10KSB40:

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------

FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996

OR

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______

COMMISSION FILE NUMBER 0-20928
-----------------------
VAALCO ENERGY, INC.
(Name of small business issuer in its charter)

Delaware 76-0274813
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

4600 Post Oak Place
Suite 309
Houston, Texas 77027
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (713) 623-0801
Securities registered under Section 12(b) of the Exchange Act:

Title of each class Name of each exchange on which registered

None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $.10 par value
(Title of class)

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

The registrant's revenues for the fiscal year ended December 31, 1996
were $2,732,128.

The aggregate market value of the voting stock of the registrant held by
non-affiliates as of April 1, 1997 was $1,684,632 based upon the closing price
as of such date.

As of March 25, 1997, there were outstanding 8,865,469 shares of Common
Stock, $.10 par value per share, of the registrant.
VAALCO ENERGY, INC.

TABLE OF CONTENTS

PART I

Item 1. Business............................................................3

Item 2. Properties..........................................................6

Item 3. Legal Proceedings..................................................13

Item 4. Submission of Matters to a Vote of Security Holders................13

PART II

Item 5. Market for Common Equity and Related
Stockholder Matters................................................14

Item 6. Management's Discussion and Analysis or Plan
of Operations......................................................15

Item 7. Financial Statements and Supplementary Data........................20

Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................43

PART III

Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.........44

Item 10. Executive Compensation.............................................46

Item 11. Security Ownership of Certain Beneficial Owners and Management.....46

Item 12. Certain Relationships and Related Transactions.....................48

Item 13. Exhibits and Reports on Form 8-K...................................51
PART I
ITEM 1. BUSINESS

BACKGROUND

VAALCO Energy, Inc., a Delaware corporation, is a Houston-based
independent energy company principally engaged in the exploration, development
and production of crude oil and natural gas. As used herein, the terms "Company"
and "VAALCO" mean VAALCO Energy, Inc. and its subsidiaries, unless the context
otherwise requires. Until recently, all of the Company's interests were located
overseas in certain offshore areas of the Philippines, India, and Gabon. In
December 1996, the Company acquired its first domestic producing properties
consisting of interests in eight platforms in the federal waters of the offshore
Gulf of Mexico. Four of the platforms are being operated by VAALCO.

VAALCO's Philippine subsidiaries include Alcorn (Philippines) Inc.,
Alcorn (Palawan) Inc., Alcorn (Production) Philippines Inc. and Alcorn
(Production) Palawan Inc. VAALCO Energy (India), Inc. was the subsidiary engaged
in business in India which was sold in 1996. VAALCO's Gabon subsidiaries are
VAALCO Gabon (Equata), Inc., VAALCO Gabon (Etame), Inc., VAALCO Production
(Gabon), Inc. and VAALCO Energy (Gabon), Inc. VAALCO (USA), Inc. holds interests
in certain properties in the United States.

GENERAL

Since its inception, the Company has employed a strategy of acquiring
interests in areas with existing production or undeveloped oil and gas
discoveries. An additional criteria is that the areas have upside potential in
the form of additional drilling locations or low risk exploration prospects in
order to maximize returns. The Company's current business strategy incorporates
building near-term cash flow by acquiring similar properties in the United
States both as a means of developing a new segment of the Company and as a
bridge to the realization of returns from its longer term international
projects.

The Company has interests in eight platforms in seven fields (covering
ten lease blocks) in the federal waters of the offshore Gulf of Mexico. Four of
the platforms in three of the fields, High Island blocks A-313, A-314, and
A-280, are being operated by VAALCO. The Company has also accumulated
approximately 1,600 acres in the Wilcox trend of Goliad, Texas.

In the international arena, the Company's business strategy is to pursue
opportunities characterized by low initial costs, favorable production sharing
contracts, reasonable work commitments, existing undeveloped discoveries,
moderate to high reserve potential and the availability of existing technical
data that may be further developed and integrated using current technology.

The Company also has an interest in two service contracts in the
Philippines, where the Company produces the Nido and Matinloc fields; with total
production for 1996 of approximately

3
870 barrels of oil per day ("BOPD"). During 1995 and 1996, the Company also
acquired interests in India (subsequently sold), and Gabon.

CUSTOMERS

Substantially all of the Company's crude oil and natural gas is sold at
the well head at posted prices under short term contracts, as is customary in
the industry. During the year ended December 31, 1996, one purchaser of the
Company's crude oil accounted for all of the Company's total crude oil sales.
The Company markets its crude oil share under an agreement with Sea Oil, a local
Philippines refiner. While the loss of this buyer might have a material effect
on the Company in the near term, management believes that the Company would be
able to obtain other customers for its crude oil.

EMPLOYEES

As of December 31, 1996, the Company had 25 full time employees, 17 of
which were located in the Philippines. The Company is not subject to any
collective bargaining agreements and believes its relations with its employees
are satisfactory. During 1995 and 1996, approximately 75% of the Company's
employees were retired from the Philippines operations office under a severance
program. The cost of the severance package was pre-accrued under the pension
fund for the Philippine employees.

COMPETITION

The oil and gas industry is highly competitive. Competition is
particularly intense with respect to acquisitions and sales of oil and gas
producing properties. There is also competition for the acquisition of oil and
gas leases suitable for exploration and the hiring of experienced personnel.
Competition also exists with other industries in supplying the energy needs of
consumers.

The Company's competition for acquisitions, exploration, development and
production include the major oil and gas companies in addition to numerous
independent oil and gas companies, individual proprietors, drilling and
acquisition programs and others. Many of these competitors possess financial and
personnel resources substantially in excess of those available to the Company
giving those competitors an enhanced ability to pay for desirable leases and to
evaluate, bid for and purchase properties or prospects. The ability of the
Company to generate reserves in the future will depend on its ability to select
and acquire suitable producing properties and prospects for future drilling and
exploration.

