VAALCO ENERGY INC DE

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND ACCOUNTING POLICIES

VAALCO Energy, Inc. (together with its consolidated subsidiaries “we”, “us”, “our”, “VAALCO” or the “Company”) is a Houston, Texas-based independent energy company engaged in the acquisition, exploration, development and production of crude oil, natural gas and NGLs properties. As operator, the Company has production operations and conducts exploration activities in Gabon and Canada and hold interests intwo production sharing contracts ("PSCs") in Egypt and holds a non-operator interest in Cote d’Ivoire. The Company has opportunities to participate in development and exploration activities in Equatorial Guinea, West Africa.

These unaudited condensed consolidated financial statements (“Financial Statements”) reflect the opinion of management and all adjustments necessary for a fair presentation of results for the interim periods presented. All adjustments are of a normal recurring nature unless disclosed otherwise. Interim period results arenot necessarily indicative of results expected for the full year.

These condensed consolidated financial statements have been prepared in accordance with rules of the Securities and Exchange Commission (“SEC”) and donot include all the information and disclosures required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. They should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form10-K for the year ended* December 31, 2023,*which includes a summary of the significant accounting policies.

Reclassification– Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications hadno effect on the reported results of operations. An adjustment has been made to the Condensed Consolidated Balance Sheet, Condensed Consolidated Statements of Operations and Comprehensive Income and Condensed Consolidated Statements of Cash Flows for fiscal year ended* December 31, 2023,*in the amounts of $673 thousand, $15 thousand, and $15 thousand, respectively, to reclassify the discontinued operations account balances and transactions.

Allowance for credit losses and other– The Company estimates the current expected credit losses based primarily using either an aging analysis or discounted cash flow methodology that incorporates consideration of current and future conditions that could impact its counterparties’ credit quality and liquidity. Uncollectible receivables are written off when a settlement is reached for an amount that is less than the outstanding historical balance or when the Company has determined that the balance willnot be collected.

The following table provides an analysis of the change of the aggregate credit loss allowance and other allowances.

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Fair value of financial instruments

2. NEW ACCOUNTING STANDARDS

Not Yet Adopted

In* August 2023,FASB issued new guidance to provide specific guidance on how a joint venture, upon formation, should recognize and initially measure assets contributed and liabilities assumed. The rules become effective prospectively for all joint venture formations occurring on or after January 1, 2025.*VAALCO is currently assessing the impact of this guidance.

In* November 2023,FASB issued new guidance to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The rules become effective for annual periods beginning after December 15, 2023,and for interim periods within fiscal years beginning after December 15, 2024.*The standard requires additional disclosures about operating segments. VAALCO is currently evaluating the impact of adopting this guidance on the consolidated financial statements.

In* December 2023,FASB issued new guidance to improve Income Tax disclosures to provide information to assess how an entity’s operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows. The rules become effective for annual periods beginning after December 15, 2024.*The standard modifies required income tax disclosures. VAALCO is currently evaluating the impact of adopting this guidance on the consolidated financial statements.

3. PENDING ACQUISITION

On* February**29,* 2024, the Company entered into a Share Purchase Agreement (the “Share Purchase Agreement”) to purchase all of the issued shares in the capital of Svenska Petroleum Exploration Aktiebolag, a company incorporated in Sweden (“Svenska”) for $66.5 million in cash (the “Purchase Price”), subject to adjustment as described in the Share Purchase Agreement. The Company subsequently closed its acquisition of Svenska for the net purchase price of $40.2 million, on* April 30, 2024after certain regulatory and government approvals were received. The purchase price was funded by a combination of a dividend of cash on Svenska’s balance sheet to the seller immediately prior to the consummation of the acquisition and$40.2* million of VAALCO’s cash-on-hand.

4. SEGMENT INFORMATION

The Company’s operations are based in Gabon, Egypt, Canada and Equatorial Guinea. Each of the reportable operating segments are organized and managed based upon geographic location. The Company’s Chief Executive Officer, who is the chief operating decision maker, evaluates the operation of each geographic segment separately, primarily based on Operating income (loss). The operations of all segments include exploration for and production of hydrocarbons where commercial reserves have been found and developed. Revenues are based on the location of hydrocarbon production. Corporate and other is primarily corporate and operations support costs that arenot allocated to the reportable operating segments.

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Segment activity of continuing operations for thethree months ended* March 31, 2024and2023* as well as long-lived assets and segment assets at* March 31, 2024* and* December 31, 2023* are as follows:

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5. EARNINGS PER SHARE

Basic earnings per share (“EPS”) is calculated using the average number of shares of common stock outstanding during each period. For the calculation of diluted shares, the Company assumes that restricted stock is outstanding on the date of vesting, and the Company assumes the issuance of shares from the exercise of stock options using the treasury stock method.

