Why we’re expecting a four-bagger from this little-known energy stock
BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR
Friday June 19, 2020
Pandemic not causing you enough trouble? Need some more? Perhaps buying into an oil and gas company? Even better, how about one that operates in Gabon and Equatorial Guinea, neither being the most stable of political jurisdictions?
That’s what Benj did this spring, as he was not content to just lie around and binge on This Is Us.
Vaalco Energy Inc. (EGY-N), with its headquarters in Houston, has been around since 1985 and has had many trials and tribulations. Recent economic woes sliced the stock price from north of US$2.50 to south of US$1 in a two-month span. Those numbers are a fraction of the zenith of US$9 where it traded less than a decade ago. The slide caused the company to receive notice in April from the New York Stock Exchange that it was in danger of being delisted, but on May 30 it received a letter that it was back in compliance.
The most recent quarter featured a fat loss of US$52.8 million. To add insult to injury, like many enterprises, a share buyback program resulted in US$4.5 million being spent at a price about double where it trades now, though toward the end of the buyback the cost was closer to its current trading price. At the end of the day, with the price near its lowest level in 18 years, the buyback was cancelled to conserve cash. Seems ironic, as now the value appears better than before.
There must be something positive with this apparent dud? There is. First is the balance sheet. Stocks in the resource sector almost always have debt, often laden with it. Vaalco does not have any and there is about US$61 million of cash. While the quarterly loss looks ugly, dig beneath the surface and US$59.7 million was because of the woebegone price of oil. Without this non-cash charge, there would have been a profit. An active drilling program had a 100 percent success rate in the most recent quarter, with the bonus of being both on time and on budget. That is unusual to be sure, and helped boost production 35 percent from the previous quarter. Plus, thus far there have been no stoppages owing to Covid-19.
Management is led by Cary Bounds, who went from being the chief operating officer in 2015 to the CEO chair. Much of his previous experience before Vaalco was with major energy producers in less friendly places to operate, such as Mozambique. He knows his way around the block. Chief financial officer Elizabeth Prochnow has been with the firm since 2015. Our belief is that these executives can help return Vaalco to previous form, but they are realistic, with Mr. Bounds saying on a recent conference call: “We expect that 2020 will be a challenging year for our business.”
One of the many reasons it could be difficult is that this month the commodity swaps put in place in May, 2019, will expire. Featuring a weighted average oil price of US$66.70 a barrel, they enhanced the bottom line over the past year. Now the ink will depend on prices going forward, which, as we’ve seen this year, are exceedingly difficult to predict.
Benj paid 85 US cents last month for his Vaalco shares. Perhaps he is dreaming in Technicolor, but Benj feels that this one could do a four-bagger from the current price of around US$1.20. Quadrupling that figure would require that discoveries continue, political and economic situations in Gabon and Equatorial Guinea remain stable and the oil price climbs.