Gran Tierra Energy Inc. — Q1 2018 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2018. Gran Tierra is an oil and gas exploration and production company focused on Colombia; following prior sales of its Brazil and Peru businesses, Colombia was its sole reportable operating segment in 2018. Amounts are in U.S. dollars unless stated otherwise.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Oil and natural gas sales | $138.2 million | $94.7 million |
| Net income | $17.9 million | $12.8 million |
| Diluted earnings per share | $0.05 | $0.03 |
| Cash provided by operating activities | $71.1 million | $49.9 million |
| Capital expenditures | $72.7 million | $46.2 million |
| Funds flow from operations (non-GAAP) | $74.7 million | $45.0 million |
| Operating netback per BOE (non-GAAP) | $42.87 | $28.57 |
Sales rose 46%, reflecting higher realized prices and sales volumes. Average realized sales price was $56.46 per BOE, up 33%; Brent averaged $67.18 per barrel, up 23%. Colombia net-after-royalty production increased 19% to 28,189 BOEPD, primarily from development and workovers at Acordionero. Consolidated sales volume increased 10% to 27,203 BOEPD. Operating expenses were $10.73 per BOE, broadly comparable year over year; transportation expense was $2.86 per BOE, down from $3.11.
Depletion, depreciation and accretion increased to $39.5 million from $26.6 million, or $16.12 per BOE versus $11.91. Interest expense was $5.5 million, up from $3.1 million. Income tax expense was $25.8 million and the effective tax rate was 59%, compared with 60%; management attributed higher current tax to increased Colombian taxable income and deferred tax expense mainly to excess tax depreciation.
Liquidity, debt and cash flow
At March 31, 2018, cash and cash equivalents were $160.5 million, compared with $12.3 million at year-end; current restricted cash was $3.3 million and long-term restricted cash was $3.2 million. The cash-flow statement’s ending balance, including restricted cash, was $166.9 million. Long-term debt carrying value was $397.6 million: $300 million principal of 6.25% Senior Notes due 2025 and $115 million principal of 5.00% convertible notes due 2021, net of issuance costs. The $148 million revolving credit balance outstanding at year-end was repaid, and the facility was undrawn at quarter-end, with a $300 million borrowing base subject to redetermination.
The Senior Notes issued in February generated $288.4 million of net proceeds, used primarily to repay the revolver, with the remainder for general corporate purposes. The company reported compliance with financial and operating covenants. It expected cash on hand, operating cash generation and credit availability to fund its 2018 plans. However, 97% of cash was held outside Canada and the United States and generally was not available for domestic or head-office needs without repatriation.
Material changes and management outlook
- Q1 capital spending was $72.7 million, versus $46.2 million a year earlier; operating cash flow was slightly below capital expenditures.
- The revised 2018 capital budget was $275–295 million, all allocated to Colombia, with 27–32 gross wells planned. Management expected the program to be fully funded by operating cash flows.
- The budget included an additional $25 million for facilities: accelerated Acordionero expansion and $20 million for gas-to-power projects. Management projected annual Acordionero operating-cost savings of $8–10 million from these power projects.
- The company reported no material change in its risk factors from its 2017 Form 10-K. It identified commodity-price volatility, Colombian peso exposure, operational and transportation disruptions, political and weather conditions, exploration outcomes, approvals and execution of development plans as risks. Derivatives were used to manage oil-price and currency exposure; outstanding oil hedges covered 10,000 bopd for April–December 2018.
Contingencies and unusual items
The National Hydrocarbons Agency is disputing the deductibility of certain transportation and related costs when calculating an additional royalty. Potential compensation was estimated at up to $51.8 million as of March 31, 2018; no amount was accrued because management did not consider a loss probable. Letters of credit and other credit support totaled $76.5 million, principally for contractual work commitments and other requirements.
Financial-instrument losses were $6.9 million, compared with a $5.4 million gain a year earlier. Q1 2018 included a $5.9 million fair-value loss on Sterling shares received or subscribed for in connection with the Peru business sale; this investment loss was unrealized. Adoption of ASC 606 and the cited financial-instrument accounting updates did not materially affect the financial statements.
Key facts for investors to verify
- Whether production growth, Acordionero expansion and the planned facilities investment deliver the expected output and cost savings.
- Whether operating cash flows are sufficient to fund the $275–295 million capital program amid oil-price and production variability.
- The outcome and potential exposure from the ANH royalty interpretation dispute, for which the stated estimate reaches $51.8 million and no accrual was recorded.
- Debt-service capacity and covenant headroom after the Senior Notes issuance, including the revolver borrowing-base redetermination and restrictions on distributions.
- Access to cash held outside Canada and the United States, and the impact of hedges, Colombian peso movements and royalty increases on realized cash flows.
Operating netback and funds flow from operations are non-GAAP measures and may not be comparable with similarly named measures at other companies.