Vaalco Energy - A broken african dream
Vaalco Energy - A broken african dream
Management's alignment with investors is questionable
VAALCO Energy, Inc. (NYSE:EGY, LSE:EGY), founded in 1985, is a Houston, USA based, independent energy company with production, development and exploration assets in West and North Africa and western Canada.
In late December 2022, a group of shareholders decided to send a letter to the management, disgrunted by a constant lack of timely communication to the market and several controversial decisions. I prepared the letter and sent it to the IR and, of course, it had no impact.
I could talk about the acquisition of TransGlobe, but I think is less relevant than other aspects of the company, and you can already read about it extensively. I’m not a big fan of heavy oil in Egypt (part of TransGlobe’s assets that the CEO, Mr. Maxwell, didn’t care to know before the investors’ call to present the deal) or natural gas in Canada, but it gives some diversification, which is good, right? The main problem was the price paid, however, let’s see if the pending receivable of $51 million (originally $66 million), to be paid by the Egyptian authorities, makes the deal less sour. Below there is an excerp of the aforementioned letter related to the most relevant part, IMO, the commitment of the management in respect to their shareholding of the company:
In the 2022 Annual Meeting of Stockholders, the shareholders approved the directors’ compensation. The proxy for the meeting included the Highlights of Executive Compensation Practices which contains a table with “Things we do…“ and “Thing we don’t do…”. Among the things the company states it does is the following:
Maintain robust stock ownership requirements. Our Board has adopted robust stock ownership guidelines that require our non-employee directors to own five times (5x) their annual base salary or retainer, as applicable, in shares of our common stock, our Chief Executive Officer and Chief Financial Officer to own three times (3x) his or her annual base salary in shares of our common stock and our other executive officers to own two times (2x) their salary in shares of our common stock
However, Mr. Maxwell holds 133,840 shares in the company after his last purchase (12th 13th of December), with a value at the day of the communication to the SEC of $556,774, which is 1.23x of his annual base salary ($450,000). Same situation occurs with Mr. Bain, who owns 24,808 shares (as announced on the 17th of November) with a value on the 21th of December of $110,643, which represents 0.32x of his annual base salary ($330,000). We are aware that each director has five years from the adoption of the policy or date of appointment, but we wonder if the directors believe there will be better opportunities to comply with this commitment than today with share price below $5. We cannot comprehend why the officers do not profit from these low levels, as we are doing, particularly as it will be accretive for them regarding this obligation once the share price recovers. Therefore, we are concerned that the directors expect to increase their ownership and comply with the abovementioned targets by vesting of shares from their stock awards, not doing actual disbursements. This situation does not comfort us on seeing a full commitment by the directors with the company as the five-year period is too broad for showing their alignment with the shareholders.
Since then, the share price has dropped even further (partly due to the oil price, I’m not that naive), and yet the shareholding of Mr. Maxwell is at 143,840 shares, a wooping addition of 10,000 shares in almost 5 months, despite these words from the CFO, Ron Bain:
We believe right now is an excellent opportunity to buy our common shares at a discount to their intrinsic value and a very attractive investment of our cash balance.
Yes, it is such an excellent opportunity that Mr. Maxwell has spent a bit more of 8% of his annual salary to acquire shares. It is clear he grabs an opportunity when he sees it … But more importantly, his shareholding is valued at $565,291 (18th May price), 1.25 times his salary, still faaaaar from the 3x threshold. Maybe, Mr. Maxwell is thinking of a pay-cut to satisfy the commitment he made, that would make sense.
Besides not considering the current share price atractive enough to increase his stake, he is not spending much in buybacks. With the announcement of the TransGlobe deal, he promised $30 million in buybacks and he’s going to deliver, but in an inconventional way. Vaalco is spending $1.5 million each month, but not as most investors would think. This amount is deployed only in the first 3-4 days of the month, period. Will that create value? Who knows? TBH, I don’t think that the buyback program has been designed with the maximum value generation in mind.
Regarding the buybacks, we had another highlight in the last call by Mr. Maxwell:
At the moment, we remain restricted in our blackout period, but it is something that we will be addressing and how we accurately adjust these levers to maximize the opportunity for repurchase on the undervalued stock position.
The call was more than 10 days ago and we didn’t see any new buybacks by the company after it, only the confirmation of the monthly acquisition of $1.5 million of shares spent between the 1st and 4th of May. BTW, what blackout period was he referring to? I guess that the blackout period wasn’t meant for one of the directors, Mr. Fawthrop, who sold 22,628 shares at $4.14 the day before of the release of the Q1 2023 results to exercise options at $1.6 for the same amount of shares. It was such a wise decision, as shares fell to $3.51 and closed at $3.84 one day later. Then, he bought 5,464 shares a few days later at $3.66, resulting in the addition of 41,000 shares at an average price of $0.48, instead of at $1.6. Lastly, it seems quite odd how the company decides to report to the LSE some of the purchases and not all of them, it seems some of Mr. Fawthrop’s transactions are not relevant enough. Quite odd … quite odd …
Disclaimer: at the moment of writing this article, I hold securities on Vaalco Energy. However, I may sell my current holding or add more to it at any time. This document only represents the opinion of its author; its content cannot be considered investment advice and it has been prepared only for informative purposes.