Executive Summary / Key Takeaways

• VAALCO Energy is strategically positioning itself for significant growth in 2026 and beyond through substantial organic investments in its diversified African asset base, particularly in Gabon and Côte d'Ivoire, following a transitional year in 2025.
• The company's focus on cost-efficient operations and regional expertise provides a competitive edge, enabling solid cash flow generation and margin performance relative to peers, even as it tackles challenges like scale and innovation gaps.
• Key projects like the Côte d'Ivoire FPSO refurbishment (expected return 2026) and the Gabon drilling campaign (starting Q3 2025) are central to the growth thesis, evaluated on long-term economics and supported by favorable PSC terms offering cost recovery benefits.
• Despite a planned reduction in the 2025 capital budget to $250M-$300M due to commodity price uncertainty, management maintains full-year production and sales guidance, citing strong performance in Gabon and Egypt and confidence in project execution.
• VAALCO maintains a strong financial position with no outstanding RBL borrowings as of Q1 2025 (though $60M was drawn in April 2025), ample liquidity from cash on hand and its new $190M facility, and remains committed to returning value to shareholders via a $0.25 annualized dividend.

Setting the Stage: A Focused African E&P Navigating a Dynamic Market

VAALCO Energy, Inc. is an independent energy company strategically focused on the acquisition, exploration, development, and production of crude oil, natural gas, and natural gas liquids, primarily across a diversified portfolio of assets in Africa. With operations spanning Gabon, Egypt, Côte d'Ivoire, Equatorial Guinea, Nigeria, and Canada, VAALCO has carved out a niche in regions where its operational expertise and established presence provide a competitive advantage. The company's overarching strategy centers on operating efficiently, investing prudently, maximizing its existing asset base, and pursuing accretive opportunities to drive sustainable growth and enhance shareholder value.

The company's journey has been marked by deliberate steps to build scale and diversify risk. Recent history, particularly since 2022, highlights a period of strong operational execution and financial performance, culminating in record adjusted EBITDAX, production, and sales. This was underpinned by operational improvements like the FSO and field reconfiguration projects in Gabon. More recently, strategic inorganic growth, notably the acquisition of Svenska Petroleum Exploration Aktiebolag in April 2024 and the subsequent acquisition of the Baobab FPSO in Côte d'Ivoire in February 2025, has significantly expanded its footprint and production capacity.

Within the competitive landscape of independent E&P, VAALCO competes with a range of players, from larger, more diversified companies like Occidental Petroleum (OXY) and APA Corporation (APA) to regional peers such as Kosmos Energy (KOS). While larger competitors benefit from scale and potentially more advanced technological capabilities for enhanced recovery, VAALCO differentiates itself through cost-efficient operations and deep regional expertise, particularly in West Africa. Its production costs per barrel are estimated to be lower than some peers like KOS, providing a margin advantage. However, VAALCO's smaller scale can lead to higher per-unit energy consumption compared to larger rivals, and it faces innovation gaps relative to companies investing heavily in R&D. The company leverages its regional knowledge for potentially faster project execution, aiming to offset the scale disadvantage and improve capital efficiency.

The broader industry is currently shaped by several dynamic trends. Commodity price volatility remains a significant factor, directly impacting revenue and profitability. Geopolitical events, including conflicts in Eastern Europe and the Middle East, continue to disrupt supply chains and contribute to market uncertainty. Furthermore, the increasing global focus on ESG factors and climate change presents both challenges and opportunities, potentially influencing demand for hydrocarbons, increasing regulatory burdens, and shifting investor sentiment. VAALCO is actively addressing ESG concerns, enhancing its reporting and working towards emission reduction targets, recognizing the importance of responsible operations in maintaining its license to operate and attract capital.

Operational Execution and Strategic Investments Drive Future Potential

VAALCO's operational performance in the first quarter of 2025 demonstrated resilience, with net income of $7.7 million and adjusted EBITDAX of $57 million, driven by NRI production of 17,764 BOEPD and sales of 19,074 BOEPD. While net income was comparable to Q1 2024, revenue increased to $110.3 million from $100.2 million, primarily due to the contribution from the Côte d'Ivoire segment, acquired in April 2024. Operating expenses saw a notable increase, driven by higher production expenses related to Gabon audit settlements, H2S chemical treatment costs, and the inclusion of Côte d'Ivoire operations. On a per-barrel basis, production expense rose to $26.05 in Q1 2025 from $21.56 in Q1 2024. Depreciation, depletion, and amortization also increased, reflecting the impact of the Svenska acquisition.

The company's strategic focus is clearly on leveraging its current financial strength to fund significant organic growth projects designed to transform its production profile. 2025 is anticipated to be a transitional year, with overall production and sales expected to be lower than the 2024 peak due to planned project timelines. The Baobab FPSO in Côte d'Ivoire ceased production in Q1 2025 for planned refurbishment and is not expected to return until 2026. Similarly, the significant drilling campaign in Gabon is scheduled to commence in Q3 2025, with meaningful production contributions anticipated towards the end of 2025 and into 2026.

