Gran Tierra Energy Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 26, 2020. Amounts are U.S. dollars unless stated otherwise. This is an annual report, not a standalone fourth-quarter filing.
Business context and reporting period
Gran Tierra explores for and produces oil and gas in Colombia and Ecuador. Colombia accounted for all 2019 revenue and proved reserves; Ecuador was a new, non-material exploration operation. The company acquired additional interests in Colombia, secured 100% working interests in three Ecuadorian blocks, and won four Colombian exploration blocks.
Financial and operating metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Oil and gas sales | $571.0 million | $613.4 million |
| Net income | $38.7 million | $102.6 million |
| Operating cash flow (GAAP) | $177.7 million | $284.5 million |
| Funds flow from operations (non-GAAP) | $272.4 million | $306.4 million |
| Capital expenditures | $379.3 million | $347.1 million |
| Production, net after royalty (NAR) | 29,015 BOEPD | 29,053 BOEPD |
| Average realized sales price | $53.68/BOE | $58.53/BOE |
| Operating netback (non-GAAP) | $34.53/BOE | $41.85/BOE |
Operating expenses rose 28% to $142.1 million, or $13.36/BOE; workover expenses rose 19% to $41.1 million, or $3.87/BOE. Transportation expense fell 30% to $20.4 million. EBITDA was $364.3 million and adjusted EBITDA was $325.9 million, both non-GAAP measures. The filing cautions that these measures may not be comparable across companies.
At year-end, cash and cash equivalents were $8.3 million, working capital was positive $91.3 million, and total assets were $2.045 billion. Debt principal was $718 million: $300 million of 6.25% notes due 2025, $300 million of 7.75% notes due 2027, and $118 million drawn on a $300 million revolving facility. Long-term debt carrying value was $700.5 million. The company reported $182 million of undrawn facility capacity and compliance with its covenants.
Proved reserves increased 26% to 67.6 MMBOE, with a reported 226% proved-reserve replacement ratio. Proved developed reserves were 36.6 MMBOE; proved undeveloped reserves were 31.0 MMBOE. The company repurchased 20.1 million shares for $37.6 million, at a weighted average price of $1.87 per share.
Material changes versus 2018
- Sales declined 7%, mainly because Brent averaged $64.16/bbl, down 11%; sales volume increased 1% and NAR production was essentially flat.
- Net income fell 62%, while operating cash flow declined 38% and funds flow from operations fell 11%.
- Operating netback per BOE declined 17%, reflecting lower realized prices and higher operating and workover costs. Management attributed higher costs chiefly to power generation, rentals, and ESP failures.
- Capital expenditures increased 9%; year-end debt principal rose to $718 million from $415 million. The company issued $300 million of 7.75% notes, repaid nearly all convertible notes, and extended the revolving facility maturity to November 2022.
- Proved undeveloped reserves rose from 17.3 MMBOE to 31.0 MMBOE, reflecting technical revisions, extensions, and acquisitions; 8.7 MMBOE converted to developed reserves.
Outlook, commentary, risks and unusual items
- 2020 plan: Capital budget of $175–$195 million, with 97% allocated to Colombia. The plan includes 16–19 gross development wells in Colombia, 1–2 Colombian exploration wells, and 0–1 Ecuador exploration wells. Management expected the program to be funded by operating cash flow, with funding assumptions relying in part on Brent at $60/bbl.
- Management expected Acordionero’s commissioned facilities and gas-to-power project to improve power reliability and reduce operating and workover costs in 2020. Production had been affected by ESP failures and temporary well shut-ins associated with high gas-oil ratios.
- Results included a $49.9 million investment gain on PetroTal shares, partly offset in earnings by an $11.5 million loss on redemption of convertible notes. Deferred income tax expense was $40.2 million; the effective tax rate was 60%, versus 32% in 2018. No oil-and-gas ceiling-test impairment was recorded.
- Key exposures include oil-price volatility, concentrated production and reserves in four Colombian fields, Colombian and Ecuadorian political, security, permitting and community risks, environmental liabilities, transport constraints, currency movements, and reserve-estimation uncertainty. The company had hedged 6,000 bopd with Brent collars for January–June 2020 (put $55/bbl; sold call $69.05/bbl).
- The company and Colombia’s ANH were discussing whether certain transportation and related costs may be deducted in calculating high-price royalties. Management said resolution was not expected to have a material adverse effect; the outcome remained uncertain. Other pending claims were also described as not expected to be material.
- The company reported no off-balance-sheet arrangements. It had $120.6 million of letters of credit and credit support for work commitments and other requirements. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also reported effective disclosure and financial-reporting controls.
Important facts for investors to verify
- Whether operating cash flow and available borrowing capacity can fund the 2020 capital program, particularly if oil prices or production fall below plan.
- Debt-service capacity and covenant headroom, including the borrowing-base redetermination due no later than May 2020 and the facility’s floating-rate exposure.
- Whether Acordionero cost reductions and production improvements materialized, given 2019 power-related outages, ESP failures, and higher unit costs.
- The durability of the reported reserve additions, especially technical revisions, and execution of the five-year development schedule for proved undeveloped reserves.
- Resolution and potential financial impact of the ANH high-price royalty cost-deduction dispute, alongside permit, community, security, environmental, and transportation risks in Colombia and Ecuador.
- The contribution and valuation sensitivity of the PetroTal investment: its $49.9 million 2019 unrealized gain materially affected reported earnings.