BUSINESS RISK, LEGISLATION AND REGULATION

BUSINESS RISKS

The Company must continually acquire, explore and develop new
hydrocarbon reserves to replace those produced or sold. Without successful
drilling, acquisition or exploration operations, the Company's hydrocarbon
reserves and revenues will decline. Drilling activities are subject to numerous
risks, including the risk that no commercially viable oil or natural gas
production will be

4
obtained. The decision to purchase, explore, exploit or develop an interest or
property will depend in part on the evaluation of data obtained through
geophysical and geological analyses and engineering studies, the results of
which are often inconclusive or subject to revisions or varying interpretations.
The cost of drilling, completing and operating wells is often uncertain.
Drilling may be curtailed, delayed or canceled as a result of many factors,
including title problems, weather conditions, compliance with government
permitting requirements, shortages of or delays in obtaining equipment,
reductions in product prices or limitations in the market for products. The
availability of a ready market for the Company's oil and gas production also
depends on a number of factors, including the demand for and supply of oil and
natural gas and the proximity of reserves to pipelines and the proximity of the
Company's properties to other producing properties. Wells may be shut in for
lack of a market or due to inadequacy or unavailability of pipeline or tanker
storage capacity or by the cessation of production operations at a nearby oil
and gas reservoir.

MARKET CONDITIONS AND CHANGING OIL AND GAS PRICES

The revenues generated by the Company's operations are highly dependent
upon the prices of, and demand for, crude oil and gas. The price received by the
Company for its oil and gas production and the level of such production depend
on numerous factors beyond the Company's control, including the condition of the
world economy, political and regulatory conditions in the Philippines and other
oil and gas-producing countries and the actions of the Organization of Petroleum
Exporting Countries. Decreases in the prices of oil and gas have had, and could
have in the future, a significant effect on the carrying value of the Company's
proved reserves and the Company's revenues, profitability and cash flow.

OPERATING HAZARDS AND UNINSURED RISKS

The Company's operations are subject to all of the risks normally
incident to the exploration for and the production of oil and natural gas,
including blowouts, cratering, oil spills and fires, each of which could result
in damage to or destruction of oil and gas wells, production facilities or other
property, or injury to persons. The Company's offshore drilling equipment is
also subject to hazards inherent in marine operations, such as capsizing,
sinking, grounding, collision and damage from severe weather conditions. The
relatively deep offshore drilling conducted by the Company involves increased
drilling risks of high pressures and mechanical difficulties, including stuck
pipe, collapsed casing and separated cable. The impact that any of these risks
may have upon the Company is increased due to the low number of producing
properties owned by the Company.

Although the Company maintains insurance coverage, it is not fully
insured against certain of these risks, either because such insurance is not
available or because of high premium costs. The Company does not carry any
political risk insurance for its foreign operations. The occurrence of a
significant event that is not fully insured against could have a material effect
on the Company's financial position.

5
GOVERNMENT REGULATION

The Company's business is regulated by the laws and regulations of the
United States, the Republic of the Philippines, India and Gabon relating to the
development, production, marketing, pricing, transportation and storage of
natural gas and crude oil, as well as environmental and safety matters. The
Company does not believe that environmental regulations have had any material
adverse effect on its capital expenditures, results of operations or competitive
position, and does not anticipate any significant expenditures will be required
to enable it to comply with existing laws and regulations. However, the
modification of existing laws or regulations or the adoption of new laws or
regulations curtailing exploratory or developmental drilling for oil and gas for
economic, environmental or other reasons could have a material effect on the
Company's operations.

The Company's international assets and operations are subject to various
political, economic and other uncertainties, including, among other things, the
risks of war, expropriation, nationalization, renegotiation or nullification of
existing contracts, taxation policies, foreign exchange restrictions, changing
political conditions, international monetary fluctuations, currency controls and
foreign governmental regulations that favor or require the awarding of drilling
contracts to local contractors or require foreign contractors to employ citizens
of, or purchase supplies from, a particular jurisdiction.

A portion of the Company's producing properties are located offshore
Palawan Island in the Republic of the Philippines. Consequently, a substantial
portion of the Company's assets are subject to regulation by the government of
the Republic of the Philippines and Philippines political risk. The Company has
operated in the Philippines since 1985 and believes it has good relations with
the current Philippine government. However, there can be no assurance that
present or future government regulation in the Philippines will not materially
adversely affect the operations of the Company.

The Company's producing properties in the Philippines are located in
fields covered under Service Contract No. 14. To obtain favorable tax treatment,
at least 15% of Service Contract No. 14 must be owned by Philippine nationals.
Residents of the Philippines currently own in excess of 15% of Service Contract
No. 14. The Company's ability to export oil produced in the Philippines is
restricted by the terms of Service Contract No. 14. The Company currently sells
its crude oil production within the Philippines and therefore may be exposed to
foreign currency risk.

ITEM 2. PROPERTIES

PHILIPPINES

The Company has an interest in two service contracts in the Philippines.
Service Contract No. 14 covers 158,000 offshore acres and Service Contract No. 6
covers 131,000 offshore acres. The Company's 1995 production was from three
fields on Service Contract No. 14, the West Linapacan "A" Field, the Nido Field
and the Matinloc Field. In January 1996, the Company suspended production
operations in the West Linapacan "A" Field due to a significant decline in oil
production caused by increasing water intrusion. However, the Company continues
to

6
produce the Nido and Matinloc fields; with a total production for 1996 of
approximately 870 BOPD.

