Form: 10KSB40

March 30, 2000

Documents

10KSB40:

Published on March 30, 2000



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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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, 1999

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

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VAALCO Energy, Inc.
(Name of small business issuer in its charter)

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

4600 Post Oak Place 77027
Suite 309 (Zip Code)
Houston, Texas
(Address of principal executive
offices)

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 thisForm 10-KSB. [X]

The registrant's revenues for the fiscal year ended December 31, 1999 were
$894,151.

The aggregate market value of the voting and non-voting common equity of
the registrant held by non-affiliates, as of March 16, 2000 was $5,541,617
based upon the closing price as of such date.

As of March 16, 2000, there were outstanding 20,744,569 shares of Common
Stock, $.10 par value per share, of the registrant.

Documents incorporated by reference: Definitive proxy statement of VAALCO
Energy, Inc. relating to the Annual Meeting of Stockholders to be filed within
120 days after the end of the fiscal year covered by this Form, which is
incorporated into Part III of this 10-KSB.

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VAALCO ENERGY, INC.

TABLE OF CONTENTS

PART I


Page
----

Item 1. Business......................................................... 1
Item 2. Properties....................................................... 9
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....... 14
Item 7. Financial Statements and Supplementary Data...................... 18
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 38

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................ 38
Item 10. Executive Compensation.......................................... 38
Item 11. Security Ownership of Certain Beneficial Owners and Management.. 38
Item 12. Certain Relationships and Related Transactions.................. 38
Item 13. Exhibits and Reports on Form 8-K................................ 38


PART I

Item 1. Business

Background

VAALCO Energy, Inc., a Delaware corporation, is a Houston-based independent
energy company principally engaged in the acquisition, 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. VAALCO owns producing properties and
conducts exploration activities as operator of consortium internationally in
the Philippines and Gabon. Through participation in a partnership with Hunt
Oil Company, VAALCO has additional international interests in Argentina, Peru,
Ethiopia, Ghana, Niger and Canada. Domestically, the Company has interests in
the Texas Gulf Coast area.

On April 21, 1998 VAALCO consummated the acquisition of 1818 Oil Corp. in
exchange for 10,000 shares of Convertible Preferred Stock, Series A. The
Preferred Stock is convertible into 27.5 million shares of VAALCO, $0.10 par
value per share, Common Stock. 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. 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, was pledged as cash collateral to secure a letter of
credit payable to Hunt for cash calls associated with the partnership.

Hunt has entered into production sharing contracts and other arrangements
that entitle it to explore for oil and gas, both onshore and offshore, on
approximately 34 million acres in various countries, including Argentina,
Peru, Ethiopia, Ghana, Niger and Canada. 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 that
pre-drilling seismic and other data indicate to have potential reserves in
excess of 100 MMBOE. To date, Hunt has not been successful in discovering
commercial deposits of oil. As of the date of this filing, Hunt has drilled at
least one dry hole on all of the concessions in the partnership, and is
currently drilling a well in Niger. Pending the outcome of the well in Niger,
Hunt will have spent substantially all of the funds committed to the
partnership for exploration. Future drilling may be dependent upon the results
of efforts to farm-out the properties.

Under the partnership agreement with Hunt, at December 31, 1999 the Company
was obligated to contribute an estimated $1.9 million to fund its share of the
exploration costs of Hunt, $1.7 million of which was subsequently funded as of
the date of this filing. In addition, if Hunt discovers oil or gas deposits,
the Company may be required to contribute an additional $7.5 million to fund
appraisal costs. The partnership has no further call on funds from VAALCO
beyond these two described obligations, and may only call the $7.5 million in
the event of an oil discovery. As of December 31, 1999 VAALCO had $10.0
million in cash ($8.3 million as of the date of this filing) in an escrow
account to fund its obligations under the partnership agreement, which
includes $0.6 million of interest earned on the funds since they were placed
in escrow, which is not pledged to the partnership. In the event any of the
funds are not called upon at dissolution of the partnership, the amounts in
escrow will be reclassified from funds in escrow to cash.

1818 Oil Corp.'s equity as of December 31, 1998 has been retroactively
changed 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 credited to additional paid-in capital.
In addition, at the time of the merger, the 1818 Fund II, L.P., a fund managed
by Brown Brothers Harriman & Co. (the "1818 Fund") contributed the debt owed
to it by 1818 Oil Corp. as additional paid-in capital to 1818 Oil Corp.

The income statement presented for the prior year periods is that of 1818
Oil Corp., not VAALCO the legal acquirer. The results of operations of VAALCO
are included in the accompanying financial statements for the

1

periods subsequent to the date of the acquisition, March 31, 1998.
Accordingly, a comparison of 1999 and 1998 may not be meaningful. The legal
name of the registrant continues to be VAALCO Energy, Inc.

VAALCO's Philippine subsidiaries include Alcorn (Philippines) Inc., Alcorn
(Production) Philippines Inc. and Altisima Energy, Inc. VAALCO's Gabon
subsidiaries are VAALCO Gabon (Etame), Inc., VAALCO Production (Gabon), Inc.
and VAALCO Energy (Gabon), Inc. VAALCO Energy (USA), Inc. holds interests in
certain properties located in the United States.

Recent Developments

In January 1999, the Company completed the drilling of the Etame 2V
delineation well on its concession offshore Gabon. The well logged oil pay in
the Gamba Sandstone, however, the reservoir was encountered at a lower depth
than expected. The well was not tested. During the second quarter of 1999, a
seismic reprocessing effort was commenced to better delineate the Gamba
reservoir which lies below a layer of salt. In February 2000, the Company
completed the seismic reprocessing activities and has recommended to the
consortium a third drilling location. At least one delineation well is planned
for the year 2000.

During February 1999, Hunt Oil Company drilled a 4,500 foot test on its Rio
Belgrano block in Argentina. The well did not encounter any commercial
hydrocarbons and was abandoned. The Company had a 7.5% interest in the well.

In November 1999, Hunt mobilized a semi-submersible drilling rig to Ghana
to drill an exploration well offshore Ghana. The well targeted a large
turbidite structure at a location in 3,000 feet of water depth. The well was
plugged and abandoned after encountering non-commercial oil shows in February
2000.

Hunt also mobilized a land rig in November 1999 to Niger from Algeria, to
drill three exploration wells on prospects on the partnership's concession in
Niger. The wells will test three separate structures, which were defined
through a seismic campaign undertaken in 1996. Several additional structures
were also delineated by the seismic campaign, and a decision to drill these
structures will be based upon the results of the three exploration wells. As
of the date of this filing, two of the wells had been drilled and encountered
significant sand accumulations, but no commercial hydrocarbons. The third well
is currently being drilled as of the date of this report.

VAALCO's share of the costs of the well offshore Ghana and the three wells
in Niger will be approximately $4.0 million, $2.3 million of which was funded
as of December 31, 1999. In February 2000, a payment was made to the
partnership of approximately $1.7 million to fund the balance of the cost of
the wells.

General

The Company's strategy is to increase reserves and production in a cost-
effective manner through a program that balances lower risk acquisitions
and/or mergers and exploratory drilling on VAALCO's domestic acreage with high
potential international prospects. Internationally, financial exposure and
political risk are mitigated through alliances with experienced industry
partners who fund the majority of required capital.

International

The Company's international strategy is to pursue selected opportunities
that are characterized by reasonable entry costs, favorable economic terms,
high reserve potential relative to capital expenditures and the availability
of existing technical data that may be further developed using current
technology. The Company believes that it has unique management and technical
expertise in identifying international opportunities and establishing
favorable operating relationships with host governments and local partners
familiar with the local practices and infrastructure.

2

The Company owns producing properties and conducts exploration activities
as operator of consortium internationally in the Philippines and Gabon.
Through participation in a partnership with Hunt Oil Company, VAALCO has
additional international interests in Argentina, Peru, Ethiopia, Ghana, Niger
and Canada.

Domestic

The Company's domestic strategy is to build near-term cash flows through
focused acquisition of domestic producing properties that have significant
exploration or future development potential. The Company will consider both
direct acquisitions and/or mergers with companies with production from
existing fields. Recognizing that international operations are subject to
greater social, economic and political volatility, the Company seeks to build
a stable domestic production and reserve base that will permit the Company to
continue to participate in more high-risk international projects with greater
reserve potential.

The joint venture agreement with Paramount Petroleum, Inc., entitles the
Company to acquire, at its option, 25% of any prospect generated by the joint
venture, 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 committed $3.0 million to fund overhead, leases,
seismic and other amounts in connection with the joint venture all of which
has been funded as of December 31, 1999.

The Company owns an interest in approximately 2,600 acres onshore Texas and
has interests in producing fields in the Gulf of Mexico.

Customers

Substantially all of the Company's crude oil and natural gas is sold at the
well head at posted or indexed prices under short-term contracts, as is
customary in the industry. For the year ended December 31, 1999, one purchaser
of the Company's crude oil accounted for essentially all of the Company's
total crude oil sales. The Company markets its crude oil share in the
Philippines under an agreement with SeaOil Corporation, a local Philippines
refiner ("SeaOil"). 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, 1999, the Company had 24 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.

Competition

The oil and gas industry is highly competitive. Competition is particularly
intense with respect to acquisitions of desirable oil and gas reserves. 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. In addition,
the producing, processing and marketing of oil and gas is affected by a number
of factors beyond the control of the Company, the effects of which cannot be
accurately predicted.

The Company's competition for acquisitions, exploration, development and
production include the major oil and gas companies in addition to numerous
independent oil 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.

3

Risk Factors

Volatility of Oil and Gas Prices and Markets

The Company's revenues, cash flow, profitability and future rate of growth
are substantially dependent upon prevailing prices for oil and gas. The
Company's ability to borrow funds and to obtain additional capital on
attractive terms is also substantially dependent on oil and gas prices. The
Company's production in the Philippines 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 prices than production located in other areas. Historically, oil
and gas prices and markets have been volatile and are likely to continue to be
volatile in the future. Prices for oil and gas are subject to wide
fluctuations in response to relatively minor changes in supply of and demand
for oil and gas, market uncertainty and a variety of additional factors that
are beyond the control of the Company. These factors include international
political conditions, the domestic and foreign supply of oil and gas, the
level of consumer demand, weather conditions, domestic and foreign
governmental regulations, the price and availability of alternative fuels and
overall economic conditions. In addition, various factors, including the
availability and capacity of gas gathering systems and pipelines, the effect
of federal, state and foreign regulation of production and transportation,
general economic conditions, changes in supply due to drilling by other
producers and changes in demand may adversely affect the Company's ability to
market its oil and gas production. Any significant decline in the price of oil
or gas would adversely affect the Company's revenues, operating income, cash
flows and borrowing capacity and may require a reduction in the carrying value
of the Company's oil and gas properties and its planned level of capital
expenditures.

