, it will come through at that level. I think the cash CapEx is going to be slightly higher than the guidance, the midpoint and the guidance on the cash CapEx, which I believe is about $73 million for the year. I would expect the cash CapEx number to be somewhere around about $80 million.

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

Yes. Thank you very much for taking my question and at the risk of sounding sycophantic, congratulations on a very good operational and financial quarter. And I know that you talked about capital allocation and that hasn’t yet been settled and you talked about the potential in Gabon, and I think, Egypt in particular, after good drilling results this year. I just wondered if you could, without sort of identifying exactly, flesh out a little bit how you see the allocation approximately in terms of geography. And in Gabon, in particular, have you done all of the work that you need to do to ensure as best as possible that your program next year delivers all of the results that you anticipate?

Thank you for the question, Charlie. It's a good one. When we examine the subsurface work, we would have expected to have mostly completed it by now for the targeted opportunities in Gabon, Egypt, and Canada for next year. And that's the case. As everyone knows, the market for service providers is currently very tight, which is crucial as we assess the chance to align our subsurface opportunities with the necessary activities in Gabon, Egypt, and Canada. While I won't go into specifics on the numbers, we have made significant progress on the Egyptian program because we have a rig contracted. We will have a workover schedule in place that runs concurrently through the fourth quarter and into the first half of 2024, and we expect the rig to return to us at the end of June to start drilling in the second half of 2024. Therefore, although we cannot provide detailed information on targets and volumes yet, we can confirm that there will be a drilling program in the second half of 2024 in Egypt. For Gabon, the assets needed for the program are not yet settled, and negotiations are ongoing. We have several firm targets to drill as well as some contingent ones. There is also topside technical work currently taking place, with a study expected to be completed by the first quarter, which may affect the sequencing of the wells. However, it will likely be late this year or early next year before we can provide more precise details on the sequencing and timing of the Gabonese program.

Well, that’s great. Thank you. And just as a sort of mini follow-up, if you like. I guess then it looks like the first half is going to be a very light program, perhaps, Canada weighted, and then the second half will be particularly busy in Gabon and Egypt. Is that right?

That’s more or less right. The first half, again, subject to securing drilling rigs, Canada will be weighted with potentially up to four wells drilled in the first half, and Gabon and Egypt are looking more towards the second half at the moment.

The next question comes from Jeff Robertson with Water Tower Research. Please go ahead.

Thanks. George, can you just talk about how you think about the share repurchase authorization, since you have got, I think, roughly $9 million left on the original $30 million authorization and how that factors into your thought process around 2024 capital outlays?

We are currently experiencing a very tight market as the service side of the business adjusts to higher commodity prices, leading to a significant increase in the costs of drilling programs for each well. We are committed to following through on the program that the Board approved at the end of last year. Despite having excess cash balances at the moment, we are preparing for an extensive program in the second half of next year. Once we finalize the details and costs of that program to halt declines and boost production by the end of 2024, we can then allocate any excess cash generated beyond our dividend commitments towards a potential buyback program. This decision will depend on the stock price, which remains low, making repurchasing favorable. We will discuss this with the board in early Q1.

How do you weigh the merits between the share repurchase and potentially increasing the dividend?

At the moment, I don’t think there would be any plans to increase the dividend. I think our dividend from an income position provides a reasonable return to the stock, particularly at the depressed levels for the stock at the moment. So the focus, I think, would be fully on stock repurchase with the excess cash that would be available.

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

Thank you. I’d actually like to ask two questions right out of the gates, if I may. Number one, what did you learn from the drilling campaign in Egypt with the horizontal wells that you drilled and what will those learnings do in terms of the next drilling campaign and your ratio or split between vertical and horizontal wells? And then the second question is, acquisition field or pipeline update, please?

Okay. I will start this conversation, but Thor may finish it when it comes to the wells. I mean, we have really only completed one significant horizontal well in Egypt, which was the Arta-77. As you are aware, in the previous calls, we didn’t get the results in that well that we anticipated. The well continues to produce. I mean, I think, I am remembering numbers now, we started around 200 barrels a day, and the last call it was down to about 120 and right now it’s around 80 barrels a day. So it continues to produce. It is one of our workover candidates. But I will let Thor jump in if we are planning to do more horizontal wells there, I think.

The well is still producing, and it appears that its production rate is stabilizing. We experienced some challenges during the drilling and completion phases, particularly with pump placement and the angle of the well. Initially, we had two wells planned, but we postponed the second one. We are now considering further technical work on drilling, possibly including another horizontal well in late 2024, informed by our experiences with this well.

I appreciate your question, Bill. Regarding acquisition updates, we have previously mentioned our strategy, and we received a shareholder inquiry about VAALCO’s future. Over the last three years, we've doubled our company size and production each year. This progress has helped mitigate the risks associated with being a single-asset company, as we saw in Q3, benefiting from having multiple production areas, especially when some faced challenges. Currently, the M&A landscape is very limited. It was much broader a year ago, but as IOCs have largely stopped divesting, opportunities at higher price points are not ones we want to pursue. However, there are still areas with potential for value, and we consistently assess these, even if they lie outside our main jurisdiction. We focus on finding value rather than just considering geography, but the market is quite tight. Our situation is similar to our peers, but we stand out as a debt-free company. Our competitors are performing well due to rising commodity prices and are pursuing the same opportunities as us. Thus, we aim to foster bilateral negotiations when we can since competitive bidding processes can quickly become unmanageable. The market is still active, and we continue to explore potential opportunities.

