Executive Summary / Key Takeaways

• VAALCO Energy is executing a transformative strategy focused on operational efficiency, prudent investment, and accretive acquisitions to unlock significant hydrocarbon potential across its diversified African portfolio. The company is poised for substantial production and reserve growth in 2026 and 2027, following a transitional 2025 marked by strategic capital projects.
• Operational excellence and technological applications, such as advanced H2S treatment and efficient drilling techniques, are driving cost reductions and enhancing asset performance, exemplified by sustained production in Gabon and accelerated drilling in Egypt.
• Despite a temporary dip in Q3 2025 financials due to planned maintenance and asset refurbishment, VAALCO maintains a robust liquidity position, supported by a recently expanded $240 million revolving credit facility and improved receivables management.
• The company's commitment to shareholder returns is evident in its attractive dividend yield, underpinned by a disciplined hedging strategy and a long-term outlook on commodity prices.
• Key catalysts for future growth include the imminent return of the Côte d'Ivoire Baobab FPSO, the commencement of a multi-well drilling campaign in Gabon, and the progression of the Venus field development in Equatorial Guinea.

A Foundation for Growth: VAALCO's African Hydrocarbon Vision

VAALCO Energy, Inc. (NYSE:EGY), an independent energy company headquartered in Houston, Texas, has strategically positioned itself as a key player in the acquisition, exploration, development, and production of crude oil, natural gas, and natural gas liquids across a diversified African-focused asset portfolio. With operations spanning Gabon, Egypt, Côte d'Ivoire, Nigeria, and Equatorial Guinea, alongside producing properties in Canada, VAALCO's overarching strategy centers on operational efficiency, prudent investment, and the pursuit of accretive opportunities to maximize its asset base. This approach is particularly critical within the broader energy landscape, where global market forces, including inflation, supply chain constraints, and shifts in U.S. trade policy, continue to influence costs and project timelines. The increasing demand for energy, partly driven by the burgeoning AI and data center sectors, presents both opportunities and challenges for traditional hydrocarbon producers.

The company's history underscores a journey of strategic evolution. A significant operational milestone in 2022 saw the deployment of a Floating Storage and Offloading (FSO) vessel in Gabon, which notably enhanced downtime capture efficiency and reduced overall operating expenses. This foundational improvement set the stage for a period of robust diversification between 2023 and 2024, culminating in record operational and financial results, including a new company record of $303 million in adjusted EBITDAX for the full year 2024. During this transformative phase, VAALCO's SEC proved reserves surged by 57% to 45 million BOE, with 2P CPR reserves reaching 96.1 million BOE.

Technological Edge and Operational Ingenuity

VAALCO's competitive differentiation is not rooted in a single, proprietary "core technology" but rather in its adept application of operational technologies and engineering efficiencies across its diverse asset base. These capabilities translate directly into tangible benefits, enhancing production, extending field life, and optimizing cost structures.

A prime example is the company's successful chemical crude sweetening process for managing hydrogen sulfide (H2S) in Gabon's Ebouri field. Historically, H2S concentrations led to the shutdown of several wells. However, an extended flow test on the Ebouri 4H well throughout 2025 demonstrated the company's ability to effectively treat the oil, with H2S levels remaining within manageable expectations. This operational success, with the 4H well producing around 1,000 barrels of oil per day, unlocks access to previously inaccessible reserves and paves the way for future development, including the highly anticipated Ebouri 5H redrill, which targets a crestal position in the reservoir structure.

Furthermore, VAALCO leverages enhanced seismic analysis in its exploration efforts, particularly in the newly acquired CI-705 block offshore Côte d'Ivoire and its Gabon exploration blocks. This advanced geological analysis is crucial for high-grading and de-risking drilling locations, enabling the identification of new, commercially viable prospects. In Egypt, the company has achieved remarkable drilling efficiency, significantly reducing the "spud to online" cycle time. Management noted drilling more wells faster and cheaper than budgeted, with some wells completed in as little as 8 days, leading to a rate of approximately 2.5 wells per month. This efficiency translates into lower capital costs per well, faster production ramp-up, and improved returns, even in challenging commodity price environments.

