Note 4 - Acquisitions and Dispositions

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Mergers, Acquisitions and Dispositions Disclosures [Text Block]

4. ACQUISITIONS AND DISPOSITIONS

Acquisition of TransGlobe Energy Corporation

On October 13, 2022, the Company and AcquireCo completed the previously announced business combination with TransGlobe whereby AcquireCo acquired all of the issued and outstanding common shares of TransGlobe and TransGlobe became a direct wholly owned subsidiary of AcquireCo and an indirect wholly owned subsidiary of the Company pursuant to an Arrangement agreement entered into by the Company, AcquireCo and TransGlobe on July 13, 2022.

At the effective time of the Arrangement and pursuant to the Arrangement Agreement, each common share of TransGlobe issued and outstanding immediately prior to the effective time of the Arrangement (the “TransGlobe common shares”) was converted into the right to receive 0.6727 (the “exchange ratio”) of a share of VAALCO common stock, par value $0.10 per share. The total number of VAALCO shares issued to TransGlobe’s shareholders was approximately 49.3 million. The Arrangement resulted in VAALCO stockholders owning approximately 54.5%, and TransGlobe shareholders owning approximately 45.5% of the Combined Company, calculated based on vested outstanding shares of each company as of the date of the Arrangement Agreement. The Combined Company results of operations of VAALCO and TransGlobe for the period of October 14, 2022 to December 31, 2022 are included in the Company’s consolidated results for the period ending December 31, 2022.

Prior to the Arrangement, TransGlobe was a cash flow-focused oil and gas exploration and development company whose activities were concentrated in Egypt and Canada. The Combined Company is an African-focused operator with a portfolio of assets in Gabon, Egypt, Equatorial Guinea and Canada. The transaction qualifies as a business combination under ASC 805, Business Combinations and the Company is the accounting acquiror.

The actual impact of the Arrangement was an increase to “Crude oil, natural gas and NGLs sales” of $47.6 million and $10.0 million of “Net income” in the consolidated statements of operations and comprehensive income for the year ended December 31, 2022.

	October 13, 2022
	(in thousands)
Purchase Consideration
Common stock issued to TransGlobe shareholders	$	274,145

	October 13, 2022
	(in thousands)
Assets acquired:
Cash	$	36,686
Wells, platforms and other production facilities		243,669
Equipment and other		2,099
Undeveloped acreage		30,216
Accounts receivable - trade		48,068
Accounts receivable - other		50,275
Accounts with joint venture owners		68
Right of use operating leases		1,609
Right of use financing leases		204
Prepayment and other		7,627
Liabilities assumed:
Asset retirement obligations		(6,134	)
Accounts payable		(10,223	)
Accrued liabilities and other		(50,128	)
Operating lease liabilities - current portion		(961	)
Financing lease liabilities - current portion		(125	)
Operating lease liabilities - net of current portion		(688	)
Financing lease liabilities - net of current portion		(21	)
Deferred tax liabilities		(40,964	)
Other long-term liabilities		(26,313	)
Bargain purchase gain		(10,819	)
Total purchase price	$	274,145

All assets and liabilities associated with TransGlobe, including crude oil, natural gas and NGLs properties, asset retirement obligations and working capital items, were recorded at their fair value. The Company used estimated future crude oil prices as of the closing date, October 13, 2022, to apply to the estimated reserve quantities acquired and market participant assumptions to the estimated future operating and development costs to arrive at the estimates of future net revenues. The future net revenues were discounted using a weighted average cost of capital to determine the fair value at closing. The valuations to derive the purchase price included the use of both proved and unproved categories of reserves, expectation for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and specific risk adjustment factors based on reserve category discount rates. Other significant estimates were used by the Company to determine the fair value of assets acquired and liabilities assumed. The purchase price allocation is preliminary pending final determination of the fair values of certain assets and liabilities, primarily the accounts receivable, asset retirement obligations, accounts payable and any contingencies, and any related tax impacts. As a result of comparing the purchase price to the fair value of the assets acquired and liabilities assumed a $10.8 million bargain purchase gain was recognized. The bargain purchase gain of $10.8 million is included in “Other income (expense), net” in the consolidated statements of operations and comprehensive income (loss). The bargain purchase gain was due to the decrease in the share price of VAALCO stock from the time period when the arrangement agreement was signed, July 13, 2022 and the share price at closing, October 13, 2022 while the exchange ratio, of TransGlobe shares converted to VAALCO shares, remained the same. 

For the twelve months ended December 31, 2022, included in the line item "Other income (expense), net" is $14.6 million of transactions costs associated with the Arrangement with TransGlobe.

