Gran Tierra Energy Inc. — 2017 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2017. Gran Tierra is an oil and gas exploration and production company focused on Colombia, which accounted for all proved reserves and 98% of revenue and other income. The company sold its Brazil assets in June and Peru assets in December 2017, and held an approximately 46% minority interest in Sterling following the Peru sale. All amounts below are in U.S. dollars unless noted.
Financial and operating performance
- Revenue and earnings: Oil and gas sales were $421.7 million, up 46% from $289.3 million in 2016, reflecting higher sales volumes and realized prices. Gran Tierra reported a net loss of $31.7 million ($0.08 per share), compared with a $465.6 million loss ($1.45 per share) in 2016. The 2017 result included a $44.4 million loss on sale of business units; 2016 included $616.6 million of asset impairment.
- Production and pricing: Average production before royalties rose 19% to 32,105 BOEPD; production net after royalties (NAR) increased 16% to 26,785 BOEPD. Sales averaged 26,689 BOEPD, up 11%. Realized oil and gas sales were $43.29 per BOE, up 31%; Brent averaged $54.82 per barrel, up 24%.
- Costs and margin: Operating expenses increased 26% to $109.9 million, or $11.28 per BOE, up 14%. Transportation expense fell 21% to $25.1 million, or $2.58 per BOE, down 29%. Operating netback, a non-GAAP measure, was $286.8 million, or $29.43 per BOE, up 68% and 51%, respectively. Higher operating costs per BOE reflected Putumayo power disruptions and NaturAmazonas conservation program costs.
- Cash flow and investment: Net cash from operating activities was $189.6 million, versus $93.0 million in 2016. Funds flow from operations, a non-GAAP measure, increased 110% to $220.2 million. Capital expenditures were $251.0 million, including $242.6 million in Colombia. Investing activities used $243.8 million; net cash and restricted cash declined $16.6 million during the year.
- Liquidity and debt: Year-end cash and cash equivalents were $12.3 million, plus $11.8 million of current restricted cash and $2.6 million of long-term restricted cash. Working capital was negative $11.7 million. Gross debt comprised $148 million drawn on a $300 million revolving facility and $115 million of 5.00% convertible notes due 2021; reported long-term debt, net of issuance costs, was $256.5 million. The company reported compliance with credit-facility covenants at year-end.
- Reserves: Proved reserves rose 11% to 59.3 MMBOE; probable reserves rose 25% to 55.2 MMBOE. Proved reserves were 99% oil and 67% developed. Three fields—Acordionero, Costayaco and Moqueta—accounted for 82% of 2017 production and 81% of proved reserves.
Material changes versus 2016
- Revenue, production, realized prices, operating netback and funds flow improved, while the net loss narrowed substantially, chiefly as 2016 included large impairment charges.
- 2017 impairment was $1.5 million, compared with $616.6 million in 2016; no Colombia ceiling-test impairment was recorded in 2017.
- Capital spending nearly doubled to $251.0 million. Operating cash flow increased, but remained below capital expenditures.
- Brazil and Peru were divested. Brazil generated approximately $36.8 million cash proceeds; the Peru sale consideration included Sterling shares and a working-capital adjustment. The sales generated a combined reported loss of $44.4 million.
- Shares repurchased and canceled totaled approximately 7.7 million for $17.9 million during 2017.
Outlook, risks and unusual items
- 2018 plans: Management’s capital-budget table gives a range of $250–270 million, with 27–32 gross wells and spending on development, exploration, facilities, seismic and studies. The filing elsewhere states a $265–285 million 2018 exploration and development program. This difference is not reconciled in the filing text provided. Management expects the program to be funded from operating cash flow; a separate risk disclosure says funding assumptions rely in part on oil prices above $50 per barrel.
- Financing after year-end: On February 15, 2018, the company issued $300 million of 6.25% senior notes due 2025. Proceeds were used to repay the revolving facility, with the remainder for general corporate purposes.
- Operational and country risks: Operations are concentrated in Colombia and in a few fields. Risks include oil-price volatility, transportation constraints, power instability in Putumayo, permitting and environmental requirements, community protests, security and political developments, foreign-exchange movements, and dependence on local infrastructure. The filing notes that road blockades delayed a planned exploration well in 2017 and that some exploration commitments were suspended because of licensing restrictions or security issues.
- Contingency: Gran Tierra and Colombia’s ANH are discussing whether certain transportation costs may be deducted when calculating the high-price royalty. Potential compensation could reach $50.8 million if the ANH’s interpretation is upheld; no accrual was recorded because the company did not consider a loss probable.
- Other notable items: Fourth-quarter 2017 net loss was $40.8 million, including a $35.3 million loss on business-unit sales and $21.1 million of financial-instrument losses. The 2017 effective tax rate was 185%, driven by foreign-tax effects, valuation allowances and other items. The company adopted new accounting guidance for intra-entity asset transfers, recording a $124.5 million cumulative adjustment to opening deficit without a cash-flow effect.
- Audit and controls: Deloitte issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor verification priorities
- Reconcile the two disclosed 2018 capital-budget ranges ($250–270 million versus $265–285 million) and confirm the final approved program and funding assumptions.
- Track the ANH royalty-cost dispute, its potential exposure of up to $50.8 million, and any change in the company’s probability assessment or accrual.
- Assess post-note-issuance debt, revolver repayment, interest burden and borrowing-base redetermination, alongside actual 2018 operating cash flow and capital spending.
- Verify delivery and economic performance of the 2018 drilling program, Acordionero facilities expansion, Putumayo power improvements and reserve additions.
- Monitor production concentration, oil prices and differentials, transport access, community and security disruptions, and the status of suspended exploration commitments.
- Review Sterling’s performance and the value, liquidity and restrictions associated with Gran Tierra’s minority investment.