10QSB: Optional form for quarterly and transition reports of small business issuers

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

| | 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.
(Exact name of small business issuer as specified 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

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 [ ].

As of August 14, 1998 there were outstanding 20,749,968 shares of Common
Stock, $.10 par value per share, of the registrant.
VAALCO ENERGY, INC. AND SUBSIDIARIES

TABLE OF CONTENTS




PART I. FINANCIAL INFORMATION


CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
June 30, 1998 (Unaudited) and December 31, 1997..........................3
Statements of Consolidated Operations (Unaudited)
Three months and six months ended June 30, 1998 and 1997..................4
Statements of Consolidated Cash Flows (Unaudited)
Three months and six months ended June 30, 1998 and 1997..................5
Notes to Consolidated Financial Statements...................................6

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................................9

PART II. OTHER INFORMATION.................................................14

2
VAALCO ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

(IN THOUSANDS OF DOLLARS, EXCEPT PAR VALUE AMOUNTS)

JUNE 30, DECEMBER 31,
1998 1997
-------- --------
ASSETS
CURRENT ASSETS:
Cash and equivalents ................................. $ 8,216 $ 32
Funds in escrow ...................................... 2,701 --
Receivables:
Trade .............................................. 285 --
Accounts with partners ............................. 2,994 --
Other .............................................. 824 --
Materials and supplies ............................... 367 --
Prepaid expenses and other ........................... 109 --
-------- --------
Total current assets ............................... 15,496 32
-------- --------
PROPERTY AND EQUIPMENT-SUCCESSFUL EFFORTS METHOD
Wells, platforms and other production facilities ..... 908 --
Investment in partnership ............................ 2,214 1,804
Work in progress ..................................... 1,322 --
Equipment and other .................................. 245 --
-------- --------
4,689 1,804
Accumulated depreciation, depletion and amortization ... (1) --
-------- --------
Net property and equipment ......................... 4,688 1,804
-------- --------
OTHER ASSETS:
Funds in escrow .................................... 12,704 --
Advances - related party ........................... 39 --
Other investments .................................. 893 --
Other long-term assets ............................. 130 --
-------- --------
TOTAL .................................................. $ 33,950 $ 1,836
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
Accounts payable ..................................... $ 4,697 $ --
Accrued liabilities .................................. 159 2,872
Deferred income tax - current ........................ 112 --
-------- --------
Total current liabilities .......................... 4,968 2,872
-------- --------
FUTURE ABANDONMENT COSTS ............................... 4,277 --
LONG TERM DEBT ......................................... -- 12,295
-------- --------
Total liabilities .................................... 9,245 15,167
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $25 par value, 500,000 shares
authorized 10,000 and 0 shares issued and
outstanding in 1998 and 1997, respectively ......... 250 --
Common stock, $.10 par value, 100,000,000 and
50,000,000 authorized shares 20,755,363 and
15,571,922 shares issued of which 5,395
are in the treasury in 1998 and 1997, respectively . 2,075 1,557
Additional paid-in capital ........................... 41,088 2,554
Accumulated deficit .................................. (18,695) (17,429)
Less treasury stock, at cost ......................... (13) (13)
-------- --------
Total stockholders' equity (deficit) ............... 24,705 (13,331)
-------- --------
TOTAL .................................................. $ 33,950 $ 1,836
======== ========

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

3
VAALCO ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)


THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1998 1997 1998 1997
-------- ------- -------- -------
REVENUES:
Oil and gas sales .............. $ 211 $ -- $ 211 $ --
OPERATING COSTS AND EXPENSES:
Production expenses ............ 138 -- 138 --
Depreciation, depletion and
amortization ................. 2 -- 2 --
General and administrative
expenses ..................... 507 -- 507 --
-------- ------- -------- -------
Total operating costs and
expenses ................... 647 -- 647 --
-------- ------- -------- -------
OPERATING LOSS ................... (436) -- (436) --

OTHER INCOME (EXPENSES):

Interest income ................ 302 -- 302 1
Interest expense and financing
charges ...................... -- (349) (424) (677)
Partnership reserve ............ (628) -- (628) --
Other, net ..................... (47) -- (48) --
-------- ------- -------- -------
Total other income (expenses) (373) (349) (798) (676)
-------- ------- -------- -------
NET LOSS BEFORE INCOME TAXES ..... (809) (349) (1,234) (676)

