VAALCO ENERGY INC /DE/ Management's Discussion and …

The following management’s discussion and analysis describes the principalfactors affecting our capital resources, liquidity, and results operations. Thismanagement’s discussion and analysis should be read in conjunction with theaccompanying Financial Statements and related notes, information about ourbusiness practices, significant accounting policies, risk factors, and thetransactions that underlie our financial results, which are included in variousparts of this Annual Report. For discussion related to changes in financialcondition and results of operations for 2021 as compared with 2020, refer toPart II, Item 7.

Management’s Discussion and Analysis of Financial Condition andResults of Operations in our 2021 Form 10-K, which was filed with the SEC onMarch 11, 2022. Certain statements in our discussion below are forward-lookingstatements. These forward-looking statements involve risks and uncertainties.

Wecaution that a number of factors could cause actual results to differ materiallyfrom those implied or expressed by the forward-looking statements. Please see”Cautionary Statement Regarding Forward-Looking Statements” and “Item 1A. RiskFactors” for further details about these statements.

59——————————————————————————– Table of ContentsINTRODUCTIONVAALCO is a Houston, Texas based independent energy company engaged in theacquisition, exploration, development and production of crude oil, natural gasand NGLs. As operator, we have production operations and conduct explorationactivities in Gabon, West Africa, Egypt and Canada. We also have opportunitiesto participate in development and exploration activities in Equatorial Guinea,West Africa.

For further discussion of our four operating segments see “Item 1.Business – Segment and Geographical Information – “Gabon Segment”, “EgyptSegment”, “Canada Segment”, and “Equatorial Guinea Segment””. As discussedfurther in Note 4 to the Financial Statements, we have discontinued operationsassociated with our activities in Angola, West Africa and Yemen.Our primary source of revenue historically has been from the Etame PSC relatedto the Etame Marin block located offshore Gabon in West Africa. The Etame Marinblock covers an area of approximately 46,200 gross acres located 20 milesoffshore in water depths of approximately 250 feet.

Currently, our workinginterest in the Etame Marin block is 58.8%, and we are designated as theoperator on behalf of the Etame Consortium. The block is subject to a 7.5%back-in carried interest by the government of Gabon, which they have assigned toa third party. Our working interest will decrease to 57.2% in June 2026 when theback-in carried interest increases to 10%.We are also a member of a consortium with BW Energy and Panoro Energy (the “BWEConsortium”).

The BWE Consortium has been provisionally awarded two blocks inthe 12th Offshore Licensing Round in Gabon. The award is subject to concludingthe terms of PSCs with the Gabonese government. BW Energy will be the operatorwith a 37.5% working interest, with VAALCO (37.5% working interest) and PanoroEnergy (25% working interest) as non-operating joint owners.

The two blocks,G12-13 and H12-13 are adjacent to our Etame PSC as well as BW Energy andPanoro’s Dussafu PSC offshore Southern Gabon and cover an area of 2,989 squarekilometers and 1,929 square kilometers, respectively.On October 13, 2022, VAALCO and VAALCO Energy Canada ULC (“AcquireCo”),an indirect wholly-owned subsidiary, completed the previously announced businesscombination involving TransGlobe Energy Corporation (“TransGlobe”), wherebyAcquireCo acquired all of the issued and outstanding TransGlobe common sharespursuant to a plan of arrangement (the “Arrangement”) and TransGlobe became adirect wholly-owned subsidiary of AcquireCo and an indirect wholly-ownedsubsidiary of VAALCO in accordance with the terms of an arrangement agreemententered into by VAALCO, AcquireCo and TransGlobe on July 13, 2022 (the”Arrangement Agreement”). Prior to the Arrangement, TransGlobe was a cashflow-focused oil and gas exploration and development company whose activitieswere concentrated in Egypt and Canada. The post-Arrangement company (the”Combined Company”) is an African-focused operator with a diverse portfolio ofassets in Gabon, Egypt, Equatorial Guinea and Canada.

See Note 4 to theconsolidated financial statements for further discussion regarding theArrangement.RECENT DEVELOPMENTSShare Buyback ProgramOn November 1, 2022, VAALCO announced that its board of directors formallyratified and approved the share buyback program that was announced on August 8,2022 in conjunction with our business combination with TransGlobe. The board ofdirectors also directed management to implement the 10b5-1 Plan to facilitateshare purchases through open market purchases, privately-negotiatedtransactions, or otherwise in compliance with Rule 10b-18 under the ExchangeAct. The 10b5-1 Plan provides for an aggregate purchase of currently outstandingcommon stock up to £30 million over 20 months.

Payment for shares repurchasedunder the share buyback program will be funded using cash on hand and cash flowfrom operations.The actual timing number and value of shares repurchased under the share buybackprogram will depend on a number of factors, including constraints specified inthe Plan, VAALCO’s stock price, general business and market conditions, andalternative investment opportunities. Under the Plan, our third-partybroker, subject to SEC regulations regarding certain price, market, volume andtiming constraints, has authority to purchase VAALCO common stock in accordancewith the terms of the Plan.

60——————————————————————————– Table of ContentsTransGlobe ArrangementOn October 13, 2022, VAALCO and AcquireCo completed the previously announcedbusiness combination with TransGlobe whereby AcquireCo acquired all of theissued and outstanding TransGlobe common shares pursuant to the Arrangement andTransGlobe became a direct wholly-owned subsidiary of AcquireCo and an indirectwholly-owned subsidiary of VAALCO, pursuant to the Arrangement Agreement.Additionally, prior to the effective time of the Arrangement, TransGlobe repaidoutstanding obligations and liabilities owned under TransGlobe’s credit facilitywith ATB Financial, representing approximately C£4.1 million. On December 19,2022, TransGlobe, as an indirect wholly-owned subsidiary of VAALCO, voluntarilydelivered a notice of termination to ATB Financial relating to the ATB Facility.As of December 31, 2022, no amounts were drawn on the revolving loanfacility.

On January 5, 2023, the ATB Facility was formally closed.For the twelve months ended December 31, 2022, included in the line item “Other(expense) income, net” is £14.6 million of transactions costs associated withthe Arrangement with TransGlobe.Entry into a Facility AgreementOn May 16, 2022, VAALCO Gabon (Etame), Inc. (the “Borrower”), a wholly ownedsubsidiary of VAALCO, entered into a facility agreement (the “FacilityAgreement”) by and among VAALCO, VAALCO Gabon and, together with VAALCO, the”Guarantors”), Glencore Energy UK Ltd., as mandated lead arranger, technicalbank and facility agent (“Glencore”), the Law Debenture Trust CorporationP.L.C., as security agent, and the other financial institutions named therein(the “Lenders”), providing for a senior secured reserve-based revolving creditfacility (the “Facility”) in an aggregate maximum principal amount of up to£50.0 million. Subject to certain conditions, the Borrower may agree with anyLender or other bank or financial institution to increase the total commitmentsavailable under the Facility by an aggregate amount not to exceed £50.0 million(any such increase, an “Additional Commitment”). Beginning October 1, 2023 andthereafter on April 1 and October 1 of each year during the term of theFacility, the Initial Total Commitment, as increased by any AdditionalCommitment, will be reduced by £6.25 million.

See “-Capital Resources andLiquidity – RBL Facility Agreement” for more information regarding the Facility.Marine Construction Agreement for Subsea ReconfigurationOn March 17, 2022, VAALCO Gabon, a wholly owned subsidiary of VAALCO, enteredinto the Marine Construction Agreement with DOF Subsea, to support the subseareconfiguration in connection with the replacement of the then-existing FPSOvessel with a FSO vessel at the Etame Marin field offshore Gabon. Pursuant tothe Marine Construction Agreement, DOF Subsea agreed to, among other things,provide all personnel, crew and equipment necessary to assist in thereconfiguration of the Etame field subsea infrastructure to accommodate allfield production to the flow to the FSO, which conversion included (i)assistance with retrieval of over 5,000 meters of new flexible pipelines from amanufacturing facility in the United Kingdom, transporting the pipelines toGabon and installing the pipelines in the Etame field, (ii) performing theretrieval and relocation of existing in-field flowlines and umbilicals toaccommodate the reconfigured field development plan and (iii) assistance in theconnection of new risers to the FSO. Pursuant to the Marine ConstructionAgreement, DOF Subsea provided an offshore construction vessel to facilitate theperformance of the Services.

In October 2022, we completed the FSO installationand field reconfiguration at Etame field.

61——————————————————————————– Table of ContentsRecent Operational UpdatesNYSE Noncompliance NoticeOn April 3, 2023, the Company was notified by the New York Stock Exchange (the”NYSE”) that it was not in compliance with the NYSE’s continued listingrequirements under the timely filing criteria established in Section 802.01E ofthe NYSE Listed Company Manual as a result of its failure to timely file itsAnnual Report on Form 10-K for the fiscal year ended December 31, 2022. Byfiling this report, the Company believes it has remedied its non-compliance.Gabon Operations UpdateCharter Agreement for the Floating Storage and Offloading Unit in GabonIn August of 2021, we and our co-venturers at Etame approved the FSO Agreementswith World Carrier to replace the existing FPSO with an FSO. The FSO Agreementsrequired a prepayment of £2 million gross (£1.2 million net to VAALCO) in 2021and £5 million gross (£3.2 million net to VAALCO) in 2022 of which £6 millionwill be recovered against future rentals.On October 19, 2022, the replacement of the existing FPSO was completed and wesigned the final acceptance certificate, at which time control of the FSO vesseltransferred to us.

