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Edited Transcript of EGY earnings conference call or presentation 7-Nov-19 3:00pm GMT

Q3 2019 VAALCO Energy Inc Earnings Call

Houston Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of VAALCO Energy Inc earnings conference call or presentation Thursday, November 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Al Petrie

VAALCO Energy, Inc. - IR Coordinator

* Cary Bounds

VAALCO Energy, Inc. - CEO & Director

* Elizabeth D. Prochnow

VAALCO Energy, Inc. - CFO

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Conference Call Participants

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* Charlie Sharp

Canaccord Genuity Corp., Research Division - Analyst

* William J. Dezellem

Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer

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Presentation

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Operator [1]

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Hello and welcome to the VAALCO Energy, Inc.'s Third Quarter 2019 Earnings Conference Call. (Operator Instructions)

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, sir.

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Al Petrie, VAALCO Energy, Inc. - IR Coordinator [2]

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Thank you, operator. Good morning, everyone, and welcome to VAALCO Energy's Third Quarter 2019 Conference Call. After I cover the forward-looking statements, Cary Bounds, our Chief Executive Officer, will review key highlights of the third quarter along with operational results. Liz Prochnow, our Chief Financial Officer, will then provide a more in-depth financial review. Cary will then return for some closing comments before we take your questions. During our question-and-answer session, we ask you to limit your questions to 1 and a follow-up. You can always re-enter the queue with additional questions.

I'd like to point out that we posted an 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 our reports we file with the Securities and Exchange Commission, including the 10-Q that was disseminated earlier today.

Please note that this conference call is being recorded.

And now let me now turn the call over to Cary.

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Cary Bounds, VAALCO Energy, Inc. - CEO & Director [3]

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Thank you, Al. Good morning, everyone, and welcome to our Third Quarter 2019 Earnings Conference Call. We've had a very exciting past few months and have achieved several significant milestones. In August, we completed our annual planned maintenance shutdown at Etame and restored production with no safety or environment incidents.

In September, we kicked off our 2019-2020 drilling campaign and recently announced the Etame 9P appraisal drilling results, which were better than expected for the Gamba and Dentale reservoirs.

On September 26, we began trading on the London Stock Exchange, which complements our listing on the New York Stock Exchange by providing us the opportunity to diversify our shareholder base and attract additional research coverage. The new listing also gives us additional options to raise new capital to grow our business in the future.

In October, we began drilling the Etame 9H horizontal development well targeting the Gamba reservoir. We plan to update you on the results in the coming weeks.

Turning to operational results for the third quarter. We produced an average of 3,081 net barrels of oil per day, which was within our guidance range. We completed our annual planned maintenance shutdown at Etame in August, on schedule and on budget and subsequently restarted production.

Production and sales volumes were lower in the quarter by about 250 net barrels of oil per day due to the temporary shutdown. Production was also impacted by the loss of the Etame 10H, Etame 4H and North Tchibala 2H wells that are temporarily shut-in. Earlier this year, the electric submersible pump failed in the Etame 10H well after operating for 4.5 years. Prior to the pump failure, the Etame 10H well was producing approximately 200 net barrels of oil per day. We are considering utilizing the Vantage drilling rig to perform a workover and replace the failed pump in the Etame 10H well. In total, production is down approximately 400 net barrels of oil per day due to these 3 wells.

Looking ahead to the fourth quarter, we are currently drilling the Etame 9H well, which is expected to start producing in December. Taking into account the production uplift from the Etame 9H well and production deferrals from the 3 wells I just mentioned, we expect production for the fourth quarter to be in the range of 3,100 to 3,500 net barrels of oil per day.

As a reminder, the production impact from our 2019-2020 drilling campaign is expected to increase our 2019 exit rate and should have a significantly greater impact on 2020 production. We currently estimate our 2019 exit rate to be in the range of 3,800 to 4,100 net barrels of oil per day, assuming the Etame 9H is completed and online.

Now I would like to give you additional details on the drilling campaign that is underway now. As part of the PSC extension in Gabon, we committed to drilling at least 2 development wells and 2 appraisal wellbores by September 2020. As previously announced, the Etame 9P appraisal wellbore was drilled successfully and encountered both the Gamba and Dentale reservoirs at targeted depths as anticipated. Based on the information we gathered in the Etame 9P wellbore, the Gamba oil column is thicker than predrill expectations and may result in higher ultimate oil recovery from the Etame field, including the Etame 9H development well that we are currently drilling as well as the Etame 11H development well, which we plan to drill shortly after the Etame 9H.