A reconciliation of reported net income to net income used in calculating EPS as well as a reconciliation from basic to diluted shares follows:

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6. REVENUE

Gabon

The Company currently sells crude oil production from Gabon under term crude oil sales and purchase agreements (“COSPAs”) or crude oil sales and marketing agreements ("COSMA or COSMAs"). The following table presents revenues from contracts with customers as well as revenues associated with the obligations under the Etame PSC.

With respect to the government’s share of Profit Oil, the Etame PSC provides that corporate income tax is satisfied through the payment of Profit Oil. In the consolidated statements of operations and comprehensive income, the government’s share of revenues from Profit Oil is reported in revenues with a corresponding amount reflected in the current provision for income tax expense. Payments of the income tax expense are reported in the period that the government takes its Profit Oil in-kind, i.e. the period in which it lifts the crude oil. As of* March 31, 2024,the Company has a $37.5 million foreign income tax payable related to Gabon. The Company had an $18.9 million foreign income tax payable as of December 31, 2023.*

Egypt

The following table presents revenues in Egypt from contracts with customers:

Canada

The following table presents revenues in Canada from contracts with customers:

Information about the Company’s most significant customers

For thethree months ended* March 31, 2024* the Company hadone customer that comprised 100% of its sales for Gabon. In Egypt, one customer made up 100% of revenue. In Canada, three separate customers made up approximately 40%,30% and 19% of revenue, respectively.

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7. CRUDE OIL, NATURAL GAS and NGLs PROPERTIES AND EQUIPMENT

The Company’s crude oil, natural gas and NGLs properties and equipment is comprised of the following:

8. DERIVATIVES AND FAIR VALUE

The Company uses derivative financial instruments from time to time to achieve a more predictable cash flow from crude oil production by reducing the Company’s exposure to price fluctuations. See the table below for the list of outstanding contracts as of* March 31, 2024*:

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The following table sets forth the loss on derivative instruments on the Company’s unaudited condensed consolidated statements of operations and comprehensive income:

9. CURRENT ACCRUED LIABILITIES AND OTHER

Accrued liabilities and other balances were comprised of the following:

10. COMMITMENTS AND CONTINGENCIES

Abandonment funding

Under the terms of the Etame PSC, the Company has a cash funding arrangement for the eventual abandonment of all offshore wells, platforms and facilities on the Etame Marin block. At* March 31, 2024*, $10.7 million ($6.3 million, net to VAALCO) of the abandonment fund has been funded on an undiscounted basis. The annual payments will be adjusted based on revisions in the abandonment estimate. This cash funding is reflected under “Other noncurrent assets” in the “Abandonment funding” line item of the consolidated balance sheets. Future changes to the anticipated abandonment cost estimate could change the asset retirement obligation and the amount of future abandonment funding payments.

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Share Buyback Program

On* November 1, 2022,the Company announced that the Company’s board of directors formally ratified and approved a share buyback program. The board of directors also directed management to implement a Rule10b5*-1 trading plan (the*“10b5*-1 Plan”) to facilitate share purchases through open market purchases, privately negotiated transactions, or otherwise in compliance with Rule10b-18 under the Securities Exchange Act of1934. The10b5-1 Plan provides for an aggregate purchase of currently outstanding common stock up to $30 million over a maximum period of 20 months. Payment for shares repurchased under the share buyback program were funded using the Company's cash on hand and cash flow from operations. The share buyback program was completed* March 12, 2024.*Under the share buyback program, we purchased a total of 6,797,711 shares at an average price of $4.41 per share.

The following table shows the repurchases of equity securities related to the share repurchase program from* January 1, 2024through March 31, 2024*:

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Merged Concession Agreement

The Company is a party to the Merged Concession Agreement with the Egyptian General Petroleum Corporation (“EGPC”). In accordance with the Merged Concession Agreement, we are required to make $10.0 million annual modernization payments through* February 1, 2026.The $10.0 million modernization payment due February 1, 2024was offset against receivables owed to the Company from EGPC. On the consolidated balance sheet at March 31, 2024,*$9.4 million of the remaining modernization payment liability was recorded in the line item "Accrued liabilities and other" and $8.7 million was recorded in "Other long-term liabilities".

The Company also has minimum financial work commitments of $50.0 million per each five-year period of the primary development term, commencing on* February 1, 2020for a total of $150 million over the15* year license contract term. Through* March 31, 2024,the Company's financial work commitments have exceeded thefive*-year minimum*$50* million threshold and any excess carries forward to offset against subsequentfive-year commitments.