INCOME TAX ....................... 32 -- 32 --
-------- ------- -------- -------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS ............ $ (841) $ (349) $ (1,266) $ (676)
======== ======= ======== =======
LOSS PER COMMON SHARE:
BASIC .......................... $ (0.04) $ (0.04) $ (0.07) $ (0.08)
======== ======= ======== =======
DILUTED ........................ $ (0.04) $ (0.04) $ (0.07) $ (0.08)
======== ======= ======== =======
WEIGHTED AVERAGE COMMON SHARES:
BASIC .......................... 19,554 8,865 17,571 8,865
======== ======= ======== =======
DILUTED ........................ 42,704 9,253 30,155 9,186
======== ======= ======== =======

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

4
VAALCO ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)

(IN THOUSANDS OF DOLLARS)

Six Months Ended
June 30,
---------------------
1998 1997
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................... $ (1,266) $ (676)
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Depreciation, depletion and amortization ........ 2 --
Partnership reserve ............................. 628 --
Accrued interest payable ........................ 424 677
Change in assets and liabilities that provided
(used) cash:
(13,413) --
Funds in escrow
Trade receivables ............................... (40) --
Accounts with partners .......................... (2,933) --
Other receivables ............................... 32 --
Materials and supplies .......................... 1 --
Prepaid expenses and other ...................... (19) --
Accounts payable ................................ 2,009 --
Accrued liabilities ............................. (55) --
-------- -------
Net cash provided by (used in) operating
activities .................................. (14,630) 1
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:

Cash acquired in merger with 1818 Oil Corp. ....... 15,812 --
Investment in partnership ......................... (1,038) (3,048)
Additions to property and equipment ............... (549) --
(540) --
Investment in joint venture
Other ........................................... 134 --
-------- -------
Net cash provided by (used in) investing
activities .................................. 13,819 (3,048)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings .......................... -- 2,286
Proceeds from the issuance of common stock ........ 8,995 762
-------- -------
Net cash provided by financing activities ..... 8,995 3,048
-------- -------
NET CHANGE IN CASH AND EQUIVALENTS .................. 8,184 1

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD ......... 32 31
-------- -------
CASH AND EQUIVALENTS AT END OF PERIOD ............... $ 8,216 $ 32
======== =======
NON-CASH ITEMS:
Contribution of debt to additional paid in
capital ........................................ $ 15,591 --
======== =======

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

5
VAALCO ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)

1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements of VAALCO Energy, Inc. and
Subsidiaries (collectively, "VAALCO" or the "Company"), included herein
are unaudited, but include all adjustments consisting of normal recurring
accruals which the Company deems necessary for a fair presentation of its
financial position, results of operations and changes in stockholders'
deficit and cash flows for the interim period. Such results are not
necessarily indicative of results to be expected for the full year. These
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-KSB for the
year ended December 31, 1997 and reports filed on Form 8-K.

On April 21, 1998 VAALCO consummated the acquisition of 1818 Oil Corp. for
10,000 shares of Convertible Preferred Stock, Series A. The Preferred
Stock is convertible into 27.5 million shares of Common Stock $0.10 par
value per share of VAALCO. As a result of the voting control 1818 Oil
Corp.'s shareholder obtained in the transaction, the 1818 Oil Corp.
acquisition has been accounted for as a reverse acquisition and 1818 Oil
Corp. is the acquiring entity for accounting purposes. As such, the
financial statements presented for the prior year periods are those of
1818 Oil Corp., not VAALCO the legal acquirer. The results of operations
of VAALCO are included in the accompanying financial statements for the
periods subsequent to the date of the acquisition. Accordingly, a
comparison of 1998 and 1997 interim results is not meaningful. The legal
name of the registrant continues to be VAALCO Energy, Inc. (See Note 2 for
pro forma information.)

2. ACQUISITION OF 1818 OIL CORP.

In April 1998, the Company acquired from The 1818 Fund II, L.P., a fund
managed by Brown Brothers Harriman & Co., all of the outstanding capital
stock of 1818 Oil Corp. in exchange for 10,000 shares of Series A
Convertible Preferred Stock. Concurrent with the acquisition, the Company
issued 5.2 million shares of Common Stock in a private placement to The
1818 Fund II, L.P. and certain institutional investors for net proceeds of
$9.0 million. The assets of 1818 Oil Corp. at closing consisted of a 7.5%
limited partnership interest in Hunt Overseas Exploration Company, L.P.
("Hunt") with book value of $2.8 million and $12.6 million in cash. The
$12.6 million of cash which 1818 Oil Corp. had at the time of the
acquisition has been pledged as cash collateral to secure a letter of
credit payable to Hunt for cash calls associated with the partnership. If
Hunt does not call such capital contributions as provided in the
partnership agreement of Hunt, the cash collateral will be released to the
Company.