The new FSO has been named “Teli” (renamed from “CapDiamant”) and is on site and accepting oil at the Etame Marin block.Total field conversion expenses were £122 million gross (£77 million net to VAALCO).The FPSO charter we were party to prior to the FSO installation was set toexpire in September 2022, but on September 9, 2022 we signed an addendum to theFPSO contract which extended the use of the FPSO through October 4, 2022, andratified certain decommissioning and demobilization items associated withexiting the contract. Pursuant to the addendum, VAALCO Gabon agreed to pay thecharterer day rate of £150,000 from August 20, 2022 through October 4, 2022 andother demobilization fees totaling £15.3 million on a gross basis (£8.9 millionnet to VAALCO).2021/2022 Drilling CampaignIn conjunction with the 2021/2022 drilling program, that began in December 2021,we executed a contract with Borr Jack-Up XIV Inc., an affiliate of Borr DrillingLimited, to drill a minimum of three wells with options to drill additionalwells. In December 2021, we spudded the Etame 8H-ST, the first well of the2021/2022 drilling program.

In February 2022 we completed the drilling of theEtame 8H-ST well and moved the drilling rig to the Avouma platform to drill theAvouma 3H-ST development well, which targeted the Gamba reservoir. The Etame8H-ST demonstrated an initial flow rate of approximately 5,000 gross barrels ofoil per day BOPD, 2,560 BOPD net to VAALCO’s 58.8% working interest in 2022. The8H-ST was shut in due to Hydrogen sulfide that arose during the drillingprocess, but a side track was performed to rectify this and resume production.In April 2022, the Avouma 3H-ST well was completed and brought online with aninitial production rate of approximately 3,100 gross BOPD, 1,589 BOPD net toVAALCO’s 58.8% working interest in 2022.In July 2022 we completed the South Tchibala 1HB-ST well on the Avoumaplatform, targeting the Gamba reservoir and also testing the Dentaleformation.

The section of the Gamba sand encountered was not economically viableto complete in this wellbore. However, we did discover two potential zones, theDentale D1 and Dentale D9 zones for development. The well was completed in theDentale D1 formation and brought online in July with an initial production rateof approximately 293-390 gross BOPD, 150-200 BOPD net to VAALCO’s 58.8% workinginterest in 2022.

The Dentale D9 well is temporarily shut-in, however; we planto evaluate and recomplete the D9 zone during the next drilling campaign.Following the completion of the South Tchibala 1HB-ST well, the rig wasmobilized to the Southeast Etame North Tchibala Platform to drill the NorthTchibala 2H-ST (“ETBNM 2H-ST”) well, targeting the Dentale formation, which isproductive in this area of the Etame license. This mobilization was delayed bytwo weeks due to weather and the rig began operations on the well in late July.After setting up the equipment and completing operations to re-enter the well,VAALCO began drilling the North Tchibala 2H-ST well on August 8, 2022. The NorthTchibala 2H-ST well was brought online in early November and flowed at a low,controlled rate to allow for cleanup and to minimize negative impact to thecompletion.

Through end of January 2023, the well flowed, with temporaryinterruptions for operational activity and shut-ins for pressure build upanalysis. During this time, the well produced approximately 18,500 gross barrelsof oil, or about 250 gross bopd and recovered about 36% of injected completionfluid. Cleanup is continuing and pressure transient analysis indicates that bothcompleted zones may be contributing.

The well is naturally flowing with no waterproduction and stable reservoir pressure indicating minimal depletion.Following the drilling campaign, we utilized the rig to perform a workover onthe North Tchibala 1H (“ETBNM 1H”) well due to a safety valve in the well thatrequired replacement. With the rig already on site it was easier and moreeconomic to utilize the rig to complete the workover following the completion ofthe North Tchibala 2H-ST well. The final well operation performed by the rig wasanother workover, the Southeast Etame 4-H (“ETSEM-4H”) well, which restoredproduction to between 1,000 and 1,500 gross BOPD upon completion, following thewell going offline in early September as a result of an upper ESP failure and wewere unable to restart the upper ESP or the lower ESP to restore production.Utilizing the rig for the workovers has optimized the total cost of the2021/2022 drilling campaign at Etame.

62——————————————————————————–Table of ContentsAfter the execution of the workovers the drilling rig was released on November 17, 2022.We estimate the cost of the current 2021/2022 drilling program with four wellsand two workovers to be £180 million, or £114 million, net to VAALCO’sparticipating interest. For 2022, we incurred approximately £148 million, orabout £94 million net to VAALCO’s participating interest.Acquisition of Additional Working Interest at Etame Marin BlockIn November 2020, we signed a SPA to acquire Sasol’s 27.8% working interest inthe Etame Marin block offshore Gabon. On February 25, 2021, we completed theacquisition of Sasol’s 27.8% working interest in the Etame Marin block offshoreGabon pursuant to the SPA.

The effective date of the transaction was July 1,2020. Prior to the Sasol Acquisition, we owned and operated a 31.1% workinginterest in Etame. The Sasol Acquisition increased our working interest to58.8%.

As a result of the Sasol Acquisition, the net portion of production andcosts relating to our Etame operations increased from 31.1% to 58.8%. Reserves,production and financial results for the interests acquired have been includedin our results for periods after February 25, 2021. All assets and liabilitiesassociated with Sasol’s interest in Etame Marin block, including crude oil,natural gas and NGLs properties, asset retirement obligations and workingcapital items were recorded at their fair value.

As a result of comparing thepurchase price to the fair value of the assets acquired and liabilities assumed,a £7.7 million bargain purchase gain was recognized. A bargain purchase gain of£5.2 million is included in “Other (expense) income, net” under “Other income(expense)” in the consolidated statements of operations and comprehensive income(loss) for the year ended December 31, 2021. An income tax benefit of £2.5million, related to the bargain purchase gain, is also included in theconsolidated statements of operations and comprehensive income (loss).

Thereason for the bargain purchase gain is mainly due to the lower crude oil priceoutlook used when the SPA was signed, November 17, 2020, and the higher oilprice outlook on February 25, 2021, when the fair value of the reservesassociated with the Sasol Acquisition were determined.Under the terms of the SPA, a contingent payment of £5.0 million was payable toSasol should the average Dated Brent price over a consecutive 90-day period fromJuly 1, 2020 to June 30, 2022 exceed £60.00 per barrel. Included in the purchaseconsideration was the fair value, at closing, of the contingent payment due toSasol. The conditions related to the contingent payment were met and on April29, 2021, we paid the £5.0 million contingent amount to Sasol in accordance withthe terms of the SPA.The actual impact of the Sasol Acquisition for the year ended December 31,2022 and 2021 was an increase to “Crude oil, natural gas and NGLs sales” inthe consolidated statements of operations and other comprehensive income(loss) of £144.8 million and £84.6 million, respectively, and a £14.6 millionand £29.3 million increase to “Net income”, respectively, in the consolidatedstatements of operations and other comprehensive income (loss).Egypt Operations UpdateWe continued to use the EDC-64 rig in its Eastern Desert drilling campaign.During the quarter, we drilled and cased two development wells and drilled twoexploration wells.

A third development well, the Arta-77Hz, as discussed below,was brought online in the first quarter of 2023.The M-17 well was drilled to a total depth of 1,900 meters targeting Aslreservoirs in the M Field. The well was fully logged and evaluated. The Asl-Areservoir has an internally estimated 11.5 meters of net oil pay, 12.2 m of netoil pay in the Asl-B reservoir and 1.1 m of net oil pay in the Asl-Dreservoir.

The Asl-A reservoir was perforated and put on production with acurrent rate of 348 BOPD at a 42% water cut (heavy crude, field estimate)(Initial production over 30 days was 406 BOPD at a 23% water cut).The NWG-2INJ-1A well was drilled to a total depth of 1,318 meters targeting theNukhul reservoir. Initially intended as a water injector, the well encounteredstrong oil and gas shows in the Nukhul. The well was fully logged and evaluatedwith an internally estimated 6.4 meters of net oil pay in the Nukhul.

This wellwas put on production with a current rate of 122 BOPD (heavy crude, fieldestimate) at 40% water cut.Two exploration wells were drilled in the north of the Petrobakrconcession. Both wells targeted the Red Bed reservoir trend that successfullyproduces at the NWG-38 Field in this area. NWG-44A was drilled to a depth of1,737 meters and NWG-46X was drilled to a depth of 1,463 meters.

Both wellsencountered minor oil and gas shows in the Red Bed formation, however the zonewas tight. Both wells were plugged and abandoned as they were dry.

63——————————————————————————–Table of ContentsLate in the fourth quarter of 2022, we initiated the Arta horizontal pilotprogram in the Arta Field by successfully drilling the Arta-77Hz well targetingthe Nukhul reservoir. The well was drilled to a total depth of 2,409 meters MD(1,182 meters TVD).

The lateral was successfully drilled through the Nukhulreservoir encountering 1,363 meters of reservoir with good oil and gasshows. Subsequent to the quarter, the well was completed through the lateralsection with a 14-stage cemented frac sleeve liner. The well was multi-stagestimulated and put on production in the first quarter of 2023.The SGZ-6X well remains shut-in.

