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Vaalco Energy Inc. (NYSE: EGY) shares were revitalized today after the company’s largest shareholder demanded a sale in a Schedule 13D filing with the SEC. The news comes after shares in the company fell around 30% in 2007 compared to a 45% rise in its peer group during the same period. Meanwhile, the company’s expenditures on failed drilling projects in the North Sea has pushed its valuation down far below where it should stand. So, will this new call to action be heard by management?

Nanes Delorme Partners, which owns an 8% stake, sent a letter to Vaalco’s board expressing its belief that the company is undervalued and suggesting that the best way to unlock value would be to immediately evaluate a range of strategic alternatives. Those familiar with activist investors know that “strategic alternatives” generally just means one alternative - a sale of the company. Such a move could unlock substantial value for shareholders.

Nanes Delorme estimates that the net asset value of Vaalco lies around $420 million, which equates to about $7.12 per share. This represents a substantial 46% premium to its closing price on Tuesday. The activist hedge fund also conveyed the fact that the company had rebuffed private inquiries regarding a potential acquisition several times at substantial premiums to the current share price. This means that there is clearly interest in the company.

As always, there is a reason for this undervaluation that should not be dismissed. Management has been spending cash acquiring and drilling minor North Sea interests that have been total exploration failtures. Recently, this included a $12 million drilling hole that has yielded no oil. These and similar projects have resulted in a substantial cash drain that could continue to destroy value unless someone stops it. Shareholders are now hoping that Nanes Delorme is that someone.

In the end, this is all great news for Vaalco shareholders. Nanes Delorme is committed to unlocking value for all and even went so far as to say that it could bid for the entire company if it felt its concerns were unheard. And why not? If there is already other interest, it could be flipped for a quick profit! Regardless, this is a situation that is definitely worth watching over the next few months!

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