Published on March 12, 2008
Exhibit 99.2
ND
Nanes Delorme
Partner I
March 11,
2008
The Board
of Directors
VAALCO
Energy, Inc.
4600 Post
Oak Place, Suite 309
Houston,
Texas 77027
Attn: Robert L. Gerry
III
Chairman of the Board and Chief
Executive Officer
Gentlemen,
Nanes
Delorme Partners I LP, with associated entities (“we”), currently beneficially
own 4,700,000 of the outstanding shares of VAALCO Energy, Inc. (“VAALCO” or the
“Company”) representing approximately 8.0% of the Company.
As
VAALCO’s largest shareholder, we have a substantial interest in seeing that the
management and the directors of the board (the “Board”) of the Company are
strongly committed to maximizing value for all shareholders, although we have
grave concerns that recent actions demonstrate the contrary. By way of
background, we have a history of successful achievements in oil and gas
transactions and we have spent a considerable amount of time analyzing and
evaluating the Company.
We are
extremely frustrated by the major disconnect that exists between VAALCO’s
depressed stock price and the underlying value of its assets. We estimate the
total Net Asset Value (‘NAV”) of the Company at approximately $420 million,
which translates into approximately $7.12 per share and as of March 6, 2008 the
shares closed as low as $4.45.
During
the past year, VAALCO’s stock has underperformed by all relevant measures. In
2007, the share price fell approximately 30%, while the Standard & Poor's
Midcap Oil and Gas Exploration and Production Index (the “Index”) climbed nearly
45%. Unsurprisingly the underperformance has continued in 2008. The share price
has declined approximately 4% through March 3, 2008, as compared to a 9%
increase for the Index. During this period where most exploration and production
companies (“E&P”) have benefited from the recent historical surge in oil
prices, we find the Company’s steady stock price decline to be particularly
alarming. Despite this continued underperformance, management does
not seem to be taking effective action. We believe that the recently announced
too-modest share buyback program is inadequate to reverse this downward trend or
to fully address true shareholder value creation.
We have
lost our initial confidence that the management and directors of the Company
have the ability to eliminate this significant valuation gap. As a result, we
urge the Board to immediately take the following actions to maximize value for
all shareholders:
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1
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·
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Evaluate
a range of strategic alternatives, including the possible sale of the
entire company or the divestiture of its valuable West African
portfolio;
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·
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Retain
a top tier investment bank to initiate an open bid process to sell the
Company to the highest bidder. Having spoken to numerous industry experts
and potential acquirers, we are confident that an offer to sell the entire
Company would attract several interested parties that would pay a
substantial premium to the current share price. As noted and detailed in
our enclosed preliminary valuation analysis (see enclosed Table 3 - VAALCO
Preliminary Valuation Analysis), we would anticipate a sale of the entire
company would fetch a minimum of $7.12 per share (representing
approximately a 60% premium to the current share
price);
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·
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Cease
attempting to diversify away from the Company’s core geographical area in
West Africa. The Company has been unwisely spending cash on acquiring and
drilling minor North Sea interests that have been total exploration
failures. The Company most recently announced its latest disappointing
result in January 2008 when it drilled a dry hole on the 9/28b-19A
exploration well for $12 million;
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·
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Take
all the appropriate measures to reduce the Company’s administrative costs
and close the Company’s office in Aberdeen (UK). We believe this office
was inappropriately opened to further develop the Company’s presence in
the North Sea, which should be reduced, and not expanded;
and
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·
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Improve
the Company’s corporate governance with the immediate redemption of the
Shareholders Rights Plan (“the Poison Pill”) adopted in September 2007
along with the declassification of the staggered Board and a prompt review
of the current skill set, composition and selection process of the
Board.
|
We would
also like to take this opportunity to draw your attention to the fact that the
UK North Sea’s production and reserves have been rapidly declining in recent
years. This petroleum basin that has been explored for decades is now widely
known for not presenting nearly as much upside as West Africa does. The stock
price of the only U.S. publicly listed E&P company focused on the North Sea
in 2007 has fallen by 41% in that same year (Endeavour International Corp. –
ticker: EAC). We feel this illustrates the market’s current lack of interest and
enthusiasm for this mature petroleum region, and we do not understand why
management has not done more to move away from this area. As VAALCO’s largest
shareholder, we are also losing confidence in the technical and operational
ability of the management, particularly in light of the recent increase in CAPEX
that haven’t led to any important replacement of the reserves
produced.