PRODUCING FIELDS

Nido Field

This field is located within the contract area covered by Service
Contract No. 14 and has four producing wells. These wells have been producing
since 1979, and through the year ended December 31, 1996 had produced an
aggregate of approximately 16.8 million barrels ("MMBbls") of crude oil. The
field is produced under the cyclic method under which the field is shut in for a
period of time (generally 60 to 120 days) and then opened up to produce
(generally four to five days). Under this cyclical method, the four wells in the
field produced at an equivalent rate of 585 BOPD during 1996. The Company has an
approximate 34.11% working interest and an approximate 26.40% net revenue
interest in the field. Production has been from a Lower Miocene carbonate
reservoir within a reefal structure.

Matinloc Field

In the second quarter of 1995, the Matinloc field was reactivated. This
field is located within the contract area covered by Service Contract No. 14 and
has three producing wells. Prior to 1995, the field had produced an aggregate
production of approximately 10.3 MMBbls from 1982 through 1991. At December 31,
1996 the field had produced 10.5 million barrels. During 1996, the field
produced approximately 105,000 barrels or 285 BOPD. The Company has an
approximate 58.66% working interest and an approximate 56.83% net revenue
interest in the field.

NON-PRODUCING FIELDS

West Linapacan "A" Field

In December 1990, the Company made an offshore oil discovery in the West
Linapacan area located within the contract area covered by Service Contract No.
14, approximately 40 miles northwest of the northern tip of Palawan Island. The
field is a fractured carbonate reservoir located in approximately 1,150 feet of
water. The Company owns a 29% working interest and an approximate 32% net
revenue interest in the West Linapacan "A" Field.

The field experienced early water breakthrough in 1993 which eventually
led to a downgrade, by Netherland, Sewell and Associates ("NSA"), independent
petroleum engineers, at December 31, 1994, of a portion of the Company's proven
reserves to the non-proven category. Despite a major work program in 1994 to
sidetrack two wells and workover two wells, the Company continued to experience
significant declines in oil production from the West Linapacan "A" field. An
additional development well was unsuccessfully drilled in June 1995. As a result
of the lack of success of the sidetrack wells and workovers, the financial
condition and operating cash flows of the Company were materially and adversely
affected. In January 1996, the Company suspended production operations in the
field after total production of 8.8 million barrels.

7
Galoc Field

This field is located within the contract area covered by Service
Contract No. 14. Four wells have been drilled in this field, of which one well
in 1,150 feet of water has undergone a long-term testing program. The Galoc
reservoir is made up of a sandstone turbidite fan sequence that was deposited on
top of the Lower Miocene limestone in a deep-water environment.

An extended production test at the Galoc 1 well in 1988 produced
approximately 400,000 Bbls of crude oil at rates up to 5,200 BOPD. As a result
of this test, the Company decided to proceed to the second phase of its testing
program. In early 1989, the Galoc 1 vertical well was reentered as a high-angle
lateral well. This well was drilled through the 9 5/8" casing of the Galoc 1
well to a sub-horizontal length of 2,000 feet in the reservoir. This well proved
the lateral extension of the Galoc oil accumulation but failed to produce, on
the initial test, multiples of the rates achieved in vertical production.
However, combined flow rates of 7,399 BOPD were achieved from the 2,000 foot
horizontal section. Despite the test rates achieved, the Company determined not
to develop this field at that time.

Subsequent analysis and research has determined that the Galoc
turbidites have poor vertical permeability as displayed during the various
drillstem tests. Consequently, development plans under consideration are all
based upon production from vertical wells that will maximize the horizontal
permeability. Costs in connection with the Galoc field are recoverable under the
cost recovery procedures of Service Contract No. 14.

RECENT DEVELOPMENTS

In October 1996, VAALCO and the other Service Contract No. 14 and
Service Contract No. 6 consortium members entered into a farm-out agreement
wherein the farmee, an Australian company, is required to shoot a $7 million 3-D
seismic program over the service contract areas during early 1997. The
Australian farmee company will earn a 35% interest in the blocks for performing
the work. In addition, the Australian company has the option to drill two wells,
one on each Service Contract, to earn up to an additional 25% interest in each
Service Contract. Seismic acquisition under the farm out agreement commenced in
February 1997.

GABON

VAALCO has an interest in two offshore blocks in Gabon, the Etame Block
and the Equata Block. These blocks were taken for a three-year term in July
1995. VAALCO initially held a 51% interest in each block and is designated the
operator of the blocks.

Etame Block

The Etame block is a 3,073 square kilometer block containing two former
discoveries, the North and South Tchibala fields. These fields are subsalt
reservoirs that lie in approximately 250 feet of water depth, 20 miles offshore.
In November 1996, the Company entered into a letter of intent with a
multi-national seismic company which will acquire 15,000 line kilometers of
seismic data (consisting of a 385 square kilometer 3-D seismic survey and a 300
line kilometer 2-D

8
survey) and pay a disproportionate 80% of the cost, up to $4.7 million, of the
estimated $5.8 million (dry hole cost) commitment well to earn a 65% interest in
the concession. The Company and its partners will be responsible for 20% of the
cost (35% over $4.7 million) of the commitment well which will test a third
"exploration" structure in the vicinity of the two Tchibala discoveries.
VAALCO's share of the dry hole cost of the commitment well is estimated to be
$675,000. VAALCO and its partners will retain a 35% working interest in the
block (17.9% net to VAALCO).

The 3-D seismic survey will commence in the second quarter of 1997, with
the exploration well scheduled for late 1997, or early 1998. In connection with
the seismic survey, several additional prospects which VAALCO has identified in
the deeper water further offshore will be evaluated for future drilling.

