GRAN TIERRA ENERGY INC. annual report, FY2013

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Gran Tierra Energy Inc. — 2013 Form 10-K

Business context and reporting period. Annual report for the fiscal year ended December 31, 2013. Gran Tierra is an independent oil and gas exploration, development and production company operating in Colombia, Argentina, Peru and Brazil. Amounts are in U.S. dollars unless noted.

Financial and operating performance

  • Revenue: Oil and natural gas sales were $720.5 million, up 24% from 2012; revenue and other income totaled $723.6 million. Higher production more than offset lower realized prices. Colombia generated 86% of revenue and other income.
  • Production and prices: Production averaged 22,267 BOEPD, up 32%. Average realized oil and NGL price was $90.61 per barrel, down 7%; realized sales price was $88.65 per BOE, down 6%.
  • Profit: Net income was $126.3 million, or $0.45 basic and $0.44 diluted per share, versus $99.7 million in 2012. Net margin was approximately 17.4%. Income tax expense was $135.5 million, with a 52% effective tax rate.
  • Cash flow and investment: Cash provided by operating activities was $520.9 million; non-GAAP funds flow from operations was $352.9 million, up 9%. Cash used in investing activities was $308.5 million. Net capital expenditures were $314.8 million; property additions in the cash flow statement were $367.3 million, partly offset by $59.6 million of property proceeds.
  • Liquidity and debt: Cash and cash equivalents were $428.8 million, up from $212.6 million; working capital was $245.8 million. No amounts were drawn on the three-year reserve-based credit facility, with a $150 million current borrowing base and up to $300 million maximum borrowing base. The filing states the company had no debt at year-end.
  • Reserves: Proved reserves were 42.1 MMBOE, up 4%; approximately 80% were proved developed. Probable reserves were 69.8 MMBOE and possible reserves 72.0 MMBOE, with major additions associated with the Bretaña discovery in Peru. Proved undeveloped reserves declined to 8.4 MMBOE from 11.2 MMBOE.

Changes versus 2012 and notable quarterly result

  • Production growth, supported by new Colombian wells and alternative oil transportation, drove annual revenue higher despite lower realized oil prices.
  • Net income increased 27%; operating expenses rose 19% in total but fell per BOE, while DD&A increased 47% to $267.1 million. The 2013 DD&A included a $30.8 million Argentina ceiling-test impairment and a $2.0 million Brazil impairment; 2012 included a $20.2 million Brazil impairment.
  • Foreign exchange shifted from a $31.3 million loss in 2012 to a $12.2 million gain in 2013, primarily reflecting currency movements and Colombian monetary tax liabilities. The 2013 result included an $18.9 million unrealized gain.
  • Fourth-quarter 2013 revenue and other income were $159.8 million and net loss was $12.5 million, versus fourth-quarter 2012 net income of $42.3 million. The filing’s quarterly table does not clearly attribute the fourth-quarter loss to specific items.

Outlook, risks and contingencies

  • 2014 plan: Management planned a $467 million capital program: $243 million in Colombia, $148 million in Peru, $44 million in Argentina, $30 million in Brazil and $2 million corporate. Planned funding was cash on hand and operating cash flow, assuming current production and commodity-price conditions. Plans included Colombian drilling and facilities, Peru Bretaña appraisal and test-production facilities, and development drilling in Argentina.
  • Colombia concentration and transport: The OTA pipeline was shut down approximately 229 days in 2013 amid security disruptions. Alternative transport enabled deliveries but reduced realized prices; the company reported a $12.55 per BOE impact for Colombian volumes sold to a truck-transported customer compared with OTA delivery. Operations also face sabotage, security and customer-concentration risks.
  • Legal and royalty exposure: Gran Tierra is contesting the ANH’s interpretation of the Moqueta high-price royalty. Potential compensation was estimated at $38.4 million; a separate dispute over deductible transportation costs could involve up to $28.9 million. Neither amount was accrued because management did not consider a loss probable. A separate Ecopetrol dispute resulted in a $4.4 million accrued loss, which the company appealed.
  • Other operating and country risks: Argentina production declined 13%, and its segment reported a $47.4 million pretax loss, including the impairment. Peru and Brazil also reported pretax losses. Risks include permitting delays, changing royalty and tax rules, currency controls and volatility, labor or landowner disruptions, environmental obligations, and dependence on a limited number of oil purchasers. In Brazil, production was constrained by gas-flaring restrictions and a Petrobras-related strike.
  • Funding and cash location: The company said the planned 2014 program depended on oil prices and operating cash flow; a shortfall could require spending cuts, borrowing, asset sales or equity issuance. At year-end, 97% of cash was held outside Canada and the United States and could be subject to restrictions or tax if repatriated.
  • Reporting controls: Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.

Important facts for investors to verify

  • Whether Colombian pipeline reliability, security incidents and alternative transport costs continue to affect production, realized prices and cash flow.
  • Progress and commercial viability of the Bretaña field in Peru, including appraisal results, permitting, facilities completion and planned long-term testing.
  • Outcome and potential financial effect of the ANH royalty arbitration and related transportation-cost interpretation dispute.
  • Execution and funding of the $467 million 2014 capital program, including actual spending, production and operating cash flow relative to assumptions.
  • Developments in Argentina’s Puesto Morales reserves and waterflood performance, and the effect of concession extensions, royalties and currency controls.
  • Customer concentration and renewal or replacement of key Colombian sales and transportation agreements.