Replacement of Reserves

The Company's future success depends upon its ability to find, develop or
acquire additional oil and gas reserves that are economically recoverable.
Except to the extent that the Company conducts successful exploration or
development activities or acquires properties containing proved reserves, the
estimated net proved reserves of the Company will generally decline as
reserves are produced. There can be no assurance that the Company's planned
development and exploration projects and acquisition activities will result in
significant additional reserves or that the Company will have continuing
success drilling productive wells at economic finding costs. The drilling of
oil and gas wells involves a high degree of risk, especially the risk of dry
holes or of wells that are not sufficiently productive to provide an economic
return on the capital expended to drill the wells. In addition, the Company's
drilling operations may be curtailed, delayed or canceled as a result of
numerous factors, including title problems, weather conditions, political
instability, economic/currency imbalances, compliance with governmental
requirements or delays in the delivery of equipment and availability of
drilling rigs. Certain of the Company's oil and gas properties are operated by
third parties or may be subject to operating committees controlled by national
oil companies and, as a result, the Company has limited control over the
nature and timing of exploration and development of such properties or the
manner in which operations are conducted on such properties.

Substantial Capital Requirements

The Company makes, and will continue to make, substantial capital
expenditures for the acquisition, exploitation, development, exploration and
production of oil and gas reserves. Historically, the Company has financed
these expenditures primarily with cash flow from operations, asset sales,
private sales of equity, bank borrowings and purchase money debt. The Company
believes that it will have sufficient capital to finance planned capital
expenditures through 2000.

At December 31, 1999 the Company had $10.0 million of funds in escrow to be
utilized to fund its share of activities within Hunt. The partnership
agreement of Hunt obligates the Company to contribute, when requested by Hunt,
up to $1.9 million to fund Hunt's remaining exploration program, $1.7 million
which has been funded as of the date of this filing. In addition, if Hunt
discovers oil, the Company may be required to contribute an

4

additional $7.5 million to fund the appraisal of the discovery. In the event
any of the funds are not called upon at dissolution of the partnership, the
amounts in escrow will be reclassified from funds in escrow to cash.

At year end 1999, the Company had invested $3.0 million in the Paramount
joint venture, of which, approximately $1.2 million has been impaired as of
December 31, 1999. There can be no assurance that the Company will realize a
return on its investments in Hunt or Paramount or that the Company's
investment in the Hunt or Paramount joint venture will be successful.

Drilling Risks

Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. There can be no
assurance that new wells drilled by the Company will be productive or that the
Company will recover all or any portion of its investment. Drilling for oil
and natural gas may involve unprofitable efforts, not only from dry wells, but
also from wells that are productive but do not produce sufficient net revenues
to return a profit after drilling, operating and other costs. The cost of
drilling, completing and operating wells is often uncertain and cost overruns
are common. The Company's drilling operations may be curtailed, delayed or
canceled as a result of numerous factors, many of which are beyond the
Company's control, including title problems, weather conditions, compliance
with governmental requirements and shortages or delays in the delivery of
equipment and services.

Operating Hazards and Uninsured Risks

The oil and gas business involves a variety of operating risks, including
fire, explosions, blow-outs, pipe failure, casing collapse, abnormally
pressured formations and environmental hazards such as oil spills, gas leaks,
ruptures and discharges of toxic gases, the occurrence of any of which could
result in substantial losses to the Company due to injury and loss of life,
severe damage to and destruction of property, natural resources and equipment,
pollution and other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. The
Company's production facilities are 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 overseas 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.
The Company and operators of properties in which it has an interest maintain
insurance against some, but not all, potential risks; however, there can be no
assurance that such insurance will be adequate to cover any losses or exposure
for liability. The occurrence of a significant unfavorable event not fully
covered by insurance could have a material adverse effect on the Company's
financial condition and results of operations. Furthermore, the Company cannot
predict whether insurance will continue to be available at a reasonable cost
or at all.

Uncertainties in Estimating Reserves and Future Net Cash Flows

There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves, including many factors beyond the control of the
Company. Reserve engineering is a subjective process of estimating the
underground accumulations of oil and gas that cannot be measured in an exact
manner. The estimates in this document are based on various assumptions
required by the Commission, including unescalated prices and costs and capital
expenditures, and, therefore, are inherently imprecise indications of future
net revenues. Actual future production, revenues, taxes, operating expenses,
development expenditures and quantities of recoverable oil and gas reserves
may vary substantially from those assumed in the estimates. Any significant
variance in these assumptions could materially affect the estimated quantity
and value of reserves set forth in this document. In addition, the Company's
reserves may be subject to downward or upward revision based upon production
history, results of future development, availability of funds to acquire
additional reserves, prevailing oil and gas prices and other factors.
Moreover, the calculation of the estimated present value of the future net
revenue using a 10% discount rate as required by the Commission is not
necessarily the most appropriate discount factor based on

5

interest rates in effect from time to time and risks associated with the
Company's reserves or the oil and gas industry in general.

It is also possible that reserve engineers may make different estimates of
reserves and future net revenues based on the same available data. In
calculating reserves on a BOE basis, gas was converted to oil at the ratio of
six Mcf of gas to one Bbl of oil. While this conversion ratio approximates the
energy equivalent of oil and gas on a Btu basis, it may not represent the
relative prices received by the Company on the sale of its oil and gas
production.

The estimated future net revenues attributable to the Company's net proved
reserves are prepared in accordance with Commission guidelines, and are not
intended to reflect the fair market value of the Company's reserves. In
accordance with the rules of the Commission, the Company's reserve estimates
are prepared using period end prices received for oil and gas. Future
reductions in prices below those prevailing at year-end 1999 would result in
the estimated quantities and present values of the Company's reserves being
reduced.

A substantial portion of the Company's proved reserves are or will be
subject to service contracts, production sharing contracts and other
arrangements. The quantity of oil and gas the Company will ultimately receive
under these arrangements will differ based on numerous factors, including the
price of oil and gas, production rates, production costs, cost recovery
provisions and local tax and royalty regimes. Changes in many of these factors
do not affect estimates of U.S. reserves in the same way they affect estimates
of proved reserves in foreign jurisdictions, or will have a different effect
on reserves in foreign countries than in the United States. As a result,
proved reserves in foreign jurisdictions may not be comparable to proved
reserve estimates in the United States.

Foreign 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. In addition, if a dispute arises with foreign
operations, the Company may be subject to the exclusive jurisdiction of
foreign courts or may not be successful in subjecting foreign persons,
especially foreign oil ministries and national oil companies, to the
jurisdiction of the United States.

The Company's private ownership of oil and gas reserves under oil and gas
leases in the United States differs distinctly from its ownership of foreign
oil and gas properties. In the foreign countries in which the Company does
business, the state generally retains ownership of the minerals and
consequently retains control of (and in many cases, participates in) the
exploration and production of hydrocarbon reserves. Accordingly, operations
outside the United States may be materially affected by host governments
through royalty payments, export taxes and regulations, surcharges, value
added taxes, production bonuses and other charges.

Certain of the Company's producing properties are located offshore Palawan
Island in the Philippines, and, consequently, a portion of the Company's
assets is subject to regulation by the government of the Philippines. Although
there has been unrest and uncertainty in the Philippines, to date, the
country's Office of Energy Affairs has been largely unaffected by political
changes. The Company has operated in the Philippines since 1985 and believes
that it has good relations with the current Philippine government. However,
there can be no assurance that present or future governmental regulation in
the Philippines will not materially adversely affect the operations or cash
flows of the Company.

All of the Company's current Philippine producing properties are located in
fields covered under Service Contract No. 14. To obtain favorable tax
treatment, Philippine nationals must own at least 15% of Service

6

Contract No. 14. Residents of the Philippines currently own in excess of 15%
of Blocks A, B, C and D of Service Contract 14, including 53% of Block C. 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 oil
production within the Philippines and therefore may be exposed to foreign
currency risk.

Control by 1818 Fund

In connection with the Hunt Transaction, the Company issued to the 1818
Fund Common Stock and Preferred Stock which votes as a class with the Common
Stock on an as converted basis, representing approximately 65% of the
outstanding voting power of the Company on an as converted basis (excluding
options and warrants). In addition, the terms of the Preferred Stock acquired
by the 1818 Fund provide that while the Preferred Stock is outstanding, the
holders of Preferred Stock voting together as a class are entitled to elect
three directors of the Company. Accordingly, the 1818 Fund is able to control
all matters submitted to a vote of the stockholders of the Company, including
the election of directors.

In connection with the Hunt Transaction, the Company made certain changes
to its bylaws which require that at least a majority of the directors
constituting the entire board of directors, which majority must include at
least one of the directors elected by the holders of Preferred Stock, approve
each of the following transactions effected by either the Company or, as
applicable, any subsidiary of the Company, any issuance of or agreement to
issue any equity securities, including securities convertible into or
exchangeable for such equity securities (other than issuances pursuant to an
employee benefit plan); the declaration of any dividend; the incurrence,
assumption of or refinancing of indebtedness; the adoption of any employee
stock option or similar plan; entering into employment or consulting
agreements with annual compensation exceeding $100,000; any merger or
consolidation; the sale, conveyance, exchange or transfer of the voting stock
or all or substantially all of the assets; the sale or other disposition to
another person, or purchase, lease or other acquisition from another person,
of any material assets, rights or properties; certain expenditures in excess
of $300,000; the formation of any entity that is not wholly-owned by the
Company; material changes in accounting methods or policies; any amendment,
modification or restatement of the certificate of incorporation or bylaws; the
settlement of any claim or other action against the Company or subsidiary in
an amount in excess of $50,000; approval or amendment of the annual operating
budget; any other action which is not in the ordinary course of business; and
the agreement to take any of the foregoing actions. Accordingly, none of the
foregoing actions can be taken by the Company without the approval of at least
one director designated by the holders of the Preferred Stock.

Investment in Hunt

The Company is a limited partner in Hunt. The general partner without the
consent or input of the limited partners makes all decisions concerning the
operations of Hunt. Accordingly, the Company is not able to influence
decisions with respect to operations of Hunt, including decisions regarding
the purchase of concessions and other interests, exploration and development
operations (including the location, testing, completing or plugging and
abandoning of wells, as well as the gathering of seismic and other geophysical
data), farm out and other participation agreements, the acquisition or sale of
real and personal property, insurance coverage, bank and other financings and
other matters significant to the operations of Hunt.

The exploration activity of Hunt is ongoing. To date, Hunt's exploration
activities have not resulted in the discovery of any commercial oil or gas
reserves. No assurance can be given that Hunt's activities will result in
commercial production or that the Company will realize a return on its
investment in Hunt. Hunt's operations are subject to risks applicable to the
oil and gas industry in general as well as to risks inherent in foreign
operations, and are subject to many of the risks disclosed herein under "Risk
Factors" including, without limitation, "--Foreign Operations," "--Volatility
of Oil and Gas Prices and Markets," "--Replacement of Reserves," "--Drilling
Risks," "--Operating Hazards and Uninsured Risks," "--Uncertainties in
Estimating Reserves and Future Net Cash Flows," "--Environmental and Other
Regulations" and "--Acquisition Risks."

7

Environmental and Other Regulations

The laws and regulations of the United States, Philippines and Gabon
regulate the Company's business. In addition, VAALCO owns a 7.5% interest in
the Hunt limited partnership, which does business in and is subject to the
laws and regulations of other foreign countries. These laws and governmental
regulations, which cover matters including drilling operations, taxation and
environmental protection, may be changed from time to time in response to
economic or political conditions. See "--Foreign Operations."