Equata Block

The Equata Block is a 50 square kilometer development block over a
discovery made in 1974. The field lies in 160 feet of water approximately 10
miles offshore at a subsurface depth of 3000 feet. A 3-D seismic survey was shot
over the field in 1987. VAALCO and its partners are seeking a third party to
drill two appraisal wells to prove the field's upside potential prior to
committing to develop the field. If the field can be successfully farmed out
under the requested terms, VAALCO would retain approximately a 20-25% interest
in the development project.

INDIA

VAALCO was the first foreign company to be awarded a development block
under the oil and gas field privatization policy undertaken by the Indian
government in 1992. VAALCO, along with its partners TATA Petrodyne ("TATA") and
Hindustan Oil Exploration Company ("HOEC"), were awarded three blocks, the PY-3
Field which is a development block, the CY-OS/2 Block in close proximity to the
PY-3 Block and the CB-OS/1 Block.

VAALCO originally was awarded the block containing the PY-3 Field in
1992 and signed the production sharing agreement with the Indian government in
December 1994. The field, in 150 to 400 feet of water depth, is a development
project to which NSA reserve engineers assigned 26 million barrels of proved
undeveloped reserves plus 11 million barrels of probable reserves. VAALCO
originally had an 18 percent interest in the field and the Company's 1995 proved
undeveloped reserves were associated with this interest. In April 1996, VAALCO
sold its interest in the field to Hardy and retained a 4 percent carried net
profits interest in the property. The carried interest was terminated in March
1997 in connection with the sale of the CB-OS/1, Gulf of Cambay Block.

The CB-OS/1 Block is located within the Gulf of Cambay, which is
situated on the Western Coast of India to the north of the Bombay High area. The
Production Sharing Agreement for the block was signed in November 1996. The
block is a 3,590 square kilometer shallow water block containing two undeveloped
discoveries drilled by the Indian National Oil Company ("ONGC") in 1992. At
December 31, 1996, the Company and its partners, TATA, HOEC, Hardy Oil & Gas
(U.K.) ("Hardy") and ONGC, had interests of 20%, 31.5%, 13.5%, 25% and 10%,
respectively, in the block. In March 1997, the Company sold its interest in this

9
block to the other members of the consortium for a combination of cash and
assumption of debt associated with prepaid drilling costs.

The Company had a 25% interest in the CY-OS/2 Block and had as its
partners TATA, HOEC and Mosbacher Energy, Co. In April 1996, the Company sold
its interest in this property along with its interest in the PY-3 Field.

UNITED STATES

Gulf of Mexico

In October 1996, VAALCO entered into an agreement with Northstar
Interests, LLC. ("Northstar") to jointly acquire from Apache Corporation
("Apache") certain properties in the Gulf of Mexico. The properties consist of
interests in seven offshore fields in ten lease blocks. Closing occurred on
December 13, 1996, and at that time half of the interest acquired from Apache
was conveyed from Northstar directly into a newly-formed domestic subsidiary,
VAALCO Energy (USA), Inc. Three of the fields, High Island blocks A-313, A-314
and A-280, are being operated by VAALCO. The Company also obtained non-operating
interests in the West Cameron 538, Ship Shoal 149, Ship Shoal 105 and Vermilion
162 fields.

The High Island A-313 and A-314 fields consist of three unmanned
platforms located approximately 150 miles south of Galveston, Texas in water
depths of 210 feet. The platforms currently combine to produce over 4,500 MCF of
gross gas per day. VAALCO operates the blocks and holds a 25% working interest
in both.

The High Island A-280 Field consists of an unmanned tripod platform
located approximately 140 miles south of Galveston, Texas in water depths of
approximately 195 feet. The platform currently produces 2,800 MCF of gross gas
per day. VAALCO operates the block and holds a 37.5% working interest.

Goliad County, Texas

The Company owns 100% working interest in approximately 1,603 acres in
two blocks, one located immediately east of the Goliad townsite in Goliad
County, Texas, and the other located immediately west of the townsite. The
acreage consists of approximately 70 leases and is located within an area of the
Wilcox trend that has recently seen a considerable amount of leasing, 3-D
seismic and drilling activity. In October 1994, the Company acquired a working
interest in approximately 1,200 acres in Goliad County, Texas. A working
interest in an additional 403 acres was acquired during 1996. VAALCO has
acquired 2-D seismic over the two areas and is in the process of evaluating the
data for the purpose of either developing or farming out its acreage position.
The Company has an average 76% net revenue interest in the acreage.

10
AGGREGATE PRODUCTION

Additional production data (net to the Company) for all of the Company's
operations for the years 1996 and 1995 are as follows:

COMPANY OWNED PRODUCTION
Year Ended December 31,
-----------------------
1996 1995
------- -------
Average Daily Production (Bbls) ................ 347 868

Average Sales Price ($/Bbl) .................... $ 8.83 $ 15.59
Average Production Cost ($/Bbl) ................ $ 7.81 $ 14.76

RESERVE INFORMATION

Reserve reports as of December 31, 1996 and 1995 have been opined on by
Netherland Sewell and Associates and by Ryder Scott Company, independent
petroleum engineers.
As of December 31,
--------------------
1996 1995
------ ------
CRUDE OIL
Proved Developed Reserves (MBbls) ........... 215 201
Proved Undeveloped Reserves (MBbls) ......... -- 4,647
------ ------
Total Proved Reserves (MBbls) ............ 215 4,848
====== ======
GAS
Proved Developed Reserves (MMcf) ............ 1,094 --
====== ======
Standardized measure of discounted
future net cash flows (in thousands) ...... $2,838 $8,447
====== ======

For 1995, the proved developed reserves relate to the Company's
Philippine properties, while the proved undeveloped reserves relate to the India
operations which were sold in early 1996. The 1996 data relates to the
Philippine properties and to the newly acquired Gulf of Mexico properties. The
standardized measure of discounted cash flows does not include the costs of
abandoning the Company's non-producing properties.

