Gran Tierra Energy Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are U.S. dollars. Gran Tierra is an independent oil and gas producer operating in Colombia, Peru and Brazil; Argentina is reported as discontinued operations following its sale on June 25, 2014.
Financial and operating performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Oil and gas sales | $161.5 million | $170.8 million | $460.5 million | $507.3 million |
| Revenue and other income | $162.3 million | $171.3 million | $462.7 million | $508.5 million |
| Income from continuing operations | $44.2 million | $40.2 million | $125.4 million | $149.8 million |
| Net income | $44.2 million | $33.1 million | $98.5 million | $138.8 million |
| Funds flow from continuing operations (non-GAAP) | $89.2 million | $84.1 million | $261.0 million | $272.4 million |
| Production, adjusted for inventory changes and losses | 20,641 BOEPD | 19,269 BOEPD | 18,980 BOEPD | 19,476 BOEPD |
| Realized price per BOE | $85.05 | $96.36 | $88.88 | $95.41 |
| Operating expense per BOE | $17.88 | $14.14 | $15.66 | $15.25 |
Q3 sales fell 5% and nine-month sales fell 9%, mainly on lower realized oil prices; higher Q3 production partly offset the price decline. Continuing-operations income rose 10% in Q3 but fell 16% year to date. Q3 net income increased 34%, helped by the absence of an Argentina discontinued-operations loss. Nine-month net income fell 29%, including a $19.3 million after-tax loss on the Argentina disposal. The effective tax rate was 40% for the first nine months. The filing does not provide a single headline gross-margin measure.
Operating expenses increased 35% in Q3, with higher unit costs attributed in part to workovers and more costly trucking and pipeline alternatives. Nine-month DD&A declined 11%, while G&A rose 34%, reflecting expanded Peru activity, salaries and stock-based compensation.
Cash, liquidity and capital
- Cash and cash equivalents were $360.4 million at September 30, down from $428.8 million at December 31, 2013. Working capital, including cash, was $329.1 million, up from $245.8 million.
- Nine-month operating cash flow was $139.8 million, including $144.6 million from continuing operations. Investing cash outflow was $219.4 million, including $250.6 million of continuing-operations property additions, partly offset by $42.8 million of net Argentina-sale proceeds. Financing provided $11.2 million from option exercises.
- The company reported no debt and had not drawn on its three-year reserve-based credit facility. The facility had a $150 million current borrowing base, with a maximum borrowing base of up to $300 million; the company said it was in compliance with covenants.
- Approximately 85% of cash was held outside Canada and the United States and generally was not available for domestic or head-office use without repatriation, which could trigger taxes.
- Continuing-operations capital expenditures were $268.9 million for the first nine months, versus $191.2 million a year earlier. Total property, plant and equipment was $1.294 billion. Asset retirement obligations totaled $26.9 million.
Material changes, outlook and risks
- Portfolio change: Argentina was sold for $69.3 million in aggregate consideration—$55.4 million cash and $13.9 million in Madalena shares. The company recorded a $19.3 million loss on sale before related discontinued-operations effects; the Madalena shares were valued at $11.7 million at quarter-end and generated a Q3 unrealized loss.
- Capital plan: Management reduced its 2014 capital program from $482 million to $472 million, including $248 million for Colombia, $175 million for Peru and $26 million for Brazil. It expected to fund the program from operating cash flow and cash on hand, assuming current oil-price trends and production levels. Management said cash resources and the credit facility were expected to cover planned activity and operations for the next 12 months. Plans included further Colombia drilling and facilities work and a Peru appraisal well and long-term production test in Q4 2014.
- Transportation and concentration: Colombia generated 95% of continuing-operations revenue and other income for the first nine months. The OTA pipeline was shut down for approximately 155 days in that period. Alternative deliveries helped maintain volumes but can reduce realized prices and increase transportation costs. Three Colombian customers represented 37%, 11% and 38% of Q3 sales, respectively.
- Contingencies: A Colombian ANH dispute over the Chaza Contract HPR royalty could result in estimated compensation of $59.7 million if the agency prevails; a separate interpretation issue involving deductible transportation costs could add up to $38.9 million. No amount was accrued because management did not consider a loss probable. The ANH’s counterclaim also seeks, among other remedies, a declaration that the contract may be terminated.
- Other operating and country risks: Brazil production remained constrained by gas-flaring restrictions. The filing highlights oil-price volatility, pipeline disruption and guerrilla activity, permitting and community-consultation challenges, political and tax changes, foreign-exchange movements, and exploration and reserve-estimation uncertainty. Management also noted a proposed Colombian tax bill that, if enacted, could raise taxes during 2015–2019.
- Unusual or accounting items: The company recognized foreign-exchange gains of $12.4 million in Q3 and $6.6 million year to date, largely noncash effects of Colombian peso movements on tax balances. It adopted accounting updates on joint and several liabilities and unrecognized tax benefits without material impact; it was assessing the future revenue standard.
Important facts for investors to verify
- Whether oil prices, production and Colombian pipeline access support the $472 million 2014 capital program and management’s liquidity outlook.
- Progress and potential exposure in the HPR royalty arbitration and related transportation-cost dispute, including the possible $59.7 million and up-to-$38.9 million amounts.
- Customer concentration, alternative-market pricing and transport costs, and the collection cycle for Colombian receivables, which increased materially during the period.
- Peru appraisal, permitting and long-term test milestones; Colombia drilling plans; and Brazil’s ability to address flaring limits.
- The value and liquidity of the Madalena shareholding, and the practical availability and tax implications of cash held overseas.