2. LIQUIDITY

Our revenues, cash flow, profitability, oil and natural gas reserve values and future rates of growth are substantially dependent upon prevailing prices for oil and natural gas. Our ability to borrow funds and to obtain additional capital on satisfactory terms is also substantially dependent on oil and natural gas prices. Historically, world-wide oil and natural gas prices and markets have been volatile, and will likely continue to be volatile. In particular, the prices of oil and natural gas declined dramatically in the second half of 2014 and have remained low through 2016. Revenues have decreased from $127.7 million for the year ended December 31, 2014 to $59.8 million for the year ended December 31, 2016.

Our financial statements for the years ended December 31, 2016, 2015 and 2014 and as of December 31, 2016 and 2015 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. In the financial statements included in our Annual Report on Form 10-K for December 31, 2015 filed with the Securities and Exchange Commission on March 16, 2016 (“2015 Form 10-K”), we concluded that at the date of filing our cash position and our ability to access additional capital may limit our available opportunities, or not provide sufficient cash available for our operations, which raised substantial doubt about our ability to continue as a going concern at such date.

Subsequent to the filing of the 2015 Form 10-K, events and conditions have improved. Oil and natural gas prices stabilized at prices which are adequate to generate cash flows from operations beginning in the fourth quarter of 2016 and continuing through March 13, 2017, the date of filing of these financial statements. As discussed in Note 8, in June 2016, we modified our revolving credit facility with the International Finance Corporation (the “IFC”) converting $20 million of the revolving portion of the credit facility into a $15 million term loan (the “Term Loan”). Although our available liquidity continues to be limited, we expect to have adequate cash flows to meet our principal and interest obligations under the Term Loan, and we expect we will be able to meet our financial covenants. We and our partners have approved a budget which limits the amount of capital expenditures for 2017. As discussed in Note 10 below, we have put contracts in place at December 31, 2016 which limit our exposure to a decline in oil prices through December 31, 2017. Based on our forecasts which consider these and other relevant factors, management believes that events and conditions as of March 13, 2017, considered in the aggregate, do not raise substantial doubt about VAALCO’s ability to continue as a going concern through March 31, 2018.