VAALCO Energy Inc
NYSE:EGY
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VAALCO Energy Inc
Earnings Call Analysis
Q4-2023 Analysis
VAALCO Energy Inc
The company has surpassed production targets, honing their drilling and completion techniques to optimize results. They're leaning towards 2.5 to 3-mile lateral wells in Canada, aiming for a production boost and increased reserves. The company's global footprint includes strong Canadian performance and anticipated growth due to new drilling in the first half of 2024, and operational efficiencies in Gabon have reduced maintenance needs and stabilized decline rates.
Investments in development and appraisal wells, along with infrastructure enhancements in Gabon, reveal a strategic focus on long-term growth. Regulatory and technical approvals are in process, with an expected $30 to $40 million allocated for 2024 initiatives. The company's debt-free position and available credit facilities signal an ability to pursue additional accretive opportunities to enhance value.
Despite a pricing decline, the company secured a 3% increase in SEC proved reserves, now standing at 28.6 million barrels of oil equivalent. Notably, its PV-10 metric decreased by 45% due to the lower SEC pricing, yet proved and probable reserves edged up by 1%. The company prides itself on a bank debt-free balance sheet, a product of disciplined operational execution and strategic growth.
The company's unrestricted cash rose to $121 million at the end of 2023, part of which is earmarked for the Svenska acquisition. This deal is expected to close in the second quarter of 2024 and promises to immediately enhance production and cash flow once finalized. The company's commitment to offering shareholder returns is evident, having returned $50.3 million or 42% of free cash flow in 2023 through dividends and share buybacks.
For 2024, the production forecast ranges from 20,800 to 23,400 working interest barrels of oil equivalent per day. The management has also committed to using a substantial portion of the free cash flow for shareholder returns, specifically targeting over $25 million in 2024. The ongoing success story is characterized by focused growth strategies, such as the current drilling campaigns in Canada and the upcoming Gabon drilling program.
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Good morning, and welcome to the VAALCO Energy Fourth Quarter 2023 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.
Thank you, operator. Welcome to VAALCO Energy's Fourth Quarter and Full Year 2023 Conference Call. After I cover the forward-looking statements, George Maxwell, our CEO, will review key highlights of the fourth quarter and full year 2023. Ron Bain, our CFO, will then provide a more in-depth financial review. George will then return for some closing comments before we take your questions.
[Operator Instructions]
I'd like to point out that we posted a supplemental investor deck on our website 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 our earnings release, the presentation posted on our website and in the reports we file with the SEC, including our Form 10-K. Please note that this conference call is being recorded. Let me now turn the call over to George.
Thank you, Al. Good morning, everyone, and welcome to our fourth quarter and full year 2023 earnings conference call. I am very pleased with our ability to deliver exceptional operational and financial results in 2023, exceeding our guidance and expectations following the TransGlobe combination that occurred in late 2022. Our focus has been on optimizing production, managing our costs and capturing operational and cost synergies, all while executing capital drilling campaigns to enhance profitability and growth. Through the execution of this strategy, we have significantly grown our cash position while fully funding our capital program, shareholder dividends and buybacks, all while remaining bank debt free.
We returned over $50 million to shareholders in 2023 through dividends and buybacks, and in 2024, we have already announced an acquisition that will utilize a portion of that $121 million in cash on the balance sheet to add 4,500 working interest barrels per day and 13 million barrels of 1P working interest CPR reserves.
Before I go into more detail on our many accomplishments over the past year and upcoming 2024 key items, let me first summarize some high-level financial and operational results that led to a record-breaking new. We grew production by 83% year-over-year, which helped us deliver record-breaking adjusted EBITDAX of $218 million in 2023. This was a 50% increase over 2022 despite a 26% decrease in realized commodity pricing.
Our record production levels were driven by our successful drilling campaign programs in Egypt and Canada as well as high operational uptime in Gabon. At midyear, we increased our production guidance given the strong performance that we had experienced in the first half of 2023 and we finished the year at the top end of our increased production guidance with 18,710 NRI barrels of oil equivalent per day or 23,946 barrels on a working interest basis.
The diversity of our asset base has allowed us to grow and generate significant operational cash flow to fund our activities. In 2023, we generated almost $120 million in free cash flow and returned over $50 million of that free cash flow back to shareholders through dividends and buybacks. After fully funding our capital program and paying dividends and buyback, we grew unrestricted cash to over $120 million at the end of 2023. We have positive momentum as we enter 2024, both operationally and financially, and we are building size, scale and profitability to sustainably grow VAALCO.
We recently announced an accretive all-cash acquisition of Svenska that expands our diversified portfolio of assets to include offshore Cote d'Ivoire. Let's begin an overview of VAALCO assets with the new acquisition. A few weeks ago, we announced that we were acquiring Svenska Petroleum Exploration in an all-cash deal with no issuance of debt or equity. The gross purchase price of $66.5 million has an effective date of October 1, 2023, and is subject to customary closing adjustments.
We believe that the net cash we will need to pay at closing which we expect to occur in the second quarter of 2024 will be between $30 million and $40 million. We are adding an asset with strong current production and reserves at a very attractive price. This acquisition is highly accretive on key metrics to our shareholder base and provides another strong asset to support future growth. It provides us with additional diversification and strategically expand our West African focus area. The Cote d'Ivoire Baobab field in Block CI-40 has strong production of about 4,500 working interest barrel of oil equivalent and is 99% oil.