There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
Company. Reserve engineering is a subjective process of estimating underground
accumulations of crude oil and natural gas that cannot be measured in an exact
manner, and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
The quantities of oil and

11
natural gas that are ultimately recovered, production and operating costs, the
amount and timing of future development expenditures and future oil and natural
gas sales prices may all differ from those assumed in these estimates. The
standardized measure of discounted future net cash flow should not be construed
as the current market value of the estimated oil and natural gas reserves
attributable to the Company's properties. The information set forth in the
foregoing tables includes revisions for certain reserve estimates attributable
to proved properties included in the preceding year's estimates. Such revisions
are the result of additional information from subsequent completions and
production history from the properties involved or the result of a decrease (or
increase) in the projected economic life of such properties resulting from
changes in product prices. Moreover, crude oil amounts shown are recoverable
under the service contracts and the reserves in place remain the property of the
Philippine government.

In accordance with the guidelines of the U.S. Securities and Exchange
Commission, the Company's estimates of future net cash flow from the Company's
properties and the present value thereof are made using oil and natural gas
contract prices in effect as of year end and are held constant throughout the
life of the properties except where such guidelines permit alternate treatment,
including the use of fixed and determinable contractual price escalations. The
contract price as of December 31, 1996 was $11.00 per Bbl for oil and $3.89 per
Mcf for gas. The contract price as of December 31, 1995 was $8.00 and $20.59 per
Bbl of crude oil for the Philippine reserves and Indian reserves, which have
subsequently been sold, respectively. See "Financial Statements and
Supplementary Data" for certain additional information concerning the proved
reserves of the Company.

DRILLING HISTORY

The Company drilled or participated in the drilling of the following
wells in the periods indicated:

Year Ended December 31,
---------------------------------
1996 1995
--------------- -------------
Gross Net Gross Net
------- ------ ------- ------
Exploratory Wells:
Productive ......... 0 0 0 0
Dry ................ 0 0 0 0
------- ------ ------- ------
Total ............ 0 0 0 0
Development Wells:
Productive ......... 0 0 1 0.29
Dry ................ 0 0 0 0
------- ------ ------- ------
Total ............ 0 0 1 0.29
------- ------ ------- ------
Total Wells ........... 0 0 1 0.29
======= ====== ======= ======

The Company had no wells in progress at December 31, 1996.

12
ACREAGE AND PRODUCTIVE WELLS

Below is the total acreage (in thousands) leased by the Company at
December 31, 1996:

U.S. Foreign
-------------------- --------------------
Gross Net(1) Gross Net(1)
---------- --------- --------- ----------
Developed Acreage 32.9 5.1 16 4.6
Undeveloped Acreage 1.6 1.6 1,765 533.3
Productive Gas Wells 15 3.7 0 0
Productive Oil Wells 5 0.3 7 2.6
- ----------
(1) Net acreage and net productive wells are based upon the Company's
working interest in the properties.

OFFICE SPACE

The Company leases its offices in Houston, Texas (approximately 8,000
square feet) and in Manila, The Republic of the Philippines (approximately 2,000
square feet), which management believes are suitable and adequate for the
Company's operations.

ITEM 3. LEGAL PROCEEDINGS

In December 1996, a member of the Service Contract No. 14 consortium in
the Philippines, Oriental Petroleum & Minerals, Inc. ("Oriental"), filed an
arbitration case against the other nine members of the consortium. Oriental
alleges it is not responsible for certain amounts expended on the West Linapacan
"A" Field for which it was placed in default by the consortium in 1995 due to
non-payment. Oriental also questions certain provisions of the Joint Operating
Agreement. Oriental is seeking $1.0 million from the consortium and to be
reinstated into the Service Contract.

The members of the consortium believe that Oriental's claims are without
merit and intend to vigorously defend this action. The consortium has filed a
reply to the claim seeking, among other things, $1.5 million in unpaid cash
calls plus interest from Oriental and certain damages to be determined by the
arbitration panel. Management believes the consortium will prevail in its
defenses and has not made any provisions for amounts claimed by Oriental.

As of December 31, 1996 and 1995, there were no other material pending
legal proceedings to which the Company is a party or to which any of its
property is subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

13
PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

GENERAL

Until September 1995, the Common Stock of the Company was traded on the
National Association of Securities Dealers Automated Quotation System (the
"NASDAQ System") under the symbol "VEIX." In September 1995, the Company's
shares of Common Stock were delisted from the Nasdaq SmallCap Market. Since that
time, the shares have been listed on the OTC Bulletin Board. As of December 31,
1996, there were approximately 58 holders of record of the Common Stock.

ADJUSTED HISTORICAL PRICES

The following table sets forth the range of high and low sale prices of
a share of Common Stock for the periods indicated. The first three quarters of
1995 prices were furnished by National Association of Securities Dealers, Inc.
(the "NASD"). The fourth quarter of 1995 and all of the 1996 prices were
furnished by Raucher Pierce Refsnes, Inc. and Jefferies and Company, Inc. The
prices represent adjusted prices between dealers, do not include retail markups,
markdowns or commissions and do not necessarily represent actual transactions.

High Low
----- -----
($ US)
FISCAL 1995
First Quarter 0.88 0.50
Second Quarter 1.13 0.38
Third Quarter 0.75 0.19
Fourth Quarter 0.63 0.25

FISCAL 1996
First Quarter 1.31 0.13
Second Quarter 1.00 0.31
Third Quarter 0.44 0.25
Fourth Quarter 0.44 0.16

The closing bid as of April 1, 1997 for the Common Stock was $0.625 per
share.