Despite these near-term dynamics, management is confident in the long-term impact of these investments. The Côte d'Ivoire FPSO refurbishment and the Gabon drilling program are evaluated on a multi-year horizon, aimed at extending field life and adding substantial reserves and production. The fiscal terms in the African PSCs, particularly the 125% cost oil return on capital spend in Côte d'Ivoire, provide strong incentives for investment and offer a degree of protection in lower price environments by increasing cost recovery entitlements.

In Gabon, the secured 2025-2026 drilling program includes a mix of development, appraisal, exploration, gas, and workover wells. A key operational focus is addressing the H2S challenge in the Ebouri field. Extended flow testing on the Ebouri 4H well has demonstrated that H2S concentrations are within modeling expectations, validating the viability of chemical treatment. This technological approach, while not a groundbreaking invention, represents a crucial application of engineering knowledge to unlock previously stranded contingent resources and extend the economic life of the field. The test results increase confidence in the planned Ebouri redevelopment, which includes workovers and potentially new wells targeting sour areas.

In Egypt, the drilling campaign initiated in Q4 2024 continued into Q1 2025, with five wells completed and brought online. These wells have shown encouraging initial production rates, and the discovery of new reserves and a production zone in the Bakr formation highlights ongoing potential. The company is also actively managing its Egyptian receivables, successfully settling the significant Backdated Receivable as of March 31, 2025, through payments and offsets.

The Canada segment, while contributing positively to revenue and operating income in Q1 2025, saw a decision to defer additional drilling in 2025. This was a direct response to current commodity price uncertainty and a move to reduce overall capital expenditures, demonstrating a prudent approach to capital allocation in the prevailing market environment. The company will continue to monitor the performance of its existing wells and the results of the Q4 2024 Southern Acreage exploration well for future drilling opportunities.

Looking ahead, the development of the Venus field in Block P offshore Equatorial Guinea is progressing, with a Final Investment Decision targeted by the end of Q2 2025. This project represents another potential source of future production growth and further diversification of VAALCO's asset base.

Financial Strength and Outlook

VAALCO maintains a solid financial position to support its ambitious capital program. As of March 31, 2025, the company held $40.9 million in unrestricted cash. While this was down from year-end 2024, primarily due to elevated capital spending and a Gabon state lifting for tax settlement, the company's liquidity is significantly bolstered by its new $190 million reserves-based revolving credit facility, entered into in March 2025. As of the end of Q1 2025, this facility was undrawn, providing $182 million in available borrowing capacity. A $60 million drawdown occurred in April 2025, demonstrating the facility's role in funding ongoing investments. Management believes that existing cash, operational cash flow, and the RBL facility provide sufficient liquidity for current and planned requirements over the next 12 months and beyond.

The 2025 capital budget has been adjusted to $250 million-$300 million, a reduction of approximately 10% from the initial range. This reflects a disciplined response to softer commodity prices, prioritizing high-impact, long-term projects while deferring smaller, discretionary spending. Despite this reduction, the full-year production and sales guidance remains unchanged, supported by strong performance in Gabon and Egypt year-to-date.

For the second quarter of 2025, VAALCO expects NRI production between 15,400 and 16,800 BOEPD and sales between 17,800 and 19,300 BOEPD. The higher sales volume relative to production in Q2 is attributed to the timing of three expected liftings in Gabon. Production expenses in Q2 are anticipated to be in line with Q1 2025, normalized for one-time items.

VAALCO remains committed to returning value to shareholders. The company declared a quarterly cash dividend of $0.0625 per share for Q2 2025, maintaining an annualized rate of $0.25 per share. Since 2022, VAALCO has returned over $100 million to shareholders through dividends and share buybacks, highlighting a consistent focus on shareholder returns alongside growth investments.

Risks to the outlook include the inherent volatility of commodity prices, which could impact revenue and the economics of future projects. Geopolitical instability in its operating regions or globally could disrupt operations or markets. Regulatory changes, particularly concerning environmental and climate policies, could increase costs or affect demand. While the company hedges a portion of its production, this provides only partial protection. Operational risks, such as those associated with drilling or FPSO refurbishment, could lead to delays or cost overruns. The company has also identified material weaknesses in internal control over financial reporting, for which remediation efforts are underway, posing a financial reporting risk until fully addressed.

Conclusion

VAALCO Energy is navigating a transitional phase in 2025, strategically investing in its core African assets to unlock significant future growth. While near-term production may reflect the planned downtime for key projects, the substantial capital program in Gabon and Côte d'Ivoire, supported by a solid balance sheet and a new credit facility, positions the company for a step-change in production and cash flow beginning in late 2025 and accelerating into 2026. The company's established operational efficiency and regional expertise provide a competitive foundation, enabling it to manage costs effectively and pursue opportunities even in a volatile commodity price environment. Despite facing challenges common to independent E&P, such as scale limitations and the need for continuous innovation, VAALCO's focused strategy, prudent capital allocation decisions (including the recent CapEx adjustment), and commitment to shareholder returns underscore a compelling investment thesis centered on unlocking value through disciplined execution of its organic growth pipeline. The market's recognition of this potential as projects come online will be a key factor to watch.