VAALCO Energy (EGY, Financial) disappointed the street with its fiscal first quarter results that failed to match the Street's expectations. In fact, its earnings have been lagging behind the analysts’ consensus for the past two quarters by a significant margin. The management has blamed the depressed oil prices for its poor performance. But it seems that investors are not buying this theory, as the stock touched its 52-week low after reporting its results for the recent quarter.
The stock’s performance is in contrast to many of its peers, which have risen in the past few months on account of a mild rally in the oil prices. This is quite disappointing and gives us raised eyebrows concerning its future performance. Starting with its numbers let’s see in detail.
Looking past the performance
Its revenue for the quarter declined 35% from a year ago period to $18.24 million, while losses widened to 67 cents a share compared to a loss of 12 cents last year. Analysts on the other hand were expecting a loss of 5 cents a share on revenue of $20.23 million. In spite of a 6% increase (YoY) in production the numbers were negatively affected by lower crude oil prices. But now oil prices seem to have hit the bottom and look poised for a rally in the future.
This is good news for the company even as it is focused to increase its production base.
These are significant developments that will significantly increase its production in the days ahead. For 2015, VAALCO has projected annual production guidance of 3,900 to 4,600 barrels of oil per day. Additionally, the company looks financially sound and is well prepared with a significant cash reserve to undertake our platform construction and the drilling program. More importantly, it hopes to achieve this without incurring substantial debt or any equity issuance even if the oil prices fall further.
However, it seems very unlikely for crude to sink below the current levels. In fact most of the analysts forecast higher prices in the coming years. According to a report:
“EIA projects the Brent crude oil price will average $61/b in 2015, $1/b higher that in last month's STEO, with prices rising from an average of $54/b in the first quarter to an average of $63/b for the remainder of the year. The Brent crude oil price is projected to average $70/b in 2016, $5/b lower than in last month's STEO, reflecting an increase in forecast OPEC crude oil production in 2016.”
Conclusion
With oil prices expected to improve, we could see some turnaround in VAALCO’s performance. As far as valuations are concerned, the company looks great with a P/S multiple of 1.21, which is far better than the industry average of 7.05, making the stock undervalued at current price. Also its forward P/E looks good at 7.93 compared to the fact that it does not have any trailing P/E at the moment. Therefore, in the light of these facts, investors can consider adding VAALCO Energy to their portfolio.