The 2022 FSO reconfiguration in Gabon stands as a testament to VAALCO's operational foresight. This project reduced back pressure into the reservoir, enhancing both well and field performance, maximizing downtime capture efficiency, and lowering overall operating expenses. These improvements have contributed to sustained strong production and improved decline curves in Gabon. On the corporate front, the implementation of a single cloud-based ERP system in Q3 2024 is streamlining back-office processes and improving efficiency across multiple international offices, contributing to reduced general and administrative (G&A) costs. For investors, these operational and technological applications collectively form a robust competitive moat, contributing to higher production, lower operating costs, and a more resilient financial performance, directly supporting the company's long-term growth strategy and market positioning.

Competitive Landscape and Strategic Positioning

VAALCO operates within a competitive landscape dominated by other independent oil and gas exploration and production companies, particularly those with a focus on West Africa. Direct competitors such as Kosmos Energy (KOS) and Tullow Oil (TLW) share similar regional interests, while larger players like Occidental Petroleum (OXY) operate on a significantly different scale.

VAALCO's market positioning is that of a specialized, niche operator. Its strength lies in deep localized expertise and established regulatory licenses in key regions like Gabon and Equatorial Guinea, which provide exclusive access to offshore blocks. This focus can lead to more efficient resource extraction and potentially stronger regulatory relationships, offering a competitive edge in specific markets. For instance, VAALCO's operational efficiency in Gabon, post-FSO reconfiguration, has allowed for sustained production and improved decline curves, a testament to its focused execution.

However, VAALCO's smaller scale compared to companies like KOS (with a broader geographic footprint) or OXY (with global operations and advanced technologies like enhanced oil recovery) presents certain vulnerabilities. While VAALCO's targeted approach can lead to better cost management in its niche, it may lag in overall diversification and scalability. Its financial performance, while robust in core segments, could be more susceptible to regional risks compared to rivals with more varied revenue streams. The company's strategic response to this involves a disciplined approach to accretive acquisitions and organic growth within its areas of expertise, aiming to build scale and resilience without overstretching its balance sheet. The farm-in to CI-705 and the acquisition of Svenska Petroleum are clear examples of this strategy in action, expanding its footprint in proven hydrocarbon systems.

Financial Performance and Liquidity

VAALCO's financial performance in 2025 reflects a strategic transitional year, with investments laying the groundwork for future growth. For the nine months ended September 30, 2025, the company reported net income of $17.20 million and adjusted EBITDAX of $130.5 million. This performance occurred even with Côte d'Ivoire's production offline for FPSO refurbishment and no new wells drilled in Gabon, underscoring the resilience of its diversified asset base.

The third quarter of 2025 saw net income of $1.10 million on revenues of $61 million, a notable decrease of approximately 57% year-over-year. This was primarily attributable to zero revenues from Côte d'Ivoire due to the FPSO shutdown and a significant sales volume decrease in Gabon (from 617 MBbls to 333 MBbls) due to a planned full-field maintenance shutdown in July 2025. Conversely, Egypt's revenue increased by approximately 3.3% to $35.70 million in Q3 2025, driven by higher sales volumes, partially offsetting declines elsewhere. Production expenses decreased by 29% in Q3 2025, largely due to the Côte d'Ivoire shutdown, though on a per-barrel basis, costs increased to $25.23 from $19.80 due to lower overall volumes. General and administrative expenses rose by 28% to $8.80 million, mainly due to increased professional service fees and salaries. The company also recorded a derivative loss due to a decrease in Dated Brent crude oil prices.

Liquidity remains a core strength. As of September 30, 2025, unrestricted cash stood at $24 million. The company's 2025 RBL Facility, initially at $190 million, was increased to $190 million in October 2025 and further to $240 million, effective January 23, 2026. This expansion, secured from a position of strength, provides ample capacity to fund its robust capital program. Proceeds from borrowings under this facility totaled $60 million for the nine months ended September 30, 2025. Critically, collections from the Egyptian General Petroleum Corporation (EGPC) have significantly improved, with over $103.6 million received since January 1, 2025. VAALCO anticipates halving its annual receivables balance from 2024 levels by year-end, with monthly invoices now being paid in full. The company's dividend yield, currently around 7%, is considered attractive, reflecting its commitment to shareholder returns amidst its growth initiatives.