The 1P working interest CPR reserves from this proven producing asset are 13 million barrels at October 1, 2023, and the 2P working interest CPR reserves are 21.7 million barrels. We are very excited about the significant organic upside opportunity that is well defined in the potential 2026 drilling campaign at Baobab and the future Kossipo development opportunity. The Baobab field has many parallels with the time in terms of the historic production profile and how the upside is realized through development drilling campaigns, meaning this is an asset type that we understand well.
The field has been significantly derisked through the drilling of 24 production wells, 5 injection wells and a near 20-year production history. The planned dry docking and upgrading of the FPSO in 2025 will position the field for the expected production growth from the potential 2026 drilling program and for future drilling campaigns for many years to come. We are partnering with a great operator and believe our significant development experience offshore West Africa and the successful managing of our FPSO changeover in 2022 will provide insight and experience to help enhance future success at Baobab.
This acquisition contributes to our ability to generate sustainable cash flow for many years and provides another producing asset base that should enhance our ability to continue to return cash to shareholders. As some condition precedents remain outstanding, we have not included production from Svenska in our 2024 guidance or any capital expenditures in our 2024 capital budget.
Turning to Egypt. Our 2023 drilling campaign saw some very positive results. We completed our 2023 campaign faster and at lower cost than we originally planned, which allowed us to increase the drilling program from the original 2023 budgeted position. We finalized the last well in the program in October. And in 2023, we drilled 18 vertical wells, including 1 injector well and 2 exploration wells as well as a horizontal well.
Overall, we had a very economic drilling program with strong production performance, and we are very pleased with our drilling performance in 2023. On the vertical wells, we're seeing significantly faster drilling performance moving from a 2022 average of about 3 wells drilled every 4 months to now drilling 2 wells per month, which is a 60% reduction in cycle times. By drilling the wells faster, we are cutting costs meaningfully and improving the economics of our wells in Egypt.
In addition to the drilling efficiencies, we have also spent time and effort in Egypt reviewing the facilities and overall production operations. These efforts resulted in increased production, lower costs and better safety and environmental performance in Egypt. In addition, we achieved a major milestone in the first quarter of 2024 with 1 million man hours without a lost time incident. The improvement in process flow and the drilling program resulted in SEC 1P additions of 4.8 million barrels on an NRI basis.
As we look to 2024, we are currently planning to reduce capital spend as we evaluate a potential drilling program. We are focusing on the first half of the year on capital workovers that are forecasted to offset decline rates for the first half of this year. We have a 10- to 15-mile drilling program that we are currently evaluating for the second half of the year. This program remains contingent on completion of the program evaluation and confirmation of a drilling rig for this period. We have not included this program within our firm CapEx guidance until confirmed. However, if successful, we anticipate additional CapEx of approximately $18 million, which will also generate additional production.
The macroeconomic position in Egypt has seen some headwinds recently. However, we have seen some positive announcements from the government over the past few weeks, which are encouraging. In Canada, we drilled 2 wells in the first quarter of 2023, a 1.5-mile lateral and a 3-mile lateral. Both wells were drilled and completed safely and cost effectively without incident. The wells were tied in and equipped in April and early May with overall cycle times that were significantly less than historical cycle times. The wells began flowing in May with good production rates. And in early July, the pump and roads were run on both wells.
Both wells initial production rates exceeded expectations, and we are now continuing to produce at slightly above the expected type curves. Canada set a production record for us in 2023 by eclipsing 3,000 barrels per day working equivalent and working interest in Q2. Another reason we performed so well in Canada and exceeded our production targets. While using the results and learnings from our 2023 drilling and completions program to enhance our 2024 drilling. We believe that to better optimize our Canadian prospects going forward, we will move to 2.5 and 3-mile laterals almost exclusively, which we believe will further improve the economics of our development program.
In addition, we have optimized facilities and pads while also refining our completion techniques. We have continued to add acreage around our existing land footprint to help extend the lateral length of our wells. We had a small increase in year-end proved reserves in Canada tied to additional proved undeveloped locations from these acquisitions. In the first half of 2024, we are drilling 4 wells in the northern part of our lease holding that are 2.5 and 3-mile laterals and anticipate having them all completed and flowing in the second quarter.
In addition, we're also targeting an exploration appraisal well in the south after completing these development wells. This should provide a strong production boost in Canada. And as you can see from our guidance, we expect our production in Canada to increase in 2024. Our Canadian assets continued to produce strong production and contribute to our overall ability to generate strong operational cash flow.
Turning to Gabon. As you know, we completed our previous drilling campaign in the fourth quarter of 2022 and invested only minimal CapEx dollars in Gabon in 2023, primarily related to maintenance CapEx and long-lead drilling equipment. We have seen strong overall production results in 2023 through reduced maintenance requirements and improved decline curves on the wells. The FSO and field reconfiguration projects in 2022 have allowed us to capture the efficiency and OpEx savings in the full year 2023 while enhancing production uptime and minimizing field decline prior to the next drilling campaign.