We continue to evaluate our strategic options.There was no production from South Ghazalat due to the SGZ-6X remaining shut-in.There is a planned workover for this well in 2023 to resume production.Canada Operations UpdateIn Canada, TransGlobe planned a seven horizontal Cardium reservoir wells (four2-mile, and three 1-mile) drilling campaign in the South Harmattan area during2022. Four of those wells were brought on production in the third quarter priorto the acquisition agreement and one well was brought on production in thefourth quarter of 2022 and the remaining two wells were brought on productionduring the first quarter of 2023.The 4-10-29-3W5 well drilled in July 2022 and was completed and brought onproduction in late December 2022. As of the first quarter of 2023, the well iscurrently producing at a field estimated rate of 100 BOPD.

The 4-18-29-3W5 and4-24-29-4W5 wells were completed in the fourth quarter of 2022 and brought onproduction in the first quarter of 2023.The 2023 drilling campaign commenced in January 2023 with the drilling of12-12-30-4W5, spud on January 28, 2023. The well was drilled to a total depth of6,713 meters. The second well of the program, 16-30-29-3W5, spud on February 22,2023, and is currently being drilled.CAPITAL RESOURCES AND LIQUIDITYCash FlowsOur cash flows for the years ended December 31, 2022 and 2021 are as follows: Year Ended December 31, Increase (Decrease) in 2022 2021 2022 over 2021 (in thousands)Net cash provided by operating activitiesbefore changes in operating assets andliabilities £ 127,817 £ 62,798 £ 65,019Net change in operating assets andliabilities 1,101 (12,589 ) 13,690Net cash provided by continuing operatingactivities 128,918 50,209 78,709Net cash used in discontinued operatingactivities (72 ) (92 ) 20Net cash provided by operating activities 128,846 50,117 78,729Net cash used in investing activities (123,211 ) (39,063 ) (84,148 )Net cash used in financing activities (17,955 ) (57 ) (17,898 )Effects of exchange rate changes on cash (218 ) – (218 )Net change in cash, cash equivalents andrestricted cash £ (12,538 ) £ 10,997 £ (23,535 )The £65.0 million increase in net cash provided by our operating activitiesbefore changes in operating assets and liabilities for the year ended December31, 2022 compared to the same period of 2021 was due to higher pricing, moreproduction and the increased number of producing wells partially offset bynegative changes due to higher realized losses on derivatives.

The net increasein changes provided by operating assets and liabilities of £13.7 million for theyear ended December 31, 2022 compared to the same period of 2021 was primarilyrelated to increases in accounts payable partially offset by changes inprepayments and other assets and crude oil inventory and other changes.

64——————————————————————————–Table of ContentsThe £84.1 million increase in net cash used in investing activities duringthe twelve months ended December 31, 2022 was due to increases in cash capitalspending in 2022 for items to related to the 2021/2022 drilling campaign and theEtame field reconfiguration of £146.4 million, £13.5 million of cash used in theEgypt and Canadian operations for property and equipment partially offset by£36.7 million of cash acquired in the TransGlobe acquisition. For the twelvemonths ended December 31, 2021, net cash used in investing activities was due tocash of £22.5 million used in the purchase of Sasol’s interest in the EtameBlock and £16.6 million for property and equipment on a cash basis.Net cash used in financing activities during the year ended December 31, 2022included £9.4 million dividends paid to common shareholders, £3.8 million fortreasury stock purchases made under our stock repurchase plan or as a result oftax withholding on options exercised and vested restricted stock as discussed inNote 17 to our consolidated financial statements, £2.1 million in deferredfinancing costs and £3.0 million related to principal finance lease payments,partially offset by £0.3 million in proceeds from options exercised. For theyear ended December 31, 2021, net cash used in financing activities included£1.4 million for treasury stock as a result of tax withholding on optionsexercised and vested restricted stock as discussed in Note 17 to ourconsolidated financial statements, partially offset by £1.3 million in proceedsfrom options exercised.Capital ExpendituresIn February 2020, we fully complied with the capital and other commitments associated with the 2018 PSC Extension.During 2022, we had accrual basis expenditures attributable to continuingoperations of £434.4 million, that includes £162.4 million for Gabon, £168.0million for Egypt, £103.3 million for Canada and £0.7 million for the corporateoffices, compared to £79.2 million for 2021.

The 2022 capital expendituresinclude TransGlobe assets acquired for stock. The difference between capitalexpenditures and the property and equipment expenditures reported in theconsolidated statements of cash flows is attributable to changes in accruals forcosts incurred but not yet invoiced or paid on the report dates. Capitalexpenditures in 2022 were attributable to expenditures related to the 2021/2022drilling program, the Etame field reconfiguration and drilling activity in Egyptand Canada.

Capital expenditures in 2021 were attributable to expendituresrelated to the 2021/2022 drilling program and the Sasol acquisition. See tablebelow in “Capital Resources, Liquidity and Cash Requirements” for furtherinformation.Regulatory and Joint Interest AuditsWe are subject to periodic routine audits by various government agencies inGabon, including audits of our petroleum Cost Account, customs, taxes and otheroperational matters, as well as audits by other members of the contractor groupunder our joint operating agreements. See Note 12 to the Consolidated FinancialStatements for further discussion.Commodity Price HedgingThe price we receive for our crude oil significantly influences our revenue,profitability, liquidity, access to capital and prospects for future growth.Crude oil commodities and, therefore their prices can be subject to widefluctuations in response to relatively minor changes in supply and demand.

Webelieve these prices will likely continue to be volatile in the future.Due to the inherent volatility in crude oil prices, we use commodity derivativeinstruments such as swaps to hedge price risk associated with a portion of ouranticipated crude oil production. These instruments allow us to reduce, but noteliminate, the potential effects of variability in cash flow from operations dueto fluctuations in commodity prices. The instruments provide only partialprotection against declines in crude oil prices and may limit our potentialgains from future increases in prices.

None of these instruments are used fortrading purposes. We do not speculate on commodity prices but rather attempt tohedge physical production by individual hydrocarbon product in order to protectreturns. The counterparty to our derivative swap transactions was a major oilcompany’s trading subsidiary, and our costless collars are with Glencore.

Wehave not designated any of our derivative contracts as fair value or cash flowhedges. The changes in fair value of the contracts are included in theconsolidated statements of operations and other comprehensive income (loss). Werecord such derivative instruments as assets or liabilities in the consolidatedbalance sheet.

We do not anticipate any substantial changes in our hedgingpolicy.The following are the hedges outstanding at December 31, 2022: Average Type of Monthly Weighted Average Weighted AverageSettlement Period Contract Index Volumes Put Price Call Price (Bbls) (per Bbl) (per Bbl)January 2023 toMarch 2023 Collars Dated Brent 101,000 £ 65.00 £ 120.00 65——————————————————————————–Table of ContentsThe following additional hedges were entered into in 2023: Average Type of Monthly Weighted Average Weighted AverageSettlement Period Contract Index Volumes Put Price Call Price (Bbls) (per Bbl) (per Bbl)April 2023 to June2023 Collars Dated Brent 95,500 £ 65.00 £ 100.00July 2023 toSeptember 2023 Collars Dated Brent 95,500 £ 65.00 £ 96.00Cash on HandAt December 31, 2022, we had unrestricted cash of £37.2 million. We invest cashnot required for immediate operational and capital expenditure needs inshort-term money market instruments primarily with financial institutions wherewe determine our credit exposure is negligible. As operator of the Etame Marinblock in Gabon, we enter into project-related activities on behalf of ourworking interest joint venture owners.

We generally obtain advances from jointventure owners prior to significant funding commitments. Our cash on hand willbe utilized, along with cash generated from operations, to fund our operations.We currently sell our crude oil production from Gabon under a crude oil salesand marketing agreement (“COSMA”) with Glencore. Under the COSMA all oilproduced from the Etame G4-160 Block offshore Gabon from August 2022 through thefinal maturity date of the Facility, expected to be May 15, 2027, will be boughtand marketed by Glencore, with pricing based upon an average of Dated Brent inthe month of lifting, adjusted for location and market factors.

Sales withGlencore are normally settled 30 days from the delivery date.Revenues associated with the sales of our crude oil in Egypt are recognized byreference to actual volumes sold and quoted market prices in active markets forDated Brent, adjusted according to specific terms and conditions as applicableper the sales contracts. Revenue is measured at the fair value of theconsideration received or receivable. For reporting purposes, we record theEGPC’s share of production as royalties which are netted against revenue.

Withrespect to taxes in Egypt, our income taxes under the terms of the MergedConcession Agreement are the liability of TransGlobe Petroleum International(“TGPI”), a wholly-owned indirect subsidiary of VAALCO. TGPI’s income taxes arepaid by EGPC on behalf of TGPI out of EGPC’s production entitlement. The incometaxes paid to the Arab Republic of Egypt on behalf of TGPI are recognized as oiland gas sales revenue and income tax expense for reporting purposes.In the period of October 14 through December 31, 2022, all sales in Egypt were to EGPC.

Sales to EGPC are normally settled two to four weeks from delivery.Revenues from the sale of crude oil, natural gas, condensate and NGLs in Canadaare recognized by reference to actual volumes delivered at contracted deliverypoints and prices. Prices are determined by reference to quoted market prices inactive markets for crude oil, natural gas, condensate, and NGLs based onproduct, each adjusted according to specific terms and conditions applicable perthe sales contracts. Revenues are recognized net of royalties and transportationcosts.