In addition, the preliminary analysis indicates that the Etame 9P wellbore encountered at least 45 feet of good quality Dentale oil sands with estimated gross recoverable oil resources of 3.9 million to 14.9 million barrels of oil in the Dentale reservoir. This is very positive news for us, as our predrill estimate was 4.6 million barrels of oil. As anticipated, we did not encounter H2S in either reservoir.

As you can imagine, we are very excited about the results as we plan for future development wells in the Dentale reservoir.

After reaching total depth in the Etame 9P wellbore, the drill pipe became stuck while lying nearly horizontal in the Dentale section. After several attempts to break free, we decided to cut and pull the drill pipe, but a portion of the drill pipe in the bottom hole assembly could not be recovered. We then plugged back to a shallower depth and began drilling the Etame 9H development well as planned.

While we are still early in the drilling campaign, the additional time spent on the 9P, coupled with the loss of drill pipe in the bottom hole assembly will likely add $3 million to $5 million net to the ultimate overall cost of the drilling program. Thus far, we have not encountered any significant issues drilling the Etame 9H development well. We expect production to come online in December at a stabilized rate of approximately 2,500 to 3,500 gross barrels of oil per day, or 675 to 960 net barrels of oil per day.

Following the Etame 9H well, we plan to drill the Etame 11H development well into the same Gamba reservoir. After we complete the 11H well, we are considering executing a workover to replace the electric submersible pump in the Etame 10H well, which is on the same platform. We then plan to move the rig to the Southeast Etame North Tchibala platform to drill the Southeast Etame 4P appraisal wellbore to evaluate a Gamba step out area in Southeast Etame. Upon drilling the second appraisal wellbore, our drilling commitment as part of the PSC extension that we signed last year will be complete.

I do want to point out that if the Southeast Etame 4P appraisal wellbore proves up the Gamba in that area, then with our joint interest owners and government approvals, we plan to drill a third development well as part of this drilling campaign. So far, we are off to a great start and our vision is to repeat similar drilling campaigns at Etame over the next several years and continue adding reserves and production.

I can't stress enough the importance of our capital discipline and operational execution, as it allows us to continue to generate significant free cash flow, build our cash balance and fund our capital programs at Etame from cash on hand and cash flow from operations.

In addition to funding our drilling program, we are also actively returning value to our shareholders through a share repurchase program. We believe the share repurchase program is an excellent opportunity to buy our common shares at a significant discount to their intrinsic value, and the program also reflects the board's confidence in the current value proposition of our stock.

We are confident that we can continue to execute our share repurchase program and fully fund our 2019-2020 drilling campaign from cash on hand and cash from operations. Later on, Liz will provide additional details regarding the share repurchase plan.

Before I turn the call over to Liz, I would like to discuss our listing in the U.K. We believe our story resonates well with the U.K. investor audience who have a strong interest in companies with the type of assets that we operate in Africa. It has already generated interest in VAALCO with new equity research coverage and increased access to international oil and gas investors.

While we don't have a current need for additional funding, should we find something particularly accretive and compelling and in line with our inorganic growth objectives, we can potentially use our London listing to tap into a deeper pool of capital.

As you can see, we've had a very busy and productive 2019. We have enhanced our corporate, financial and operational capabilities and positioned VAALCO to succeed for many years to come.

With that, I would like to turn the call over to Liz to discuss our financial results.

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Elizabeth D. Prochnow, VAALCO Energy, Inc. - CFO [4]

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Thank you, Cary, and good morning, everyone. As Cary mentioned, it's an exciting time for us at VAALCO, with our drilling program well underway and with the early positive results. Additionally, we completed our listing on the London Stock Exchange, and we are very pleased to have 2 new analysts now providing research coverage on our company.

In the third quarter, we reported a net loss of $3.9 million or $0.07 per diluted share. This was impacted by a noncash expense of $5.1 million or $0.09 per share related to deferred income tax, which was partially offset by noncash benefit of $1.8 million or $0.03 per diluted share related to unrealized gains on crude oil swaps.

Adjusting for the net impact of these items totaling $3.4 million, third quarter adjusted net loss was $0.6 million or $0.01 per share. Third quarter 2019 net loss was also impacted by lower revenues reflecting lower sales volumes as well as a $1.2 million or $0.02 per diluted share noncash expense for stock options, restricted stock and stock appreciation rights.