Looking at 2024 and into 2025, we are preparing for our next drilling campaign at Etame. We initially have planned a 3- to 4-well campaign in Gabon with a mix of development, appraisal wells and a gas well for infield power requirements. We also initiated a review of our Ebouri field with a view to development opportunities to drill additional wells and workovers, which will target between 8 million to 12 million barrels of oil. This is currently in our 1C and 2C reserve numbers. This will require some enhancement of the Ebouri platform to handle crude sweetening equipment.
Our engineering and subsurface plants are meeting completion to allow a move towards FID later this year, which have approved will enhance the planned drilling program in Gabon. Some technical and regulatory approvals are still to be obtained in addition to completing the valuation and we will provide a further update on this exciting project when we confirm the scope and timing of our Gabon drilling program. We're expecting to spend between $30 million and $40 million in long lead items in 2024, preparing for and in anticipation of the drilling campaign.
Turning to Blocks G and H. We held some discussions with the partners and have made some encouraging progress this quarter and plan to move towards further discussions and negotiations in the second quarter of this year, where we will provide a further update. On Equatorial Guinea, efforts have continued and have intensified to finalize the JOA with our partners. I am pleased to say that we have only some confirmatory details remaining outstanding and upon receipt, we expect to move this project into firm CapEx FEED study in the very near future.
Turning to reserves. We are very pleased with the growth of our SEC proved reserve base despite a significant decline in pricing. Our positive reserve revisions due to positive field performance in Gabon and drilling results in Egypt and Canada coupled with the reserves added with some land purchases in Canada helped to more than offset production and downward pricing. SEC proved reserves at year-end increased by 3% to 28.6 million barrels of oil equivalent. The lower SEC pricing impacted our PV-10 values for 2023 despite the slight increase in 1P barrels.
Overall, our PV-10 decreased 45% from $624 million to $342 million. Our 2P CPR estimate which includes proven and probable reserves using VAALCO's management assumptions for future pricing and costs reported in our working interest basis prior to deductions for government royalties saw a year-over-year increase of 1% to 77.3 million barrels of oil equivalent. Once again, strong operational performance and reserves additions outweighed the impact of lower pricing and production. The 2P CPR and PV-10 value was impacted mainly by pricing and cost inflation as we saw a 23% decrease to $631 million at year-end 2023.
In closing, we delivered outstanding results in 2023, and I'm excited about 2024 and beyond. We are focused on growing production, reserves and value for our shareholders. We have delivered significant shareholder returns during 2023 and have retained a strong balance sheet. I would like to thank our hardworking team who continue to operate and execute our plans. We are bank debt free and remain firmly focused on our strategic vision of accretive growth while maximizing shareholder return opportunities and operating with the highest regard towards ESG. With that, I would like to turn the call over to Ron to share our financial results.
Thank you, George, and good morning, everyone. I will provide some insight into the drivers for our financial results. And rather than repeating what you can read in the earnings release or our 10-K, I will focus on the key points. Let me begin by echoing George's comments about our continued success in 2023, driven by strong operational performance that yielded record financial results. In the fourth quarter, we generated $44 million in net income or $0.41 per share and $96 million in adjusted EBITDAX. Both were significant increases compared to prior quarters and ahead of consensus estimates. The exceptional fourth quarter numbers helped to push our full year 2023 net income to $60.4 million or $0.56 per share on adjusted EBITDAX to $280 million.
We have a strong cash position, a clean balance sheet and no bank debt. I'm proud to say that we are in a much better positioned today with a growing and diversified asset base than ever before in VAALCO's history.
Let's turn to production and sales, which, along with realized pricing drives our revenue. Production for the fourth quarter remained solid at the high end of our guidance, with our sales for the quarter also at the higher end of guidance. The production performance of our assets in 2023 was buoyed by successful drilling in Egypt and Canada and mitigating decline in Gabon through operating efficiencies. With a diversified portfolio of assets, we will have changes from quarter-to-quarter in the mix of sales from each of our producing areas. This change in mix impacts our realized pricing and ultimately, our revenue and earnings. But if you look at the bigger picture and over a full year, you'll see impressive growth across our expanding portfolio of producing assets.
We saw growth in total sales volumes quarter-over-quarter and overall realized pricing increase from the third quarter due to higher sales mix in Gabon versus Egypt. This drove our fourth quarter revenues to $149 million. For the full year 2023, we saw revenue increase by a little over $100 million. This was driven by sales increasing 86% year-over-year, but somewhat offset by lower realized pricing, which declined 26%. You will note in our earnings release yesterday, we provided a detailed breakout of sales volumes along with commodity pricing by country.
Regarding hedging, as shown in our earnings release, we continue to implement a hedging program that helps mitigate risk and protect our commitment to shareholder return. We have costless collars in place for Q1 through Q3 2024. All our collars have a floor price of $65 for around 15% of our production through Q3 2024, with upside on the collar to between $92 and $100. It's worth noting we have 85% of our production through Q3 2024 unhedged whilst protecting our commitment to our dividend.
Turning to costs. Our production cost for the full year 2023 were below the low end of guidance on an absolute basis and at the bottom end of guidance on a per barrel basis. We remain focused on capturing synergies and keeping our costs low to enable us to maximize margins and increase our cash flow. While absolute costs were up 36% year-over-year, primarily due to higher sales volumes, our production cost per barrel are 27% lower year-on-year. This demonstrates that we are delivering on capturing synergies and cost-saving initiatives like the FSO project last year.