As the Merged Concession Agreement was signed in* January 2022and is effective as of February 1, 2020,there was an effective date adjustment owed to the Company for the difference in the historic commercial terms and the revised commercial terms applied against the production since the Merged Concession Effective Date. In accordance with GAAP, the Company has recognized a receivable in connection with the effective date adjustment of $67.5 million as of October 13, 2022,based on historical realized prices. However, the cumulative value to be received because of the effective date adjustment is currently being finalized with the EGPC and could result in a range of outcomes based on the final price per barrel negotiated. As of March 31, 2024,*the remaining $50.3 million of the original $67.5 million receivable is recorded on the unaudited condensed consolidated balance sheet in "Egypt receivables and other, net".

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11. DEBT

As of* March 31, 2024* and* December 31, 2023,*the Company hadno outstanding debt.

RBL Facility

On* May 16, 2022,the Company entered into an agreement with Glencore, and other lenders, to provide a senior secured reserve-based revolving credit facility for a maximum principal amount of up to $50.0 million. Beginning October 1, 2023and thereafter on April 1and October 1of each year during the term of the RBL Facility, the $50 million initial commitment, was reduced by $6.3 million. At March 31, 2024,*the amount available to be drawn under the facility was $43.8 million.

The RBL Facility agreement contains certain debt covenants, including that, as of the last day of each calendar quarter, (i) the ratio of Consolidated Total Net Debt to EBITDAX (as each term is defined in the RBL Facility agreement) for the trailing12 months shallnot exceed 3.0x and (ii) consolidated cash and cash equivalents shallnot be lower than $10.0 million at any time. The amount the Company can borrow with respect to the borrowing base is subject to compliance with the financial covenants and other provisions of the RBL Facility agreement. Regarding the requirement, the Company must deliver its annual financial statements to Glencore within90 days of the end of each fiscal year. At* March 31, 2024,*the Company was in compliance with all debt covenants and hadno outstanding borrowings under the facility.

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12. STOCK-BASED COMPENSATION AND OTHER BENEFIT PLANS

Stock options and performance shares

Stock options have an exercise price that* may**not* be less than the fair market value of the underlying shares on the date of grant. In general, stock options granted to participants will become exercisable over a period determined by the Compensation Committee of the Company’s board of directors that is generally athree-year period, vesting inthree equal parts on the anniversaries from the date of grant, and* may*contain performance hurdles.

The Company used the Monte Carlo simulation to calculate the grant date fair value of performance stock option awards. The fair value of these awards will be amortized to expense over the derived service period of the option.

For options that donot contain a market or performance condition, the Company uses the Black-Scholes model to calculate the grant date fair value of stock option awards. This fair value is then amortized to expense over the service period of the option.

During thethree months ended* March 31, 2024* and2023, no stock options were granted.

Restricted shares

Restricted stock granted to employees will vest over a period determined by the Compensation Committee that is generally athree-year period, vesting inthree equal parts on the anniversaries following the date of the grant. Restricted stock granted to directors will vest on the earlier of (i) thefirst anniversary of the date of grant and (ii) thefirst annual meeting of stockholders following the date of grant (butnot less thanfifty (50) weeks following the date of grant). The vesting of the restricted stock is dependent upon, among other things, the employees’ and directors’ continued service with the Company.

During thethree months ended* March 31, 2024* and2023, no restricted shares were granted.

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13. INCOME TAXES

VAALCO and its domestic subsidiaries file a consolidated U.S. income tax return. Certain foreign subsidiaries also file tax returns in their respective local jurisdictions that include Canada, Egypt, Equatorial Guinea and Gabon.

The foreign taxes payable are attributable to Gabon for thethree months ended* March 31, 2024* and2023.

The Company’s effective tax rate for thethree months ended* March 31, 2024and2023,* excluding the impact of discrete items, was 61.05% and 60.96%, respectively. For thethree months ended* March 31, 2024and2023,* the Company’s overall effective tax rate was primarily impacted by tax rates in foreign jurisdictions higher than the US statutory rate and by non-deductible items associated with operations.

For thethree months ended* March 31, 2024,*the income tax expense of $22.2 million includes a $1.6 million unfavorable oil price adjustment as a result of the change in value of the government of Gabon's allocation of Profit Oil between the time it was produced and the time it was taken in-kind. After excluding this impact, income taxes were $20.7 million for the period.

As of* March 31, 2024*, the Company hadno material uncertain tax positions. The Company’s policy is to recognize potential interest and penalties related to unrecognized tax benefits as a component of income tax expense.

14. OTHER COMPREHENSIVE INCOME

The Company’s other comprehensive loss was$2.5 million for thethree months ended* March 31, 2024*. The functional currency of our Canadian segment is the Canadian Dollar. All of the Company’s other comprehensive income arises from the currency translation of our Canadian segment to USD.

The components of accumulated other comprehensive income are as follows:

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