DIVIDENDS

The Company has not declared or paid any dividends on the Common Stock
since its inception and does not anticipate paying cash dividends in the
foreseeable future. The Company may not declare or pay any cash dividend on the
Common Stock or otherwise make a distribution in cash or redeem any shares of
Common Stock if all or any portion of the dividends paid to the

14
holders of shares of Preferred Stock on the dividend payment date next preceding
the date of such dividend payment, distribution date or redemption date, as
applicable, was paid in shares of Common Stock (as described below).

The Preferred Stock accrues a cumulative dividend of 10% per annum (an
aggregate of $225,000 per year), payable prior to any dividends on the Common
Stock. The Company declared and paid dividends of $71,837 on the Preferred Stock
for 1995. No dividends were paid in 1996. Dividends on the Preferred Stock are
payable quarterly on the first day of February, May, August and November and are
payable in cash, or, at the Company's option, in shares of Common Stock equal to
the market price of the Common Stock on the dividend payment date. The holders
of preferred stock deferred their right to receive dividend payments in 1995 and
1996. During 1995, a portion of the accrued dividend ($71,837) was used to pay
down related party receivables.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

CAPITAL RESOURCES AND LIQUIDITY

Historically, the Company's primary source of capital resources has been
from its production operations in the Philippines, assets sales and the issuance
of debt. Throughout 1994 and 1995, however the Company experienced significant
declines in oil production from its primary source of revenue, the West
Linapacan "A" Field , in the Philippines. In January 1996, the Company suspended
operations in the field. The Company continues to produce the Nido and Matinloc
fields in the Philippines at approximately 870 BOPD.

The Company is actively seeking projects to replace its West Linapacan
operations. Through a diversification program undertaken by management, the
Company acquired producing assets in the Gulf of Mexico of the United States and
interests in five international blocks outside of the Philippines, three in
India (all subsequently sold) and two in Gabon. Four of the five blocks
contained existing undeveloped discoveries. The Company has also accumulated
approximately 1,603 acres in the Wilcox trend of Goliad County, Texas.

In order to execute the diversification program, the Company has, among
other activities, been actively seeking farmout partners to progress the
development of its prospects. In this regard, the Company has successfully
entered into farmout agreements in one of its Gabon blocks and in its
Philippines blocks in exchange for partially carried work programs. For the
domestic acquisition program, the Company will, in the near-term, rely on the
private placement of equity and issuance of debt to raise capital for these
acquisitions. A more detailed description of the Company's activities is
described below.

United States

In December 1996, the Company issued $618,000 in debt associated with
the acquisition of certain properties in the Gulf of Mexico. The loan is secured
by an assignment of revenue interests in certain of the properties. The loan is
recourse only to the assigned revenue interests, and is not guaranteed by the
Company. The Gulf of Mexico properties consist of interests in seven offshore
fields in ten lease blocks. Four of the platforms in three of the fields, High
Island

15
blocks A-313, A-314 and A-280, are being operated by VAALCO. The balance of the
package consists of non-operated interests in the West Cameron, Vermilion and
Ship Shoal areas of the Gulf of Mexico. No significant capital expenditures are
anticipated in 1997 for these properties.

In October 1994, the Company acquired a working interest in
approximately 1,200 acres in Goliad County, Texas, in exchange for cash and
warrants to purchase shares of the Company's Common Stock, $.10 par value per
share (the "Common Stock"). The warrants have a term of three years and will
consist of the right to purchase 200,000 shares of Common Stock at an exercise
price of $2.50 per share and 200,000 shares of Common Stock at an exercise price
of $5.00 per share, subject to the terms and conditions of the acquisition
agreement. A working interest in an additional 403 acres was acquired during
1996. The Company has an average 76% net revenue interest in the acreage and
plans to analyze this property in 1997 for viability. The three year lease has
no drilling obligation requirements. Capital expenditures for 1997 will depend
upon the outcome of analysis currently being done on the area.

Gabon

In July 1995, the Company acquired two blocks offshore Gabon, the Equata
block and the Etame block. Both blocks contain previous discoveries that the
Company is currently evaluating to determine their commercial viability. The
Company and its partners have an obligation to the Government of Gabon to obtain
approximately 1,500 line kilometers of seismic data and to drill one well on the
Etame block during the three-year term of the license. In November 1996, the
Company entered into a letter of intent with a multi-national seismic company
which will perform the required seismic surveys and pay a disproportionate 80%
of the cost, up to $4.7 million, of the estimated $5.8 million (dry hole cost)
commitment well to earn a 65% interest in the concession. The Company and its
partners will be responsible for 20% of the cost (35% over $4.7 million) of the
commitment well.
VAALCO's share of the dry hole cost of the commitment well is estimated to be
$0.7 million.

Philippines

In October, 1996, VAALCO and the other Service Contract No. 14 and
Service Contract No. 6 consortium members entered into a farm-out agreement
wherein the farmee, an Australian company, is required to shoot a $7 million 3-D
seismic program over the service contracts during early 1997. The Australian
farmee company will earn a 35% interest in the blocks for performing the work.
In addition, the Australian company has the option to drill two wells, one on
each Service Contract, to earn up to an additional 25% interest in each Service
Contract. Seismic acquisition under the farm out agreement commenced in February
1997. No significant capital expenditures are anticipated in 1997 for the
Philippines operations.

