Exploration Success Fuels Growth While Enhanced Efficiencies Boost Oil Margins

Key Takeaways

• Strategic acquisitions and exploration efforts are expected to enhance reserves, boost production, and positively impact future revenue and earnings.
  
• Operational efficiencies and technological advancements are likely to improve production margins and cash flow through higher-margin oil sales.
  
• Operational risks from exploration programs and high foreign income taxes may impact VAALCO's production, revenue, and net margins across multiple regions.

Catalysts

An independent energy company, engages in the acquisition, exploration, development, and production of crude oil, natural gas, and natural gas liquids in Gabon, Egypt, Equatorial Guinea, and Canada.

• The successful Svenska acquisition has resulted in a 30% increase in reserves, enhancing production capabilities, which should positively impact future revenue growth.
  
• Increased production efficiency and higher oil composition in Canada through longer lateral wells are likely to improve net margins due to higher-margin oil sales.
  
• The development of the Venus Block P plan in Equatorial Guinea and the anticipated FEED study completion could lead to future revenue increases and expanded operations.
  
• Exploration and drilling in Gabon and the new exploration blocks G&H with partners are expected to boost reserves and production, positively influencing earnings.
  
• Operational improvements such as reduced back pressure in Gabon and favorable reservoir performance are likely to support stable production levels, impacting cash flow and profitability positively.

VAALCO Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming VAALCO Energy's revenue will decrease by -7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.7% today to 21.2% in 3 years time.
• Analysts expect earnings to reach $85.9 million (and earnings per share of $0.81) by about November 2027, down from $89.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.8x on those 2027 earnings, up from 6.2x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 0.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.3%, as per the Simply Wall St company report.

VAALCO Energy Future Earnings Per Share Growth

Risks

• The planned FPSO shutdown and sail away in Cote d'Ivoire could potentially impact production and sales, leading to fluctuation in revenue and earnings depending on the execution and timing of the project.
  
• High foreign income tax rates and settlement methods in Gabon, including taxes settled through in-kind oil liftings, could affect net margins and cash flow.
  
• Delays and uncertainty in collecting backdated receivables in Egypt pose a risk to cash flow and working capital, impacting the overall financial positioning.
  
• Dependence on the successful execution of exploration and drilling programs across multiple regions (Gabon, Cote d'Ivoire, Canada, Egypt) introduces operational risks that could affect production volumes and revenue projections.
  
• Fluctuations in production costs due to varying liftings and potential asset-related challenges could lead to increased per barrel expenses, thereby impacting net margins and profitability.

Valuation

• The analysts have a consensus price target of $9.17 for VAALCO Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.0, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $406.2 million, earnings will come to $85.9 million, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 7.3%.
• Given the current share price of $5.34, the analyst's price target of $9.17 is 41.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.