Revenues are measured at the fair value of the consideration received.Settlement of accounts receivable in Canada occur on the 25th of the following month after production.Capital Resources, Liquidity and Cash RequirementsHistorically, our primary source of liquidity has been cash flows fromoperations and our primary use of cash has been to fund capital expenditures fordevelopment activities in the Etame Marin block. We continually monitor theavailability of capital resources, including equity and debt financings thatcould be utilized to meet our future financial obligations, planned capitalexpenditure activities and liquidity requirements including those to fundopportunistic acquisitions. Our future success in growing proved reserves,production and balancing the long-term development of our assets with a focus ongenerating attractive corporate-level returns will be highly dependent on thecapital resources available to us.Based on current expectations, we believe we have sufficient liquidity throughour existing cash balances and cash flow from operations, including the additionof our Egypt and Canada segments, to support our current cash requirements,including the FSO charter, drilling programs, as well as transaction expensesand capital and operational costs associated with our business segments’operations.

However, our ability to generate sufficient cash flow fromoperations or fund any potential future acquisitions, consortiums, jointventures or pay dividends for other similar transactions depends on operatingand economic conditions, some of which are beyond our control. If additionalcapital is needed, we may not be able to obtain debt or equity financing onterms favorable to us, or at all. We are continuing to evaluate all uses ofcash, including opportunistic acquisitions, and whether to pursue growthopportunities and whether such growth opportunities, additional sources ofliquidity, including equity and/or debt financings, are appropriate to fund anysuch growth opportunities.

66——————————————————————————– Table of ContentsMerged Concession AgreementOn January 19, 2022, legacy subsidiaries of TransGlobe executed the MergedConcession Agreement with EGPC to update and merge TransGlobe’s three Egyptianconcessions in West Bakr, West Gharib and NW Gharib (the “Merged Concession”).The modernization payments under the Merged Concession Agreement total £65.0million and are payable over six years from the Merged Concession EffectiveDate. Under the Merged Concession Agreement, we will be required to pay anadditional £10.0 million on February 1 for each of the next three years. Inaddition, we have committed to spending a minimum of £50.0 million over eachfive-year period for the 15 years of the primary term (totaling £150.0 million).Our ability to make scheduled payments arising from the Merged ConcessionAgreement will depend on our financial condition and operating performance,which is subject to then prevailing economic, industry and competitiveconditions and to certain financial, business, legislative, regulatory and otherfactors beyond our control.RBL Facility Agreement and Available CreditOn May 16, 2022, VAALCO Gabon (Etame), Inc. entered into Facility Agreement byand among VAALCO, VAALCO Gabon, Glencore, the Law Debenture Trust CorporationP.L.C. and the Lenders, providing for a senior secured reserve-based revolvingcredit facility in an aggregate maximum principal amount of up to £50.0 million(the “Initial Total Commitment”).

In addition, subject to certain conditions,the Borrower may agree with any Lender or other bank or financial institution toincrease the total commitments available under the Facility by an aggregateamount not to exceed £50.0 million. Beginning October 1, 2023 and thereafter onApril 1 and October 1 of each year during the term of the Facility, the InitialTotal Commitment, as increased by any Additional Commitment, will be reduced by£6.25 million.The Facility provides for determination of the borrowing base asset based on ourproved producing reserves and a portion of our proved undeveloped reserves. Theborrowing base is determined and re-determined by the Lenders on March 31 andSeptember 30 of each year.

Based on the redetermination performed during theyear, there was no change in the borrowing base.The Borrower’s obligations under the Facility Agreement are guaranteed byGuarantors and secured by interests, rights, activities, assets, entitlements,and development in the Etame Marin Permit (Block G64-160) Field and any otherassets which are approved by the Majority Lenders (as defined in the FacilityAgreement).Each loan under the Facility will bear interest at a rate equal to LIBOR plus amargin (the “Applicable Margin”) of (i) 6.00% until the third anniversary of theFacility Agreement or (ii) 6.25% from the third anniversary of the FacilityAgreement until the Final Maturity Date (defined below).Pursuant to the Facility Agreement, we shall pay to Glencore for the account ofeach Lender a quarterly commitment fee equal to (i) 35% per annum of theApplicable Margin on the daily amount by which the lower of the totalcommitments and the borrowing base amount exceeds the amount of all outstandingutilizations under the Facility, plus (ii) 20% per annum of the ApplicableMargin on the daily amount by which the total commitments exceed the borrowingbase amount. The Borrower is also required to pay customary arrangement andsecurity agent fees.The Facility Agreement contains certain debt covenants, including that, as ofthe last day of each calendar quarter, (i) the ratio of Consolidated Total NetDebt to EBITDAX (as each term is defined in the Facility Agreement) for thetrailing 12 months shall not exceed 3.0x and (ii) consolidated cash and cashequivalents shall not be lower than £10.0 million. As of December 31, 2022,our borrowing base was £50.0 million.

The amount we are able to borrow withrespect to the borrowing base is subject to compliance with the financialcovenants and other provisions of the Facility Agreement. We were in compliancewith all debt covenants at December 31, 2022. As of December 31, 2022, we had nooutstanding borrowings under the facility.

With regard to the requirement thatwe deliver our fiscal year 2022 annual financial statements to Glencore within90 days of the end of each fiscal year, we have requested and received anextension until April 17, 2023.The Facility will mature on the earlier of (i) the fifth anniversary of the dateon which all conditions precedent to the first utilization of the Facility havebeen satisfied and (ii) the Reserve Tail Date (as defined in the FacilityAgreement) (the “Final Maturity Date”).In connection with the Arrangement with TransGlobe in October 2022, prior to theeffective time of the Arrangement, TransGlobe repaid in full all outstandingobligations and liabilities owed under TransGlobe’s credit facility with ATBFinancial, representing approximately C£4.1 million. On December 19, 2022,TransGlobe, as an indirect wholly-owned subsidiary of VAALCO, voluntarilydelivered a notice of termination to ATB Financial relating to the ATB Facility.As of December 31, 2022, no amounts were drawn on the revolving loanfacility. On January 5, 2023, the ATB Facility was formally closed.

Terminationof the ATB Facility did not affect our £50.0 million senior securedreserve-based revolving credit facility with Glencore.

67——————————————————————————– Table of ContentsCash RequirementsOur material cash requirements generally consist of finance leases, operatingleases, purchase obligations, capital projects and 3D seismic processing, theSasol Acquisition, the TransGlobe acquisition transaction costs, dividendpayments, funding of our share buyback program, merged concession agreement,future lease payments and abandonment funding, each of which is discussed infurther detail below.Sasol Acquisition – As a result of completing the Sasol Acquisition onFebruary 25, 2021, our obligations with respect to development activities in theEtame have increased based on the increase in our working interest in the Etamefrom 31.1 % at December 31, 2020, to 58.8%. As a result of the SasolAcquisition, the net portion of production and costs relating to our Etameoperations increased from 31.1% to 58.8%. Reserves, production and financialresults for the interests acquired in the Sasol Acquisition have been includedin VAALCO’s results for periods after February 25, 2021.

We expect that part ofthis increase will be offset by an increase in our operating cash flows based onour increased portion of the Etame production.Abandonment Funding – Under the terms of the Etame PSC, we have a cash fundingarrangement for the eventual abandonment of all offshore wells, platforms andfacilities on the Etame Marin block. As a result of the PSC Extension, annualfunding payments are spread over the periods from 2018 through 2028, under theapplicable abandonment study. The amounts paid will be reimbursed through theCost Account and are non-refundable.

In November 2021, a new abandonment studywas done and the estimate used for this purpose is approximately £81.3 million(£47.8 million, net to VAALCO) on an undiscounted basis. The new abandonmentestimate has been presented to the Gabonese Directorate of Hydrocarbons asrequired by the PSC. Through December 31, 2022, £35.0 million (£20.6 million,net to VAALCO) on an undiscounted basis has been funded.

The annual paymentswill be adjusted based on revisions in the abandonment estimate. This cashfunding is reflected under “Other noncurrent assets” in the “Abandonmentfunding” line item of the consolidated balance sheets. Future changes to theanticipated abandonment cost estimate could change the asset retirementobligation and the amount of future abandonment funding payments.Leases – We are a party to several operating and financing lease arrangements,including operating leases for the corporate office, a drilling rig, rental ofmarine vessels and helicopters, warehouse and storage facilities, equipmentand financing lease agreements for the FSO and generators used in the operationsof the Etame Marin block and for equipment, offices and vehicles used in theoperations of Canada and Egypt.

The annual costs of these leases are significantto us. For further information see Note 14 to our consolidated financialstatements.Merged Concession Agreement – On January 20, 2022, prior to the consummation ofthe Arrangement, TransGlobe announced a fully executed Merged ConcessionAgreement with EGPC that merged the three existing Eastern Desert concessionswith a 15-year primary term and improved economics. In advance of the Ministerof Petroleum and Mineral Resources of the Arab Republic of Egypt (the”Minister”) executing the Merged Concession Agreement, TransGlobe paid the firstmodernization payment of £15.0 million and signature bonus of £1.0 million aspart of the conditions precedent to the official signing ceremony on January 19,2022.

On February 1, 2022, TransGlobe paid the second modernization payment of£10.0 million. In accordance with the Merged Concession, we agreed to substitutethe 2023 payment and issue a £10.0 million credit against receivables owed fromEGPC. We will make three further annual equalization payments of £10.0 millioneach beginning February 1, 2024, until February 1, 2026.