G&A costs were also in line with guidance. When compared to the combined G&A costs seen in 2022 by both VAALCO and TransGlobe, we've seen meaningful reductions in costs well ahead of our target synergies. The final integration and reorganization of the business is behind us. And we've commenced a back-office process improvement project with the implementation of a single cloud-based ERP across the whole company. Noncash DD&A costs decreased considerably quarter-over-quarter, primarily due to year-end depletion adjustments mostly in Egypt that were made in the fourth quarter once we completed our reserves evaluation under our 2023 competent persons report.
Compared to the prior year in 2023, we have seen an increase in DD&A, that's due to the step-up of the TransGlobe asset valuation and because of the additional investment in new wells brought online for both Egypt and Canada. In the fourth quarter, we agreed on a protocol with the Gabonese state for a long-standing debt on TVA together with an outstanding debt from the government-owned Sogara Refinery. This was by way of transfer of state profit oil barrels to Etame contractors and settlement of its debt. This reduced the quantity of barrels we are holding as foreign taxes payable and that will likely be settled by a state lifting of the remaining barrels in 2024.
We had no Gabonese state lifting in 2023, primarily due to the protocol agreement but had a state lifting in 2022 of approximately 600,000 barrels. Tax costs in the fourth quarter of about $37.6 million resulted in an effective tax rate of about 46% in the quarter. This was lower than prior quarters and driven by the revaluation of tax oil barrels held for Gabon. As I stated before, in Gabon, our foreign income taxes are settled by the government through in-kind oil payments. At the end of each quarter, we have to mark-to-market the in-kind oil.
So in general, when the prices rise, it has a negative impact to our accrued taxes. And if prices fall, we see a benefit, thus reducing our tax liability. We cannot control the movement of the underlying commodity price to which this in-kind oil is marked too. We continue to guide that 60% to 65% effective tax rate is a correct effective tax rate over the long term, excluding discrete items.
Turning now to the balance sheet and cash flow statement. Unrestricted cash rose to $121 million as of December 31, 2023. We plan to use a portion of this cash to fund the Svenska acquisition. Last call, we discussed likely working capital movements, some of which occurred in the fourth quarter of 2023 related to the reduction in accounts payable associated with the 2023 capital program.
At the beginning of 2024, we're projecting a build and Egyptian accounts receivable associated with domestic sales in the first quarter, and that will be partially offset by our annual modernization payment. Additionally, with certain annual cash payments that tend to be paid early in the new year, including the domestic market obligation in Gabon and insurances.
Finally, as part of being a responsible operator and community partner in Gabon, we are executing on community engagement projects sanctioned by the PSC that were previously accrued. These items will impact our working capital position in the first quarter of 2024. As has been the case since the third quarter of 2018, we are carrying no bank debt and credit facilities available to utilize for additional accretive acquisition opportunities to continue to build value.
In Q4 2023 VAALCO paid a quarterly cash dividend of $0.0625 per common share or $6.7 million, and our share buyback was about $6 million. For the full year 2023, we returned $50.3 million or 42% of our free cash flow to shareholders through dividends and share buybacks. In February, we announced the first dividend payment of the year at the same quarterly rate as 2023. Aside from fully funding our shareholder returns, we also fully funded over $70 million of capital expenditures in 2023. These expenditures were primarily related to our drilling program in Egypt and Canada with some maintenance CapEx and long lead items for Gabon.
Let me now turn to guidance, where I'll give you some key highlights and updates. I want to remind you that guidance does not include the recently announced Svenska acquisition and will be updated once the acquisition is finalized. Also, our full guidance breakout is in the earnings release and in our supplemental slide deck on our website with production breakout of both working interest and net revenue interest.
For the total company, we are forecasting Q1 2024 production to be between 21,700 and 22,400 working interest barrel of oil equivalent per day and between 16,800 and 17,300 net revenue interest barrels of oil equivalent per day. This is down slightly from the fourth quarter of 2023 due to natural decline. With that said, we do expect solid production growth in Canada due to a drilling program in 2024.
For the full year 2024, we are forecasting our total company production to be between 20,800 and 23,400 working interest barrel of oil equivalent per day and between 16,100 and 18,300 net revenue interest barrel of oil equivalent per day.
Looking at production by asset, we are expecting natural decline in Gabon and Egypt. Although we do have a capital workover program in Egypt in the first half of 2024, that should help mitigate decline. In Canada, as I've mentioned, we expect year-over-year growth from our drilling campaign. For full year 2024, we are assuming our sales will be in line with our production. But for the first quarter, this may not be the case. You will notice that Q1 sales in Gabon have a wide range. This is because a lifting in Gabon is scheduled for the end of March and could potentially shift into April. Of course, if that happens, it will not impact our full year sales but impact our first and second quarter sales in Gabon.
Our absolute operating costs are expected to remain in line with 2023, but we are projecting or per barrel oil equivalent range to potentially increase slightly due to less projected revenue barrels. We're also expecting small increases in absolute G&A and per barrel of oil equivalent G&A costs primarily due to resourcing requirements.