The Company's domestic operations are subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. The Company's domestic
operations could result in liability for personal injuries, property damage,
oil spills, discharge of hazardous materials, remediation and clean-up costs
and other environmental damages. In addition, the Company could be liable for
environmental damages caused by previous property owners. As a result,
substantial liabilities to third parties or governmental entities may be
incurred; the payment of which could have a material adverse effect on the
Company's financial condition, results of operations and liquidity. The
Company maintains insurance coverage for its operations, including limited
coverage for sudden environmental damages, but does not believe that insurance
coverage for environmental damages that occur over time is available at a
reasonable cost. Moreover, the Company does not believe that insurance
coverage for the full potential liability that could be caused by sudden
environmental damages is available at a reasonable cost. Accordingly, the
Company may be subject to liability or may lose substantial portions of its
properties in the event of certain environmental damages. The Company could
incur substantial costs to comply with environmental laws and regulations.

A substantial portion of the Company's producing properties are located
offshore. The costs to abandon offshore wells may be substantial. For
financial accounting purposes the Company accrues a per BOE charge over the
life of a field to cover such abandonment costs. No assurances can be given
that such reserves will be sufficient to cover such costs in the future as
they are incurred.

The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution
Act of 1990, could have a material adverse impact on the Company.

The recent trend toward stricter standards in environmental legislation and
regulation in the U.S. is likely to continue. If such legislation were
enacted, it could have a significant impact on the operating costs of the
Company, as well as the oil and gas industry in general.

In addition, while the Company believes that it is currently in compliance
with environmental laws and regulations applicable to the Company's operations
in the Philippines, Gabon and the U.S., no assurances can be given that the
Company will be able to continue to comply with such environmental laws and
regulations without incurring substantial costs.

Acquisition Risks

The Company intends to acquire oil and gas properties. Although the Company
performs a review of the acquired properties that it believes is consistent
with industry practices, such reviews are inherently incomplete. It generally
is not feasible to review in depth every individual property involved in each
acquisition. Ordinarily, the Company will focus its due diligence efforts on
the higher valued properties and will sample the remainder. However, even an
in-depth review of all properties and records may not necessarily reveal
existing or potential problems nor will it permit a buyer to become
sufficiently familiar with the properties to assess fully their deficiencies
and capabilities. Inspections may not be performed on every well, and
structural or environmental problems, such as ground water contamination, are
not necessarily observable even when an inspection is undertaken. The Company
may be required to assume preclosing liabilities, including environmental
liabilities, and may acquire interests in properties on an "as is" basis.
There can be no assurance that the Company's acquisitions will be successful.

8

Reliance on Key Personnel

The Company is highly dependent upon its executive officers and key
employees, particularly Messrs. Gerry, Walston and Scheirman. Moreover, the
Company's investment in the Paramount joint venture is highly dependent upon
Robert Schneeflock. The unexpected loss of the services of any of these
individuals could have a detrimental effect on the Company. The Company does
not maintain key man life insurance on any of its employees, but maintains a
$4.0 million life insurance policy on Mr. Schneeflock.

Forward-Looking Information and Risk Factors

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. The Company can give no
assurances that the assumptions upon which such statements are based 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," elsewhere herein and in 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.

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 produces the Nido and Matinloc
fields with a total gross production for 1999 of approximately 313,000 barrels
or 860 BOPD.

Nido Field

This field is 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, 1999 had produced an aggregate of approximately 17.1 MMBbls of
oil. The field is produced using the cyclic method under which the field is
shut in for a period of time (generally 60 days) and then opened up to produce
(generally four to five days). However during 1999, the lack of demand for
crude oil in Asia resulted in fewer liftings than normal. During 1999, the
four wells in the field produced at an equivalent rate of 108 BOPD compared to
244 BOPD in 1998. If optimum liftings were obtained, the field would be
capable of producing in excess of 500 BOPD. The Company has an approximate
22.2% working interest and an approximate 17.4% net revenue interest in the
field.

Matinloc Field

This field is located within the contract area covered by Service Contract
No. 14 and has three producing wells. The field had produced an aggregate
production of approximately 10.3 MMBbls from 1982 through 1991. Production was
suspended from the field in 1991 until it was reactivated in 1995. At December
31, 1999 the field had produced an aggregate of 11.0 MMBbls. During 1999, the
field produced approximately 239 MBbls or 655 BOPD. The Company has an
approximate 38.1% working interest and an approximate 26.8% net revenue
interest in the field. Other production was obtained from the North Matinloc
field, which is an extension to the Matinloc field. This field produced 35
MBbls or 96 BOPD from one well during 1999. The Company has an approximate
45.4% working interest and an approximate 40.3% net revenue interest in the
North Matinloc field.

During 1998 and 1997 an Australian oil company, (SOCDET), acquired 132,000
line kilometers of 3-D seismic data over Service Contracts No. 14 and No. 6 in
exchange for a farm out of interests in the Service Contracts. Upon completion
of the seismic shoot and presentation of an interpretation thereof, SOCDET
earned

9

a 35% interest in Service Contract No. 14 effective December 29, 1998. In
connection with the assignment, SOCDET was assigned an interest in the
production platforms, and the liability to abandon them in the future. This
resulted in a reversal of abandonment liability net to the Company of $1.1
million in 1998. An option to earn an additional 25% interest through the
drilling of a well was not exercised and expired in October 1999.

Galoc Field

This field is located within the contract area covered by Service Contract
No. 14 and is currently not producing. 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. Previous wells tested in excess of 5,000 BOPD. The Galoc
field is one of the areas being studied extensively for the potential to drill
an additional delineation well in the field.

Gabon

VAALCO has an interest in one offshore block in Gabon, the Etame Block.
Interest in the block vests in a production-sharing contract entered into by
the Company's subsidiary VAALCO (Gabon) Equata, Inc., providing for two three-
year terms, which commenced in July 1995. The Company elected to extend the
contract into the second three-year term during 1998. As a result of the
participation agreement discussed below, VAALCO currently owns a 17.9%
interest in the production-sharing contract covering the Etame Block.

Etame Block

The Etame Block is a 3,073 square kilometer block acquired in July 1995,
containing two former Gulf Oil Company discoveries, the North and South
Tchibala discoveries. These discoveries consist of subsalt reservoirs that lie
in approximately 250 feet of water depth, 20 miles offshore. The Company and
its partners undertook an obligation to the Government of Gabon to obtain and
process seismic data and to drill one commitment well on the Etame block over
the three-year primary term of the license. In April 1998, a participation
agreement was entered into with Western Atlas Afrique, Ltd. ("Western Atlas"),
a subsidiary of Baker Hughes, to conduct a 320 square kilometer seismic survey
at Western Atlas' sole cost and to pay a disproportionate 80% of the cost, up
to $4.7 million, of the first commitment well. In return for these payments,
Western Atlas earned a 65% interest in the production-sharing contract. In
June 1998, Western Atlas completed the above-mentioned acquisition of seismic
data over the property. This data was processed, and the Company drilled the
commitment well, the Etame No. 1 well, in June 1998 resulting in a 3,700 BOPD
Gamba sandstone discovery on the block. Completion of the Etame No. 1 well
satisfied all of the Company's obligations to the Government of Gabon under
the primary three-year term of the contract.

During 1998, the consortium of companies owning the Etame Block production
sharing contract agreed to renew the production sharing contract for three
additional years, thereby taking on a commitment to drill two additional
exploration wells and to perform a 3-D seismic reprocessing. A delineation
well, the Etame 2V well, was drilled in January 1999 and encountered
additional oil pay in the Gamba sandstone, however the well encountered the
Gamba sandstone lower than expected. The Consortium elected to reprocess the
3-D seismic data prior to drilling additional delineation wells. The Company
anticipates drilling at least one additional delineation well in 2000. The
Etame 2V counted as the first of the two commitment wells under the three-year
contract term extension.

Domestic Properties

Paramount Joint Venture

The Company participates in a joint venture with Paramount Petroleum, Inc.
to conduct exploration activities primarily in the onshore Gulf Coast area,
including Alabama, Mississippi and Louisiana. During 1999, the Company agreed
to take a 9% interest in two prospects drilled during the second and third
quarters of 1999.

10

Neither of the two prospects encountered commercial hydrocarbons and both were
abandoned. During February 2000, two additional prospects generated by
Paramount were spudded in Alabama in the Black Warrior Basin one of which
appears to be a gas discovery. The Company elected not to take a working
interest in the prospects, but will earn a back-in and override in the
prospects if they are successful.

Brazos County Prospects

The Company has working interests in approximately 1,600 net acres in
Brazos County, Texas, which the Company leased with the intent to participate
in the drilling of extended-reach horizontal wells in the underlying Buda and
Georgetown formations. Substantially all of these leases will expire during
2000. Drilling plans were placed on hold in reaction to the low crude oil
price environment experience by the industry in 1998 and 1999. The Company is
actively attempting to arrange a consortium to drill one of the prospects
during 2000. The Company does not plan to renew any of its leases in the area,
pending the outcome of the prospect it is seeking to drill. During 1999, the
Company took an impairment charge of $0.7 million associated with the
expiration of approximately 4,200 acres of leases in Brazos County.

Goliad County, Texas

VAALCO owns an interest in approximately 1,000 acres located immediately
west of the Goliad town site. 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 January
1998, a farm out agreement was entered into with an industry partner over
1,000 acres of its Goliad acreage whereby the Company recovered its lease
costs and assigned a 75% working interest to its partner. The Company owns
certain overriding royalties and a 25% working interest in the acreage. The
leases expire in 2001.

Other Domestic Properties

The Company owns an interest in 640 acres (224 net acres) in Dimmit County
on which a horizontal gas well was drilled in 1999 to the Georgetown
formation. The well is productive and is awaiting testing results. The
Company's net cost of the well (approximately $425,000) is carried as work in
progress at year-end 1999. The Company also owns certain non-operated
interests in the Vermilion and Ship Shoal areas of the Gulf of Mexico, which
accounted for no significant production during the year ended December 31,
1999. No capital expenditures are anticipated in 2000 for these properties.

Aggregate Production

Additional production data (net to the Company) for all of the Company's
operations for the years 1999 and 1998 are as follows: (See "Item 1--
BACKGROUND" regarding the merger with 1818 Oil Corp.)

Company Owned Production



Year Ended December 31,
-----------------------------------
1999 1998
------------------ ----------------
BOE(1) Bbl Mcf BOE(1) Bbl Mcf
------ ----- ----- ------ ----- ---

Average Daily Production (Oil in BOPD, gas
in MCFD)................................. 251 249 13 332 332 --
Average Sales Price ($/unit)(2)........... $9.04 $9.00 $2.26 $6.51 $6.51 --
Average Production Cost ($/unit).......... 6.03 6.03 1.00 $5.10 $5.10 --

- --------
(1) BOE is barrels of oil equivalent with 6 Mcf of gas equal to 1 Bbl of oil.
(2) Oil prices are primarily from the Philippines properties where a formula
for transportation costs is netted from the sales price.