Adjusted EBITDAX totaled $4.5 million in the third quarter of 2019, which was likewise impacted by lower pricing and production. Through the first 9 months of 2019, we have generated $27.1 million of adjusted EBITDAX, which has helped us fund our capital program and remain free cash flow positive.

Third quarter 2019 oil sales totaled 279,000 net barrels compared with 329,000 net barrels in the same period a year ago and 357,000 net barrels in the second quarter of 2019. Third quarter 2019 sales volumes were impacted by lower production volumes during the quarter, which was the result of the planned full field maintenance shutdown that occurred in August 2019 as well as the impact from the wells currently shut-in.

For the fourth quarter of 2019, we expect sales to increase as a result of higher estimated production from the Etame 9H well, which is currently being drilled, and which is expected to come online in December.

Our realized oil price for the third quarter 2019 averaged $61.26 per barrel, down 19% from $75.40 in the third quarter of 2018 and down 11% from $68.62 in the second quarter of 2019.

In the third quarter, we recorded noncash mark-to-market unrealized gains related to our crude oil swaps of $1.8 million, while we realized a cash gain of $0.5 million on the swaps which settled during the quarter. These swap agreements are at a Dated Brent weighted average price of $66.70 per barrel.

As of September 30, 2019, there were swaps outstanding for 394,735 barrels for the period from and including October 2019 through June 2020.

We will continue to evaluate ways to mitigate price risk, ensure future cash flows for our drilling program and allow for upside to rising commodity prices through our hedging program.

Turning to expenses. Total production expense, excluding workovers, for the third quarter 2019, was $9.5 million or $34.01 per barrel of oil sales. This compares with $7.5 million or $22.93 per barrel in the same quarter of 2018, and $9.8 million or $27.45 per barrel in the second quarter of 2019.

For the fourth quarter of 2019, we expect production expense, excluding workovers, to be between $9 million and $11 million, or $30 to $36 per barrel. Production expense for the fourth quarter is expected to continue to be somewhat high as a result of planned preventative maintenance.

DD&A for the third quarter of 2019 was $1.5 million or $5.41 per barrel of oil. This compares to $1.1 million or $3.43 per barrel in 2018 third quarter and $1.9 million or $5.35 per barrel in the second quarter of 2019. The year-over-year increase in DD&A per barrel of oil reflects an increase in depletable costs associated with the PSC extension, partially offset by a favorable impact of the upward revisions to reserves at December 31, 2018. We continue to expect our full year DD&A rate to be in the range of $5.50 to $6.50 per barrel of sales.

General and administrative expense for the third quarter of 2019, excluding noncash stock compensation was $3.6 million or $12.86 per barrel of oil as compared to $1.8 million or $5.59 per barrel of oil in the third quarter of 2018, and $2.8 million or $7.93 per barrel of oil in the second quarter of 2019.

The expense for the third quarter was higher due to the increased professional fees associated with our listing on the London Stock Exchange as well as our growth initiatives.

We expect our fourth quarter G&A, excluding noncash compensation, to be between $2 million and $3 million.

Noncash stock-based compensation expense related to stock appreciation rights, or SARs, was a charge of $1 million during the 3 months ended September 30, 2019, as compared to a charge of $0.8 million in the comparable 2018 period and a credit of $0.7 million in the second quarter of 2019.

SARs are revalued quarterly based on the closing stock price at the end of the quarter, which was $2.03 at the end of the third quarter 2019 versus $1.67 per share on June 30, 2019. Stock price variability greatly impacts the fair value of the SARs, and there will be an expense or credit booked every quarter associated with the mark-to-market value of the SARs.

Income tax expense for the 3 months ended September 30, 2019, was $7.7 million. This is comprised of $5.1 million of deferred tax expense and a current tax provision of $2.6 million. For the 3 months ended September 30, 2018, the company had a current provision of $4 million and a current deferred tax benefit of $66.2 million. The decrease in the current provision between the third quarter of 2019 and the third quarter of 2018 is primarily attributable to Gabon income taxes which were impacted by a decrease in revenues.

With respect to deferred income tax, for periods prior to the 3 months ended September 30, 2018, the company had full valuation allowances on its net deferred tax assets, and deferred income tax was 0. The deferred income tax benefit of $66.2 million in the third quarter of 2018 related to the recognition of deferred tax assets and the reversal evaluation allowances on the other deferred tax assets.