Outlook and Strategic Initiatives

VAALCO's outlook is firmly anchored in its ambitious organic growth program for 2026 and beyond. Management has raised the midpoint of its full-year 2025 production and sales guidance by approximately 5%, while simultaneously reducing capital guidance by almost 20% (or $58 million from original 2025 guidance), all while maintaining operating expenses virtually flat. This demonstrates effective capital allocation and operational efficiency.

The Côte d'Ivoire Baobab FPSO refurbishment is progressing ahead of schedule, with the vessel expected to sail away in January 2026 and achieve first oil by late April/early May 2026. This will be followed by significant development drilling in 2026, aiming for meaningful production additions from the Baobab field. The 10-year license extension for CI-40 until 2038 provides long-term stability for this investment. In the newly acquired CI-705 block, detailed geological analysis of seismic data is underway, with the potential for future exploration drilling.

In Gabon, the delayed drilling campaign, now commencing in late Q4 2025, includes a firm commitment for five wells with options for five additional wells. This program targets multiple development wells on the Etame and Seent platforms, alongside re-drills and workovers in the Ebouri field, leveraging the successful H2S treatment capabilities. The company also plans a seismic survey for the Niosi Marin exploration block in late 2025 or early 2026.

Egypt will see continued drilling activity, with plans for an additional eight wells in the second half of 2025, building on the operational efficiencies already achieved. Workovers and optimization activities will also continue to enhance production. In Equatorial Guinea, the initial Front End Engineering and Design (FEED) study for the Venus field development on Block P is complete, confirming technical viability. VAALCO is now evaluating alternative technical solutions, including a subsea development, to enhance economic value and simplify drilling, with a Final Investment Decision (FID) targeted for 2025 and actual commitments well into the second half of 2026. The Canadian drilling program has been deferred in 2025 due to capital allocation priorities and commodity price uncertainty, with a focus on lower-cost optimization projects instead.

For Q4 2025, VAALCO forecasts working interest production between 20,300 and 22,200 BOE per day, and NRI production between 15,600 and 70,300 BOE per day, an increase from Q3 due to the completion of Gabon's maintenance and continued strong Egyptian production. Capital expenditures for Q4 2025 are projected between $90 million and $110 million, reflecting the start of the Gabon drilling campaign. The company is also targeting approximately 40% of its H1 2026 oil production to be hedged by year-end 2025, building on existing hedges for 2025 and 2026 with average floors around $61-$62 per barrel.

Risks and Challenges

Despite a compelling growth trajectory, VAALCO faces several pertinent risks. Geopolitical instability in its operating regions, particularly the uncertain sustainability of the Gaza ceasefire and persistent tensions in West Africa, could impact operational continuity and energy supply chains. U.S. tariffs and global trade policies may lead to increased costs and longer lead times for equipment and materials, affecting project timing and cost structures. Commodity price volatility remains a significant concern; a 5% decline in oil prices could result in a non-cash impairment exceeding $100 million for certain asset groups. The company also acknowledges long-term structural pressures from ESG and climate change initiatives, which could shift demand away from hydrocarbons and increase regulatory compliance costs. Furthermore, VAALCO has identified material weaknesses in its internal control over financial reporting, with a remediation plan underway, though the timeline for full remediation remains uncertain.

Conclusion

VAALCO Energy stands at a pivotal juncture, transforming its asset base through strategic acquisitions and a robust organic capital program. The company's disciplined approach to operational efficiency, coupled with the effective application of operational technologies like H2S management and advanced drilling techniques, is enhancing asset performance and driving future growth. While 2025 serves as a transitional period with significant capital investment, the imminent return of the Côte d'Ivoire FPSO and the commencement of the Gabon drilling campaign are set to deliver a material uplift in production and reserves from 2026 onwards.

With a strong balance sheet, an expanded credit facility, and a commitment to shareholder returns, VAALCO is well-positioned to execute its ambitious plans. The company's ability to consistently meet or exceed guidance, even amidst market volatility and operational challenges, reinforces confidence in its management team. As VAALCO continues to unlock the vast hydrocarbon potential of its African portfolio, its strategic investments and operational prowess are expected to drive sustained value creation for investors in the coming years.