11

Reserve Information

A reserve report as of December 31, 1999 has been opined on by Netherland
Sewell & Associates, independent petroleum engineers. There have been no
estimates of total proved net oil or gas reserves filed with or included in
reports to any federal authority or agency other than the Commission since the
beginning of the last fiscal year. All of the reserves are located in the
Philippines. There are no reserve estimates for the U.S. properties or for the
Etame discovery in Gabon, pending further delineation drilling. (See "Item 1--
BACKGROUND" regarding the merger with 1818 Oil Corp.)



As of
December 31,
--------------
1999 1998
------- ------

Crude Oil
Proved Developed Reserves (MBbls).............................. 661 691
Proved Undeveloped Reserves (MBbls)............................ -- --
------- -----
Total Proved Reserves (MBbls)................................ 661 691
------- -----
Standardized measure of discounted future net cash flows at 10%
(in thousands)................................................ $ 2,823 $ 226
------- -----


The standardized measure of discounted cash flows does not include the
costs of abandoning the Company's non-producing properties. The significant
increase in standardized measure of discounted future net cash flows reflects
the increases in oil prices in 1999.

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 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 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, 1999 was $11.95 per Bbl of oil for Matinloc and
$11.45 per Bbl for Nido. See "Financial Statements and Supplementary Data" for
certain additional information concerning the proved reserves of the Company.

12

Drilling History

The Company drilled or participated in the drilling of six wells for the
period ended December 31, 1999. The Company had two wells in progress at
December 31, 1999. Both productive wells drilled were suspended at December
31, 1999.



1999 Wells Drilled United States International
------------------ ------------------- -------------------
Gross Net Gross Net
--------- --------- --------- ---------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----

Exploration Wells
Productive............................ 1.0 1.0 0.35 0.35 1.0 1.0 0.18 0.18
Dry................................... 3.0 3.0 0.93 0.30 1.0 1.0 0.08 0.08
--- --- ---- ---- --- --- ---- ----
Total Wells......................... 4.0 4.0 1.28 0.65 2.0 2.0 0.26 0.26
=== === ==== ==== === === ==== ====


Acreage and Productive Wells

Below is the total acreage under lease and the total number of productive
oil and gas wells of the Company as of December 31, 1999:



United
States International
------------ ----------------
Gross Net(1) Gross Net(1)
----- ------ -------- -------
(In thousands)

Developed acreage................................ 10.6 0.7 14.7 4.6
Undeveloped acreage(2)........................... 2.6 1.8 34,319.8 2,729.8
Productive gas wells............................. 2 0.4 -- --
Productive oil wells............................. 5 0.3 7 2.2

- --------
(1) Net acreage and net productive wells are based upon the Company's working
interest in the properties.
(2) Includes acreage attributable to the investment in Hunt.

Office Space

The Company leases its offices in Houston, Texas (approximately 8,000
square feet) and in Manila, The Republic of the Philippines (approximately
3,000 square feet), which management believes are suitable and adequate for
the Company's operations.

Item 3. Legal Proceedings

The Company is currently not a party to any material litigation.

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

The Company's Common Stock trades on the OTC Bulletin Board. The following
table sets forth the range of high and low sales prices of the Common Stock
for the periods indicated. The prices represent adjusted prices between
dealers, do not include retail markups, markdowns or commissions and do not
necessarily represent actual transactions. As of December 31, 1999 there were
approximately 96 holders of record of the Company's Common Stock.



Period High Low
------ ----- -----

1998:
First Quarter................................................. $2.69 $1.88
Second Quarter................................................ 3.56 2.50
Third Quarter................................................. 3.03 1.38
Fourth Quarter................................................ 1.38 0.63
1999:
First Quarter................................................. $1.09 $0.25
Second Quarter................................................ 0.56 0.34
Third Quarter................................................. 0.63 0.44
Fourth Quarter................................................ 0.75 0.44
2000:
First Quarter (through March 16, 2000)........................ $0.63 $0.41


On March 16, 2000, the last reported sale price of the Common Stock on the
OTC Bulletin Board was $0.44 per share.

Dividends

The Company has not paid cash dividends and does not anticipate paying cash
dividends on the Common Stock in the foreseeable future.

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

Introduction

In April 1998, the Company acquired from The 1818 Fund, a fund managed by
Brown Brothers Harriman & Co., all of the outstanding capital stock of 1818
Oil Corp. The 1818 Oil Corp. acquisition has been accounted for as a reverse
acquisition and 1818 Oil Corp. is the acquiring entity for financial
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
1999 and 1998 results is not meaningful. 1818 Oil Corp.'s equity as of
December 31, 1999 and December 31, 1998 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 contributed the debt owed to it
by 1818 Oil Corp. as additional paid-in capital to 1818 Oil Corp.

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. The Company's production in the
Philippines 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

14

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. 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. The Company produces 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.

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, private sales of equity, borrowings and
purchase money debt. In 1998, cash was derived predominantly from the sale of
marketable securities, and the private placement of Common Stock, Preferred
Stock and debt. In 1999, the Company's primary uses of capital have been to
fund its exploration operations.

The Company produces oil from the Matinloc and Nido fields in the South
China Sea, the Philippines. During the year ended December 31, 1999, total
production from the fields was approximately 313,000 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 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 financial accounting purposes. 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 1999
and 1998 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
approximately 34 million acres in countries including Argentina, Canada,
Ethiopia, Ghana, Niger and Peru. Under the partnership agreement with Hunt, at
December 31, 1999 the Company was obligated to contribute an estimated $1.9
million to fund its share of the exploration costs of Hunt. In addition, if
Hunt discovers oil or gas deposits, the Company may be required to contribute
an additional $7.5 million to fund appraisal costs. The partnership has no
further call on funds from VAALCO beyond these two described obligations. As
of December 31, 1999 VAALCO had $10.0 million in cash in an escrow account to
fund its obligations under the partnership agreement, which includes $0.6
million of interest earned on the funds that is not pledged to the
partnership.

15

During 1998, the Company issued 5.2 million shares of Common Stock in a
private placement 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.

At year-end 1999, the Company had invested $3.0 million in the Paramount
joint venture of which $1.2 million has been impaired as of December 31, 1999.

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 2000, the Company anticipates that it will make capital expenditures
on oil and gas properties of approximately $3.5 million, including Hunt
partnership expenditures and a well in Gabon. The anticipated capital
expenditures exclude potential acquisitions. The Company believes the cash on
hand at December 31, 1999 will be sufficient to fund the Company's capital
budget through 2000.

Year 2000

The Company experienced no Year 2000 issue problems. The Company expended
approximately $20,000 for Year 2000 upgrades to computer programs utilized in
its accounting department.

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 financial
accounting purposes. As such, the financial statements presented for the prior
year, 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 1999 and 1998 results is not meaningful. The legal name of the
registrant continues to be VAALCO Energy, Inc.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

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

Cash Flows

Net cash provided by operating activities for 1999 was $1.1 million, as
compared to net cash used in operating activities of $15.3 million in 1998.
1999 net cash provided by operations included $7.6 million from funds taken
out of escrow. This was offset by settlement of $1.4 million of accounts
payable and $4.2 million of accounts with partners. 1998 net cash used in
operating activities included $17.6 million of funds placed in escrow for the
Hunt exploration program, Gabon drilling and the Paramount joint venture.

Net cash used in investing activities for 1999 was $4.8 million, as
compared to net cash used in investing activities of $0.7 million in 1998.
Investments in Hunt and Paramount total $3.1 and $3.9 million in 1999 and 1998
respectively. $1.5 million of exploration expenses were incurred in 1999
versus $0.9 million in 1998. Additions to property and equipment of $0.3
million in 1999 and $1.4 million in 1998 occurred primarily in Gabon. In 1998,
the Company acquired assets net of cash of $3.2 million as a consequence of
the merger with 1818 Oil Corp.

Net cash provided by financing activities for 1999 was $0, as compared to
net cash provided by financing activities of $22.6 million in 1998. The 1998
amount consists of proceeds from the issuance of Common Stock and capital
contributed in conjunction with the merger with 1818 Oil Corp.

16

Revenues

Total oil and gas sales for 1999 were $0.8 million as compared to $0.6 for
1998. The 1999 and 1998 revenues include revenues relating to the Philippines,
with 1999 representing a full year of operations, and 1998 excluding
production prior to the merger in April 1998. The Company produced the Nido
and Matinloc fields at approximately 860 BOPD in 1999 versus 797 BOPD in 1998.

Operating Costs and Expenses

Production expenses for 1999 were $0.6 million as compared to $0.5 for
1998. 1999 production expense included the cost of an underwater platform
inspection at the Matinloc field.

Exploration costs for 1999 were $1.5 million as compared to $0.9 for 1998.
In 1999, the company drilled unsuccessful exploration wells in Texas and
Alabama, and incurred charges associated with expiring exploration acreage of
$0.7 million. In addition, 1999 exploration costs included $0.3 million of
seismic reprocessing expense associated with Gabon. In 1998, exploration costs
included costs of the exploration wells drilled in Texas, Alabama and
Louisiana.

Depreciation, depletion and amortization of properties for 1999 and 1998
was $0.

General and administrative expenses for 1999 were $1.9 million as compared
to $1.5 million for 1998. 1999 general and administrative expenses included
the full year results, while 1998 general and administrative expenses only
included the VAALCO portion from the effective date of the merger in April
1998.

Operating Loss

Operating loss for 1999 was $3.0 million as compared to a $2.2 million
operating loss for 1998 reflecting higher exploration costs and general and
administrative expense.

Other Income (Expense)

Interest income for 1999 was $0.8 million compared to $0.9 million in 1998.
Both the 1999 and 1998 amounts represent interest earned and accrued on cash
balances and funds in escrow.

Equity in loss on unconsolidated entities expense for 1999 was $3.8 million
compared to $1.1 million in 1998. Expenses associated with the Paramount
exploration effort and Hunt accounted for the losses in both 1999 and 1998.

Interest expense and financing charges for 1999 were $0 as compared to $0.4
million in 1998. In 1998, interest was accrued on advances to the Company to
fund Hunt expenses. All accrued interest and long-term debt associated with
these advances was extinguished in conjunction with the merger, with the gain
reflected in additional paid in capital.

Other, net was a loss of $0.4 million in 1999 compared to a gain of $1.1
million in 1998. In 1999 the Company took a $0.2 million abandonment liability
accrual associated with an interest in Service Contract No. 14, which was
reassigned to it by a local company. In 1998 the assignment of the interest in
Service Contract No. 14 to SOCDET resulted in a reduced abandonment liability
of $1.1 million in the Philippines.

In 1999 the Company incurred $0.2 million in income taxes associated with
foreign exchange movements in the Philippines, all of which was deferred.

Net Loss

Net loss attributable to common stockholders for 1999 was $6.6 million as
compared to net loss of $1.8 million in 1998. The 1999 and 1998 net losses
resulted from exploration expenses internationally as well as domestically.

17

Item 7. Financial Statements and Supplementary Data

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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, 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 as of December 31,
1999 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.