Hunt has entered into production sharing contracts and other arrangements
which entitle it to explore for oil and gas, both onshore and offshore, on
34 million acres in countries including Argentina, Canada, Ethiopia,
Ghana, Niger and Peru. The general partner of Hunt is Hunt Overseas
Operating Company, a subsidiary of Hunt Oil Company. Hunt explores for
high risk, large reserve accumulations, generally targeting deposits which
pre-drilling seismic and other data indicate to have potential in excess
of 100 MMBOE.

6
Under the partnership agreement of Hunt, the Company will have an
obligation to contribute an estimated $5.1 million to fund its share of
the exploration costs of Hunt. In addition, if Hunt discovers oil or gas
deposits, the Company will be required to contribute an additional $7.5
million to fund appraisal costs.

The holders of the Series A Preferred Stock have the right to appoint
three directors of the Company, voting separately as a class. In addition,
the holders of the Series A Preferred Stock have the right to vote with
the holders of Common Stock on all matters submitted to a vote of the
holders of Common Stock on an "as converted basis." As a result of the
acquisition, The 1818 Fund II, L.P. owns Common Stock and Series A
Preferred Stock which, in the aggregate, represents approximately 65% of
the outstanding voting power of the Company on an as converted basis
(excluding options and warrants), and therefore has the ability to control
the vote on all matters submitted to a vote of the holders of the Common
Stock, including the election of directors. In April 1998, three members
of Brown Brothers Harriman & Co. were elected to VAALCO's board of
directors.

The 1818 Oil Corp. acquisition has been accounted for as a reverse
acquisition and 1818 Oil Corp. is the acquiring entity for accounting
purposes. Therefore, because 1818 Oil Corp. is the acquirer for
accounting purposes, the financial statements for prior years are those
of 1818 Oil Corp., not VAALCO the legal acquirer. Accordingly, a
comparison of 1998 and 1997 interim results is not meaningful. 1818
Oil Corp.'s equity as of June 30, 1998 and December 31, 1997 have been
retroactively charged for the equivalent number of shares of VAALCO's
common stock received in the transaction. The difference between the
par value of the common stock of 1818 Oil Corp. and VAALCO has been
charged to additional paid in capital. In addition, at the time of the
merger, 1818 Fund II, L.P. contributed the debt owed to it by 1818 Oil
Corp. as additional paid in capital to 1818 Oil Corp.

The following summarizes pro forma financial information assuming the
acquisition of 1818 Oil Corp. had occurred on January 1, 1998.


(THOUSANDS OF DOLLARS)
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
Total revenues ..................... $ 366 $ 6,437
Loss before income taxes ........... (978) (12,128)
Net loss attributable to common
stockholders ....................... (1,004) (12,310)
Basic net loss per share ........... (0.06) (0.73)
Total assets ....................... 33,947 33,228

3. CURRENT DEVELOPMENTS

Concurrent with the acquisition with 1818 Oil Corp., the Company formed a
joint venture with Paramount Petroleum, Inc. to conduct exploration
activities primarily in the onshore Gulf Coast area, including Alabama,
Mississippi and Louisiana. The agreement entitles the Company to acquire,
at its option, 25% of any prospect generated by the joint venture,

7
on a non-promoted basis taking into account the Company's interest in the
joint venture. The joint venture agreement also provides for the sharing
of any revenues attributable to prospects generated by the joint venture
and sold to others. The Company has committed to expend $3.0 million to
fund overhead, leases, seismic and other amounts in connection with the
joint venture, $1.2 million of which has been funded as of the date of
this filing. The Company has posted a letter of credit to secure such
commitment.

In July 1998, the company elected to participate at a 15 percent working
interest level in the first prospect developed by the joint venture. The
operator of the prospect, an unrelated third party, which also elected to
participate in the prospect, has until October 1, 1998 to spud the
exploration well.