We also have minimumfinancial work commitments of £50.0 million per each five-year period of theprimary development term, commencing on February 1, 2020 (the “Merged ConcessionEffective Date”). As of December 31, 2022, the £50 million of financial workcommitments had been delivered to EGPC.FSO Agreements – On August 31, 2021, we and our Etame co-venturers approved theBareboat Contract and Operating Agreement with World Carrier to replace theexisting FPSO with a FSO unit at the Etame Marin block offshore Gabon. Pursuantto the Bareboat Charter, World Carrier will provide use of the Teli vessel toVAALCO Gabon for an initial eight-year term, subject to optional two successiveone-year extensions.

Pursuant to the Operating Agreement, VAALCO Gabon agreed toengage World Carrier for the purposes of maintaining and operating the FSO onits behalf in accordance with the specifications therein and to provide otherservices to VAALCO Gabon in connection with the operation and maintenance of theFSO. As consideration for the performance by World Carrier of the OperatorServices, VAALCO Gabon agreed to pay a daily operating fee (to be paid monthly)beginning on the date of issuance of the Fit to Receive Certificate (as definedin the Operating Agreement) until the end of the term, with such term being thesame as the term in the Bareboat Charter.

68——————————————————————————–Table of ContentsThe FSO Agreements required a prepayment of £2 million gross (£1.2 million netto VAALCO) in 2021 and £5 million gross (£3.2 million net) in 2022 of which £6million will be recovered against future rentals. In addition, VAALCO Gabonagreed to pay a daily hire rate at certain rates specified therein, with suchhire rate being based on the year within the term.In connection with the implementation of the FSO, we were required to incur certain Etame field configuration expenses in order to facilitate the FSO.

Total field conversion expenses were £122 million gross (£77 million net to VAALCO).The FPSO charter we were party to prior to the FSO installation was set toexpire in September 2022, but on September 9, 2022, we signed an addendum to theFPSO contract which extended the use of the FPSO through October 4, 2022, andratified certain decommissioning and demobilization items associated withexiting the contract. Pursuant to the addendum, VAALCO Gabon agreed to pay thecharterer day rate of £150,000 from August 20, 2022 through October 4, 2022 andother demobilization fees totaling £15.3 million on a gross basis (£8.9 millionnet to VAALCO Gabon).On October 19, 2022, we issued final acceptance certificate of the FSO. On December 4, 2022, the first lifting from the FSO was successfully completed at the same time the final remaining volumes from the FPSO were removed.BWE Consortium – On October 11, 2021, we announced our entry into a consortiumwith BW Energy and Panoro Energy and that the BWE Consortium has beenprovisionally awarded two blocks in the 12th Offshore Licensing Round in Gabon.The award is subject to concluding the terms of the PSC with the Gabonesegovernment.

BW Energy will be the operator with a 37.5% working interest. Wewill have a 37.5% working interest and Panoro Energy will have a 25% workinginterest as non-operating joint owners. The two blocks, G12-13 and H12-13, areadjacent to our Etame PSC, as well as BW Energy and Panoro’s Dussafu PSCoffshore Southern Gabon, and cover an area of 2,989 square kilometers and 1,929square kilometers, respectively.

The two blocks will be held by the BWEConsortium and the PSCs over the blocks will have two exploration periodstotaling eight years which may be extended by an additional two more years.During the first exploration period, the joint owners intend to reprocessexisting seismic and carry out a 3-D seismic campaign on these two blocks andhave also committed to drilling exploration wells on both blocks. In the eventthe BWE Consortium elects to enter the second exploration period, the BWEConsortium will be committed to drilling at least another one exploration wellon each of the awarded blocks.Drilling Program – We commenced the 2021/2022 drilling campaign in December 2021with the drilling of the Etame 8H-ST development well. In February 2022 wecompleted the drilling of the Etame 8H-ST well and moved the drilling rig to theAvouma platform to drill the Avouma 3H-ST development well, which targeted theGamba reservoir.

The initial flow rate of the ETAME 8H-ST well was 5,000 BOPD,2,560 BOPD net to VAALCO’s 58.8% working interest in 2022. The 8H-ST was shut indue to Hydrogen sulfide that arose during the drilling process, but a side trackwas performed to rectify this and resume production. In April 2022, the Avouma3H-ST well was completed and brought online with an initial production rate ofapproximately 3,100 gross BOPD, 1,589 BOPD net to VAALCO’s 58.8% workinginterest in 2022.In July 2022 we completed the South Tchibala 1HB-ST well on the Avoumaplatform, targeting the Gamba reservoir and also testing the Dentale formation.The section of the Gamba sand encountered was not economically viable tocomplete in this wellbore.

However, we did discover two potential zones, theDentale D1 and Dentale D9 zones for development. The well was completed in theDentale D1 formation and brought online in July with an initial production rateof approximately 293-390 gross BOPD, 150-200 BOPD net to VAALCO’s 58.8% workinginterest in 2022. The Dentale D9 well is temporarily shut-in, however; we planto evaluate and recomplete the D9 zone during the next drilling campaign.Following the completion of the South Tchibala 1HB-ST well, the rig wasmobilized to the Southeast Etame North Tchibala Platform to drill the NorthTchibala 2H-ST well, targeting the Dentale formation, which is productive inthis area of the Etame license.

This mobilization was delayed by two weeks dueto weather and the rig began operations on the well in late July. After settingup the equipment and completing operations to re-enter the well, VAALCO begandrilling the North Tchibala 2H-ST well on August 8, 2022. The North Tchibala2H-ST well was brought online in early November and flowed at a low, controlledrate to allow for cleanup and to minimize negative impact to thecompletion.

Through end of January, the well flowed, with temporaryinterruptions for operational activity and shut-ins for pressure build upanalysis. During this time, the well produced approximately 18,500 gross barrelsof oil, or about 250 gross BOPD and recovered about 36% of injected completionfluid. Cleanup is continuing and pressure transient analysis indicates that bothcompleted zones may be contributing.

The well is naturally flowing with no waterproduction and stable reservoir pressure indicating minimal depletion.

69——————————————————————————–Table of ContentsWe recently utilized the rig to perform a workover on the North Tchibala 1H welldue to a safety valve in the well that required replacement. With the rigalready on site it was easier and more economic to utilize the rig to completethe workover following the completion of the North Tchibala 2H-ST well. Thefinal well operation planned for the rig was another workover, the South EastEtame 4-H well, which restored production to 1,000 and 1,500 gross BOPD uponcompletion.

This well went offline in early September as a result of an upperESP failure and we were unable to restart the upper ESP or the lower ESP torestore production. Utilizing the rig for the workovers has optimized the totalcost of the 2021/2022 drilling campaign at Etame.After the execution of the workovers the drilling rig was released on November 17, 2022.We estimate the cost of the current 2021/2022 drilling program with four wellsand two workovers to be £180 million, or £114 million, net to VAALCO’sparticipating interest. For 2022, we incurred approximately £148 million, orabout £94 million net to VAALCO’s participating interest.TransGlobe Acquisition – On October 13, 2022, the Company and AcquireCocompleted the business combination with TransGlobe.

At the effective time of theArrangement and pursuant to the Arrangement Agreement, each common share ofTransGlobe issued and outstanding immediately prior to the effective time of theArrangement was converted into the right to receive 0.6727 of a share of VAALCOcommon stock. The total number of VAALCO shares issued to TransGlobe’sshareholders was approximately 49.3 million. In addition, we incurred £14.6million of transaction costs associated with the acquisition agreement.Dividend Policy – On February 14, 2023, we announced that our board of directorsadopted of a quarterly cash dividend policy of an expected £0.0625 per commonshare per quarter, commencing in the first quarter of 2023.

Payment of futuredividends, if any, will be at the discretion of the board of directors aftertaking into account various factors, including current financial condition, thetax impact of repatriating cash, operating results and current and anticipatedcash needs.Payment of future dividends, if any, will be at the discretion of the board ofdirectors after taking into account various factors, including current financialcondition, the tax impact of repatriating cash, operating results and currentand anticipated cash needs.Share Buyback Program – On November 1, 2022, we announced that our board ofdirectors formally ratified and approved the share buyback program that wasannounced on August 8, 2022 in conjunction with our business combination withTransGlobe. The board of directors also directed management to implement the10b5-1 Plan to facilitate share purchases through open market purchases,privately-negotiated transactions, or otherwise in compliance with Rule 10b-18under the Exchange Act. The 10b5-1 Plan provides for an aggregate purchase ofcurrently outstanding common stock up to £30 million over 20 months.

Payment forshares repurchased under the share buyback program will be funded using our cashon hand and cash flow from operations. As of December 31, 2022, approximately£27.0 million remained available for repurchase under current authorizations.Trends and UncertaintiesCOVID-19 Pandemic – While crude oil prices have recently been at the highestlevels seen in recent years, the continued spread of COVID-19, includingvaccine-resistant strains, or deterioration in crude oil, natural gas andNGLs prices could result in additional adverse impacts on our results ofoperations, cash flows and financial position, including asset impairments. Thehealth of our employees, contractors and vendors, and our ability to meetstaffing needs in our operations and certain critical functions cannot bepredicted and is vital to our operations.

