VAALCO Energy, Inc. (EGY)

LEGMAKER (< 20) Submitted: 5/12/08 9:57 AM : Start Price: $6.79 EGY Score: 6.43

Every once in a while I try to find companies lack look solid going forward that have small analyst coverage, where it is easy to make the mistake of not pricing in the current growth of some companies. I generally stick with sectors that look good, but should have continued growth going forward. A company I found is Vaalco Energy Inc. They are quite interesting as they seem to have a good balance sheet and very good reserves in oil and gas. The only downside is their large exposure to Africa where political unrest can be quite high, but on paper this company looks real good, and may be a take out candidate as some of the bigger companies find they are undervalued.





With consolidation looking to continue through the year and big companies unable to find growth they will have to buy it. Companies like Exxon and Chevron have been forecasting slower growth going forward and they know the only way to increase this are... More Every once in a while I try to find companies lack look solid going forward that have small analyst coverage, where it is easy to make the mistake of not pricing in the current growth of some companies. I generally stick with sectors that look good, but should have continued growth going forward. A company I found is Vaalco Energy Inc. They are quite interesting as they seem to have a good balance sheet and very good reserves in oil and gas. The only downside is their large exposure to Africa where political unrest can be quite high, but on paper this company looks real good, and may be a take out candidate as some of the bigger companies find they are undervalued.





With consolidation looking to continue through the year and big companies unable to find growth they will have to buy it. Companies like Exxon and Chevron have been forecasting slower growth going forward and they know the only way to increase this are to buy it. This being said Vaalco has an impressive balance sheet. They have managed to keep debt low and provide decent growth. With oil being the new hedge against inflation it may be better to look at this as a buying opportunity. Every dollar spent on oil increases our debt and deficit, so it is reasonable that oil is being traded on the weak dollar. Vaalco is a very small company with 40 employees. Their market cap is $388 million up from $295 at the end of last year. Their reserves are 5,993 MBOE and proven reserves are 4,688 MBOE. 99% of this is oil with the remaining 1% natural gas. Their average production in 2007 was 5,200+ BOED. They operate in 3 countries and were 100% operational for last year.





West Africa is an interesting proposition as reserves seem to be quite good, but many do not want to enter these regions as they have political issues, but Vaalco maintains their first strategy is to produce oil through exploration to increase cash and acquire and find new growth. They have had a good run of increasing reserves through the drill bit and are planning to continue doing so. They want to expand their West African base and maintain financial responsibility as they are sticking with what they know and have worked for them.





The growth opportunity looks to hit at the end of this year. Currently, in Gabon they have four wells that produce 12,000 barrel per day. This is a 48,000 total. Of this they have a 28% interest which puts their part of the production at 13,400 barrels per day. At the end of this year they will have an additional 5,000 barrels per day or approximately a 30% increase. They also have two new wells that look to produce another 10000 barrels per day. They also have 1.4 billion barrels of reserves that they are tapping this year, but production numbers are not out yet. They also have a possible 500 million barrels in Angolia but only 5 tapped wells have shown oil and they are still mainly in development with this. If we look back to 2007 they only produced 5200 barrels a day and it looks by the end of this year there will be a dramatic increase. It could increase five fold if everything goes right. With a forward PE of ten this looks like they could unbelievably undervalued. Plus the company has very little debt as their debt to equity ratio is only .035. Their $5 million in debt they have is easily paid for with their levered free cash flow of $33 million. Quarterly revenue growth was up 132% although earnings have missed as they have been paying to increase operations without acquiring debt. Their earnings misses have been due to higher costs with respects to expansion and it has caused their stock price to be cut in half over the last two years. This is important as they look to have the ability to crush going forward. These higher costs decreased earnings by one half from 2006 to 2007. For 2008 they have figured their earnings on the price of oil being $70 as opposed to it trying to hit $120. For 2008 they are approximating production to double after other party's interest is removed.





The current chart shows a breakout at current price levels and makes the one year estimate of $5 by analysts seem low. Barrels of oil sales were increased by 27% year over year although prices averaged $87 a barrel and under $60 in the last quarter. Lastly, Delorme currently owns 8% of the company that experienced a 30% loss over last year and is pushing the company to sell. The company could see at least a 50% increase from today's prices if an offer was to be made. I think this is a nice short term play on a pullback as when the stock pops it will be huge.

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