Finally, looking at CapEx. Our 2024 capital spend of $70 million to $90 million includes drilling 4 long lateral development wells in our northern acreage in Canada, long lead items in Gabon preparing for the 2025 drilling campaign and capital workovers in Egypt. For the first quarter, we are expecting a range of between 22 million and 28 million for our CapEx.
In closing, we continue to trade at a very low multiple of EBITDAX despite having a strong dividend yield and being bank debt free. At year-end 2023, we had over $120 million in cash on the balance sheet, generated $280 million in adjusted EBITDAX and trading well below 2x EBITDAX. With this Svenska acquisition, we should see an increase in production in sales while we continue to generate significant adjusted EBITDAX and operational cash flow in 2024. We are very well positioned to execute and fund the CapEx program across multiple producing assets over the next several years. With that, I'll now turn the call back over to George.
Thanks, Ron. Our strategy remains unchanged, operate efficiently, invest prudently, maximize our asset base and look for accretive opportunities. As you have heard this morning, we have successfully delivered strong operational and financial results in 2023 by executing on our strategic vision. Our effective drilling campaigns in Egypt and Canada helped both areas grow production in 2023 and our continued focus on operational uptime helped Gabon minimize decline.
All 3 areas have strong production performance that exceeded guidance. We generated record adjusted EBITDAX of $280 million and free cash flow of $120 million, while funding all of our CapEx, quarterly dividends and share buybacks with cash flow and cash on hand. We ended the year with over $121 million in cash on hand, and we're using some of that cash to make a very accretive acquisition.
We have delivered on our commitment to the market and to our shareholders and we are in an enviable financial position with no bank debt and a greater portfolio of producing assets with future potential upside. In addition to funding our capital program and growing our cash position, we have remained focused on returning value to our shareholders.
In 2023, we returned $50.3 million to our shareholders through dividends and buybacks. That's a 42% of the free cash flow that we generated. We nearly doubled our quarterly dividend and have continued that higher rate into 2024. We are on pace to deliver another $0.25 per share annual dividend for 2024, matching what we paid out in 2023, which at our current share price is a dividend yield of nearly 6%.
We have continued to repurchase common shares through the buyback program approved in 2022. Since inception of the program back in November 2022, we have returned over $28 million to shareholders and repurchased in excess of 6 million common shares. We are committed to returning value to our shareholders. And in 2024, we are targeting returning over $25 million of free cash flow to shareholders. We are expecting to close the Svenska acquisition sometime in the second quarter of 2024. And once it closes, we will see an immediate boost to production, adjusted EBITDAX and cash flow in both absolute and per share terms.
Our current 2024 guidance does not have the Svenska acquisition incorporated, but once it closes, we will provide updated guidance. We are truly excited about the future and VAALCO now is in a very enviable position. We have multiple producing areas and future prospects that have completely diversified our risk profile and our sources of income. We will remain disciplined in our approach to maximize value for our shareholders by delivering growth in production, reserves and cash flow. We are drilling 4 longer lateral wells right now in Canada, purchasing long lead items and preparing for the planned drilling campaign in Gabon, and in Egypt, we have multiple workovers and are evaluating an additional 10 to 15 well drill program.
Our success over the past 2 years has generated meaningful change at VAALCO and created significant development opportunities well into the future. We are very excited for the future of VAALCO and remain confident that we will continue to deliver superior long-term value to our shareholders. Thank you. And with that, operator, we are ready to take questions.
We will now begin the question-and-answer session.
[Operator Instructions]
Our first question today is from Stephane Foucaud with Auctus Advisors. Please go ahead.
I'd like if possibly to go back to the guidance, the CapEx and production guidance. I think George, you talked about the Gabon CapEx -- the same CapEx been $30 million to $40 million. Could you come back on the other items, please? And particularly, if there is -- I don't think there is, but confirm if there is anything associated with the FEED study for EG? And related to that, so should I understand that there should not be any uptick in production in Gabon around the end of the year, because the drilling program now is more likely to start in '25 rather than '24?
So yes, we're looking at $30 million to $40 million of CapEx within Gabon, which is primarily related to maintenance CapEx and long-lead items for the drilling program. One thing that I mentioned during the introduction was that we do have -- or we're currently evaluating a drilling program in Egypt, which is not in guidance, but should that get confirmed, that would add an additional $18 million of CapEx for those 10 to 15 wells.
You're correct in that when we were looking at the program and particularly the focus on the revision of the Ebouri field, that is -- the reason that we're delaying slightly the Gabonese program is to allow that program to have a much wider scope and therefore, a greater number of wells, which will lower the overall cost from the drilling because we'll have more wells to spread mobilization, demobilization over, and that makes it much more efficient. And also, we're targeting effectively what were originally proven reserves for Gabon and the Ebouri field and converting them from contingent. So there's quite a lot of opportunities within the CapEx program.
And so the split between Egypt and Canada for the same CapEx?
Stephane, it's Ron. Let me take that element for you on the breakdown of the CapEx. So as we said in the guidance, we got $70 million to $80 million. I would say, for guidance purposes, you're looking at Gabon being between 40% and 45% of that. Egypt between 10% and 15%. Canada 35% to 40% and then the other will be corporate and possibly FEED studies.
And you're referring for that maybe for EG, the FEED study?