We are unable to predict the extent ofthe impact that the continuing spread of COVID-19 may have on our ability tocontinue to conduct our operations.Further, the impacts of a potential worsening of global economic conditions andthe continued disruptions to, and volatility in, the credit and financialmarkets as well as other unanticipated consequences remain unknown. In addition,we cannot predict the impact that COVID-19 will have on our customers, vendorsand contractors; however, any material effect on these parties could adverselyimpact our business. The situation surrounding COVID-19 remains fluid andunpredictable, and we are actively managing our response and assessing potentialimpacts to our financial position and operating results, as well as any adversedevelopments that could impact our business.

70——————————————————————————–Table of ContentsWar with Ukraine and Other Market Forces – The outbreak of armed conflictbetween Russia and Ukraine in February 2022 and the subsequent sanctions imposedon the Russian Federation has, and may continue to have, a destabilizing effecton the European continent and the global oil and natural gas markets. Theongoing conflict has caused, and could continue to intensify, volatility in oiland natural gas prices, and the extent and duration of the military action,sanctions and resulting market disruptions could be significant and couldpotentially have a substantial negative impact on the global economy and/or ourbusiness for an unknown period of time.Further, the slowdown in the Chinese economy is negatively impacting the globalmarket and the global supply chain problems may have a material adverse impacton our financial results and business operations, including our timing andability to complete future drilling campaigns and other efforts required toadvance the development of our crude oil, natural gas and NGLs properties.For example, shortly after the outbreak of the conflict through the year endedDecember 31, 2022 and on-going into 2023, we noticed that the lead timesassociated with obtaining materials to support our operations and drillingactivities has lengthened, leading to delays and, in most cases, prices formaterials have increased. Management believes the ongoing war between Russia andUkraine and its related impact on the global economy are causing supply chainissues and energy concerns in parts of the global economy.

In addition,increased inflation, higher interest rates and current turmoil in certaingovernments are impacting the global supply chain market.Commodity Prices – Historically, the markets for oil, natural gas and NGLs havebeen volatile. Oil, natural gas and NGLs prices are subject to wide fluctuationsin supply and demand. Our cash flows from operations may be adversely impactedby volatility in crude oil prices, a decrease in demand for crude oil and futureproduction cuts by OPEC+.

In July 2021, OPEC+ agreed to increase productionbeginning in August 2021 to phase out a portion of the prior production cuts bySeptember 2022. However, as a result of the recent decline in oil prices, onOctober 5, 2022, OPEC+ announced plans to reduce overall oil production by 2MMBbls per day starting November 2022. To date, we have not received any mandateto reduce our current oil production from the Etame Marin block as a result ofthe OPEC+ initiative.

Brent crude prices were approximately £82.82 per barrel asof December 31, 2022.ESG and Climate Change Effects – ESG matters continue to attract considerablepublic and scientific attention. In particular, we expect continued regulatoryattention on climate change issues and emissions of GHGs, including methane (aprimary component of natural gas) and carbon dioxide (a byproduct of crude oil,natural gas and NGLs combustion). This increased attention to climate change andenvironmental conservation may result in demand shifts away from crude oil,natural gas and NGLs products to alternative forms of energy, higher regulatoryand compliance costs, additional governmental investigations and privatelitigation against us.

For example, numerous proposals have been made and arelikely to continue to be made at the international, national, regional and statelevels of government to monitor and limit emissions of GHGs. These efforts haveincluded consideration of cap-and-trade programs, carbon taxes, GHG reportingand tracking programs and regulations that directly limit GHG emissions fromcertain sources. In addition, institutional investors, proxy advisory firms andother industry participants continue to focus on ESG matters, including climatechange.

We expect that this heightened focus will continue to drive ESG effortsacross our industry and influence investors’ investment and voting decisions,which for some investors may lead to less favorable sentiment towards carbonassets and diversion of investment to other industries. Consistent with theincreased attention on ESG matters and climate change, we have prioritized andare committed to responsible environmental practices by monitoring our adherenceto ESG standards, including the reduction of our carbon footprint andmeasurement of GHG emissions. ESG is important to us, and we are in the processof developing a multi-year plan to establish and document our ESG base currentlyand developing a systematic plan to monitor and improve matters related to ESGand climate change going forward.

Additional ESG regulation will result inadditional expenses and may result in less revenue due to the cost ofcompliance.VAALCO recognizes climate change as a risk to the business and industry.It also recognizes the potential for the business to decarbonize its operations,reduce operating costs, and deliver more sustainably produced oil and gasproducts, whilst serving its developing host nation that still require improvedenergy access and supply, and the economic benefits the industry generates,directly and indirectly.The Company acknowledges the requirement to share information with stakeholders regarding its response to climate-related risks and opportunities.For the past three years the Company has matured its reporting in line with therecommendations of the Task force on Climate-related Financial Disclosures(“TCFD”), which is recognized as the global standard in climate-relatedreporting. The full TCFD report will be included within the 2022 ESG Report(rather than in this Annual Report on Form 10-K or in the annual report whichwill be published in connection with the annual meeting), as the ESG Reportdetails with environmental, social and governance matters which the TCFD reportforms an important part of. The 2022 ESG Report will be made available on theCompany’s website.In summary the Company considers itself consistent with both the Governance andStrategy pillars and the recommendations therein.

It does not consider itselfconsistent with Risk Management nor Metrics and Targets, but has made meaningfulprogress against certain of the underlying recommendations and providesstatements of intent to address these recommendations during 2023. For furtherdetail see the table below.

71——————————————————————————– Table of ContentsGovernance Describe the Board’s oversight The Board is actively engaged in of climate-related risks and understanding the climate-related risks opportunities relevant to the business. The Board supported the establishment of the decarbonization program and receives regular updates on progress.

At each Board meeting, the ESG manager reports emissions performance and progress within decarbonization program. Management receives periodic updates from the ESG Engineer and Buchanan ESG relating to climate-related matters. The formalized management of climate-related matters, and specifically VAALCO’s efforts to manage its emissions profile, is delivered through its decarbonization working group and steering group, for identification of emissions reduction projects and subsequent approval respectively.

Describe management’s role in The Company considers its approach to assessing and managing governance consistent with the climate-related risks and recommendations. opportunities.Strategy Describe the climate-related The Company has identified transitional risks and opportunities the and physical risks and opportunities organization has identified identified over the short (<2 years), over the short, medium and medium (2 to 10 years) and long term long term. (>10 years) within its ESG Report 2022. Describe the impact of The company has indicated thepotential climate-related risks and impact of these risks and associated opportunities on the mitigations. organization’s businesses, strategy, and financial planning. The Company continues to mature its approach to factoring in climate-related risks and opportunities into its strategy and financial planning.

This also includes its diligence through M&A activity. Describe the resilience of the This year, the business conducted organization’s strategy, scenario analysis using the IEA’s Net taking into consideration Zero Emissions (NZE), Announced Pledges different climate-related Scenario (APS) and Stated Policies scenarios, including a 2?C or Scenario (STEPS), the details and lower scenario findings for which are enclosed in the ESG Report. The Company considers its approach to Strategy consistent with the recommendations.Risk Describe the organization’s The Company has a defined risk Management processes for identifying and management process for identifying and assessing climate-related assessing risk, which incorporates risks. climate-related risks.

Detail to this process can be found within the ESG Report. Describe the organization’s Whilst in development through the processes for managing decarbonization program, the Company climate-related risks. considers its processes for managing climate-related risk to beinconsistent with the recommendations. Describe how processes for During 2023, the Company will conduct a identifying, assessing, and review of its risk management processes, managing climate-related risks particularly in view of itsenlarged are integrated into the portfolio. organization’s overall risk management.Metrics Disclose the metrics used by The Company reports its scope 1 and 2 and the organization to assess emissions but has not yet set any Targets climate-related risks and targets. opportunities in line with its strategy and risk management process.

Disclose Scope 1, Scope 2 and, The Company considers its approach to if appropriate Scope 3 metrics and targets inconsistent with greenhouse gas (GHG) emissions the recommendations and, through its and the related risks. decarbonization program, isseeking to set interim reduction targets for its GHG emissions. Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets 72——————————————————————————– Table of ContentsHedgingWe seek to mitigate the impact of volatility in crude oil prices through hedging.The following are the hedges outstanding at December 31, 2022: Average Type of Monthly Weighted Average Weighted AverageSettlement Period Contract Index Volumes Put Price Call Price (Bbls) (per Bbl) (per Bbl)January 2023 toMarch 2023 Collars Dated Brent 101,000 £ 65.00 £ 120.00The following are the additional hedges entered into in 2023: Average Type of Monthly Weighted Average Weighted AverageSettlement Period Contract Index Volumes Put Price Call Price (Bbls) (per Bbl) (per Bbl)April 2023 to June2023 Collars Dated Brent 95,500 £ 65.00 £ 100.00July 2023 toSeptember 2023 Collars Dated Brent 95,500 £ 65.00 £ 96.00 73——————————————————————————– Table of ContentsRESULTS OF OPERATIONSYear Ended December 31, 2022 Compared to Year Ended December 31, 2021We reported net income for the year ended December 31, 2022 of £51.9 million,compared to a net income of £81.8 million for the year ended December 31, 2021.The year-over-year decrease in earnings was mainly due to increases indepreciation, depletion and amortization expense, production expenses andchanges in taxes from a benefit in 2021 to an expense in 2022. Furtherdiscussion of results by significant line item follows.

