What does Vaalco do?

They pump oil, mainly in Gabon on the African west coast. They also have a couple other properties that look like they’re going to be coming under production shortly, a few offshore, and some onshore (all in Gabon).

They don’t have fields that would attract the Shells or Exxons. Typically, a large company won’t be interested unless there’s over 100 million barrels of reserves. That allows this group to get into some of these smaller arenas. They have great relationships with the government in Gabon, which is very important in this industry.

The company was held back for some time because it was part of a trust arrangement that was coming to maturity, and those in control didn’t want the company to be too volatile. They didn’t want any real aggressive exploration or acquisitions. That ended in about 2004 – the company was set free to grow and develop.

Why do you like the stock right now?

We look for three basic things when we buy a stock. First, we want to see relatively good valuation levels (i.e., price to earnings, price to book, price to cash, etc). Second, we want to see that earnings are growing. And third, we want a price that’s growing at a quicker rate than the market.

This stock is trading at a price multiple of less than 12.The stock is up 51% this year (in the last 12 months it’s up 30%), but the earnings growth is up over 138% in the 12 months ending in November 2005. So even though the price has grown, earnings have grown very rapidly, too. So it’s still selling relatively cheap. It’s not a large company. Its market cap is around $360 million, so not a lot of people are following it, which is another thing we like.

Part of the run-up in price recently had to do with the price limitations in place at many small-cap funds. A lot of them can’t buy a stock until it reaches a price of $5. EGY hit $5 in January, and everyone started loading up.

Given the incredible price growth, is there still potential for further gains?

I think so, definitely. They haven’t even started pumping oil yet from some of the other concessions that they own. They’re taking all the right steps, they’re using their cash flow on their other concessions, and there’s a lot more to be produced.

Another important thing is that they’re doing it all themselves, they’re not just going out there and buying others’ production. This is hand-to-hand combat. While we don’t buy a company thinking it will be taken over, this company would definitely fit very nicely into some bigger company’s portfolio.

The fact that it’s setting new highs doesn’t bother us at all. I believe that you hold on to your winners and you sell your losers. This one’s a winner. It wouldn’t surprise me to see this continue to rise up relative to the rest of the market even at these levels. A 20% to 25% gain this year isn’t unreasonable, especially as the company becomes better known.