On April 30, 1998, the Company spudded the Etame No. 1 well offshore Gabon
on the Etame Block. The well was drilled to a depth of 8,000 feet and
resulted in an oil discovery, which tested at a rate of 3,700 barrels oil
per day on a 32/64's inch choke from perforations in the Gamba sandstone.
The Etame Block is a 3,073 square kilometer block, which in addition to
the Etame-1 discovery, contains two former Gulf Oil Company discoveries,
the North and South Tchibala discoveries. All three discoveries consist of
subsalt reservoirs that lie in approximately 250 feet of water depth, 40
miles offshore. The consortium plans to drill at least one delineation
well later this year on the Etame-1 structure to assist in determining
recoverable reserves . The Consortium is also conducting facilities
studies, to determine optimum development options and timing. The Company
has a 17.9% working interest in the well.

4. LONG-TERM DEBT

Pursuant to the subscription agreement entered into at the time of
organization of 1818 Oil Corp., capital contributions from The 1818 Fund
II, L.P. were apportioned between long term debt and paid in capital. The
percentages set forth in the agreement were 75 percent long-term debt and
25 percent capital contribution. Interest accrued on the long-term debt at
a rate of 14 percent per annum. There were no payments of interest by 1818
Oil Corp. to The 1818 Fund II, L.P. In April, at the time of the
acquisition of 1818 Oil Corp. by VAALCO, the long-term debt and accrued
interest were contributed back to 1818 Oil Corp. by The 1818 Fund II, L.P.
and added to additional paid in capital.

5. EARNINGS PER SHARE

The weighted average common shares outstanding represent those of
historical VAALCO for the applicable periods.

8
VAALCO ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

THIS REPORT 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 ("EXCHANGE ACT"). ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACT INCLUDED IN THIS REPORT (AND THE EXHIBITS HERETO),
INCLUDING WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S FINANCIAL
POSITION AND ESTIMATED QUANTITIES AND NET PRESENT VALUES OF RESERVES, ARE
FORWARD LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS
UPON WHICH SUCH FORWARD LOOKING STATEMENTS ARE BASED ARE REASONABLE, IT CAN GIVE
NO ASSURANCES THAT SUCH ASSUMPTIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S
EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THE SECTION "RISK
FACTORS" INCLUDED IN THE COMPANY'S FORMS 10-KSB AND OTHER PERIODIC REPORTS FILED
UNDER THE EXCHANGE ACT, WHICH ARE HEREIN INCORPORATED BY REFERENCE. ALL
SUBSEQUENT WRITTEN AND ORAL FORWARD LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED BY THE
CAUTIONARY STATEMENTS.

INTRODUCTION

The Company's results of operations are dependent upon the difference between
prices received for its oil and gas production and the costs to find and produce
such oil and gas. Oil and gas prices have been and are expected in the future to
be volatile and subject to fluctuations based on a number of factors beyond the
control of the Company. Recent events in Asia have created reduced demands for
oil products in the region, which has substantially reduced the price the
Company receives for its Philippines production relative to world oil prices,
which are also substantially below prices in 1997. Although the Company expects
the supply and demand imbalances to correct themselves over time, no assurances
can be made as to the time required for such imbalances to correct themselves.
In addition, the Company's production in the Philippines (representing
substantially all of the Company's oil production since 1994) is from mature
offshore fields with high production costs. The Company's margin on sales from
these fields (the price received for oil less the production costs for the oil)
is lower than the margin on oil production from many other areas. As a result,
the profitability of the Company's production in the Philippines is affected
more by changes in oil prices than production located in other areas.

The Company's results of operations are also affected by currency exchange
rates. As of January 1, 1998, the Company and Seaoil Corporation, the purchaser
of the Company's Philippines production, have agreed that 20% of the price of
oil paid by Seaoil to the Company will be paid in Philippine pesos at the
prevailing rate, up to 40 pesos to the dollar. A decrease in the exchange rate
of pesos to the dollar will have the effect of reducing the price received for
oil (in U.S. dollars). This reduction will be partially offset because certain
operating costs paid by the Company and Seaoil are paid in Philippine pesos.

A substantial portion of the Company's oil production is located offshore of the
Philippines. Since 1996, the Company has produced into barges, which transport
the oil to market. Due to weather and other factors, the Company's production is
generally highest during the first and fourth quarters of the year.

9
The Company uses the successful efforts method to account for its investment in
oil and gas properties whereby costs of productive wells, developmental dry
holes and productive leases are capitalized and amortized using the
units-of-production method based on estimated net proved reserves. The costs of
development wells are capitalized but charged to expense if and when the well is
determined to be unsuccessful. Geological and geophysical costs and the costs of
carrying and retaining undeveloped properties are expensed as incurred.