Year Ended December 31, 2022 2021 Increase/(Decrease) (in thousands except per Boe information)Net crude oil, natural gas, and NGLs salesvolume (MBoe) 3,677 2,711 966Average crude oil, natural gas and NGLssales price (per Boe) £ 94.77 £ 70.66 £ 24.11Net crude oil, natural gas, and NGLs revenue £ 354,326 £ 199,075 £ 155,251Operating costs and expenses:Production expense 112,661 81,255 31,406FPSO demobilization 8,867 – 8,867Exploration expense 258 1,579 (1,321 )Depreciation, depletion and amortization 48,143 21,060 27,083General and administrative expense 10,077 14,766 (4,689 )Bad debt expense 3,082 875 2,207Total operating costs and expenses 183,088 119,535 63,553Other operating (expense) income, net 38 (440 ) 478Operating income £ 171,276 £ 79,100 £ 92,176The revenue changes between the years ended December 31, 2022 and 2021identified as related to changes in price or volume are shown in the tablebelow:(in thousands)Price (1) £ 94,674Volume 14,698Other (1,672 )Change in revenue from Gabon £ 107,700Net revenue from Egypt £ 37,710Net revenue from Canada 9,841Total net revenue £ 155,251(1) The price in the table above excludes revenues attributed to carried interests. 74——————————————————————————–Table of ContentsThe table below shows net production, sales volumes and realized prices for bothyears. Year Ended December 31, 2022 2021Net crude oil, natural gas and NGLs production (MBoe) 3,729 2,405Net crude oil, natural gas and NGLs sales (MBoe) 3,677 2,711Average realized crude oil, natural gas and NGLs price (£/Boe) £ 94.77 £ 70.66Average Dated Brent spot price* (£/Bbl) £ 100.93 £ 70.86*Average of daily Dated Brent spot prices posted on the U.S. Energy Information Administration website.Crude oil, natural gas and NGL revenues increased £155.3 million, orapproximately 78.0%, during the year ended December 31, 2022 compared to thesame period of 2021.

The total barrels lifted in Gabon for the year endedDecember 31, 2022 was more than the barrels lifted during the same period in2021, mainly due to 2021/2022 drilling campaign partially offset by naturaldeclines in production. In addition, the per barrel price received during2022 was £32.43 higher than the price received in 2021. Crude oil sales in Gabonare a function of the number and size of crude oil liftings in each year andthus crude oil sales do not always coincide with volumes produced in any givenyear.

We made 11 liftings in Gabon during both years ended December 31, 2022,and December 31, 2021, respectively. Our share of crude oil inventory, excludingroyalty barrels, was approximately 76,274 and 75,680 barrels at December 31,2022 and 2021, respectively. Crude oil, natural gas and NGLs sales alsoincreased due to the TransGlobe acquisition on October 13, 2022 with sales fromboth Egypt and Canada being recorded from the acquisition date through December31.

2022 and contributing £47.6 million of revenue in 2022.Production expenses increased £31.4 million, or approximately 38.7%, in the yearended December 31, 2022 compared to the same period of 2021. £17.5 million ofthe increase is attributable to our Gabon operations with higher marine fuel andpersonnel costs as a result of inflation increases. In addition, we incurred£13.9 million of production expense related to our Egypt and Canadian operationsfrom the date of the acquisition through December 31, 2022. On a per barrel NRIbasis, production expense, excluding workover expense and stock compensationexpense, for the year ended December 31, 2022, increased to £29.33 per barrelfrom £26.77 per barrel for the year ended December 31, 2021, primarily as aresult of higher marine, fuel and personnel costs.

While we have not experiencedany significant operational disruptions associated with the current worldwideCOVID-19 pandemic, we have incurred approximately £1.8 million of COVID-19related costs, net to VAALCO, for the year ended December 31, 2022. For the sameperiod in 2021, we incurred £2.9 million, net to VAALCO, higher costs related tothe proactive measures taken in response to the pandemic.FPSO demobilization costs for the year ended December 31, 2022 were £8.9million. These costs were incurred to retire the FPSO as we transitioned theEtame block to the FSO.

No similar expenses were incurred during the same periodin 2021.Exploration expenses decreased £1.3 million or approximately 83.7%, in the yearended December 31, 2022 compared to the same period of 2021. The decrease is dueto incurring minimal amounts for seismic processing costs for the year endedDecember 31, 2022 compared to the same period in 2021 when we were processingthe seismic data acquired in 2020.Depreciation, depletion and amortization increased £27.1 million, orapproximately 128.6%, in the year ended December 31, 2022 compared to the sameperiod of 2021. £13.7 million of the change is attributable to our Gabonoperations while £13.4 million of the change is due to the depletions associatedwith the TransGlobe acquisition from the date of acquisition, October 13, 2022,through December 31, 2022. The higher depletion associated with the Gabonoperations is due to higher depletable costs associated with the 2021/2022drilling campaign.General and administrative expenses decreased £4.7 million, or approximately31.8% in the year ended December 31, 2022 compared to £14.8 million in the sameperiod of 2021.

The decrease in expense was primarily related to lower corporatesalary and wages, lower legal fees, lower compensation related to liabilityawards and higher allocations of corporate expenses in 2022 (collectively £10.2million) partially offset by higher audit and professional fees, higher stockbased compensation related to equity awards and higher professional fees andother fees (collectively £5.2 million). In addition, we incurred £0.4 million ofgeneral and administrative expenses associated with the TransGlobe acquisitionfrom the acquisition date, October 13, 2022, through December 31, 2022 75——————————————————————————–Table of ContentsBad debt (recovery) expense and other reflected bad debt expense associated withthe VAT allowance for the year ended December 31, 2022. Bad debt expenseincreased £2.2 million, or approximately 252.2% in the year ended December 31,2022 compared to the same period of 2021 as a result of increased spending as aresult of the 2021/2022 drilling campaign partially offset by £0.5 million, netto VAALCO, in VAT payments received.Other operating income (expense), net increased £0.5 million, or approximately108.6%, in the year ended December 31, 2022 compared to the same period of2021.

For the year ended December 31, 2021 other operating income (expense) isprimarily comprised of the difference between the fair value of the contingentconsideration paid to Sasol in April 2021 of £5.0 million, and the fair value ofthe contingent consideration on the closing date of the Sasol Acquisitionof £4.6 million.Derivative instruments gain (loss), net is attributable to our commodityinstruments as discussed in Note 10 to the consolidated financial statements.Derivative losses increased £15.0 million to a loss of £37.8 million loss forthe year ended December 31, 2022 from a loss of £22.8 million for the year endedDecember 31, 2021. We used swaps to hedge our production through the thirdquarter of 2022 and then transitioned to costless collars beginning in thefourth quarter of 2022. Every quarter in 2021 and continuing through the thirdquarter of 2022 Dated Brent crude oil prices increased.

Since VAALCO owesthe counterparty for any Dated Brent price over the initial per barrel value, wecontinued to incur losses associated our commodity swap derivatives. Our currentcommodity derivative instruments cover a portion of our production through June2023.Interest (expense) income, net increased £2.0 million to an expense of£2.0 million for the year ended December 31, 2022 from expense of £0.0 millionduring the same period in 2021. Net interest expense for the year ended December31, 2022, includes commitment fees incurred on the Facility, amortization ofdebt issue costs related to the VAALCO RBL Facility and interest associated withour finance leases partially offset by interest income.Other (expense) income, net decreased £11.5 million to expense of £8.0 millionfor the year ended December 31, 2022 from income of £3.5 million for the yearended December 31, 2021.

Other (expense) income, net normally consists offoreign currency losses as discussed in Note 2 to the consolidated financialstatements. However, for the year ended December 31, 2022, other (expense)income, net, also included £14.6 million of transaction costs associated withthe Arrangement with TransGlobe, £2.7 million of foreign exchange lossesassociated with the TransGlobe activity from October 13, through December 31,2022 partially offset by a bargain purchase gain of £10.8 million associatedwith the acquisition of TransGlobe. Other (expense) income, net, was primarilyattributable to £5.2 million for the bargain purchase gain offset by £1.0million for an acquisition success fee and foreign currency losses for the yearended December 31, 2021.Income tax expense (benefit) for the year ended December 31, 2022 was an expenseof £71.4 million.

This is comprised of £26.6 million of current tax provisionand a deferred tax provision of £44.8 million. Income tax expense for the yearended December 31, 2021 was a benefit of £22.1 million. This is comprised of£42.4 million of deferred tax benefit and a current tax provision of £20.3million.

The current tax provision in both periods is primarily attributable toour operations in Gabon, Egypt and Canada and is higher in 2022 than income taxfor the comparable 2021 period as a result of higher revenues. See Note 8 to theConsolidated Financial Statements for further discussion.Income (loss) from discontinued operations, net of tax for theyear ended December 31, 2022 was attributable to our Angola and Yemensegments as discussed further in Note 4 to the Financial Statements. For theyear ended December 31, 2021, loss from discontinued operations was attributableto our Angola segment.

The loss from discontinued operations for the year endedand December 31, 2022 and December 31, 2021, respectively, was related to Angolaand Yemen administration costs.CRITICAL ACCOUNTING ESTIMATESThe preparation of Financial Statements in accordance with GAAP requires us tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities as of thedate of the Financial Statements and the reported amounts of revenues andexpenses during the respective reporting periods. Accounting estimates areconsidered to be critical if (1) the nature of the estimates and assumptions ismaterial due to the levels of subjectivity and judgment necessary to account forhighly uncertain matters or the susceptibility of such matters to change, and(2) the impact of the estimates and assumptions on financial condition oroperating performance is material. Actual results could differ from theestimates and assumptions used.

