Upcoming Drilling And FPSO Refurbishments Will Increase Future Production

Key Takeaways

• Strategic development and exploration plans in Africa and North America aim to boost production, supporting revenue growth and improving earnings stability.
  
• Financial flexibility through a new credit facility enables support for capital-intensive projects, enhancing organic growth and shareholder value.
  
• Significant CapEx and geopolitical risks could strain resources, reduce cash flow, and impact earnings and revenue predictability across VAALCO's operational 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 extension and refurbishment of the FPSO in Cote d'Ivoire and the planned significant development drilling starting in 2026 are set to boost production, which would have a positive impact on future revenue growth.
  
• The acquisition and exploration of the CI-705 block offshore Cote d'Ivoire is expected to uncover additional reserves and resources, thereby increasing VAALCO Energy’s future oil and natural gas prospects which could enhance revenue and earnings.
  
• The planned extensive drilling campaign in Gabon, including 3 infill development wells and 1 oil exploration well, aims to maintain and grow production levels, supporting revenue and potentially improving net margins.
  
• The ongoing and planned drilling programs in Canada and Egypt, along with efforts to improve the production mix (favoring more liquid output), aim to stabilize and increase production, which would contribute positively to revenue and earnings stability.
  
• The engagement in a new revolving credit facility, allowing for additional financial flexibility, enables VAALCO Energy to finance its capital-intensive projects and pursue organic growth, ultimately supporting earnings expansion and shareholder value.

VAALCO Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming VAALCO Energy's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 15.1% in 3 years time.
• Analysts expect earnings to reach $90.0 million (and earnings per share of $0.9) by about April 2028, up from $57.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, up from 6.2x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.4x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.99%, as per the Simply Wall St company report.

VAALCO Energy Future Earnings Per Share Growth

Risks

• The FPSO in Cote d'Ivoire is set to undergo refurbishment, requiring significant capital investment, which could temporarily reduce cash flow and impact earnings.
  
• The CapEx for ongoing and future drilling campaigns, including those in Gabon, is substantial and may strain financing resources, potentially impacting earnings if not managed effectively.
  
• The reliance on government settlements for foreign income taxes in regions like Gabon and Cote d'Ivoire could lead to revenue volatility, as production disruptions or delay in settlements could impact cash flow and margins.
  
• VAALCO has significant projects slated for 2025, creating potential execution risks, which if not managed well, could increase OpEx and adversely affect net margins.
  
• The current socio-economic and political climate in VAALCO's operational regions, including Egypt and Equatorial Guinea, may pose geopolitical risks, affecting production levels and revenue predictability.

Valuation

• The analysts have a consensus price target of $8.367 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 $7.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $598.0 million, earnings will come to $90.0 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 7.0%.
• Given the current share price of $3.46, the analyst price target of $8.37 is 58.6% higher.
• 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.