Yes. I mean -- so just to recap that, I mean, we -- as I mentioned earlier in the call, we have made significant progress on Block P with the position with the partners, and whilst we're not in a position right now at this time to confirm move towards a FEED study on the venous development. I do anticipate in the very near future, we will be.
The next question is from Charlie Sharp with Canaccord.
Congratulations on a great set of results. If I could just try and clarify a little bit more Gabon, if I may. I think, George, you said at the beginning of your piece on Gabon that you initially planned a 3- or 4-well program, presumably that did not include the potential additional 2C 8 million to 12 million barrels resources that you highlighted, might it be more than 3 or 4 wells. That's what I'm trying to get at, and exactly what might that encompass in terms of targets, reserves versus resources?
Yes. So you're correct on that. The initial program did not include the opportunity of the redevelopment of the Ebouri field, the total, we would say probably an additional 2 wells and 1 workover. So that would take the program on an almost firm basis between 6 and 7 wells, and obviously, we will carry options onto that as well. The target for contingent resource to conversion to reserves for the Ebouri development remains between 8 million to 12 million barrels. As I mentioned in the commentary, one of the wells is for field -- fuel supply. It's a gas well, so it won't add anything, but it will reduce -- further reduce our OpEx and in the field as we replace natural gas with diesel.
And the other targets, obviously, it's difficult to give you a range when we're looking at an appraisal step-out well but we'll be looking between 2 million to 4 million barrels on the other 2 wells.
That's great. And can I just follow up with one question on the CI-40 license. And I think you've indicated that the FPSO will be going in for maintenance and upgrades in 2025 for -- presumably for a year or more. What's the reason for that? And how much is that all going to cost? And presumably, that will be cost recoverable in the following year?
Hard question really because obviously, we're not the operator of Baobab and those plans have yet to be finalized by the operator. Our anticipation is, obviously, these would be fully cost recoverable. There is a time schedule that would the vessel off station for a period of time. Once we are in a position to have direct discussions with the operator, we'll be in a position to comment more accurately on both the outage and time delays where the dry docking will take place and the nature of the upgrades.
In our evaluation, clearly, we included estimates both for time and CapEx within that. And we're very confident that our estimates here on the conservative side to allow us to make the statement of how accretive we believe this transaction is, but it would really be upon completion, we'll be able to give a more accurate picture, really.
The next question is from Jeff Robertson with Water Tower Research.
George, this may be premature based on your answer to the previous question. But from your understanding, is the FPSO work that is expected to be done in the Ivory Coast, is it similar at all to what VAALCO did at Etame? In terms of trying to upgrade the field to lower costs and great, better run times?
I'll let Thor answer that one. He's sitting beside me.
So the upgrade is really based around the class on the vessel itself. So if you recollect in Gabon, we actually changed the vessel out from an FPSO to an FSO. In this case, what's happening is that the vessel is reach class limits, and needs to go into dry dock to get class resumed. So that's the first part of it.
While it's there, they'll obviously pick up some metal replacement. They'll do some additional work probably on the process equipment, I would expect cleaning it up, reinvigorating it for the next phase of its life, and then the other part that needs to be done is there needs to be some bearing replacements on the current. On the subsea side, there's really not a lot of work that's happening there. So it's the same, but somewhat different, more of the topside scope than the subsea scope.
From a perspective on the rig program in Gabon and ultimately, if you get the JOA finalized for EG, George, can you talk about the effect, if any, of just cost fluctuations that are having an impact on how you evaluate the work going into the FID and the FEED work?
Yes, I can, Jeff. I mean, obviously, from where VAALCO were 2 years ago, capital allocation was relatively simple as a single asset company, capital allocation and a multi-asset company becomes -- I wouldn't say more problematic, it becomes challenging as to where we get the best return for the investment. Now when we look at where we were 18 months ago and preparing the plan of development for venous in Equatorial Guinea. Obviously, pricing both on drilling units on production units has moved considerably.
Now we believe we've maybe seen the top of that cycle now. We're starting to maybe see it plateau often from where it was in its historic highs in 2023. And that's really the purpose of the FEED study. And it's not really to go and reconfirm or challenge the technical position inside the plan of development.
However, if we do see a better way of doing it, and we do see a more economic way of doing it, that will come into that FEED study. But the project itself had fairly robust economics despite its CapEx intensity. We've been looking at that CapEx position and seeing how we can challenge that between CapEx and lease flow. We've been looking at that also from a tax perspective. But bear in mind that albeit a relatively small project at about 17 million to 20 million barrels recoverable, it has a very short life, which gives it an attractive cash flow.
So throughout 2024, we'll be working on that FEED to firm up both the timing of the development, how it fits into our overall corporate CapEx program and ensuring that the FEED study can deliver us towards an FID position.
The next question is from Chris Wheaton with Stifel.
Two questions, if I may. Firstly, I wonder if you'd go back to Equatorial Guinea and just understand what the timing might be of the stages you need to get through to be able to get to FID here? Because obviously, you're in the FEED stage -- it sounds like you're in the FEED stage at the moment, you need to get through to FID at some point. I'm presuming now that, that is going to be next year sometime i.e. 2025, because you need to get the operating agreement sorted out as well.