Deloitte & Touche LLP

Houston, Texas
March 24, 2000

18

VAALCO ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands of dollars, except par value amounts)



As of December
31,
------------------
1999 1998
ASSETS -------- --------

CURRENT ASSETS:
Cash and cash equivalents..................................... $ 2,925 $ 6,671
Funds in escrow............................................... 108 5,248
Receivables:
Trade....................................................... 411 311
Other....................................................... 131 335
Materials and supplies, net of allowance for inventory
obsolescence of $9........................................... 332 326
Prepaid expenses and other.................................... 24 25
-------- --------
Total current assets....................................... 3,931 12,916
-------- --------
PROPERTY AND EQUIPMENT--SUCCESSFUL EFFORTS METHOD
Wells, platforms and other production facilities.............. 1,331 89
Undeveloped acreage........................................... 703 1,385
Work in progress.............................................. 2,331 1,820
Equipment and other........................................... 64 47
-------- --------
4,429 3,341
Accumulated depreciation, depletion and amortization.......... (840) (10)
-------- --------
Net property and equipment................................. 3,589 3,331
-------- --------
OTHER ASSETS:
Funds in escrow............................................... 9,966 12,400
Investment in unconsolidated entities......................... 4,197 4,949
Advances-related party........................................ -- 35
Deferred tax asset............................................ 370 533
Other long-term assets........................................ 35 --
-------- --------
TOTAL...................................................... $ 22,088 $ 34,164
======== ========


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued liabilities...................... $ 609 $ 2,041
Accounts with partners........................................ 403 4567
-------- --------
Total current liabilities................................... 1,012 6,608
-------- --------
MINORITY INTEREST............................................... 12 --
FUTURE ABANDONMENT COSTS........................................ 3,297 3,217
-------- --------
Total liabilities........................................... 4,321 9,825
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY
Preferred stock, $25 par value, 500,000 authorized shares;
10,000 shares issued and outstanding in 1999 and 1998,
respectively................................................. 250 250
Common stock, $.10 par value, 100,000,000 authorized shares;
20,749,964 shares issued of which 5,395 are in the treasury
in 1999 and 1998............................................. 2,075 2,075
Additional paid-in capital.................................... 41,215 41,215
Accumulated deficit........................................... (25,761) (19,189)
Less treasury stock, at cost.................................. (12) (12)
-------- --------
Total stockholders' equity.................................. 17,767 24,339
-------- --------
TOTAL....................................................... $ 22,088 $ 34,164
======== ========


See notes to consolidated financial statements.

19

VAALCO ENERGY, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED OPERATIONS

(in thousands of dollars, except per share amounts)



Year Ended
December 31,
----------------
1999 1998
------- -------

REVENUES:
Oil and gas sales.......................................... $ 824 $ 595
Gain on sales of assets.................................... 70 --
------- -------
Total revenues........................................... 894 595
------- -------
OPERATING COSTS AND EXPENSES:
Production expense......................................... 553 466
Exploration expense........................................ 1,488 887
Depreciation, depletion and amortization................... 14 10
General and administrative expenses........................ 1,877 1,451
------- -------
Total operating costs and expenses....................... 3,932 2,814
------- -------
OPERATING LOSS............................................... (3,038) (2,219)
OTHER INCOME (EXPENSE):
Interest income............................................ 849 915
Interest expense and financing charges..................... -- (424)
Equity loss in unconsolidated entities..................... (3,802) (1,120)
Other, net................................................. (418) 1,082
------- -------
Total other income (expense)............................. (3,371) 453
------- -------
LOSS BEFORE TAXES............................................ (6,409) (1,766)
Income tax expense (benefit)................................. 163 (6)
------- -------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS................. $(6,572) $(1,760)
======= =======
BASIC LOSS PER COMMON SHARE.................................. $ (0.32) $ (0.09)
======= =======
DILUTED LOSS PER COMMON SHARE................................ $ (0.32) $ (0.09)
======= =======
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............. 20,745 19,169
======= =======
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........... 20,905 20,738
======= =======


See notes to consolidated financial statements.

20

VAALCO ENERGY, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

(in thousands of dollars, except share data)



Preferred
Stock Common Stock Additional Total
------------- ----------------- Paid-in Accumulated Treasury Stockholders'
Shares Amount Shares Amount Capital Deficit Stock Equity
------ ------ ---------- ------ ---------- ----------- -------- -------------

Balance at January 1,
1998................... -- -- 229 -- $ 4,098 $(17,429) -- $(13,331)
Issuance of Preferred
Stock................ 10,000 $250 -- -- 12,370 -- -- 12,620
Issuance of Common
Stock................ -- -- 5,183,441 $ 518 8,440 -- -- 8,958
Acquisition of
Treasury Stock....... -- -- 5,395 -- -- -- $(12) (12)
Net Loss.............. -- -- -- -- -- (1,760) -- (1,760)
Merger with 1818 Oil
Corp................. -- -- 15,560,899 1,557 16,307 -- -- 17,864
------ ---- ---------- ------ ------- -------- ---- --------
Balance at December 31,
1998................... 10,000 $250 20,749,964 $2,075 $41,215 $(19,189) $(12) $ 24,339
Net Loss.............. -- -- -- -- -- (6,572) -- (6,572)
------ ---- ---------- ------ ------- -------- ---- --------
Balance at December 31,
1999................... 10,000 $250 20,749,964 $2,075 $41,215 $(25,761) $(12) $ 17,767
====== ==== ========== ====== ======= ======== ==== ========




See notes to consolidated financial statements.

21

VAALCO ENERGY, INC. AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED CASH FLOWS

(in thousands of dollars)



Year Ended
December 31,
----------------
1999 1998
------- -------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(6,572) $(1,760)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, depletion and amortization................... 14 10
Equity loss in unconsolidated entities..................... 3,802 1,120
Provision for deferred income taxes........................ 163 6
Abandonment reserve........................................ 80 (1,060)
Exploration expense........................................ 1,488 887
Interest expense........................................... -- 424
Change in assets and liabilities that provided (used) cash:
Funds in escrow............................................ 7,574 (17,648)
Trade receivables.......................................... (100) (311)
Other receivables.......................................... 204 (335)
Materials and supplies..................................... (6) (326)
Prepaid expenses and other................................. 1 (25)
Accounts payable and accrued liabilities................... (1,432) (831)
Accounts with partners..................................... (4,164) 4,567
------- -------
Net cash provided by (used in) operating activities........ 1,052 (15,282)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration expense......................................... (1,488) (887)
Cash acquired in merger..................................... -- 2,154
Investment in unconsolidated entities....................... (3,050) (3,913)
Additions to property and equipment......................... (272) (1,413)
Assets net of cash acquired in merger....................... -- 3,180
Other--net.................................................. 12 184
------- -------
Net cash used in investing activities....................... (4,798) (695)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions....................................... -- 13,658
Proceeds from the issuance of common stock.................. -- 8,958
------- -------
Net cash provided by financing activities............... -- 22,616
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (3,746) 6,639
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 6,671 32
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 2,925 $ 6,671
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Non-cash items:
Contribution of debt to additional paid-in capital........ $ -- $16,370


See notes to consolidated financial statements.

22

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

(in thousands of dollars, unless otherwise indicated)

1. ORGANIZATION

VAALCO Energy, Inc., a Delaware corporation, is a Houston-based independent
energy company principally engaged in the acquisition, 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. VAALCO owns producing properties and
conducts exploration activities as operator of consortium internationally in
the Philippines and Gabon. Through participation in a partnership with Hunt
Oil Company, VAALCO has additional international exploration interests in
Argentina, Peru, Ethiopia, Ghana, Niger and Canada. Domestically, the Company
has interests in the Texas Gulf Coast area.

In April 1998, the Company acquired from The 1818 Fund II, L.P., (the 1818
Fund), a fund managed by Brown Brothers Harriman & Co., all of the outstanding
capital stock of 1818 Oil Corp. 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 that 1818 Oil Corp. had at the time of the
acquisition was pledged as cash collateral to secure a letter of credit
payable to Hunt for cash calls associated with the partnership. In the event
any of the funds are not called upon at dissolution of the partnership, the
amounts in escrow will be reclassified from funds in escrow to cash.

Hunt has entered into production sharing contracts and other arrangements
which entitle it to explore for oil and gas, both onshore and offshore, on
approximately 34 million acres in countries including Argentina, Peru,
Ethiopia, Ghana, Niger and Canada. 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.

Under the partnership agreement with Hunt, at December 31, 1999 the Company
was obligated to contribute an estimated $1.9 million to fund its share of the
exploration costs of Hunt. In addition, if Hunt discovers oil or gas deposits,
the Company may be required to contribute an additional $7.5 million to fund
appraisal costs. The partnership has no further call on funds from VAALCO
beyond these two described obligations. As of December 31, 1999 VAALCO had
$10.0 million in cash in an escrow account to fund its obligations under the
partnership agreement, which includes $0.6 million of interest earned on the
funds since they were placed in escrow, which is not pledged to the
partnership.

The 1818 Oil Corp. acquisition has been accounted for as a reverse
acquisition and 1818 Oil Corp. is the acquiring entity for financial
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
1999 and 1998 results is not meaningful. 1818 Oil Corp.'s equity as of
December 31, 1999 and December 31, 1998 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 contributed the debt owed to it
by 1818 Oil Corp. as additional paid-in capital to 1818 Oil Corp.

23

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

(in thousands of dollars, unless otherwise indicated)


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



Year Ended
December 31, 1998
----------------------
(Thousands of Dollars)

Total revenues........................................ $ 750
Loss before income taxes.............................. (1,528)
Net loss attributable to common stockholders.......... (1,508)
Basic net loss per share.............................. (0.07)


1818 Oil Corp. ("1818 Oil") is a corporation that was organized and
commenced operations on September 13, 1995 under the General Corporation Law
of the State of Delaware. Prior to the merger, 1818 Oil was a wholly owned
subsidiary of the 1818 Fund, a limited partnership organized on August 20,
1993 under the Delaware Revised Uniform Limited Partnership Act. The 1818 Fund
owned beneficial and legal title to all outstanding equity and voting
securities of 1818 Oil. The general partner of the 1818 Fund is Brown Brothers
Harriman & Co. ("BBH&Co."), a New York limited partnership. BBH&Co. had the
exclusive power to manage, operate and control the businesses of the 1818 Fund
and 1818 Oil and has sole discretion in making investment decisions.

On September 13, 1995, 1818 Oil entered into a subscription agreement to
purchase Class B limited partnership interest in Hunt Overseas Exploration
Company, L.P. (the "Hunt Partnership"), a Delaware limited partnership, in the
amount of $30,000,000. The nature of Hunt's business is the exploration of
international oil and gas prospects. Countries in which exploration activities
are conducted by Hunt include Argentina, Canada, Ethiopia, Niger, Ghana, and
Peru. As of December 31, 1999, 1818 Oil's contributed capital to Hunt was
$20.6 million.

Within the gross commitment level of $30 million to Hunt, first level
commitments comprise 75% ($22.5 million) and second level commitments comprise
25% ($7.5 million). First level commitments are associated with exploration
efforts while second level commitments may only be called by Hunt after a
discovery well has been drilled upon any of the properties of Hunt, and may
only be used by Hunt in connection with appraisal activities to evaluate
whether such properties are worthy of being developed commercially.