We also
have reason to believe that VAALCO rebuffed private inquiries regarding a
potential acquisition of the Company at a significant premium to its current
share price on several occasions. In these instances the Board has not only
failed to generate maximum value for shareholders, it has stood in the way of
shareholders being able to realize this value through a sale and further
perpetuated the cycle of value destruction at VAALCO.
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We made
our investment in VAALCO based on our belief that VAALCO is a company which has
first class oil and gas properties, with a balanced portfolio of assets with
substantial exploration upside in Angola and Gabon and which generates
significant cash flow. However, despite these positive factors, the stock has
continued to trade at a substantial discount to VAALCO’s E&P peers using
virtually all relevant comparable valuation metrics. The Company recently has
traded at a total enterprise value to 2007 estimated EBITDA of approximately
2.4x, compared to recent multiples of approximately 11.9x for its selected group
of E&P peers. Moreover, while the Company trades at a recent price to
earnings ratio of approximately 9.5x, its peers trade at significantly higher
multiples of approximately 19.4x based on the Bear Stearns E&P Index (see
enclosed Table 1 – Summary E&P Comparable Trading Multiples). We strongly
believe that VAALCO’s stock price is significantly undervalued particularly when
taking into account the value of similar M&A transactions in Africa where
the Company’s core assets are located (see enclosed Table 2 - Similar Recent
Transactions Multiples in Gabon). In spite of record oil prices and a portfolio
of high quality oil and gas E&P properties, the Company’s stock price
remains depressed and we believe is not appropriately valued by the public
market.
We are
beginning to doubt whether management’s and directors’ interests are aligned
closely enough with those of other shareholders, and note that senior management
and directors own in the aggregate less than 5% of the common stock outstanding,
with most of this ownership consolidated in the hands of the Chairman. For the
reasons laid out in this letter, we are committed to exchanging our views and to
meeting with the Company's management and directors, and possibly other large
shareholders as soon as possible, in an effort to urgently address the above
problems plaguing the Company and negatively affecting its stock price, in an
attempt to unlock value for all shareholders.
I would
like to reiterate that we are committed shareholders whose priority is to work
with the Company – not against it – in doing what is best for all
shareholders. As always, we stand ready to meet with the Board and
its representatives at their earliest convenience and are willing to discuss our
views. We must, of course, reserve all rights to take any and all action
required to protect the interests of shareholders if our concerns continue to
fall on deaf ears, including, but not limited to, seeking Board representation
or bidding for the entire Company. We hope such action will be unnecessary.
Lastly, we remind the Board that we will not hesitate to hold the Company’s
directors accountable should the Company seek to utilize its balance sheet and
cash flows to pursue any unwise transactions.
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We look
forward to a timely response to ensure appropriate actions in the best interest
of all shareholders.
Sincerely,
Nanes
Delorme Partners I LP
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By:
Nanes Balkany Partners LLC, General Partner
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By:
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/s/ Julien Balkany | ||
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Name:
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Julien
Balkany
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Title:
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Managing
Member
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Table
1 - Summary E&P comparable trading multiples (as of March 3,
2008)
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||||||||
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Company
|
Ticker
|
EV/
EBITDA
|
Annual
Return
|
|||||
|
Selected
E&P Peer Group
|
2007E
|
2008E
|
Year to
Date*
|
2007
|
||||
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Approach
Resources
|
AREX
|
10.6x
|
6.5x
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10.30%
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7%
|
|||
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Cabot
Oil & Gas
|
COG
|
11.5x
|
10.4x
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25.10%
|
33%
|
|||
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Denbury
Resources
|
DNR
|
13.3x
|
11.0x
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7.50%
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114%
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|||
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Newfield
Exploration
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NFX
|
5.9x
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6.2x
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6.20%
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15%
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|||
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Petrohawk
Energy
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HK
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7.1x
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7.9x
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5.00%
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51%
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Plains
Exploration
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PXP
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15x
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7.8x
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2.00%
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14%
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Quicksilver
Resources
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KWK
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20x
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15.3x
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19.20%
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63%
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Range
Resources
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RRC
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14.5x
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11.6x
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22.30%
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87%
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Southwestern
Energy
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SD
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19.1x
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13.9x
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21.70%
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59%
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Ultra
Petroleum
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UPL
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26.2x
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15.8x
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10.30%
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50%
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|||
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W&T
Offshore
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WTI
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4.1x
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3.8x
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18.30%
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-2%
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Brigham
Exploration
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BEXP
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5.3x
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5.7x
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6.50%
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3%
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Carrizo
Oil & Gas
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CRZO
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21.3x
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12.5x
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8.30%
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89%
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Delta
Petroleum
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DPTR
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33.1x
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16.2x
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28.50%
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-19%
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Encore
Acquistion Co.