CAPITAL RESOURCES AND LIQUIDITY

Historically, the Company's primary source of capital resources has been from
cash flows from operations, assets sales, private sales of equity, bank
borrowings and purchase money debt. During 1994 and 1995, the Company's primary
source of cash flow was sales of production from the West Linapacan "A" Field.
In 1996, 1997 and 1998, cash was derived predominantly from asset sales, the
sale of marketable securities, and the private placement of Common Stock. The
Company's primary uses of capital have been to fund acquisitions and to fund its
exploration and development operations.

The Company produces oil from the Matinloc and Nido fields in the South China
Sea, the Philippines. During the six months ended June 30, 1998, total
production from the fields was approximately 133,000 gross barrels of oil.
Substantially all of the Company's crude oil and natural gas is sold at the well
head at posted or index prices under short-term contracts, as is customary in
the industry. The Company markets its share of crude oil under an agreement with
SeaOil, 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.

On April 21, 1998 VAALCO consummated the acquisition of 1818 Oil Corp. for
10,000 shares of Convertible Preferred Stock, Series A. The Preferred Stock is
convertible into 27.5 million shares of Common Stock $0.10 par value per share
of VAALCO. The assets of 1818 Oil Corp. consisted at closing of a 7.5% limited
partnership interest in Hunt with book value of $2.8 million and $12.6 million
in cash. As a result of the voting control 1818 Oil Corp.'s shareholder obtained
in the transaction, the 1818 Oil Corp. acquisition has been accounted for as a
reverse acquisition and 1818 Oil Corp. is the acquiring entity for accounting
purposes. As such, the financial statements presented for the prior year periods
are those of 1818 Oil Corp., not VAALCO the legal acquirer. The results of
operations of VAALCO are included in the accompanying financial statements for
the periods subsequent to the date of the acquisition. Accordingly, a comparison
of 1998 and 1997 interim results is not meaningful. The legal name of the
registrant continues to be VAALCO Energy, Inc.

Hunt has entered into production sharing contracts and other arrangements which
entitle it to explore for oil and gas, both onshore and offshore, on 34 million
acres in countries including Argentina, Canada, Ethiopia, Ghana, Niger and Peru.
The partnership agreement of Hunt obligates the Company to contribute, when
requested by Hunt, up to $5.1 million to fund Hunt's exploration program. In
addition, if Hunt discovers oil, the Company may be required to contribute an
additional $7.5 million to fund the appraisal of the discovery. The $12.6
million of cash which 1818 Oil Corp. had at the time of the acquisition has been
pledged as cash collateral to secure a letter of credit payable to Hunt for cash
calls associated with the partnership. If Hunt

10
does not call such capital contributions as provided in the partnership
agreement of Hunt, the cash collateral will be released to the Company.

The holders of the Series A Preferred Stock have the right to appoint three
directors of the Company, voting separately as a class. In addition, the holders
of the Series A Preferred Stock have the right to vote with the holders of
Common Stock on all matters submitted to a vote of the holders of Common Stock
on an "as converted basis." As a result of the acquisition, The 1818 Fund II,
L.P. owns Common Stock and Series A Preferred Stock which, in the aggregate,
represents approximately 65% of the outstanding voting power of the Company on
an as converted basis (excluding options and warrants), and therefore has the
ability to control the vote on all matters submitted to a vote of the holders of
the Common Stock, including the election of directors. In April 1998, three
members of Brown Brothers Harriman & Co. were elected to VAALCO's board of
directors.

Concurrent with the acquisition, the Company issued 5.2 million shares of Common
Stock in a private placement with The 1818 Fund II, L.P. and certain
institutional investors for proceeds of $9.0 million net of $0.8 million in fees
and expenses. These amounts will be used to fund the Company's capital
expenditure program, including investments in the Paramount joint venture and
possible future acquisitions, and for general corporate purposes.

The Company has committed to invest $3.0 million in the Paramount joint venture,
of which $1.2 million has already been funded as of the date of this filing.
There can be no assurance that the Company will realize a return on this
investment or that the Company's investment in the Paramount joint venture will
be successful.

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.

During 1998, the Company anticipates that it will make capital expenditures on
oil and gas properties of approximately $7.0 million, including a contribution
of $2.7 million to the Paramount joint venture. The Company has postponed
drilling plans for exploration activities in Brazos County, Texas due to low oil
prices. The anticipated capital expenditures exclude potential acquisitions. The
Company believes the total net proceeds of $22.8 million received from the
private placement and cash acquired in 1818 Oil Corp. will be sufficient to fund
the Company's capital budget through 1998.