With respect to the third quarter of 2019, the deferred tax expense of $5.1 million in the third quarter of 2019 includes a $4.8 million charge to increase the valuation allowance on U.S. deferred tax assets, which was primarily due to a decrease in future estimated taxable earnings, primarily as a result of lower oil prices.

As detailed on Slide 23 in the presentation deck posted this morning on our website, we currently estimate that VAALCO's operational breakeven in 2019 is approximately $37 per barrel of oil sales and our free cash flow breakeven in 2019 is approximately $47 per barrel of oil sales, with both amounts including workover expense.

In general terms, we estimate that each $5 increase in realized oil prices increases our annual adjusted EBITDAX by $6 million. This clearly shows our strong leverage to higher oil prices.

At the end of the third quarter, we had a cash balance of $57.2 million, which included $11.8 million of cash attributable to nonoperating joint venture owner advances. At the end of the third quarter, VAALCO had $29 million of working capital from continuing operations. This metric excludes lease liabilities and amounts attributable to discontinued operations.

On June 20, 2019, VAALCO announced that its Board of Directors had authorized a stock repurchase program. Since inception of this program through November 5, we have purchased nearly 1.6 million shares of our common stock at an average price of $1.80, representing a total investment of approximately $2.9 million. This represents 2.6% of the 59.8 million shares of common stock outstanding as of June 30, 2019, just prior to implementing the program -- just post implementing the program.

Despite the weakness in oil prices, VAALCO's cash position remains very strong. We can continue to opportunistically execute our buyback program and also fully fund our planned 2019-2020 drilling program at Etame from cash on hand and cash flow from operations.

For the 9 months ended September 30, 2019, we invested $8.4 million in accrual basis capital expenditures, primarily for the drilling program and, to a lesser degree, for equipment and other. The current estimated net capital expenditure range for 2019, which is primarily associated with our drilling program, is expected to be at $20 million to $25 million. However, as Cary mentioned, the total cost of the 2019-2020 drilling program is now estimate to be approximately $3 million to $5 million higher than the original $25 million to $30 million estimate due to additional rig and service costs associated with the 9P well.

The full 2019-2020 drilling program will include up to 3 development wells and 2 appraisal wellbores. We anticipate that it will be completed in the first half of 2020.

With this, I will now turn the call over to Cary.

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Cary Bounds, VAALCO Energy, Inc. - CEO & Director [5]

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Thanks, Liz. Over the past several years, we have worked diligently to strengthen our financial position and create opportunities for growth. We are debt free with over $45 million in cash on hand, excluding cash attributable to joint owner advances, and we are generating strong operational cash flow that can be used to fund our drilling program.

The 2019-2020 drilling program is the first in a series of drilling campaigns where we hope to create significant value. I am pleased that we have already seen results that are better than expected from the first appraisal well in the program. We are looking forward to the expected production increase from the next 2 Etame development wells on the drilling schedule, followed by an appraisal wellbore at Southeast Etame with the potential to add meaningful reserves.

I believe that moving forward, we will create substantial value for our shareholders by growing reserves and production at Etame and building our asset portfolio through mergers and acquisitions.

In short, this is a very exciting time for VAALCO, and we are well-positioned to deliver profitable and accretive growth.

Thank you. And with that, operator, we are ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Charlie Sharp with Canaccord.

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Charlie Sharp, Canaccord Genuity Corp., Research Division - Analyst [2]

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Just one quick question. You outlined the successful results from the 9P well in Etame and how that might impact 9H and 11H.

Have you had any chance yet to assess perhaps a wider implication across the license, or is that something that's work [in train]?

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Cary Bounds, VAALCO Energy, Inc. - CEO & Director [3]

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Right. That is work in progress, Charlie. That's a great question. And the better-than-expected results that we saw in the Gamba will affect, you're right, the 9H and 11H. But it affects the entire Etame field. And I say field. You know on the Etame license we have 4 fields, and the Etame field is 1 of them in the Gamba reservoir. There are 2 other wells right now, the 10 and the 12, that are producing from the platform. Or the 10 is shut-in, but, anyway, and then there's also the Subsea wells, the 6 and the 7. So we think the good news we saw in the Gamba actually spreads across all of those wells and are -- we're evaluating the results and the impact, and we'll work with our reserve auditors and probably make an announcement when we finish our year-end reserves.