As of December 31, 1999 and 1998, remaining first and second level
commitments were as follows:



1999 1998
------- -------

Gross Commitment............................................ $30,000 $30,000
------- -------
First level commitment...................................... $22,500 $22,500
Less: First level capital contributions..................... 20,626 18,151
------- -------
Remaining first level capital commitment.................... $ 1,874 $ 4,349
======= =======
Second level commitment..................................... $ 7,500 $ 7,500
Less: Second level capital contributions.................... -- --
------- -------
Remaining second level capital commitment................... $ 7,500 $ 7,500
======= =======


VAALCO's subsidiaries include Alcorn (Philippines) Inc. and Alcorn
(Production) Philippines Inc., VAALCO Gabon (Etame), Inc., VAALCO Production
(Gabon), Inc., VAALCO Energy (Gabon), Inc., VAALCO Energy (USA), Inc. and 1818
Oil Corp.

24

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

(in thousands of dollars, unless otherwise indicated)


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries, as well as the subsidiaries' share in the assets, liabilities,
income and expenses of joint operations. All significant transactions within
the consolidated group have been eliminated in consolidation.

Cash and Cash Equivalents--For purposes of the consolidated statement of
cash flows, the Company and its subsidiaries consider all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. For the years ended December 31, 1999 and 1998, no payments
were made for income taxes or for interest.

Funds in Escrow--Current amounts represent an escrow for the drilling of
the Etame 2V well in Gabon. Other funds in escrow represent amounts for Hunt
($9,996) and funds for abandonment costs relating to certain Gulf of Mexico
properties ($108).

Inventory Valuation--Materials and supplies are valued at the lower of
cost, determined by the weighted-average method, or market.

Income Taxes--The Company records taxes on income in accordance with
Statement of Financial Accounting Standards "SFAS" No. 109, "Accounting for
Income Taxes". Under SFAS No. 109, deferred income taxes reflect the net tax
effects of (a) temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes, and (b) operating loss and tax credit carryforwards.

The Company calculates current and deferred income taxes on separate
company basis. Deferred income taxes are recognized for future tax
consequences of differences between the tax basis of assets and liabilities
and their financial reporting amounts at year-end.

Property and Equipment--The subsidiaries follow the successful efforts
method of accounting for exploration and development costs. Under this method,
exploration costs, other than the cost of exploratory wells, are charged to
expense as incurred. Exploratory well costs are initially capitalized until a
determination as to whether proved reserves have been discovered. If an
exploratory well is deemed to not have found proved reserves, the associated
costs are expensed at that time. All development costs, including
developmental dry hole costs, are capitalized. Provisions for impairment of
undeveloped oil and gas leases are based on periodic evaluations and other
factors. The Company recognizes gains for the sale of developed properties
based upon an allocation of property costs between the interest sold and the
interest retained based on the fair value of those interests.

The Company reviews its oil and gas properties for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
properties may not be recoverable. When it is determined that an oil and gas
property's estimated future net cash flows will not be sufficient to recover
its carrying amount, an impairment charge must be recorded to reduce the
carrying amount of the asset to its estimated fair value. For years ending
December 31, 1999 and 1998, no impairments were recognized.

Depletion of wells, platforms and other production facilities are provided
on a field basis under the unit-of-production method based upon estimates of
proved developed reserves. Provision for estimated abandonment costs,
including platform dismantlement and site restoration, is included in
depreciation, depletion and

25

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

(in thousands of dollars, unless otherwise indicated)

amortization expense on a unit-of-production basis. Provision for depreciation
of other property is made primarily on a straight-line basis over the
estimated useful life of the property. The annual rates of depreciation are as
follows:



Office and miscellaneous equipment............................. 3-5 years
Leasehold improvements......................................... 8-12 years


In connection with the annual estimate of the Company's oil and gas
reserves for the fiscal year ended December 31, 1999, the Company's
independent petroleum engineers estimated proved oil reserves at December 31,
1999 to be 0.7 million barrels, all of which are classified as proved
developed, net to the Company. The Company had no gas reserves at December 31,
1999. The proved developed reserves relate to the Company's Philippine
operations.

During 1999, the Company was reassigned a 2.6% interest in Block C of
Service Contract No. 14 from a local company in consideration of an unpaid
note receivable. (The Company had previously fully reserved the note
receivable in 1996). Consequently, the Company recorded $816 of Property,
Plant and Equipment attributable to these assets based on prior investments
and $816 of Accumulated Depreciation, Depletion and Amortization since no
proven reserves were reacquired. Due to the non-cash nature of the
acquisition, these amounts have no effect on the Statement of Consolidated
Cash Flows.

Investments--The Company invests funds in escrow and excess cash in
certificates of deposit and commercial paper issued by banks with maturities
typically not exceeding 90 days.

At December 31, 1999, the Company accounted for its investments in
unconsolidated entities under the equity method.

At December 31, 1999, the investment in unconsolidated entities was valued
at fair value using methods determined in good faith by management after
consideration of all relevant information, including, current financial
information and restrictions on dispositions. The values assigned to the
investments do not necessarily represent the amount which might ultimately be
realized upon the sale or other disposition, since such amounts depend on
future circumstances and cannot reasonably be determined until actual
liquidation occurs. However, because of the inherent uncertainty of such
valuations, those estimated values may differ significantly from the values
that would have been used had a ready market for the investments existed, and
the difference could be material.

Foreign Exchange Transactions--For financial reporting purposes, the
subsidiaries use the United States dollar as their functional currency.
Monetary assets and liabilities denominated in foreign currency are translated
to U.S. dollars at the rate of exchange in effect at the balance sheet date,
and items of income and expense are translated at average monthly rates.
Nonmonetary assets and liabilities are translated at the exchange rate in
effect at the time such assets were acquired and such liabilities were
incurred. Gains and losses on foreign currency transactions are included in
income currently and were insignificant during each of 1999 and 1998.

Accounts With Partners--Accounts with partners represent cash calls due or
excess cash calls paid by the partners for exploration, development and
production expenditures made by the following subsidiaries of the Company:
APPI-14, APPI-6, and VAALCO Gabon (Etame), Inc.

Revenue Recognition--The Company recognizes revenues from crude oil and
natural gas sales upon delivery to the buyer.

26

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

(in thousands of dollars, unless otherwise indicated)


Fair Value of Financial Instruments--The Company's financial instruments
consist primarily of cash, trade accounts and note receivables and trade
payables. The book values of cash, trade receivables, and trade payables are
representative of their respective fair values due to the short-term maturity
of these instruments. The book value of the Company's note receivable
instruments are considered to approximate the fair value, as the interest
rates are adjusted based on rates currently in effect.

Risks and Uncertainties--The Company's interests are located overseas in
certain offshore areas of the Philippines and Gabon.

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. For the year ended December 31, 1999 one purchaser
of the Company's crude oil accounted for essentially all of the Company's
total crude oil sales. The Company markets its crude oil share 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.

All of Hunt's operations are conducted outside the United States. The
partnership attempts to conduct its affairs so as to protect against risks
that may be inherent in doing business in international locations.

Estimates of oil and gas values as made in the financial statements require
extensive judgments and are generally less precise than other estimates made
in connection with financial disclosures. Assigning monetary values to such
estimates does not reduce the subjectivity and changing nature of such
estimates of value. The information set forth herein is therefore subjective
and, since judgments are involved, may not be comparable to estimates of value
made by other companies. The Company considers its estimates to be reasonable;
however, due to inherent uncertainties and the limited nature of data,
estimates are imprecise and subject to change over time as additional
information become available.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133. "Accounting for Derivative
Instruments and Hedging Activities" which was amended in June 1999 by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133--an amendment of FASB
Statement No. 133." SFAS No. 133, as amended, is effective for derivative
instruments and hedging activities that require an entity to recognize all
derivatives as an asset or liability measured at its fair value. Depending on
the intended use of the derivative, changes in its fair value will be reported
in the period of change as either a component of earnings or a component of
comprehensive income. Retroactive application to periods prior to adoption is
not allowed. The Company is not affected by adoption of FASB No. 133, as
amended, in this reporting period as it has no current hedging activities.

Use of Estimates in Financial Statement Preparation--The preparation of
financial statements in conformity with generally accepted accounting
principles requires estimates and assumptions that affect the reported amounts
of assets and liabilities as well as certain disclosures. The Company's
financial statements include amounts that are based on management's best
estimates and judgments. Actual results could differ from those estimates.

Reclassifications--Certain amounts from 1998 have been reclassified to
conform to the 1999 presentation.

27

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

(in thousands of dollars, unless otherwise indicated)


3. INVESTMENT IN UNCONSOLIDATED ENTITIES

At December 31, 1999, VAALCO had the following investments:



December 31, December 31,
1999 1998
------------ ------------

Investment in Hunt................................. $ 2,439 $3,094
Investment in VAALCO Exploration LLC............... 1,758 1,855
------- ------
$ 4,197 $4,949
======= ======


Investment in Hunt represents a $30 million limited partnership interest in
Hunt Overseas Exploration Company L.P., a $350 million partnership, giving the
Company a 7.5% interest in the assets of the partnership. Cash investments
were made to Hunt during 1999 totaling approximately $2.5 million. VAALCO
recognized an impairment of $3.1 million and $0.5 million during 1999 and 1998
respectively, reflecting its share of certain dry hole costs and exploration
expenses incurred by the Partnership. Investment is recorded under the equity
method. At December 31, 1998 the investment had a cost of $18.1 million with
an estimated value of $3.1 million. At December 31, 1999, the investment had a
cost of $20.6 million and an estimated value of $2.4 million.

Investment in Joint Venture represents a 50/50 membership interest shared
by VAALCO Energy, Inc. and Robert Schneeflock of Paramount Petroleum in VAALCO
Exploration LLC. VAALCO Exploration was formed to conduct exploration
activities primarily in the onshore Gulf Coast area, including Alabama,
Mississippi and Louisiana. VAALCO and Schneeflock have contributed capital
interests of 93.75% and 6.25%, respectively. Net Profit is allocated first
based on contributed capital interests up to the aggregate amount of Net Loss
allocated and thereafter based on membership interest of 50/50. Net Loss is
allocated first based on membership interest up to the aggregate amount of Net
Profit allocated and thereafter based on contributed capital interest. VAALCO
has invested $3.0 million to fund overhead, leases, seismic and other amounts
in connection with the business. The Company records the investment under the
equity method as VAALCO's membership interest is 50% and neither party has a
majority voting interest. Investment value at December 31, 1999 and 1998 was
$1.8 and $1.9 million respectively.

The following summarizes the aggregated financial information for all
investments owned by VAALCO, which were accounted for under the equity method
as of December 31, 1998 and 1999 respectively:



December 31, December 31,
1999 1998
-------------- ------------
(in
(in thousands) thousands)

Balance Sheet:
Current assets................................. $ 23,807 $ 9,976
Oil and gas property........................... 30,431 37,877
Other assets................................... 19 165
Owner's equity................................. 44,353 47,436
Statement of Earnings:
Income......................................... $ 1,544 $ 443
======== ========
Gross profit................................... $(34,424) $(29,231)
======== ========
Net loss....................................... $(34,978) $(29,951)
======== ========
VAALCO's share of net loss..................... $ (3,802) $ (1,120)
======== ========


28

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

(in thousands of dollars, unless otherwise indicated)


4. ACCRUED LIABILITIES



December
31,
---------
1999 1998
---- ----

Other.............................................................. $129 $136
---- ----


5. STOCKHOLDERS' EQUITY

The following discussion of shares under option incorporates options
granted by the predecessor VAALCO. These obligations were assumed by the
Company pursuant to the merger.