The Company does not expect the cost of converting its computer systems to year
2000 compliance will be material to its financial condition. The Company
believes it will be able to achieve year 2000 compliance by the end of 1999, and
does not currently anticipate any disruption in its operations as the result of
any failure by the Company to be in compliance. The Company is currently in the
process of determining if its' customers and suppliers are year 2000 compliant.

11
RESULTS OF OPERATIONS

The 1818 Oil Corp. acquisition has been accounted for as a reverse acquisition
and 1818 Oil Corp. is the acquiring entity for accounting purposes. As such, the
financial statements presented for the prior year periods are those of 1818 Oil
Corp., not VAALCO, the legal acquirer. The results of operations of VAALCO are
included in the accompanying financial statements for the periods subsequent to
the date of the acquisition. Accordingly, a comparison of 1998 and 1997 interim
results in not meaningful. The legal name of the registrant continues to be
VAALCO Energy, Inc.

THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997

REVENUES

Total revenues from oil and gas sales were $211 thousand for the three months
ended June 30, 1998. Substantially all revenues were from the Philippines.

EXPENSES

Total production expenses for the three months ended June 30, 1998 were $138
thousand. General and administrative expenses amounted to $507 thousand.

OTHER INCOME (EXPENSES)

Interest income of $302 thousand was received on amounts on deposit. Interest
rates received were approximately 5.5% on invested funds. Partnership expenses
of $628 thousand were reserved associated with the Hunt partnership, consisting
of partnership exploration expense and general administrative costs. No
partnership expenses for dry holes were reserved during the quarter. As a result
of the debt restructuring at the time of the merger, interest expense was $0
compared to $349 thousand in the quarter ended June 30, 1997

NET LOSS

Net loss attributable to common stockholders for the three months ended June 30,
1998 was $841 thousand, compared to a net loss attributable to common
stockholders of $349 thousand for the same period in 1997. The increased net
loss in 1998 was due to reserves for partnership expenses associated with the
Hunt venture.

12
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

REVENUES

Total revenues from oil and gas sales were $211 thousand for the six months
ended June 30, 1998. Substantially all of these revenues were associated with
Philippines production from the effective date if the merger.

EXPENSES

Total production expenses for the six months ended June 30, 1998 were $138
thousand. General and administrative expenses amounted to $507 thousand.

OTHER INCOME (EXPENSES)

Interest income of $302 thousand was received on amounts on deposit during the
six months period ending June 30, 1998, compared to $1 thousand in the
comparable 1997 period. Interest rates received were approximately 5.5% on
invested funds. Partnership expenses of $628 thousand were reserved associated
with the Hunt partnership, consisting of partnership exploration expense and
general administrative costs. No partnership expenses for dry holes were
reserved during the period. As a result of the debt restructuring at the time of
the merger, interest expense was $424 compared to $677 thousand in the six
months ended June 30, 1997

NET LOSS

Net loss attributable to common stockholders for the six months ended June 30,
1998 was $1,266 thousand, compared to a net loss attributable to common
stockholders of $676 thousand for the same period in 1997. The increased net
loss in 1998 was mainly due to reserves for partnership expenses associated with
the Hunt venture.

UNAUDITED PRO FORMA INFORMATION

The following summarizes pro forma financial information assuming the
acquisition of 1818 Oil Corp. had occurred on January 1, 1998.

(THOUSANDS OF DOLLARS)
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
Total revenues ...................... $ 366 $ 6,437
Loss before income taxes ............ (978) (12,128)
Net loss attributable to common
stockholders ........................ (1,004) (12,310)
Basic net loss per share ............ (0.06) (0.73)
Total assets ........................ 33,947 33,228


13
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is not presently a party to any material legal proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On April 21, 1998, the Company issued 10,000 shares of Convertible Preferred
Stock, Series A, ("Preferred Stock"), to the 1818 Fund II, L.P. Each share of
Preferred Stock is convertible to 2,750 shares of Common Stock. The holders of
the Preferred Stock have the right to appoint three directors of the Company
voting separately as a class. In addition, the holders of the Preferred Stock
have the right to vote as a class with the holders of Common Stock on all
matters submitted to a vote of the holders of Common Stock on an "as converted"
basis." The 1818 Fund II, L.P. owns Common Stock and Preferred Stock which in
the aggregate represents approximately 65% of the outstanding voting power of
the Company on an as converted basis (excluding options and warrants) and
therefore has the ability to control the vote on all matters submitted to a vote
of the holders of Common Stock. The Preferred Stock has such other powers,
preferences and rights as more fully described in the Certificate of Designation
for the Convertible Preferred Stock, Series A, which is filed as an exhibit
hereto.

