Gran Tierra Energy Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Unaudited figures are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted. Gran Tierra explores, develops, and produces oil and natural gas, principally in Colombia and Argentina, with activity in Peru and Brazil.
Financial and operating results
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Oil and gas sales | $83.7 | $58.3 | $176.6 | $91.4 |
| Revenue and other income | $84.1 | $58.5 | $177.2 | $92.1 |
| Income (loss) before tax | $30.2 | $(24.1) | $51.4 | $(10.0) |
| Net income (loss) | $17.4 | $(28.2) | $27.3 | $(14.1) |
| Basic earnings (loss) per share | $0.07 | $(0.12) | $0.11 | $(0.06) |
| Funds flow from operations (non-GAAP) | $44.3 | $36.0 | $98.6 | $56.6 |
| Net cash from operating activities | Not stated separately | Not stated separately | $53.0 | $5.1 |
- Q2 production averaged 13,376 barrels of oil equivalent per day (BOE/d), up 6%; first-half average was 14,158 BOE/d, up 23%. Growth was primarily attributed to new Colombian development wells.
- Realized oil and gas sales per BOE were $68.78 in Q2, up 35%, and $68.93 for the first half, up 58%. Higher production and prices drove the revenue improvement.
- Operating expenses rose 7% in Q2 and 23% in the first half; general and administrative expense rose 37% and 38%, respectively. First-half depletion, depreciation, accretion and impairment increased 20%, including a $3.7 million Argentina ceiling-test impairment recorded in Q1.
- Foreign exchange losses were $3.1 million in Q2 and $17.4 million in the first half; $1.3 million and $14.0 million, respectively, were described as unrealized and non-cash. The losses principally reflected translation of a Colombian-peso-denominated deferred tax liability.
Balance sheet, liquidity and cash flow
- At June 30, cash and cash equivalents were $293.2 million, compared with $270.8 million at December 31, 2009. Working capital, including cash, was $278.7 million, up $63.6 million.
- First-half cash from operations of $53.0 million and financing inflows of $18.5 million exceeded investing outflows of $49.0 million; cash increased $22.4 million. Property, plant and equipment additions were $50.9 million.
- Total assets were $1.187 billion; property, plant and equipment was $693.9 million. Current liabilities were $103.3 million. The company reported no debt at June 30 and said cash and no debt were expected to support its plans for at least 12 months.
- Subsequent to quarter-end, a subsidiary signed a reserve-based credit facility for up to $100 million, with an initial committed borrowing base of $20 million, secured by Colombian subsidiary reserves.
Material changes, outlook and risks
- Compared with 2009, the company moved from net losses to net income in both the quarter and first half, reflecting higher output and realized prices and substantially lower Q2 foreign-exchange loss. First-half results also included higher expenses and the Argentina impairment.
- Management forecast 2010 average production of 14,000–16,000 BOE/d, excluding potential exploration success. The revised 2010 capital program was $223 million, up from $195 million, including planned spending of $143 million in Colombia, $45 million in Argentina and $32 million in Peru. Management expected the program to be funded by operating cash flow and cash on hand, subject to unforeseen events and commodity prices.
- Exploration and development updates included a Moqueta-1 oil discovery in Colombia, successful testing of Costayaco-11, three Colombian block awards pending contract finalization, and planned Peru seismic and drilling activity. The Argentina VM.x-1001 gas well was scheduled for drilling in Q3 2010; management cited Gas Plus qualification as a potential route to higher gas prices.
- Key exposures include volatile oil prices, dependence on Ecopetrol (96% of revenue in Q2 and first-half 2010), Colombian pipeline disruption and security risks, foreign-country political and regulatory risk, and Argentina’s regulated pricing and lack of sales contracts. Argentina production declined 27% in Q2 and 18% in the first half year over year.
- Ecopetrol claimed approximately $5.4 million in damages in a dispute over allocation of Guayuyaco test-well oil. No loss was accrued because management did not consider a loss probable. The filing also reports other claims whose outcomes were not determinable, but says management did not expect them to materially affect results or financial position.
- Contractual obligations totaled $51.6 million, including $44.4 million for drilling, completion, facilities and oil transportation services; $45.1 million was due within one year. Management cautioned that actual capital spending could vary and that additional financing, if needed, could dilute shareholders or require asset pledges.
Important facts for investors to verify
- Whether production targets and the $223 million capital plan remain achievable, and how exploration results affect output and spending.
- Terms, borrowing-base availability and any subsequent use of the newly signed credit facility; quarter-end debt was reported as none.
- Exposure to Ecopetrol and the reliability and capacity of Colombian transport routes, including impacts from pipeline outages.
- Developments in Argentina’s sales-contract and pricing uncertainty, and the operating and impairment outlook for that segment.
- Status and potential financial effect of the Guayuyaco dispute, and the assumptions supporting the no-accrual conclusion.
- Cash conversion: first-half non-GAAP funds flow was $98.6 million versus GAAP operating cash flow of $53.0 million; review the working-capital effects and the company’s non-GAAP reconciliation.