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VAALCO Energy, Inc - Initiation Note

VAALCO Energy, Inc

NEUTRAL (EGY, $5.60)

Initiating Coverage On VAALCO Energy With A NEUTRAL Rating And $6 Price Target

May 20, 2015

Glenn Williams Jr.

212.417.3638

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We are initiating coverage on VAALCO Energy with a NEUTRAL rating and $6 price target. Despite what we consider potentially valuable assets along the coast of West Africa, we believe that recent sharp declines in oil prices could hinder the company’s development prospects in 2015. We also note that with an Enterprise value (EV) of $205 million (Market capitalization + net debt), VAALCO trades at a 50% premium to its year end 2013 PV-10 calculation.

We look favorably on VAALCO’s balance sheet, and strong cash position relative to debt. Specifically, we note that VAALCO has just $15 million in total debt, relative to a cash position of $133.5 million. Additionally, VAALCO has a net debt to total capital ratio of just 5.1%, well-below its peers in the E&P space.

However, in looking at the December 31, 2013 reserve report, prices of $107.90 were used to estimate cash flows. (Investors should note that E&P firms use the prior 12 month’s prices to calculate PV-10). Since that time, Brent crude prices have fallen 55% to its current price of $48.04 (which we expect to be reflected in VAALCO’s new reserve calculations in 1st quarter 2015). VAALCO’s share price by comparison, has declined 19% over the same time frame. Given the drop, VAALCO trades on par with the peer median on an EV to Flowing Barrel (daily production) basis, but at a 56% premium when we examine VAALCO’s EV to Proved reserves ratio. Thus, given the current environment for oil prices, we expect VAALCO’s stock price to appreciate just 7% in 2015.

Ultimately we arrive at our $6 price target by using a blended average of 4 valuation metrics. Specifically we base our valuation on daily production, discretionary cash flows, PV-10, and proved reserves (Exhibit 10). In doing so we arrive at a $6 price target, implying 7% upside, given VAALCO’s current price of $5.60.

EGYSource: Capital IQ; National Securities Corporation


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