My second question is kind of related to Equatorial Guinea, after you folded in the Svenska acquisition of the Baobab stake. I'm presuming you'd quite like to do both Equatorial Guinea and the Cote d'Ivoire redevelopment simultaneously. Financially, I'm interested in whether you see there's a risk of -- you see any risk of you not being able to do that. I would have thought your -- given your cash flows and your balance sheet strength, you're quite able to do both of those projects simultaneously. If you want to, I guess the question is, how good are they returns when you stack them up against each other? That's my second question.
The first question, we are at a position now with Equatorial Guinea where through efforts from everyone in particular efforts from the MMH, the government in Equatorial Guinea, we've got -- I would say, 99% alignment on where we want to be within the JOA. And as I've indicated, I can't say for sure today, but I do expect to see for sure in the very near future that the JOA issues are extensively behind us.
Like I said in my opening remarks, we're looking at confirmatory documentation as opposed to negotiating documentation, which is a big step forward from where we've been previously. That does allow us to move into feed. I'm kind of guessing that when we move into feed given the complexity for a blue water development that we are estimating 9 months on feed. It could go quicker, it could go slower.
But given we have the seabed survey, environmental impact assessments and like I said starting from a blue water location, I do anticipate 9 months is a reasonable time frame to get to feed and feed will deliver, and we do anticipate delivering FID. During that same period, obviously, we'll be able to give much more surety and clarity around what's happening in the Svenska acquisition, which we do expect to close in Q2 and become a full partner with the operator CNRL throughout the rest of this year.
As we get into that position, we can give more clarity as to what the costing and timings are for the rehabilitation of the MV10. The challenges, as you pointed out, Chris, about a number of CapEx opportunities coming together at the same time, we'll all be looked at the merits. There are certain things that must happen. And clearly, there's a time frame that we will be engaged with CNRL around of what is happening for that field to shut down and recommence.
So there's a commitment there that we are absolutely committed to based on the operator's time schedule as soon as we can discuss that with them. When we look at our own operations with regard to the drilling program and the enhancement that we talked about and the opportunities in Gabon for early 2025 and the timing around the EG development.
Again, as I said, we've looked at the EG development and said, well, it's CapEx intensive. However, we're looking at opportunities where we replace CapEx with lease opportunities given the tax environment in EG. And also, given that there's a nice dovetail opportunity between drilling programs in Gabon and Equatorial Guinea, so we can, as I mentioned earlier, back to -- I think it was Charlie that we may have a 7 -- up to 7-well program opportunity in Gabon, we can tag that to potential 10-well opportunity and a much more exciting program for a rig operator if we dovetail the wells that we have planned in Equatorial Guinea.
So I do agree with you. We're -- financially, we're placed exceptionally well to execute all of these projects. But we're not challenged to the extent that we see we'd have to delay any as a result of financial constraints, it's really going to be on technical.
The next question is from Bill Dezellem with Tieton Capital.
Congratulations on a great quarter. Would you please talk about the sourcing of the Svenska deal? And talk about if you would be willing to do an additional transaction in '24 or if this is enough for now?
I think obviously, additional transactions are difficult to comment on, Bill, as you'd appreciate. But we do look for opportunities where our natural experience and experience we have inside the company where we can get a deal structure that we see as immediately accretive and immediately adding production. So are we a company that's going to look around for blue water exploration acreage? That's not really -- doesn't fit our build, but we will be looking at opportunities where we see production.
Now do we have enough for now? Yes, we've got a lot of opportunities. And with the opportunities we've acquired to date, we've created considerable longevity to the production profile that VAALCO has. When you look at the source, I'm not quite sure what you're referring to when it comes to source. We've got lots of information around opportunities as they exist in West Africa and in other parts of the world.
When we looked at this particular opportunity that we've managed to conclude subject to closing precedences, we actually looked at that some time ago when we were running -- another company called you and we -- a lot of these deals, as some of you will be aware, in Africa can take a long time to percolate.
And what really aided and abetted VAALCO's opportunity to close this particular deal was our knowledge of the asset, which came from a number of years ago, and our speed at which we could do technical and financial due diligence. And that came from the knowledge base we have inside the company. So the real sources is inherent inside VAALCO's DNA right now. And we do apply that to areas where maybe some of our shareholders have never heard of before, but we know there's accretive opportunities in the discipline -- in those geographies.
George, that's very helpful. And one country that -- or area that we have heard of is Canada. And given the success that you have had there, would you be willing to make additional acquisitions in Canada? How are you thinking about that?
That's a good question. And I will respond exactly the same challenge that the Board gave the executive team over 12 months ago. They said, look, this is a nice business, a small business, how do you make it more viable. How do you make it more contributive to the overall corporate plan? How do you make it cash generative while still expanding the opportunities inside Canada? .
And that's exactly what we've done. We have a 5-year plan that was put together by the Canadian management team. It's an excellent plan, and I have to commend them for putting it together. In that plan, as we mentioned, we're moving to longer lateral wells to enhance the economic returns that we get from our investment activities there. And in order to do that, we have to acquire land parcels that connect the disconnected land parcels that we have to allow the 3-mile laterals instead of a 1-mile lateral or we have to go into joint ventures where we see opportunities in connecting those land parcels where perhaps the existing incumbent does not.
And that's exactly -- some of this campaign we're going right now is based on that strategy, where we have went into agreements with partners and adjoining land parcels with us where they come in as a co-venture initially. And in one instance, they decided they didn't want to and we've taken it 100%. So I see opportunities to grow that strategy, but I don't see it growing into 3 or 4, 5x a footprint we have today. But we do have a very nice contributing business in Canada right now.