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Operator [4]

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The next question comes from Bill Dezellem with Tieton Capital.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [5]

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I actually wanted to continue down this same path. What were you originally expecting in terms of the Gamba sands in terms of the thickness? It came out, you said at least 45 feet for the oil column. What was in your mind going in?

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Cary Bounds, VAALCO Energy, Inc. - CEO & Director [6]

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Well, that's really a range. And I would say at the low end of the range, probably half that thickness, but somewhere between 25 and 45 feet.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [7]

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And so you also came out with your initial press release with the Dentale that you were thinking the sands were somewhere in the neighborhood of 35 feet. And then with the second release, you came out and said that it was at least 45 feet. What led to that upgrade in the Dentale sands in that intervening time?

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Cary Bounds, VAALCO Energy, Inc. - CEO & Director [8]

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Right. Right. What led to that -- that's a good question, Bill. We gathered information as we drilled the Etame 9P. The information we gathered was mainly well logs. And so it took some time to interpret those logs. There was an initial interpretation, and we wanted to get the news out very quickly with our initial interpretation. And then after our engineers and geoscientists had more time to study the logs, the interpretation improved, and so we made another announcement.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [9]

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Great. Congratulations on that. And then talk, if you would, please, about the implications of the Dentale sand, which, if I understand correctly, is underneath the Gamba, and pretty much your entire production has been from the Gamba. So how do we think about this now that the Dentale, which is an entirely new reservoir, if I understand this correctly, being at the same thickness as the Gamba?

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Cary Bounds, VAALCO Energy, Inc. - CEO & Director [10]

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Well, it is -- what we found is what we call Oil Down To. So we know that there's at least 45 feet of oil; it could be thicker. And so that's part of what's driving the range of reserves. I mentioned 4 million to 15 million, 14 million barrels; 4 million to 14 million. So there's a range around thickness and then there's a range around aerial extent. How wide or what area does the Dentale cover? So that's what's driving the range 4 million to 14 million barrels of oil recoverable. It may take 2 to 3 wells to recover all of that oil, but that analysis is going on right now. So we're combining what we learned from the wellbore and the well logs that we took, combining that with our seismic interpretation and our mapping and coming up with our best estimate of where to drill development wells.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [11]

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Cary, are you thinking that it is possible that with your assets that you just are on the verge of finding that you have double the oil than what you previously did? And what I'm thinking is that the Dentale, if it is the same as the Gamba.

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Cary Bounds, VAALCO Energy, Inc. - CEO & Director [12]

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Well, structurally, it's different. And so, no, the Dentale is not the same as the Gamba. It's a very good quality sand, but not as good as the Gamba. And like I said, structurally, it's different.

But I would point you back. When I think of the future potential in the field, or I should say on the license, I would look across at all of our opportunities. And what we've said on our website in our investor deck is that we have a line of sight to another 123 million barrels of potential reserves and resources. And to date, we've produced over 110. So if everything works out as planned, we're halfway through the life of the field. Or I should say the life of the license.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [13]

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Great. Thank you. And then I would like to ask relative to your share repurchase, what was the highest price that you paid?

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Elizabeth D. Prochnow, VAALCO Energy, Inc. - CFO [14]

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We haven't really disclosed that separately. I mean, we have -- you can kind of gather some of the information. But I think the last quarter we disclosed that the average price was around $1.75 or so. Cumulatively, we're now at around $1.80. So the price has kicked up a bit during this past quarter, which you would expect.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [15]

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Great. Thank you. And then 1 additional question. As I think about your drilling program, you had built cash coming into this. You are paying for the program out of cash and cash flow. Then it appears to me as though you'll be benefiting from increased production, cash generation. And then, I suspect, given what you have inferred, that you'll be coming back with another drilling program. And it almost seems as though you have a drill, produce, build cash -- or I guess increase production, build cash and repeat process that you're starting to develop.

Are we understanding philosophically how you're thinking about this?

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Cary Bounds, VAALCO Energy, Inc. - CEO & Director [16]

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That is exactly correct. I have nothing to add to that, Bill. That's exactly what we are doing.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [17]

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Okay. Thank you for the help and congratulations on making it through this quarter.

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Operator [18]

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(Operator Instructions) As there is nothing else at the present time, I would like to return the floor to Cary Bounds for any closing comments.

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Cary Bounds, VAALCO Energy, Inc. - CEO & Director [19]

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Yes. I'd like to thank everybody for joining our conference call today, and we look forward to another good quarter and our next call.

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Operator [20]

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