In April 1998, the Company completed a private placement to accredited investors
of 5,183,441 shares of Common Stock for proceeds of $9.0 million net of $0.8
million of fees and expenses (including a 7 percent commission to the placement
agent). The Company also issued warrants to purchase 100,000 shares of Common
Stock at an exercise price of $2.00 per share to the placement agent for
services rendered in connection with the private placement.

The Company claimed exemption from registration under the Securities Act of
1933, as amended, of such warrants and shares issued by the Company under
Section 4(2) of such Act as a transaction by an issuer not involving any public
offering.

As discussed in Item 4, the number of authorized shares of Common Stock has been
increased from 50,000,000 to 100,000,000 shares.

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

At the annual meeting of stockholders held on June 24, 1998, the stockholders of
the Company approved an increase of authorized common shares from 50,000,000
shares to 100,000,000 shares. The stockholders also approved the appointment of
Deloitte & Touche as auditors of the Company.

Regarding the proposal to amend Article Four of the Company's Restated
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 50,000,000 shares to 100,000,000 shares, 38,900,489 votes were
cast for the proposal, 3,410 votes were cast against the proposal and 0 votes
abstained from voting. Regarding the proposal to approve the

14
appointment of Deloitte & Touche as the Company's auditors, 38,903,899 votes
were cast for the proposal, 0 votes were cast against the proposal and 0 votes
abstained from voting.

The Common and Preferred Stockholders elected five Directors and the Preferred
Stockholders, voting as a class, elected three additional Directors to serve on
the Company's Board of Directors.

DIRECTORS ELECTED BY
COMMON AND PREFERRED
STOCKHOLDERS VOTES CAST FOR VOTES CAST AGAINST

Arne R. Nielsen 38,903,899 0
W. Russell Scheirman 38,903,899 0
Virgil A. Walston, Jr. 38,903,899 0
Robert L. Gerry III 38,903,899 0
Charles W. Alcorn, Jr. 38,903,899 0

Directors Elected by
PREFERRED STOCKHOLDERS VOTES CAST FOR VOTES CAST AGAINST

Lawrence L. Tucker 10,000 0
T. Michael Long 10,000 0
Walter W. Grist 10,000 0


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

2. Plan of acquisition, reorganization , arrangement, liquidation or
succession

2.1 (a) Stock Acquisition Agreement and Plan of Reorganization
dated February 17, 1998 by and among the Company and the
1818 Fund II, L.P.

2.2 (c) First Amendment to Stock Acquisition Agreement and Plan
of Reorganization, dated April 21, 1998