India

In April 1996, the Company completed the sale of all of the outstanding
capital stock of VAALCO Energy (India), Inc., the Company's wholly owned
subsidiary, to Hardy Oil & Gas (UK) Limited ("Hardy"). Such sale included the
Company's interest in two blocks on the East Coast of India, the PY-3 field and
the CY-OS/2 concession, and a portion of a third block, the

16
Gulf of Cambay Block, on the West Coast of India. The Company retained a 4% net
profits interest in the CY-OS/2 concession and a portion of the Gulf of Cambay
Block. A gain resulting from the sale of $1.1 million was recognized in 1996,
with a $0.13 effect on earnings per common share. There was no other material
impact on the Company's results of operations as the subsidiary had no income
and the majority of the expenses recorded by the subsidiary were overhead
expenses allocated by the parent. With the completion of the sale, the Company
sold substantially all of its international proved undeveloped reserves, other
than the retained net profits interest therein. In conjunction with the sale,
Hardy loaned the Company $1 million on a non-recourse basis. Such loan was
initially repayable only upon the payment by Hardy, for the account of VAALCO,
of certain drilling costs associated with the Gulf of Cambay concession.

In November 1996, the Company signed the production sharing agreement
with the Indian government on the Gulf of Cambay Block. In March 1997, the
Company sold its Gulf of Cambay concession and its 4% net profits interest in
the CY-OS/2 concession to Hardy for $2.5 million. The Company applied $1 million
of the proceeds from the sale to complete repayment of the non-recourse loan
made to the Company by Hardy in 1996. With the completion of this sale, the
Company sold all remaining interest that it had in India.

Issuance of Recourse Debt

The Company entered into a Credit Agreement (the "Credit Agreement") on
June 23, 1993 to borrow $6 million, at an interest rate of LIBOR plus 2%, from a
European institutional lender. The Company drew down $6 million against the
facility in the third quarter of 1993. Proceeds were utilized for further
development of the West Linapacan "A" Field. The Company had repaid $2.0 million
of the note, plus interest, as of the second quarter of 1995. In August 1995,
the Company and the note holder reached an agreement to defer the entire balance
of the note, at an interest rate of 7.6875% per annum, until January 31, 1997,
in return for the pledge of marketable securities held by the Company. The
Company sold a portion of these marketable securities and reduced the balance of
the note by $0.7 million in April 1996. Also in connection with the sale, the
Company prepaid the interest on the note through January 1997. In February 1997,
the Company sold additional pledged securities for $3.44 million and paid all
accrued interest and $3.2 million of the $3.3 million principal balance due on
the note. The balance of $0.1 million is due January 1998. The Company
anticipates the recognition of a $0.7 million gain on the sale of the marketable
securities in the first quarter of 1997.

Cash Flows

Net cash used in operating activities for 1996 was $1.8 million, as
compared to net cash provided by operating activities of $0.5 million in 1995.
The change was primarily due to declining cash flows from production from the
Company's Philippine operations.

Net cash provided by investing activities for 1996 was $1.1 million, as
compared to net cash used in investing activities of $1.4 million in 1995. The
1996 amount reflects cash received from the sale of marketable securities and
the sale of VAALCO Energy (India), Inc. in 1996. The 1995 amount reflects
capital expenditures for the West Linapacan "A" Field, offset by proceeds from
the sale of a 49% working interest in the Gabon prospect.

17
Net cash provided by financing activities for 1996 was $0.9 million, as
compared to net cash used in financing activities of $0.4 million in 1995. The
1996 amount reflects proceeds from the non-recourse loan received in conjunction
with the sale of VAALCO Energy (India), Inc. The variance is offset by the
payment of a portion of the Company's debt obligations. The 1995 amount resulted
primarily from advances to related parties and payment of debt obligations.

The Company continues to seek financing to fund the development of
existing properties and to acquire additional assets. The Company will rely on
the issuance of equity and debt securities, assets sales and cash flow from
operations to provide the required capital for funding future operations. While
there can be no assurance the Company will be successful in raising new
financing, management believes the prospects the Company has in hand will enable
it to attract sufficient capital to fund required oil and gas activities.

Items 1, 2, 3 and 7 of document includes forward looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Although the
Company believes the expectations reflected in such forward looking statements
are based upon reasonable assumptions, the Company can give no assurance these
expectations will be achieved. Important factors which could cause actual
results to differ materially from the Company's expectations include general
economic, business and market conditions, the volatility of the price of oil and
gas, competition, development and operating costs and the factors that are
disclosed in conjunction with the forward looking statements included herein.

18
RESULTS OF OPERATIONS

Amounts stated hereunder have been rounded to the nearest $100,000,
however, percentage changes have been calculated using the accompanying
consolidated financial statement amounts.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

REVENUES

Total crude oil sales for 1996 were $2.7 million, a decrease of $ 1.0 million,
or 26%, as compared to $3.7 million for 1995. In January 1996, production
operations in the West Linapacan "A" Field were suspended resulting in the
decline in revenues in 1996. The Company continues to produce the Nido and
Matinloc fields at approximately 870 BOPD.

The gain on sale of assets of $1.1 million, recognized in 1996, was associated
with the sale of the Company's interest in the PY-3 field in India. A $0.5
million gain was recognized in 1995 resulting from the sale of a 49% working
interest in the Gabon prospect.

OPERATING COSTS AND EXPENSES

Production expenses for 1996 were $1.7 million, a decrease of $2.7 million, or
61%, as compared to $4.4 million for 1995. The decrease is primarily due to
declining operating costs in 1996 as a result of the suspension of production at
the West Linapacan "A" Field.

Exploration costs for 1996 were $0.3 million, a decrease of $0.2 million as
compared to $0.5 million for the same period in 1995. The decrease is primarily
due to costs incurred in 1995 associated with the Company's Gabon project.

Depreciation, depletion and amortization of properties for 1996 was $0.6
million, a decrease of $3.8 million, or 86%, as compared to $4.4 million in
1995. The 1996 amount includes an adjustment for depletion costs that were
capitalized in crude oil inventory at December 31, 1995. Nominal depletion
expense was recorded in 1996, as the Company's fields have been fully depleted.