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EAC
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7.0x
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5.8x
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8.80%
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36%
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Exco
Resources
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XCO
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7.5x
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6.0x
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9.60%
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-8%
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Mariner
Energy
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ME
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5.0x
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3.0x
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23.70%
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17%
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Penn
Virginia
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PVA
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6.7x
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3.2x
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-3.70%
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25%
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PetroQuest
Energy
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PQ
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5.3x
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4.3x
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13.70%
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12%
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Swift
Energy
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SFY
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4.3x
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3.5x
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11.10%
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-2%
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Whiting
Petroleum
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WLL
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7.2x
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6.2x
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5.70%
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24%
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Select
E&P Peer Group
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11.9x
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8.4x
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12%
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32%
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||||
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S&P
MidCap Oil & Gas E&P Index
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NA
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NA
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9%
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44%
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||||
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S&P
SmallCap Oil & Gas E&P Index
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NA
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NA
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11%
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27%
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||||
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P
/ E
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EV/
EBITDA
|
Annual
Return
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|||||||||||||
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2007E 2008E
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2007E 2008E
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Year
to Date*
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2007
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||||||||||||
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Bear
Stearns E&P Index
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19.4x
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18.9x
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7.5x
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6.4x
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9%
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35%
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VAALCO
Energy (EGY)
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9.5x
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8.5x
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2.4x
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2.2x
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-4%
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-30%
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*
until March 3, 2008
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Source:
Bloomberg, Bear Stearns & Co. Inc. and JPMorgan estimates
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This
sample of US publicly listed small and medium-size companies E&P
companies has been provided only for general information purposes and does
not represent an investment advice.
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Table
2 - Similar Recent Transactions Multiples in Gabon
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Date
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Acquirer
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Seller
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Price
($MM)
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Description
of the Transaction
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2P Reserves(1)
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$
/ 2P(1)
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|||||||
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Aug-06
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Addax
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PanOcean
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1,400
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Addax
acquired PanOcean Energy, a Canadian E&P company with all its assets
located in Gabon. Its core holding was its 31% interest in the Etame
Permit.
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67MMBOE
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$21
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|||||||
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Nov-07
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Oranje-Nassau
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Devon
Energy
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206
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Devon
sold its 18.75% non-operated interest in the Kowe Block, offshore Gabon to
Oranje-Nassau.
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10MMBOE
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$21
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This
implies a value of $221MM for VAALCO's 28% interest in the Etame
Permit
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10.5MMBOE(2)
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$21
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(1)
Net proved and probable reserves in million barrels of oil
equivalent
(2)
According to slide 25 of the Company Corporate Presentation at
Pritchard Energy Conference in January 2008
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Source:
Nanes Delorme Partners I LP and John S. Herold, Inc. estimates
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Table
3 - VAALCO Preliminary Valuation Analysis
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|||||||
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Est.
Value
($MM)
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Est.
Value /
Share
|
||||||
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Estimated
NPV for the Etame Permit ( Producing Assets Gabon) (1)
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220
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$3.73
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African
Exploration Assets (2)
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110
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$1.86
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North
Sea Interest (3)
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(15)
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($0.25)
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Other
Assets (including Texas and Gulf of Mexico Properties)
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5
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$0.08
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|||||
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Net
Debt
|
(5)
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($0.08)
|
|||||
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Cash
in Bank (4)
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105
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$1.78
|
|||||
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Implied
Total NAV for VAALCO Energy, Inc.