4. Instruments defining rights of security holders, including
indentures

4.1(b) Restated Certificate of Incorporation

4.2(b) Certificate of Amendment to Restated Certificate of
Incorporation

4.3(b) Bylaws

4.4(b) Amendment to Bylaws

15
4.5(c) Designation of Convertible Preferred Stock, Series A

10. Material Contracts

10.1(d) Service Contract No. 6, dated September 1, 1973, among
the Petroleum Board of the Republic of the Philippines
and Mosbacher Philippines Corporation, ET AL, as
amended.
10.2(d) Operating Agreement, dated January 1, 1975, among
Mosbacher Philippines Corporation, Husky (Philippines)
Oil, Inc. and Amoco Philippines Petroleum Company.
10.3(d) Service Contract No. 14, dated December 17, 1975, among
the Petroleum Board of the Republic of the Philippines
and Philippines--Cities Service, Inc., ET AL, as amended.
10.4(d) Operating Agreement, dated July 17, 1975, among
Philippines-Cities Service, Inc., Husky (Philippines) Oil,
Inc., Oriental Petroleum and Minerals Corporation,
Philippines-Overseas Drilling & Oil Development
Corporation, Basic Petroleum and Minerals, Inc., Landoil
Resources Corporation, Westrans Petroleum, Inc. and
Philippine National Oil Company, as amended.
10.5(d) Memorandum of Understanding, dated April 2, 1979, among
the Bureau of Energy Development of the Republic of the
Philippines and Philippines--Cities Service, Inc., ET AL.
10.6(d) Indemnity Agreement entered into among the Company and
certain of its officers and directors listed therein.
10.7(e) Exploration and Production Sharing contract between the
Republic of Gabon and VAALCO Gabon (Equata), Inc. dated
July 7, 1995.
10.8(e) Exploration and Production Sharing contract between the
Republic of Gabon and VAALCO Gabon (Etame), Inc. dated
July 7, 1995.
10.9(e) Deed of Assignment and Assumption between VAALCO Gabon
(Etame), Inc., VAALCO Energy (Gabon), Inc. and
Petrofields Exploration & Development Co., Inc. dated
September 28, 1995.
10.10(e) Deed of Assignment and Assumption between VAALCO Gabon
(Equata), Inc., VAALCO Production (Gabon), Inc. and
Petrofields Exploration & Development Co., Inc. dated
September 8, 1995.
10.11(f) Letter of Intent for Etame Block, Offshore Gabon dated
January 22, 1997 between the Company and Western Atlas
International, Inc.
10.12(f) Farm In Agreement for Service Contract No. 14 Offshore
Palawan Island, Philippines dated September 24, 1996
between the Company and SOCDET Production PTY, Ltd.
10.13(f) Letter Agreement between the Company and Northstar
Interests LLC. dated December 5, 1996.
10.14(g) Registration Rights Agreement, dated July 28, 1997, by and
among the Company, Jefferies & Company, Inc. and the
investors listed therein.
10.15(h) Warrant Agreement to Purchase Shares of Common Stock of
VAALCO Energy, Inc., dated July 31, 1997, between
VAALCO Energy, Inc. and Jefferies & Company, Inc.

16
10.16(h) Employment Agreement between the Company and W. R.
Scheirman dated March 15, 1996, as amended.
10.17(h) Employment Agreement between the Company and Robert L.
Gerry, III dated August 1, 1997.
10.18(c) Registration Rights Agreement among the Company and The
1818 Fund II, L.P., dated April 21, 1998

10.19(c) Registration Rights Agreement dated April 21, 1998 by and
among the Company, Jeffries & Company, Inc. and the
investors listed therein.

27. Financial Data Schedule

_____________

(a) Filed as an exhibit to the Company's report on Form 8-K filed with
the Commission on March 4, 1998 (file no. 000-20928) and hereby
incorporated by reference herein.

(b) Filed as an exhibit to the Company's Registration Statement on Form
S-3 filed with the Commission on July 15, 1998 and hereby
incorporated by reference herein.

(c) Filed as an exhibit to the Company's Report on Form 8-K filed with
the Commission on May 6, 1998 and hereby incorporated by reference
herein.

(d) Filed as an exhibit to the Company's Form 10 (File No. 0-20928)
filed on December 3, 1992, as amended by Amendment No. 1 on Form 8
on January 7, 1993, and by Amendment No. 2 on Form 8 on January 25,
1993, and hereby incorporated by reference herein.

(e) Filed as an exhibit to the Company's Form 10-QSB for the quarterly
period ended September 30, 1995, and hereby incorporated by
reference herein.

(f) Filed as an exhibit to the Company's Form 10-KSB for the quarterly
period ended December 31, 1996, and hereby incorporated by reference
herein.

(g) Filed as an exhibit to the Company's Form 10-QSB for the quarterly
period ended June 30, 1997, and hereby incorporated by reference
herein.

(h) Filed as an exhibit to the Company's Form 10-KSB for the quarterly
period ended December 31, 1997, and hereby incorporated by reference
herein.

17
(B) REPORTS ON FORM 8-K

The company filed two reports on Form 8-K for the three month period
ended June 30, 1998. A Form 8-K, filed on May 6, 1998 reported the
acquisition of 1818 Oil Corp. from The 1818 Fund II, L.P., contained
a designation for Convertible Exchangeable Preferred Stock, Series
A, and contained the unaudited pro forma financial statements of
VAALCO Energy, Inc. A Form 8-K, filed on May 29, 1998 contained the
financial statements of 1818 Oil Corp.


SIGNATURES

In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

VAALCO ENERGY, INC.
(Registrant)



By /s/W. RUSSELL SCHEIRMAN
W. RUSSELL SCHEIRMAN, PRESIDENT,
CHIEF FINANCIAL OFFICER AND DIRECTOR
(on behalf of the Registrant and as the
principal financial officer)


Dated August 14, 1998


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