Further, in some cases, GAAP allows more thanone alternative accounting method for reporting. In those cases, our reportedresults of operations would be different should we employ an alternativeaccounting method. See Note 2 to the Consolidated Financial Statements for ouraccounting policy elections.

76——————————————————————————– Table of ContentsIncome TaxesOur annual tax provision is based on expected taxable income, statutory ratesand tax planning opportunities available to us in the various jurisdictions inwhich we operate. The determination and evaluation of our annual tax provisionand tax positions involves the interpretation of the tax laws in the variousjurisdictions in which we operate and requires significant judgment and the useof estimates and assumptions regarding significant future events such as theamount, timing and character of income, deductions and tax credits. Changes intax laws, regulations, agreements and tax treaties or our level of operations orprofitability in each jurisdiction would impact our tax liability in any givenyear.

We also operate in foreign jurisdictions where the tax laws relating tothe crude oil, natural gas and NGLs industry are open to interpretation, whichcould potentially result in tax authorities asserting additional taxliabilities. While our income tax provision (benefit) is based on the bestinformation available at the time, a number of years may elapse before theultimate tax liabilities in the various jurisdictions are determined.Judgment is required in determining whether deferred tax assets will be realizedin full or in part. Management assesses the available positive and negativeevidence to estimate if existing deferred tax assets will be utilized.

When itis estimated to be more-likely-than-not that all or some portion of the deferredtax assets will not be realized, a valuation allowance must be established forthe amount of the deferred tax assets that are estimated to not be realizable.Factors considered include earnings generated in previous periods, forecastedearnings, the expiration period of carryovers, and overall economic conditionsof the industry. As of December 31, 2022, we had deferred tax assets of £99.6million primarily attributable to Canada, Gabon and U.S. basis differences infixed assets, foreign tax credit carryforwards, and U.S. and foreign netoperating loss carryforwards. A valuation allowance of £47.6 million has beenestablished against the deferred tax assets as of December 31, 2022, asmanagement has concluded that it was more-likely-than-not that only some portionof the deferred tax assets would be realized.

In future periods, we maydetermine that it is more-likely-than-not that all or some portion of thedeferred tax assets will be realized, and in such period all or a portion ofthis valuation allowance may be reversed as the evidence warrants.In certain jurisdictions, we may deem the likelihood of realizing deferred taxassets as remote where we expect that, due to the structure of operations andapplicable law, the operations in such jurisdictions will not give rise tofuture tax consequences. Should our expectations change regarding the expectedfuture tax consequences, we may be required to record additional deferred taxesthat could have a material effect on our consolidated financial position andresults of operations. For further discussion, see Note 8 to the ConsolidatedFinancial Statements.Oil and Gas Accounting Reserves DeterminationThe successful efforts method of accounting depends on the estimated reserves webelieve are recoverable from our crude oil, natural gas and NGLs reserves.

Theprocess of estimating reserves is complex. It requires significant judgments anddecisions based on available geological, geophysical, engineering and economicdata.To estimate the economically recoverable crude oil, natural gas and NGLs reserves and related future net cash flows, we incorporate many factors and assumptions including:o expected reservoir characteristics based on geological, geophysical andengineering assessments;o future production rates based on historical performance and expected future operating and investment activities; o future crude oil, natural gas and NGLs quality differentials; o assumed effects of regulation by governmental agencies; and o future development and operating costs.We believe our assumptions are reasonable based on the information available tous at the time we prepare our estimates. However, these estimates may changesubstantially going forward as additional data from development activities andproduction performance becomes available and as economic conditions impactingcrude oil, natural gas and NGLs prices and costs change.Management is responsible for estimating the quantities of proved crude oil,natural gas and NGLs reserves and for preparing related disclosures.

Estimatesand related disclosures are prepared in accordance with SEC requirements andgenerally accepted industry practices in the U.S. as prescribed by the Societyof Petroleum Engineers. Reserve estimates are independently evaluated at leastannually by our independent qualified reserves engineers, NSAI for Gabon andEquatorial Guinea, while GLJ evaluates our Egyptian and Canadian reserves.

77——————————————————————————–Table of ContentsOur board of directors has established the Technical and Reserves (“T&R”)Committee with the authority, responsibility and primary purpose of assistingthe board of directors in its oversight responsibilities relating to evaluatingand reporting on oil and gas reserves. The T&R Committee, to the extent it deemsnecessary or appropriate, will oversee (i) annual review of oil and gasreserves, (ii) procedures for evaluating and reporting oil and gas producingactivities, and (iii) compliance with applicable regulatory and securities lawsrelating to the preparation and disclosure of information with respect to oiland gas reserves and shall consult with the Audit Committee on such mattersrelating to oil and gas reserves which impact our financial statements.Our senior executives and reserve engineers oversee the preparation of our crudeoil, natural gas and NGLs reserves and related disclosures by our appointedindependent reserve engineers.

The T&R Committee and senior executives meet withthe reserve engineers periodically to review the reserves process and results,and to confirm that the independent reserve engineers have had access tosufficient information, including the nature and satisfactory resolution of anymaterial differences of opinion between us and the independent reserveengineers.Reserves estimates are critical to many of our accounting estimates, including: o determining whether or not an exploratory well has found economically producible reserves;o calculating our unit-of-production depletion rates. Proved developed reserves estimates are used to determine rates that are applied to each unit-of-production in calculating our depletion expense; ando assessing, when necessary, our crude oil, natural gas and NGLs assets forimpairment using undiscounted future cash flows based on management’sestimates. If impairment is indicated, discounted values will be used todetermine the fair value of the assets.

The critical estimates used to assess impairment, including the impact of changes in reserves estimates, are discussed below.See “Item 15. Exhibits and Financial Statement Schedules – Supplemental Information on crude oil, natural gas and NGLs Producing Activities (unaudited).”Impairment of crude oil, natural gas and NGLs producing propertiesWe review the crude oil, natural gas and NGLs producing properties forimpairment quarterly or whenever events or changes in circumstances indicatethat the carrying amount of such properties may not be recoverable. When a crudeoil, natural gas and NGLs property’s undiscounted estimated future net cashflows are not sufficient to recover its carrying amount, an impairment charge isrecorded to reduce the carrying amount of the asset to its fair value.

Ourassessment involves a high degree of estimation uncertainty as it requires us tomake assumptions and apply judgment to estimate undiscounted future net cashflows related to proved reserves. Such assumptions include commodity prices,capital spending, production and abandonment costs and reservoir data. The fairvalue of the asset is measured using a discounted cash flow model relyingprimarily on Level 3 inputs to estimate the undiscounted future net cash flows.The undiscounted estimated future net cash flows used in the impairmentevaluations at each quarter end are based upon the most recently preparedindependent reserve engineers’ report adjusted to use forecasted prices from theforward strip price curves near each quarter end and adjusted as necessary fordrilling and production results.

For further discussion, see Note 9 to theConsolidated Financial Statements.Impairment of Unproved PropertyWe evaluate our undeveloped crude oil, natural gas and NGLs leases forimpairment on at least a quarterly basis by considering numerous factors thatcould include nearby drilling results, seismic interpretations, market values ofsimilar assets, existing contracts and future plans for exploration ordevelopment. When undeveloped crude oil, natural gas and NGLs leases are deemedto be impaired, exploration expense is charged. Unproved property costs consistmainly of acquisition costs related to undeveloped acreage in the Etame Marinblock in Gabon and to Block P in Equatorial Guinea.

In connection with theTransGlobe acquisition as discussed under Note 4 to the Consolidated FinancialStatements, reserves in Egypt and Canada were also attributed to undevelopedproperties and leasehold costs.

78——————————————————————————– Table of ContentsBusiness CombinationsWe apply the acquisition method of accounting for business combinations, underwhich we record the acquired assets and assumed liabilities at fair value andrecognize goodwill to the extent the consideration transferred exceeds the fairvalue of the net assets acquired. To the extent the fair value of the net assetsacquired exceeds the consideration transferred, we recognize a bargain purchasegain.In estimating the fair values of assets acquired and liabilities assumed in abusiness combination, various assumptions are made. The most significantassumptions relate to the estimated fair values assigned to proved and unprovedcrude oil, natural gas and NGLs properties.

If sufficient market data is notavailable regarding the fair values of proved and unproved properties, estimatesof the fair value of crude oil and gas reserves are prepared. Estimates offuture prices to apply to the estimated reserves quantities acquired andestimates of future operating and development costs are used to estimate futurenet cash flows. For estimated proved reserves, the future net cash flows arediscounted using a market-based discount rate determined appropriate at the timeof the acquisition.

Estimated deferred taxes are based on available informationconcerning the tax basis of assets acquired and liabilities assumed and losscarryforwards at the acquisition date, although such estimates may change in thefuture as additional information becomes known.We estimate the fair values of the acquired assets and assumed liabilities as ofthe date of the acquisition, and our estimates are subject to adjustment throughcompletion, which is in each case within one year of the acquisition date, basedon our ongoing assessments of the fair values of property and equipment,intangible assets, other assets and liabilities and our evaluation of taxpositions and contingencies.

See Note 4 to the Consolidated Financial Statementsunder “Acquisitions and dispositions” for further discussion.NEW ACCOUNTING STANDARDSSee Note 3 to the Consolidated Financial Statements.(C) Edgar Online, source Glimpses