General and administrative expenses for 1996 were $2.3 million, an increase of
$0.6 million, or 32%, as compared to $1.7 million for 1995. The increase is
primarily due to costs associated with asset sales, pension termination costs
and lower overhead reimbursements in the Philippines.

OPERATING LOSS

Operating loss for 1996 was $1.1 million, a reduction of loss of $5.8 million,
or 84%, as compared to a $6.9 million operating loss for 1995. The above
mentioned decreases in operating expenses and depreciation, depletion and
amortization of properties, coupled with the gain on sales of certain assets by
the Company were the primary reason for this reduction in operating loss.

19
OTHER INCOME (EXPENSES)

Interest expense and financing charges for 1996 were $0.3 million, a decrease of
$0.1 million, or 19%, as compared to $0.4 million in 1995. This was primarily
due to the partial extinguishment of debt in 1996.

Other, net increased $0.9 million in 1996 as compared to 1995. This was
primarily due to the gain on the sale of certain securities in 1996.

NET LOSS

Net loss attributable to common stockholders for 1996 was $0.6 million, a
reduction of loss of $6.6 million or 92%, as compared to net loss of $7.2
million in 1995. The reduction in net loss was the result of lower operating
costs, coupled with the gain on sales of certain assets by the Company.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

20
INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF VAALCO ENERGY, INC. AND
SUBSIDIARIES

We have audited the consolidated balance sheets of VAALCO Energy, Inc.
and its subsidiaries ("VAALCO") as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the years then ended. These financial statements are the
responsibility of VAALCO's management. Our responsibility is to express an
opinion on the financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of VAALCO at December 31, 1996 and
1995, and the results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1, the Company's ability to continue as a going concern is dependent upon its
ability to successfully select and acquire suitable producing properties and to
obtain the necessary financing for future drilling and exploration activities.
Management's plans concerning these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.

/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Houston, Texas
April 2, 1997

21
VAALCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT PAR VALUE AMOUNTS)

December 31,
---------------------
1996 1995
-------- --------
ASSETS
CURRENT ASSETS:
Cash and equivalents ............................... $ 1,055 $ 701
Advances-related party ............................. 1,916 --
Marketable securities-related party ................ 777 --
Receivables:
Trade ............................................ 103 --
Accounts with partners ........................... 190 1,998
Other ............................................ 1,177 950
Crude oil inventory ................................ -- 1,511
Materials and supplies, net of allowance
for inventory obsolescence of $9 and
$497 at 1996 and 1995, respectively ............. 387 802
Prepaid expenses and other ......................... 9 210
-------- --------
Total current assets ............................. 5,614 6,172
-------- --------
PROPERTY AND EQUIPMENT-SUCCESSFUL EFFORTS METHOD
Wells, platforms and other production
facilities ...................................... 46,866 46,122
Undeveloped acreage ................................ 808 647
Equipment and other ................................ 342 644
-------- --------
48,016 47,413
Accumulated depreciation, depletion and
amortization .................................... (46,383) (46,615)
-------- --------
Net property and equipment ....................... 1,633 798
-------- --------
OTHER ASSETS:

Marketable securities .............................. -- 901
Other long-term assets ............................. 119 230
Advances-related party ............................. -- 1,921
Marketable securities-related party ................ -- 565
Funds in Escrow .................................... 370 --
-------- --------
TOTAL ................................................ $ 7,736 $ 10,587
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts payable ................................... $ 1,862 $ 6,067
Accrued liabilities ................................ 1,280 1,224
Current portion of debt obligations ................ 3,918 4,000
-------- --------
Total current liabilities ........................ 7,060 11,291
-------- --------
FUTURE ABANDONMENT COSTS ............................. 4,942 4,172
OTHER LONG TERM LIABILITIES .......................... 1,000 --
-------- --------
Total liabilities .................................. 13,002 15,463
-------- --------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT:
Preferred stock, $25 par value, 10%
cumulative dividend 500,000 authorized
shares; 90,000 shares issued and outstanding .... 2,250 2,250
Common stock, $.10 par value, 15,000,000
authorized shares; 8,870,864 shares issued
of which 5395 are in the treasury
in 1996 and 1995 ................................ 887 887
Additional paid-in capital ......................... 11,401 11,401
Accumulated deficit ................................ (19,707) (19,123)
Net unrealized loss on noncurrent
marketable securities ........................... (84) (278)
Less treasury stock, at cost ....................... (13) (13)
-------- --------
Total stockholders' deficit ...................... (5,266) (4,876)
-------- --------
TOTAL ................................................ $ 7,736 $ 10,587
======== ========

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

22
VAALCO ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)

Year Ended December 31,
--------------------------
1996 1995
----------- -----------
REVENUES:
Crude oil sales ........................ $ 2,732 $ 3,671
Gain on sale of assets ................. 1,030 510
----------- -----------
Total revenues ....................... 3,762 4,181
----------- -----------
OPERATING COSTS AND EXPENSES:
Production expenses .................... 1,735 4,434
Exploration costs ...................... 268 489
Depreciation, depletion and amortization 614 4,403
General and administrative expenses .... 2,276 1,719
----------- -----------
Total operating costs ................ 4,893 11,045
----------- -----------
OPERATING LOSS .......................... (1,131) (6,864)

OTHER INCOME (EXPENSES):
Interest income ........................ 132 269
Interest expense and financing charges . (285) (352)
Other, net ............................. 925 (8)
----------- -----------
Total other income (expense) ......... 772 (91)
----------- -----------
NET LOSS ................................. (359) (6,955)

Preferred dividends ...................... (225) (225)
----------- -----------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS .................... $ (584) $ (7,180)
=========== ===========
LOSS PER COMMON SHARE ................... $ (0.07) $ (0.81)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ............................ 8,865,469 8,865,469
=========== ===========

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

23
VAALCO ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)