Thank you. And congratulations again on a good quarter.
Next question is from Jamie Wilen with Wilen Management.
Nice quarter on all fronts. A couple of cash questions. So as you talk about the acquisition. You're paying $60 million, but it will be $30 million to $40 million in cash by the time it closes. I assume that means that the operation is generating north of $5 million a quarter for you when it closes?
Yes. I mean, Jim, it's Ron. As we said before, the business itself is operating about 4,500 barrels equivalent to us per day when we close. And we see that is effectively going to be able to reduce the overall cash payment that we take because the effective date is the first of October 2023. So we're looking at this deal as being, as I said, it's going to close somewhere between $30 million and $40 million in cash. And with that business still continuing to deliver on those barrels right through until 2025, we see that business effectively paying itself back at present oil prices very, very quickly.
Wonderful. At the end of the third quarter, you talked about kind of building cash in the fourth quarter of about $50 million. And I realize you had the buyback program, the dividend and your payables actually declined by $20 million. So it looks like you hit that $50 million target less all those outflows for shareholder returns and payable decline?
That's correct, Jamie. I mean our cash flow from operations was over $51 million for the quarter. And we did guide that in the transcript, we did state that because the drilling programs were over, and there's a lag between that and the invoices being processed, they would have an account people outflow, and we did see that in Q4.
Got you. I'm very pleased to see the acquisition was done for cash as opposed to shares considering how undervalued our shares are. As you look at the buyback program, we're coming up on the -- nearing the end of the $30 million, would you expect to reauthorize an additional sum for the buyback given the accretiveness of the acquisition and how good the operations have been over the past year and the future outlook?
I mean that's a good question. As I said earlier, the capital allocation is a key consideration that we're going to address at the upcoming meetings once we've completed and fully understand the program inside the Svenska acquisition. As I've said, we haven't had direct discussions with the operator. So until we have that opportunity to sit down and fully understand those plans, then it allows us to give the longer-term cash management plan as to how we allocate that and make sure we -- despite our very strong balance sheet to make sure we avoid going into a debt position. Not that debt is a bad thing when you're looking at these kind of growth opportunities we have, but we'll be planning to steer away from that.
Excellent. As you talk about the closing of the acquisition in the second quarter, are you looking at the end of the second quarter? Or that's a 90-day period? How -- where would you forecast it to be middle, beginning or end of the quarter?
Thor and I are traveling to Cote d'Ivoire in 2 weeks' time. And based on the reception we get from the minister, I'll be able to answer that. But so far, the ministerial comments have been very positive on VAALCO entering the country.
The next question is a follow-up from Jeff Robertson of Water Tower Research.
George, just geopolitical question. Can you comment on any impacts that your Egypt operations are having moving export cargoes? Given what's going on in the Red Sea and then you've operated with the new government of Gabon now for 5 or 6 months. Just a comment on how things are going with them?
On the first instance, with regard to cargoes on the Red Sea, we're seeing no impact on that, primarily because we're still working with the EGPC to plan our 2024 cargoes, and we're hopeful to get that discussions resolved in the very near future. So I guess from the shipping incidences that are taking place in the Red Sea, that is absolutely no impact to us whatsoever. But the impact is we still have discussions right now with EGPC regarding our 2024 cargoes. And as we have our Q1 call in May, hopefully, we're in a position to give a resolution to that with some timing for these cargoes.
With regard to Gabon, I had a very good meeting with the President back in November and the minister when I traveled down to Libreville, I had a really good private dinner with the President and understood his aspirations for the country and how we can work with them to achieve that. We have seen some changes in regulatory framework in Gabon, which we're going to have to work with, in particular, new finance act, which has added 5% to the withholding tax, and we need to work out with the government how best and efficiently, our investment is not impacted by that when we look at the drilling program.
But overall, I think we have seen, as I mentioned last year, during the announcement of the Q, we have seen no impact to our operations, and I can attest to the meeting we had in November with the President, we see no impact to our future investing opportunities in Gabon. We have seen, as I mentioned earlier, that where we've had stalled discussions around block G and H with our partners, BWE and Panoro, we've seen an acceleration of those discussions in Q4 and Q1. And hopefully, by the end of Q2, we've got some more exciting news on those opportunities.
This concludes our question-and-answer session. I would like to turn the conference back over to George Maxwell for any closing remarks.
Thank you very much. I think it's always a pleasure to have had such a monumental achievements in 2023. When we look at all the reorganization and integration work that had to happen post TransGlobe, post the reconfiguration in Gabon, and we're starting to see and reap the benefits of both of these transactions in 2023 to then couple that with an opportunity to add more exciting asset bases to our company and start another journey in another jurisdiction with a long degree of longevity, at least another 14, 15 years of production is also very exciting.
So I think we should enjoy the moment. We've got a lot of hard work ahead of us, a lot of opportunities to develop more oil in the near term with capital investment. We have a strong balance sheet. And as you've -- as I've already pointed out, we've got a very strong team here in Houston and in other places of the world to make sure we can execute in every jurisdiction that we operate. And I'd like to thank everyone. Thank you very much for the call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.