Gran Tierra Energy Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Gran Tierra is an oil and gas exploration and production company operating in Colombia and Ecuador. Unless otherwise stated, financial amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Oil sales | $53.1 million | $132.5 million | $173.0 million | $443.0 million |
| Net income (loss) | $(107.8) million | $(28.8) million | $(730.1) million | $11.7 million |
| Adjusted EBITDA* | $21.8 million | $73.7 million | $74.2 million | $265.0 million |
| Funds flow from operations* | $8.1 million | $59.0 million | $36.3 million | $222.7 million |
| Production NAR | 17,051 BOPD | 27,763 BOPD | 20,264 BOPD | 29,525 BOPD |
| Operating netback* | $31.1 million; $19.83/bbl | $82.7 million; $32.45/bbl | $79.8 million; $14.30/bbl | $292.7 million; $36.24/bbl |
*Non-GAAP measures as defined by the company. Q3 Brent averaged $43.34/bbl, down 30% year over year; realized oil price was $33.85/bbl. Q3 sales volume fell 38% year over year. Compared with Q2 2020, oil sales rose 57% and adjusted EBITDA rose 22% as benchmark prices improved.
Q3 operating expenses were $19.6 million, workover costs $1.1 million, and transportation costs $1.3 million. Q3 capital expenditures were $7.4 million, down 94% from Q3 2019. For the first nine months, operating cash flow was $59.3 million versus $138.4 million; investing cash outflow was $125.9 million versus $368.2 million. Financing provided $81.1 million. Cash, cash equivalents and restricted cash ended at $24.8 million, up from $11.1 million at year-end 2019.
Liquidity, debt and balance sheet
- September 30 cash and cash equivalents were $21.4 million; current restricted cash was $0.4 million. Working capital, including cash, was $49.9 million, down 45% from December 31, 2019.
- Debt included $300 million of 6.25% Senior Notes due 2025, $300 million of 7.75% Senior Notes due 2027, and $200 million drawn on the revolving facility. Reported long-term debt, including unamortized issuance costs and lease obligations, was $784.3 million.
- The revolver borrowing base had been reduced from $300 million to $225 million; reported availability was $25 million. The next borrowing-base redetermination was scheduled for November 2020. The company was compliant with applicable covenants at September 30 under amended terms and stated it forecast compliance for at least the next year, subject to assumptions.
- The amendment imposed tighter restrictions, higher interest spreads during covenant relief, and mandatory prepayments in specified circumstances, including cash above $15 million. A revolver default could trigger a default under the senior-note indentures.
- Senior-note fair values were materially below carrying amounts: $103.6 million for the 6.25% notes and $105.6 million for the 7.75% notes, compared with carrying amounts of $291.9 million and $290.6 million, respectively.
Material changes, outlook and risks
- Nine-month results included $502.9 million of oil and gas property impairment, $4.2 million of inventory impairment, and $102.6 million of goodwill impairment, primarily reflecting lower oil prices and reduced forecasts. Q3 included $104.7 million of total asset impairment. The company used a $47.95/bbl average Brent price in its September ceiling test.
- Production fell due to shut-ins at Suroriente and PUT-7 following a local farmers’ blockade, resolved by quarter-end, and shut-ins of smaller fields amid low prices. The company reported beginning to reactivate 10 shut-in fields and restarting workovers at Acordionero.
- Management planned to restart development drilling in Q4 2020, targeting one to two new oil wells by year-end. It reported no exploration or development wells drilled in Q3. It forecast 30%–35% lower cost per workover versus 2019.
- Management cited COVID-19 disruption, lower commodity prices, reduced demand, operating restrictions and logistics challenges. Q3 COVID-related costs were $1.1 million; nine-month costs were $1.5 million.
- Other key risks include a possible borrowing-base reduction, covenant compliance and access to financing, further asset impairments, oil-price and production volatility, Colombian and Ecuadorian operating and political conditions, and customer or supplier non-performance. Management said liquidity could not be assured at or above current levels.
- Contingencies include ongoing litigation and a dispute with Colombia’s National Hydrocarbons Agency over HPR royalty calculations; the company did not expect resolution to materially affect its consolidated financial position, results or cash flows. Letters of credit and other credit support totaled $96.6 million.
Investor verification priorities
- Confirm the November 2020 borrowing-base redetermination outcome, facility availability, and covenant terms and compliance trajectory.
- Track liquidity, debt service, cash restrictions and collections of Colombian tax and VAT receivables; the company reported collecting $97 million in refunds year to date.
- Assess whether production recoveries and planned drilling occurred, and whether price, sales volumes and differentials support cash generation.
- Review impairment assumptions, reserve values and the effect of future commodity prices on asset carrying values and borrowing capacity.
- Monitor the ANH royalty dispute, letters of credit and other contingencies, alongside the significant gap between senior-note carrying values and disclosed fair values.