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420
|
$7.12
|
|||||
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Current
Share Price (5)
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$4.45
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||||||
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Implied
Total Premium to Current Share Price
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60%
|
||||||
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(1)
Discounted net present value at 10% (post-tax) of proved and probable
reserves for VAALCO in the Etame Permit, as of December 31, 2007 and using
a long term oil price of $75 per barrel
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(2) Exploration
risked value for the Company’s 100% interest in the Mutumba field (Gabon)
and for its 40% working interest in the offshore Block 5
(Angola)
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(3)
Future liability due to the payment of a significant portion of the well
cost on Block 48/25c
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(4)
According to slide 25 of the Company Corporate Presentation at Pritchard
Energy Conference in January 2008
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(5)
As of March 6, 2008
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The
estimates and information shown above represent the opinions of Nanes
Delorme Partners I LP and should not be regarded by any recipient as
providing the basis for any investment decision nor should it be
interpreted as a fairness opinion.
|
NOTHING
IN THIS LETTER CONSTITUTES TAX, LEGAL (INCLUDING WITHOUT LIMITATION INTELLECTUAL
PROPERTY) OR INVESTMENT ADVICE. THE COMPANY, ITS MANAGEMENT, AND ITS
BOARD OF DIRECTORS SHOULD CONSULT ITS OWN ADVISERS FOR ADVICE CONCERNING THE
VARIOUS CONSIDERATIONS RELATING TO THE MATTERS OUTLINED OR REFERRED TO IN THIS
LETTER. NONE OF NANES DELORME PARTNERS I LP, NANES BALKANY PARTNERS
(ITS GENERAL PARTNER), AND ANY OTHER ENTITY OR PERSON IN THE NANES DELORME
GROUP; NOR THEIR AFFILIATES; NOR ANY SHAREHOLDERS, PARTNERS, MEMBERS, MANAGERS,
DIRECTORS, PRINCIPALS, PERSONNEL, TRUSTEES, OR AGENTS OF ANY OF THE FOREGOING IS
RESPONSIBLE FOR GIVING, OR IS LIABLE FOR, ANY LEGAL, INVESTMENT, OR TAX ADVICE
WITH RESPECT TO THE COMPANY NOR SHALL BE LIABLE FOR ANY ERRORS (AS A RESULT OF
NEGLIGENCE OR OTHERWISE TO THE FULLEST EXTENT PERMITTED BY LAW IN THE ABSENCE OF
FRAUD) IN THE INFORMATION, BELIEFS, AND/OR OPINIONS INCLUDED IN THIS LETTER, OR
FOR THE CONSEQUENCES OF RELYING ON SUCH INFORMATION, BELIEFS, OR
OPINIONS. ANY INFORMATION, BELIEFS, AND/OR OPINIONS PROVIDED IN THIS
LETTER CONSTITUTE THE UNDERSTANDING OF THE ENTITY PROVIDING SUCH INFORMATION,
BELIEFS, AND/OR OPINIONS AS OF THE DATE OF THIS LETTER, ARE SUBJECT TO CHANGE
WITHOUT NOTICE, AND MAY NOT REFLECT THE CRITERIA EMPLOYED BY THE ENTITIES IN THE
NANES DELORME GROUP TO EVALUATE INVESTMENTS. NO REPRESENTATION IS
MADE THAT THE STATISTICS AND OTHER INFORMATION DESCRIBED IN THIS LETTER ARE
COMPLETE OR ADEQUATE OR THAT THEY WOULD BE USEFUL IN SUCCESSFULLY EVALUATING THE
COMPANY’S BUSINESS OR STRATEGIC DECISIONS. CERTAIN INFORMATION AND
OPINIONS INCLUDED IN THIS LETTER HAVE BEEN OBTAINED FROM THIRD-PARTY SOURCES
BELIEVED TO BE APPROPRIATE FOR CONSIDERATION. SOURCES FOR SUCH
INFORMATION AND OPINIONS MAY HAVE SELF-INTERESTED REASONS FOR PROVIDING
INCORRECT INFORMATION. MOREOVER, NO ASSURANCE CAN BE GIVEN THAT SUCH
INFORMATION OR OPINIONS ARE RELIABLE, AND THEY SHOULD NOT BE TAKEN AS
SUCH.
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