Great. Thank you, both.

Thanks, Bill.

The next question comes from Jamie Wilen with Wilen Management. Please go ahead.

Hi, fellas. Given the large amount of cash you were able to put on the balance sheet between the second and third quarters, as you look forward with limited capital expenditures, are you looking to similarly bulk up the balance sheet by $50 million each quarter over the next few?

That's a good question. We can't ignore the fact that we have limited capital expenditures in the fourth quarter. We are expecting at least two to three liftings from Gabon. Therefore, we anticipate another strong cash performance for Q4. We have not yet finalized our capital allocation for 2024. However, we do plan to start drilling in Canada in early January or February, with costs estimated at approximately $4 million to $6 million per well.

Yeah.

We will continue with the drilling in Gabon, and we expect to have a relatively low capital expenditure in the first and second quarters.

Got you. Given the progress you have made in Canada, what are your thoughts on monetizing that asset and using a portion of the funds for the next drilling campaigns, as well as a share buyback, and what do you think Canada would really be worth?

Well, we have a valuation of Canada because we carry on the books. So the valuation on the books, I think, rests between $80 million and $100 million. Ronald, tell me if I have got that number wrong.

You are probably near the upper range.

I want to reiterate what I mentioned last quarter. The turnaround in the Canadian operation has been incredibly impressive. The team there has done outstanding work. They have presented us with a five-year plan that generates positive cash flow and yields cash every year. Their focus on changing drilling techniques to longer reach laterals and acquiring additional land to achieve that has been very successful. Additionally, I've been reminded that our drilling and completion cycle times have been significantly reduced to around 68 days, which is quite remarkable.

Roughly half.

So we now have a valuable, very efficient operation, but to be frank, to be big in Canada, we need scale. So there’s always a consideration of whether that scale exists and whether the best use of capital is to continue to grow and invest or look at other opportunities. So we do consider that all the time and when we look at the 2024 position, that will be part of that consideration.

The next question comes from Jeff Robertson with Water Tower Research. Please go ahead.

Thanks, George. Just to follow up, has there been any change in anybody you deal with the Hydrocarbon Ministry in Gabon in light of the changes back in August?

Good question. Yes, there have been some changes due to the previous Minister being removed. However, as I mentioned the day after that event, we were out of the office for just one day, and we have experienced no interruptions to our operations. We have continued to work diligently with the government on our investment profile and on our backdated positions where we are looking to recover receivables. Ron pointed out the tax event that impacts our tax position because of the mark-to-market. We are also collaborating with the government to improve the situation regarding their unlifted barrels and our outstanding receivables. I will be in Gabon later this month, and this is one of the topics we'll discuss. From a relationship standpoint, while some players have changed, our business operations have remained completely uninterrupted.

Yeah. If I could just add to that. If anything, I would suggest that it’s become a more positive climate and a more active climate with more engagement with ministries.

Thank you.

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

Thor, I’d like to follow up on your last comment and does that improvement or positive relationship include a desire, a recognition, an interest, I don’t know what the right term would be to stay more current on their payables to you?

I think the government has changed, and there’s a significant effort to get their finances in order. This means they are focused on cleaning up their payables and accounts receivable, and they are putting processes in place to prevent similar issues in the future.

Great. Thank you, and congratulations on great operational results.

Thank you.

We will now take some questions from email.

Okay. The first question that I have got here is, bear with me one second. Can you confirm the amount of $33.3 million in foreign income taxes payable in the balance sheet corresponds to the value of the pending in-kind payment?

Okay. I will take that one, Al. Yes, is the short answer. The foreign tax payable is accrued in the balance sheet at the effective tax rate together with a foreign income tax adjustment, and that’s a discrete item where we mark-to-market the Brent pricing at the end of the period. I think there’s a question out there in relation to the amount of barrels and is it calculated at the end of each quarter or is it pending the lifting? I mean, what we do is the calculation is made each period and it’s calculated in barrels per the PSC. The period barrels are then added to the brought forward position and if the state is no lifting in the period, the last lifting that the state took was back in Q4 2022. So it’s been about a year since the state took a lifting.

Okay. And the next one I have, the lifting that was done in early October, was that just for VAALCO or the Gabonese Government or both?

That lifting in October was for the Etame JV partners and not for the state. Traditionally, the state elects to lift on their own.

Okay. And I think that’s all that I had.

This concludes our question-and-answer session. I would like to turn the conference back over to George Maxwell, CEO, for any closing remarks.

Thank you very much. It’s positive to conclude Q3 with strong results and performance in both production and operations, partially fueled by rising commodity prices. As we progress into Q4, our confidence in maintaining this performance remains high. As I mentioned earlier, we aim to continue increasing our cash balances throughout the quarter. We are beginning to realize the benefits of diversifying our asset base, which helps us navigate minor challenges in one area while being supported by others. As Ron pointed out, we have effectively implemented the synergies from last year's amalgamation, resulting in a more efficient combined operation compared to the two independent entities. However, this also presents certain challenges. With the integration now complete, we need to advance as a larger organization, which requires investment in personnel and improvements in systems and processes to address the reporting difficulties we encountered in Q1. We have a plan in place to transition to a more integrated system that we hope will enable faster reporting by mid-year or the third quarter of 2024. I want to express my gratitude to our staff, as these results are the result of the hard work of a dedicated team. I look forward to our next discussion at the 10-K. Thank you very much.

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