Gran Tierra Energy Inc. — Q3 2022 Form 10-Q
Business context and period: Gran Tierra is an international oil and gas exploration and production company operating in Colombia and Ecuador. This unaudited filing covers the quarter and nine months ended September 30, 2022. Figures below are in U.S. dollars; millions are shown unless stated otherwise.
Financial and operating results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Oil sales | $168.4M | $135.3M | $548.8M | $327.4M |
| Income before taxes | $60.4M | $44.0M | $205.7M | $6.8M |
| Net income (loss) | $38.7M | $35.0M | $105.8M | $(20.0)M |
| Diluted EPS | $0.10 | $0.10 | $0.28 | $(0.05) |
| Funds flow from operations (non-GAAP) | $93.7M | $69.1M | $284.7M | $121.3M |
| Free cash flow (non-GAAP) | $36.7M | $34.3M | $121.0M | $11.7M |
| Capital expenditures | $57.0M | $34.8M | $163.7M | $109.7M |
Q3 operations: Net-after-royalty production was 23,472 barrels per day (BOPD), roughly flat year over year; sales averaged 23,516 BOPD. Brent averaged $97.70 per barrel, up 33% year over year. Operating netback, a non-GAAP measure, was $124.1M, or $57.38 per sales barrel. Adjusted EBITDA was $121.2M; trailing-twelve-month adjusted EBITDA was $462.3M.
Cash flow and liquidity: For the first nine months, GAAP operating cash flow was $355.8M, investing cash outflow was $160.5M, and financing cash outflow was $100.0M. Cash and cash equivalents were $118.2M at September 30, 2022, compared with $26.1M at year-end 2021. Net debt was reported at $461.7M, with net debt to trailing-twelve-month adjusted EBITDA of 1.0x.
Debt: The company reported $279.9M principal of 6.25% Senior Notes due 2025 and $300.0M of 7.75% Senior Notes due 2027. It repurchased $20.1M principal of the 2025 notes for $17.3M cash consideration, recording a $2.6M gain; the notes were held as treasury bonds, not cancelled. A new secured credit facility provides $100M initially available, with a possible additional $50M by mutual agreement; it was undrawn at quarter-end. The facility matures August 2024, subject to a potential extension, and the company reported compliance with its covenants.
Material changes and management commentary
- Q3 oil sales increased 24% year over year, mainly reflecting higher Brent prices, partly offset by higher quality and transportation discounts and a shift to M+1 Brent pricing. Compared with Q2 2022, oil sales fell 18% as Brent declined 13% and discounts increased.
- Nine-month production rose 11% year over year, which management attributed to drilling and workover activity in Acordionero and Costayaco. Q3 production was broadly unchanged year over year.
- Q3 operating expenses increased 9% year over year, attributed to workovers, higher lifting costs, environmental and community costs, and lower partner recoveries amid social blockades in the Suroriente Block. Transportation expense declined 23% year over year.
- Nine-month income tax expense was $99.9M, including $63.1M current tax; the effective tax rate was 49%. Management cited higher taxable income and several items affecting the rate, including costs incurred in jurisdictions where tax benefits are not recognized.
- The company repurchased 10.7M shares at an average $1.34 during the first nine months, recording $14.4M as treasury stock. The announced program permits repurchases of up to approximately 36.0M shares through August 31, 2023, subject to conditions.
Outlook, risks, and contingencies
Management stated that cash on hand, operating cash generation, and available credit were expected to support strategic objectives and the planned capital program for the next 12 months, assuming current oil-price trends and production levels. The filing provides no specific earnings or production guidance.
Key exposures include volatile oil prices and differentials, foreign exchange, floating interest rates on any facility borrowings, and operating disruptions in South America, including social blockades, protests, strikes, transport constraints, weather, and technical or regulatory delays. The company noted pending claims, including a dispute with Colombia’s National Hydrocarbons Agency over high-price-share royalties, but believed their resolution would not materially adversely affect its financial position, results, or cash flows. Letters of credit and other credit support totaled $109.8M for work commitments and other requirements.
The company’s non-GAAP measures, including adjusted EBITDA, funds flow, free cash flow, net debt, and operating netback, are not standardized GAAP measures and may not be comparable with those of other companies.
Important facts for investors to verify
- Whether Brent prices, realized pricing, quality and transportation discounts, and M+1 pricing continue to support cash generation.
- Production and project outcomes from the drilling and workover program, and the effect of royalties, operating costs, and social disruptions.
- Liquidity and covenant headroom under the new facility, including its availability period, maturity-extension conditions, and borrowing costs.
- Cash taxes, deferred tax balances, and the timing and collectability of tax receivables.
- Developments in the ANH royalty dispute and other claims, as well as the obligations secured by the $109.8M of credit support.
- Use of cash for capital spending, debt repurchases, and share repurchases; reconcile non-GAAP cash-flow and leverage measures to GAAP statements.