In connection with the Arrangement with TransGlobe and pursuant to the Arrangement Agreement, at the effective time of the Arrangement, certain awards previously issued to TransGlobe’s key employees and board members who continued their relationship as employees or board members of VAALCO following the Arrangement, continue to be governed by the applicable TransGlobe plan, provided that each such applicable plan has been amended to provide that VAALCO common stock shall be issuable in lieu of TransGlobe common stock with respect to TransGlobe’s deferred share units (“DSU”s), performance share units (“PSU”s) and restricted stock units (“RSU”s), in each case, based on the exchange ratio in the Arrangement. For the PSUs that remained outstanding following the effective time of the Arrangement as described in the immediately preceding sentence, the applicable vesting percentage was determined by the TransGlobe board of directors to be 200% for PSUs granted in 2020 and 2021; and 64.4% for PSUs granted in 2022. 

On the effective date of the Arrangement, October 13, 2022, the combined fair value of the DSUs, PSU's and RSU's from TransGlobe was $6.0 million. On December 16, 2022, the awards were amended from cash-settled liability awards to equity awards. On the date of this conversion, the awards were revalued, based on VAALCO's share price, and the Company recognized a gain of $0.6 million in its consolidated statements of operations and comprehensive income. See Note 17, for further information on the DSUs, PSUs and RSUs after the conversion.

Acquisition of Sasol Gabon S.A.’s Interest in Etame

On February 25, 2021, VAALCO Gabon S.A. completed the acquisition of Sasol’s 27.8% working interest in the Etame Marin block offshore Gabon pursuant to the SPA. The effective date of the transaction was July 1, 2020. Prior to the Sasol Acquisition, the Company owned and operated a 31.1% working interest in Etame. The Sasol Acquisition increased the Company’s working interest to 58.8%. As a result of the Sasol Acquisition, the net portion of production and costs relating to the Company’s Etame operations increased from 31.1% to 58.8%. Reserves, production and financial results for the interests acquired in the Sasol Acquisition have been included in VAALCO’s results for periods after February 25, 2021.

The following amounts represent the allocation of the purchase price to the assets acquired and liabilities assumed in the Sasol Acquisition:

	February 25, 2021
	(in thousands)
Purchase Consideration
Cash	$	33,959
Fair value of contingent consideration		4,647
Total purchase consideration	$	38,606

	February 25, 2021
	(in thousands)
Assets acquired:
Wells, platforms and other production facilities	$	37,176
Equipment and other		5,568
Value added tax and other receivables		1,234
Abandonment funding		11,781
Accounts receivable - trade		11,220
Other current assets		3,963
Liabilities assumed:
Asset retirement obligations		(14,564	)
Accrued liabilities and other		(10,121	)
Bargain purchase gain		(7,651	)
Total purchase price	$	38,606

All assets and liabilities associated with Sasol’s interest in Etame Marin block, including crude oil, natural gas and NGLs properties, asset retirement obligations and working capital items, were recorded at their fair value. The Company used estimated future crude oil prices as of the closing date, February 25, 2021, to apply to the estimated reserve quantities acquired and market participant assumptions to the estimated future operating and development costs to arrive at the estimates of future net revenues. The future net revenues were discounted using the Company’s weighted average cost of capital to determine the fair value at closing. The valuations to derive the purchase price included the use of both proved and unproved categories of reserves, expectation for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates, and risk adjusted discount rates. Other significant estimates were used by the Company to determine the fair value of assets acquired and liabilities assumed. As a result of comparing the purchase price to the fair value of the assets acquired and liabilities assumed a $7.7 million bargain purchase gain was recognized. A bargain purchase gain of $5.2 million is included in “Other income (expense), net” in the consolidated statements of operations and comprehensive income (loss). An income tax benefit of $4.1 million, related to the bargain purchase gain, is also included in the consolidated statements of operations and comprehensive income (loss). The bargain purchase gain is primarily attributable to the increase in crude oil price forecasts from the date the SPA was signed, November 17, 2020, to the closing date, February 25, 2021, when the fair value of the reserves associated with the Sasol Acquisition were determined.

Under the terms of the SPA, a contingent payment of $5.0 million was payable to Sasol should the average Dated Brent price over a consecutive 90-day period from July 1, 2020 to June 30, 2022 exceed $60.00 per barrel. Included in the purchase consideration was the fair value, at closing, of the contingent payment due to Sasol. The conditions related to the contingent payment were met and on April 29, 2021, the Company paid the $5.0 million contingent amount to Sasol in accordance with the terms of the SPA.

For the twelve months ended December 31, 2021, included in the line item "Other income (expense), net" is $1.0 million of transaction fees associated with the Sasol Acquisition. 

The impact of the Sasol Acquisition was an increase to “Crude oil, natural gas and NGLs sales” of $144.8 million and $14.6 million of “Net income” in the consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2022. The impact of the Sasol Acquisition was an increase to “Crude oil, natural gas and NGLs sales” of $84.6 million and $29.3 million of “Net income” in the consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2021.

The unaudited pro forma results presented below have been prepared to give the effect to the Sasol Acquisition discussed above on the Company’s results of operations for the years ended December 31, 2022 and 2021, as if the Sasol Acquisition had been consummated on January 1, 2020. In addition the unaudited pro forma results presented below have been prepared to give the effect to the TransGlobe Arrangement discussed above on the Company’s results of operations for the years ended December 31, 2022 and 2021, as if the Arrangement had been consummated on January 1, 2021. The unaudited pro forma results do not purport to represent what the Company’s actual results of operations would have been if the Sasol Acquisition or TransGlobe Arrangement had been completed on such date or to project the Company’s results of operations for any future date or period.

