Gran Tierra Energy Inc. — Q1 2020 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. Gran Tierra explores for and produces oil and natural gas in Colombia and Ecuador; all reported revenue in both periods came from oil sales. Amounts below are U.S. dollars unless noted.
Key financial and operating results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Oil and gas sales | $86.1 million | $152.6 million |
| Net income (loss) | $(251.6) million | $2.0 million |
| Diluted earnings (loss) per share | $(0.69) | $0.01 |
| Cash flow from operating activities | $5.5 million | $45.3 million |
| Funds flow from operations (non-GAAP) | $22.2 million | $75.5 million |
| Adjusted EBITDA (non-GAAP) | $34.5 million | $93.9 million |
| Capital expenditures | $44.3 million | $94.5 million |
| Sales volume, net after royalties | 24,850 BOEPD | 31,833 BOEPD |
| Operating netback (non-GAAP) | $37.5 million; $16.56/BOE | $103.4 million; $36.08/BOE |
Average Brent was $50.82 per barrel, down 20%; realized sales price was $38.07/BOE, down 29%. Sales fell 44%, reflecting lower Brent prices, 22% lower sales volumes, and wider quality and transportation discounts. NAR production declined 20% to 25,371 BOEPD.
Q1 expenses included a $102.6 million goodwill impairment for the Colombia business unit and a $3.9 million inventory impairment. There was no Q1 asset impairment under the ceiling test, but the filing warned of increased impairment risk in Q2 and beyond. Other significant items included a $65.3 million unrealized loss on PetroTal shares, partially offset by an $18.3 million commodity-derivative gain, and an $18.8 million foreign-exchange loss. Income-tax expense was $34.9 million, including $34.6 million deferred tax expense.
Balance sheet, liquidity and debt
- At March 31, cash and cash equivalents were $39.3 million; current restricted cash was $0.4 million. Working capital, including cash, was $37.0 million, down from $91.3 million at December 31, 2019.
- Long-term debt on the balance sheet was $786.6 million, including lease obligations and net of unamortized debt issuance costs. Principal debt comprised $204 million drawn on the revolving facility and $600 million of senior notes: $300 million of 6.25% notes due 2025 and $300 million of 7.75% notes due 2027.
- Operating cash flow was insufficient to fund investing activity: investing used $62.1 million, while financing provided $87.8 million, principally from $88.0 million net proceeds from bank debt. Cash, cash equivalents and restricted cash increased by $30.7 million to $41.8 million.
- The company reported $135.4 million of letters of credit and other credit support, mainly for work commitments and other operating or capital requirements. It reported no off-balance-sheet arrangements.
Material changes, outlook and risks
- In response to COVID-19, the collapse in oil prices and weak demand, the company deferred most remaining 2020 capital spending, suspended development and operations in fields with zero or negative netbacks, stacked all drilling and workover rigs, and shut in minor fields. Management said only minimal maintenance capital would be spent in 2020 at its discretion.
- Production was also affected by a local farmers’ blockade at the Suroriente and PUT-7 Blocks. The company said production and waterflood operations there remained shut in; wells awaiting routine workovers would stay offline during the low-price environment. The filing did not give a timetable for restart.
- Management reported progress on vendor-contract renegotiations and other operating-cost initiatives, with benefits expected from Q2 onward. Executive salaries and director retainers were reduced 20%; management expected G&A costs to be 30%–35% below the original budget.
- The company was in compliance with its credit-facility covenants at March 31, but forecast it would not meet certain EBITDAX-related covenants during the next 12 months under then-current assumptions. Management was negotiating covenant amendments and expected them in Q2, but gave no assurance they would be obtained or on acceptable terms. A breach could restrict borrowing, permit acceleration of facility debt and potentially trigger defaults under the senior notes.
- The $300 million borrowing base was due for redetermination in May 2020. Lenders could reduce it; any borrowing-base amount below the $204 million drawn could require repayment of excess borrowings within 90 days. Management believed the redetermination would not reduce the base below amounts drawn, but gave no assurance.
- The filing explicitly states that covenant uncertainty creates substantial doubt about the company’s ability to continue as a going concern. The financial statements were prepared on a going-concern basis and do not include adjustments that might be necessary if the company could not continue normal operations.
- At March 31, commodity hedges covered 6,000 bopd for April–June, 4,000 bopd for April–December, and 3,000 bopd for July–December 2020. The filing also disclosed COP collars hedging forecast expenses. Hedging limits exposure but does not remove oil-price, currency or liquidity risk.
- Other risks include possible further impairment of oil and gas assets, restricted access to financing, customer or supplier non-performance, operational disruption and uncertain COVID-19 effects. The company disclosed ongoing legal claims, including an HPR royalty dispute with Colombia’s ANH, and said it did not expect their resolution to have a material adverse effect.
Most important facts for investors to verify
- Whether lenders amended covenant terms and completed the May 2020 borrowing-base redetermination, and the resulting liquidity and repayment requirements.
- Subsequent cash, debt, covenant headroom and access to financing, given the going-concern uncertainty and low Q1 operating cash flow.
- Actual oil prices, hedge settlements, realized differentials, sales volumes and the timing and economics of restarting shut-in fields.
- Whether later oil-price assumptions led to additional asset or inventory impairments, reserve revisions or changes in deferred tax asset valuations.
- Delivery of the announced operating-cost and G&A reductions, and the level of capital spending after the deferral.
- Developments in the Suroriente and PUT-7 blockade, the ANH royalty dispute and the company’s $135.4 million of credit support commitments.