In 1993, an officer and director of the Company was granted options to
purchase 75,000 shares of Common Stock of the Company, and was also granted
75,000 stock appreciation rights ("SARs"), all at an exercise price of $10.25
per share. One-third of such options and SAR's vested at the end of each of
the three years of the contract term, and are exercisable for five years from
the date of vesting. As of December 31, 1999, the options and SAR's were
completely vested, 25,000 of the options had expired, and none of the options
and SAR's had been exercised. In 1996 additional options were granted to this
officer and director for 1,000,000 shares of the Common Stock of the Company
at exercise prices of $0.375 per share for 400,000 shares, $0.50 for 300,000
shares and $1.00 for 300,000 shares. The options vest over a term of three
years and may be exercised for five years from the vesting date. As of
December 31, 1999, the options were completely vested. None of the options had
been exercised as of December 31, 1999.

In 1996, a former officer of the Company was granted warrants to purchase
shares of the Company's Common Stock. The warrants have a remaining term
expiring August 31, 2003 and consist of the right to purchase 250,000 shares
of Common Stock at an exercise price of $0.50 per share; 250,000 shares of
Common Stock at an exercise price of $2.50 per share; 250,000 shares of Common
Stock at an exercise price of $5.00 per share; and 250,000 shares of Common
Stock at an exercise price of $7.50 per share. None of the warrants had been
exercised as of December 31, 1999.

In 1997, another officer of the Company was granted options to purchase
1,000,000 shares at $0.625 per share, vesting 500,000 shares at August 1, 1997
and 500,000 shares at August 1, 1998. None of the options had been exercised
as of December 31, 1999.

An investment banking firm was granted 345,325 warrants to purchase the
Company's Common Stock on July 31, 1997 in connection with the private
placement of Common Stock. The warrants have a term of five years from the
date of issuance and consist of the right to purchase shares at $1.00 per
share. The same investment banking firm was granted 100,000 warrants to
purchase the Company's Common Stock on April 1, 1998 in connection with the
private placement of Common Stock. The warrants have a term of five years from
the date of issuance and consist of the right to purchase shares at $2.00 per
share. None of the warrants had been exercised as of December 31, 1999.

29

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

(in thousands of dollars, unless otherwise indicated)


Information with respect to the Company's stock options are as follows:



Vested Weighted
Options/ Shares Average
Warrants Under Exercise
Exercisable Option Price
----------- --------- --------

Balance, December 31, 1997.................... 2,440,325 3,420,325 1.82
Granted/Vested................................ 1,080,000 100,000 2.00
--------- --------- ------
Balance, December 31, 1998.................... 3,520,325 3,520,325 $ 1.82
Forfeited..................................... 25,000 25,000 10.25
--------- --------- ------
Balance, December 31, 1999.................... 3,495,325 3,495,325 $ 1.76
========= ========= ======


The following table summarizes information about stock options outstanding
as of December 31, 1999:



Weighted- Weighted- Weighted-
Number Average Average Number Average
Outstanding Remaining Exercise Exercisable Exercise
Range of Exercise Prices At 12/31/99 Contractual Life Price At 12/31/99 Price
------------------------ ----------- ---------------- --------- ----------- ---------

$0.375 to 1.00.......... 2,595,325 2.84 years $0.65 2,595,325 $0.65
1.01 to 2.50........... 350,000 3.55 years 2.36 350,000 2.36
2.51 to 5.00........... 250,000 3.67 years 5.00 250,000 5.00
5.01 to 10.25.......... 300,000 3.16 years 7.96 300,000 7.96
$0.375 to 10.25......... 3,495,325 3.00 years $1.76 3,495,325 $1.76


The Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value as determined by generally recognized option pricing
models such as the Black-Scholes model or the binomial model. Because of the
inexact and subjective nature of deriving non-freely traded employee stock
option values using these methods, the Company has adopted the disclosure-only
provisions of SFAS No. 123 and continues to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."

The provision of SFAS No. 123 had no material effect for 1999.

The Company follows Statement of Financial Accounting Standards No. 128--
"Earnings per Share," ("SFAS No. 128"), which establishes the requirements for
presenting earnings per share ("EPS"). SFAS No. 128 requires the presentations
of "basic" and "diluted" EPS on the face of the income statement.

30

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

(in thousands of dollars, unless otherwise indicated)


The following schedule is presented as a reconciliation of the numerators
and denominators of basic and diluted earnings per share computations.



For the Year Ended December 31,
1999
---------------------------------
Per-
Share Net Loss Shares
Amount (Numerator) (Denominator)
------ ----------- -------------

Basic EPS
Net loss attributable to common
Shareholders.......................... $(0.32) $(6,572) 20,745
Effect of Diluted Securities
Common stock options................... -- -- 160
------ ------- ------
Diluted EPS
Net loss attributable to common
shareholders.......................... $(0.32) $(6,572) 20,905
====== ======= ======


For the Year Ended December 31,
1998
---------------------------------
Per-
Share Net Loss Shares
Amount (Numerator) (Denominator)
------ ----------- -------------

Basic EPS
Net loss attributable to common
shareholders.......................... $(0.09) $(1,760) 19,169
Effect of Diluted Securities
Common stock options................... -- -- 1,569
------ ------- ------
Diluted EPS
Net loss attributable to common
shareholders.......................... $(0.09) $(1,760) 20,738
====== ======= ======


Options excluded from the above calculation, as they are anti-dilutive, are
2,545,325 and 825,000 for 1999 and 1998 respectively.

7. INCOME TAXES

The Company and its domestic subsidiaries file a consolidated United States
income tax return. Certain subsidiaries' operations are also subject to
Philippine income taxes. Provision (benefit) for income taxes consists of the
following:



Year Ended
December 31,
-------------
1999 1998
------ ------

U.S. federal:
Current..................................................... $ -- $ --
Deferred.................................................... -- --
Philippine:
Current..................................................... -- (6)
Deferred.................................................... 163 --
------ -----
Total..................................................... $ 163 $ (6)
====== =====


31

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

(in thousands of dollars, unless otherwise indicated)


The primary differences between the financial statement and tax bases of
assets and liabilities at December 31, 1999 and 1998 are as follows:



Year Ended
December 31,
--------------
1999 1998
------- ------

Deferred Tax Liabilities:
Unrealized foreign exchange gain........................... $ 265 $ 102
------- ------
Deferred Tax Assets:
Reserves not currently deductible.......................... 1,044 756
Operating loss carryforwards............................... 13,742 5,518
Alternative minimum tax credit carryover................... 635 635
Other assets............................................... 284 120
------- ------
15,705 7,029
Valuation allowance.......................................... 15,070 6,394
------- ------
635 635
------- ------
Net deferred tax asset....................................... $ 370 $ 533
======= ======


Pretax income (loss) is comprised of the following:



Year Ended
December 31,
----------------
1999 1998
------- -------

United States............................................. $(5,545) $(2,276)
Foreign (Philippine/Gabon)................................ (864) 510
------- -------
$(6,409) $(1,766)
======= =======


A reconciliation between the provision (benefit) for income taxes
recognized in the Company's Statements of Operations computed by applying the
statutory federal income tax rate and income taxes to pre-tax losses follows:



Year ended
December 31,
----------------
1999 1998
------ ------

Statutory income tax rate................................ (35)% (35)%
Effective income tax rate................................ 3% 1%
------ ------
(32)% (34)%
====== ======


At December 31, 1999, the Company and its subsidiaries had no foreign tax
credit ("FTC") carryforwards for United States tax purposes.

At December 31, 1999, the Company and its subsidiaries had net operating
loss ("NOL") carryforwards of approximately $38.1 million for United States
income tax purposes. A full valuation allowance has been provided against this
NOL. Due to previous ownership changes, Internal Revenue Code section 382 will
limit future utilization of the net operating loss carryforwards.

At December 31, 1999, the Company was subject to federal taxes only, with
no allocations made to state and local taxes.

32

VAALCO ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

(in thousands of dollars, unless otherwise indicated)


8. RELATED-PARTY TRANSACTIONS

The 1818 Fund entered into a guaranty and covenant agreement with Hunt
under which the 1818 Fund is contingently liable to Hunt in the amount of
undrawn cash commitments of 1818 Oil of $9,374 and $11,849 as of December 31,
1999 and 1998, respectively.

As compensation for its services, prior to the merger in April 1998, the
1818 Fund paid BBH&Co. quarterly management fees, in arrears, in an amount
equal to one percent per annum of the average weekly amount of invested funds
for each fiscal quarter. It was the policy of the 1818 Fund to bear 1818 Oil's
allocable share of these costs on behalf of 1818 Oil.

9. COMMITMENTS AND CONTINGENCIES

The Company owns a 17.9% interest in a block offshore Gabon, the Etame
Block. The block contains the recent Etame discovery as well as previous
discoveries that the Company is currently evaluating to determine their
commercial viability. The Company and its partners undertook an obligation to
the Government of Gabon to obtain and process seismic data and to drill one
commitment well on the Etame Block over the three-year term of the license. In
April 1998, a participation agreement was entered into with Western Atlas
Afrique, Ltd. ("Western Atlas"), a subsidiary of Western Atlas International,
Inc., to conduct a 320 square kilometer seismic survey at Western Atlas' sole
cost and to pay a disproportionate 80% of the cost, up to $4.7 million, of the
first commitment well. In return for these payments, Western Atlas earned a
65% interest in the production-sharing contract. In June 1998, Western Atlas
completed the above-mentioned acquisition of seismic data over the property.
This data was processed, and the Company drilled the commitment well, the
Etame No. 1 well, in June 1998 resulting in a 3,700 BOPD Gamba sandstone
discovery on the block. Completion of the Etame No. 1 well satisfied all of
the Company's obligations to the Government of Gabon under the primary three-
year term of the contract.

During 1998, the consortium of companies owning the Etame Block production
sharing contract agreed to renew the production sharing contract for three
additional years, thereby taking on a commitment to drill two additional
exploration wells and to perform a 3-D seismic reprocessing. A delineation
well, the Etame 2V well, was drilled in January 1999 and encountered
additional oil pay in the Gamba sandstone, however the well encountered the
Gamba sandstone lower than expected. The Company is currently reprocessing the
3-D seismic data prior to drilling additional delineation wells. The Company
anticipates drilling at least one additional delineation well in 2000. The
Etame 2V counted as the first of the two commitment wells under the three-year
contract term extension.