	Year Ended December 31,
	2022			2021
	(in thousands)
Pro forma (unaudited)
Crude oil and natural gas sales	$	547,670	(a)	$	367,210	(a)
Operating income	$	267,582	(b)	$	104,924	(c)
Net income	$	130,425	(d)	$	54,534	(e,f)
Basic net income per share:
Income from continuing operations	$	1.21		$	0.51
Loss from discontinued operations, net of tax		-			-
Net income per share	$	1.21		$	0.51
Basic weighted average shares outstanding		108,206			107,537
Diluted net income per share:
Income from continuing operations	$	1.20		$	0.50
Loss from discontinued operations, net of tax		-			-
Net income per share	$	1.20		$	0.50
Diluted weighted average shares outstanding		108,642			108,062

(a)	The unaudited pro forma net revenues associated with Crude oil, natural gas and natural gas liquids sales have been adjusted for shipping and handling costs based on the Company’s historical policy and revenue recognition is based on the Company’s working interest, less royalties, the entitlement method.
(b)	The unaudited pro forma operating income for the year ended December 31, 2022 removes the $23.7 million impairment reversal recorded by TransGlobe in 2022, excludes $10.2 million of severance costs associated with the Arrangement, excludes $6.5 million of TransGlobe transaction costs associated with the Arrangement, reclassifies depreciation expense, for certain leases identified as operating leases, to production expense and adjusts depreciation, depletion and amortization expense related to the depletable assets and asset retirement obligations acquired in the Arrangement based on the purchase price allocation.
(c)	The unaudited pro forma operating income for the year ended December 31, 2021 removes the $31.5 million impairment reversal recorded by TransGlobe in 2021, adjusts costs associated with overlifts to reduce revenue, includes $10.2 million of severance costs associated with the Arrangement, reclassifies depreciation expense, for certain leases identified as operating leases, to production expense and adjusts depreciation, depletion and amortization expense related to the depletable assets and asset retirement obligations acquired in the Arrangement based on the purchase price allocation.
(d)	The unaudited pro forma net income for the year ended December 31, 2022 excludes $14.6 million of transaction costs incurred by VAALCO associated with the Arrangement, excludes the bargain purchase gain of $10.8 million and reclassifies interest expense, for certain leases identified as operating leases, as production expense.
(e)	The unaudited pro forma net income for the year ended December 31, 2021 includes $21.1 million of transaction costs incurred by VAALCO and TransGlobe associated with the Arrangement, includes the bargain purchase gain of $10.8 million and reclassifies interest expense, for certain leases identified as operating leases, as production expense.
(f)	The unaudited pro forma net income for the year ended December 31, 2021 excludes nonrecurring pro forma adjustments directly attributable to the Sasol Acquisition, consisting of a bargain purchase gain of $7.7 million and transaction costs of $1.0 million

Discontinued Operations - Angola and Yemen

In November 2006, the Company signed a production sharing contract for Block 5 offshore Angola (“Block 5 PSA”). The Company’s working interest was 40%, and the Company carried Sonangol P&P, for 10% of the work program. On September 30, 2016, the Company notified Sonangol P&P that it was withdrawing from the joint operating agreement effective October 31, 2016. On November 30, 2016, the Company notified the national concessionaire, Sonangol E.P., that it was withdrawing from the Block 5 PSA and reduced its activities in Angola. As a result of this strategic shift, the Company classified all the related assets and liabilities as those of discontinued operations in the consolidated balance sheets. The operating results of the Angola segment have been classified as discontinued operations for all periods presented in the Company’s consolidated statements of operations and comprehensive income (loss). The Company segregated the cash flows attributable to the Angola segment from the cash flows from continuing operations for all periods presented in the Company’s consolidated statements of cash flows. During the year ended December 31, 2022 and 2021, the Angola segment did not have a material impact on the Company’s financial position, results of operations, cash flows and related disclosures.

As part of the Arrangement with TransGlobe, the Company acquired TG Holdings Yemen Inc. who previously owned TransGlobe's interests in four PSAs in Yemen: Block 32, Block 72, Block 75 and Block S-1. In January 2015, TransGlobe relinquished its interests in Block 32 and Block 72 in Yemen (effective dates of March 31, 2015 and February 28, 2015, respectively), and in October 2015 TransGlobe sold its subsidiary that held interests in Block 75 and Block S-1. The operating results of the Yemen segment have been classified as discontinued operations for all periods presented in the Company’s consolidated statements of operations and comprehensive income (loss). The Company segregated the cash flows attributable to the Yemen segment from the cash flows from continuing operations for all periods presented in the Company’s consolidated statements of cash flows. During the year ended December 31, 2022, the Yemen segment did not have a material impact on the Company’s financial position, results of operations, cash flows and related disclosures.