33

VAALCO ENERGY, INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES

(Unaudited)

(in thousands of dollars, unless otherwise indicated)

The following information is being provided as supplemental information in
accordance with certain provisions of SFAS No. 69, "Disclosures about Oil and
Gas Producing Activities". The Company's reserves are located offshore of the
Republic of the Philippines. The following tables set forth costs incurred,
capitalized costs, and results of operations relating to oil and natural gas
producing activities for each of the periods. (See "Footnote 1--ORGANIZATION")

Costs Incurred in Oil and Gas Property Acquisition, Exploration and
Development Activities



United
States International
----------- -------------
1999 1998 1999 1998
---- ------ ------ ------

Costs incurred during the year:
Exploration(1).................................. $601 $1,215 $1,234 $1,515
Acquisition--unproved........................... -- 180 -- --
---- ------ ------ ------
Total......................................... $601 $1,395 $1,234 $1,515
==== ====== ====== ======
Company's share of equity method investee's costs
incurred(1)...................................... $945 $1,613 $1,829 $1,373
==== ====== ====== ======

- --------
(1) Includes costs which are capitalized or expensed.

In 1999, of the $601 of United States exploration costs incurred, $220 was
expensed for dry hole costs. Of the $1,234 in International exploration costs
incurred, $217 was expensed for geophysical costs. In 1998, of the $1,215 of
U.S. exploration costs incurred, $632 was expensed for dry hole costs.
International exploration costs include capitalized costs of $1,259 for Etame,
and $255 was expensed for the Gabon Equata Block as the lease term expired.
The Company's share of investee's costs was for the Paramount joint venture in
the U.S. and Hunt internationally.

Capitalized Costs Relating to Oil and Gas Producing Activities:



Year Ended
December 31,
--------------
1999 1998
------ ------

Capitalized costs--
Unproved properties not being amortized.................. $4,365 $3,205
Properties being amortized................................. -- 89
------ ------
Total capitalized costs................................ 4,365 3,294
Less accumulated depreciation, depletion, and
amortization............................................ (816) (10)
------ ------
Net capitalized costs.................................... $3,549 $3,284
====== ======
Company's share of equity method investee's net capitalized
costs..................................................... $4,850 $4,453
====== ======


The capitalized costs pertain to the Company's producing activities in the
Philippines, the Etame discovery and U.S. activities. As a result of the
merger with 1818 Oil Corp., $39.5 million carried by VAALCO in previously
fully depleted costs carried in capitalized costs were closed out against the
associated accumulated depreciation, depletion and amortization.

34

VAALCO ENERGY, INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES--(Continued)

(Unaudited)

(in thousands of dollars, unless otherwise indicated)


Results of Operations for Oil and Gas Producing Activities:



United States International
-------------- --------------
1999 1998 1999 1998
------- ----- ------- -----

Crude oil and gas sales.................... $ 29 $ 26 $ 795 $ 569
Production expense......................... (75) (18) (478) (448)
Exploration expense........................ (1,271) (632) -- (255)
Depreciation, depletion and amortization... -- -- -- --
------- ----- ------- -----
Loss before taxes.......................... (1,317) (624) 317 (134)
Income tax benefit......................... -- -- (163) 6
------- ----- ------- -----
Results from oil and gas producing
activities................................ $(1,317) $(624) $ 154 $(128)
======= ===== ======= =====
Company's share of equity method investee's
results of operations..................... $ -- $ -- $(2,185) $(851)
======= ===== ======= =====


Proved Reserves

The following tables set forth the net proved reserves of VAALCO Energy,
Inc. as of December 31, 1999 and 1998, and the changes therein during the
periods then ended.



Oil (MBbls)
-----------

PROVED RESERVES:
BALANCE AT DECEMBER 31, 1997..................................... --
Production..................................................... (91)
Acquired in merger............................................. 1,154
Sales of reserves in place..................................... (372)
BALANCE AT DECEMBER 31, 1998..................................... 691
-----
Production..................................................... (91)
Revisions...................................................... 61
-----
BALANCE AT DECEMBER 31, 1999..................................... 661
=====


In April 1998, the Company merged with 1818 Oil Corp. The 1818 Oil Corp.
acquisition has been accounted for as a reverse acquisition and 1818 Oil Corp.
is the acquiring entity for financial accounting purposes.



Oil (MBbls)
PROVED DEVELOPED RESERVES ----------

Balance at December 31, 1998..................................... 691
Balance at December 31, 1999..................................... 661


All of the Company's Proved Developed Reserves are located offshore the
Republic of the Philippines.

35

VAALCO ENERGY, INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES--(Continued)

(Unaudited)

(in thousands of dollars, unless otherwise indicated)


Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil Reserves

The information that follows has been developed pursuant to procedures
prescribed by SFAS No. 69 and utilizes reserve and production data estimated
by independent petroleum consultants. The information may be useful for
certain comparison purposes, but should not be solely relied upon in
evaluating VAALCO Energy, Inc. or its performance.

The future cash flows are based on sales prices and costs in existence at
the dates of the projections, excluding the interests of the Philippine
government and the other consortium members. Future production costs do not
include overhead charges allowed under joint operating agreements or
headquarters general and administrative overhead expenses. Future development
costs include amounts accrued attributable to future abandonment when the
wells become uneconomic to produce. The standardized measure of discounted
cash flows for 1999 do not include the costs of abandoning the Company's non-
producing properties.



Philippines
--------------
December 31,
--------------
1999 1998
------ ------

Future cash inflows......................................... $7,825 $4,146
Future production costs..................................... (3,086) (2,801)
Future development costs.................................... (1,605) (1,517)
Future income tax expense................................... -- --
------ ------
Future net cash flows....................................... 3,134 (172)
Discount to present value at 10% annual rate................ 311 398
------ ------
Standardized measure of discounted future net cash flows.... $2,823 $ 226
====== ======


Future development costs at December 31, 1999 includes $1,605 for future
abandonment costs which have been accrued by the Company. Due to the
availability of net operating loss carryforwards, there is no future income
tax expense attributable to the Company's reserves.

Changes in Standardized Measure of Discounted Future Net Cash Flows:

The following table sets forth the changes in standardized measure of
discounted future net cash flows as follows:



December
31,
------------
1999 1998
------ ----

BALANCE AT BEGINNING OF PERIOD................................. $ 226 $ --
Sales of oil and gas, net of production costs.................. (271) (129)
Net changes in prices and production costs..................... 2,350 --
Revisions of previous quantity estimates....................... 495 --
Purchase (Sale) of reserves in place, net of taxes............. -- 355
Changes in estimated future development costs.................. -- --
Development costs incurred during the period................... -- --
Accretion of discount.......................................... 23 --
Net change in income taxes..................................... -- --
Change in production rates (timing) and other.................. -- --
------ ----
BALANCE AT END OF PERIOD....................................... $2,823 $226
====== ====


36

VAALCO ENERGY, INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES--(Continued)

(Unaudited)

(in thousands of dollars, unless otherwise indicated)


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 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, 1999 was $11.95 per Bbl for
Matinloc oil and $11.45 per barrel for Nido oil in the Philippines.

Under the laws of the Republic of the Philippines, the Philippine
government is the owner of all oil and gas mineral rights. However, pursuant
to The Oil Exploration and Development Act of 1972, the Philippine government,
acting through its Office of Energy Affairs (formerly, the Petroleum Board),
may enter into service contracts under which contractors will be granted
exclusive rights to perform exploration, drilling, production and other
"petroleum operations" in a contract area. Further, such Act vested the
Ministry of Energy with regulatory powers over business activities relating to
the exploration, exploitation, development and extraction of energy resources.

Pursuant to the service contracts, the Philippine government receives an
allocation of the production from the contract area instead of a royalty.
Under the service contracts, the Philippine government does not take actual
delivery of its allocated production. Instead, the Company has been authorized
to sell the Philippine government's share of production and remit the proceeds
to the Philippine government. Under this production sharing scheme, the
consortium is permitted a Filipino Participation Incentive Allowance ("FPIA")
and a deduction to recover certain costs expended on the development of the
contract area of up to 60% of gross revenues from the contract area. The FPIA,
a deduction equivalent to 7.5% of project gross revenue, is allowed when
Filipino ownership participation in the consortium equals or exceeds 15%,
which is the case for Service Contract No. 14. The consortium also receives a
production allowance of approximately 50% of the balance of the oil after
deducting FPIA and cost recovery oil. The remaining oil is shared 40% by the
consortium and 60% by the Philippine government. Under this scheme, the
consortium currently receives approximately 90.3% of the oil produced and the
Philippine government receives approximately 9.7%. Because the cost recovery
account contains over $200 million, the Company anticipates receiving the
maximum 60% of cost oil during the life of the Nido and Matinloc reserves.

37

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

None.

PART III

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

Information required by this item will be included in the Company's proxy
statement for its 2000 annual meeting, which will be filed with the Commission
within 120 days of December 31, 1999, and which is incorporated herein by
reference.

Item 10. Executive Compensation

Information required by this item will be included in the Company's proxy
statement for its 2000 annual meeting, which will be filed with the Commission
within 120 days of December 31, 1999, and which is incorporated herein by
reference.

Item 11. Security Ownership of Certain Beneficial Owners and Management

Information required by this item will be included in the Company's proxy
statement for its 2000 annual meeting, which will be filed with the Commission
within 120 days of December 31, 1999, and which is incorporated herein by
reference.

Item 12. Certain Relationships and Related Transactions

Information required by this item will be included in the Company's proxy
statement for its 2000 annual meeting, which will be filed with the Commission
within 120 days of December 31, 1999, and which is incorporated herein by
reference.

Item 13. Exhibits and Reports on Form 8-K



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

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

3. Articles of Incorporation and Bylaws

3.1(b) Restated Certificate of Incorporation

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

3.3(b) Bylaws

3.4(b) Amendment to Bylaws

3.5(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.



38



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,
1998 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, 1998, 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, 1998, between VAALCO Energy, Inc. and
Jefferies & Company, Inc.

10.16(c) Registration Rights Agreement among the Company and The 1818 Fund II,
L.P., dated April 21, 1998.

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

10.18(i) Assignment Agreement between the Company, members of the Service
Contract 14 Consortium and SOCDET dated December 29, 1998.

21.1 Subsidiaries of the Registrant

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.

39

(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 annual 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 annual period
ended December 31, 1997, and hereby incorporated by reference herein.
(i) Filed as an exhibit to the Company's Form 10-KSB for the annual period
ended December 31, 1998, and hereby incorporated by reference herein.

(b) Reports on Form 8-K.

None

40

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

VAALCO ENERGY, INC.
(Registrant)

/s/ W. Russell Scheirman
By __________________________________
W. Russell Scheirman,
President, Chief Financial
Officer and Director

Dated March 30, 2000

In accordance with the Exchange Act, this report has been signed below on
the 30th day of March, by the following persons on behalf of the registrant
and in the capacities indicated.



Signature Title
--------- -----


/s/ Robert L. Gerry, III Chairman of the Board, Chief
___________________________________________ Executive Officer and Director
Robert L. Gerry, III (Principal Executive Officer)

/s/ Virgil A. Walston, Jr. Vice Chairman of the Board, Chief
___________________________________________ Operating Officer and Director
Virgil A. Walston, Jr.

/s/ W. Russell Scheirman President, Chief Financial Officer
___________________________________________ and Director (Principal Financial
W. Russell Scheirman Officer and Principal Accounting
Officer)

/s/ Director
___________________________________________
Walter W. Grist

/s/ Director
___________________________________________
T. Michael Long

/s/ Director
___________________________________________
Arne R. Nielsen

/s/ Director
___________________________________________
Lawrence C. Tucker


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