Gran Tierra Energy Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Gran Tierra is an international oil and gas exploration and production company with operations in Colombia and Ecuador. All reported revenue for the quarter came from oil sales. Amounts below are in U.S. dollars unless otherwise stated.
Financial and operating performance
| Metric | Q1 2022 | Comparable period |
|---|---|---|
| Oil sales | $174.6 million | $95.5 million in Q1 2021 |
| Net income (loss) | $14.1 million; $0.04 per diluted share | $(37.4) million; $(0.10) per share in Q1 2021 |
| Cash provided by operating activities | $103.8 million | $41.9 million in Q1 2021 |
| Funds flow from operations (non-GAAP) | $87.3 million | $29.0 million in Q1 2021 |
| Capital expenditures | $41.5 million | $37.4 million in Q1 2021 |
| Free cash flow (non-GAAP) | $45.8 million | $(8.5) million in Q1 2021 |
| Adjusted EBITDA (non-GAAP) | $119.4 million | $41.9 million in Q1 2021 |
| Production, net after royalty (NAR) | 22,833 BOPD | 20,533 BOPD in Q1 2021 |
Oil sales rose 83% year over year, primarily reflecting a 60% increase in average Brent prices and 12% higher sales volumes. Average realized price was $85.33 per barrel, versus $52.34; operating netback was $67.12 per barrel, versus $34.73. Operating netback is a non-GAAP measure. Royalties rose to 22% of working-interest production before royalties, from 16%, in line with Colombia’s price-sensitive royalty regime. Production increased year over year following drilling and workovers, but was down 3% from Q4 2021 as royalties increased.
Operating expenses were $34.4 million, up 16% year over year; management attributed higher per-barrel costs partly to activity and waterflood chemicals. Transportation expense was $2.8 million, up 13%. DD&A increased 31% to $41.0 million. Income before tax was $53.7 million, compared with a $28.8 million loss in Q1 2021.
Cash, debt and liquidity
- Cash and cash equivalents were $58.7 million at March 31, up from $26.1 million at December 31, 2021; cash, cash equivalents and restricted cash totaled $65.1 million.
- Operating cash flow of $103.8 million funded $41.5 million of capital additions and $27.5 million of debt repayments. Cash and restricted cash increased $33.7 million during the quarter.
- Balance-sheet debt was $627.4 million, including the revolving facility, senior notes net of issuance costs, and lease obligations. The company had $40.0 million drawn on its revolver at quarter-end, versus $67.5 million at year-end. It reported reducing the revolver balance to $10.0 million by April 29, 2022.
- Outstanding senior notes were $300 million of 6.25% notes due 2025 and $300 million of 7.75% notes due 2027. The revolver was due November 10, 2022. Its $150 million borrowing base included $125 million readily available and $25 million subject to major-lender approval; the filing reported $110 million of availability at March 31.
- The company was in compliance with its revolver covenants at March 31. The facility requires maximum debt/EBITDAX of 4.0x, maximum senior secured debt/EBITDAX of 3.0x, and minimum EBITDAX/interest of 2.5x.
Material changes and notable items
- Net income turned positive from a substantial year-earlier loss, reflecting stronger oil prices and higher production. Funds flow from operations increased 201% year over year.
- Income tax expense was $39.5 million, including $20.8 million current and $18.7 million deferred expense. The effective tax rate was 74%; management cited foreign taxes and translation, valuation allowances, permanent differences, and nondeductible stock compensation.
- Foreign exchange moved from a $13.1 million loss in Q1 2021 to a $3.7 million gain in Q1 2022. Derivative instruments generated a $21.4 million loss, including commodity-price derivatives; cash settlements on derivatives were $8.6 million.
- At March 31, outstanding hedges covered portions of expected April–June 2022 production: 5,000 BOPD in three-way collars, 3,000 BOPD in swaps, and 1,000 BOPD in deferred puts. Derivative liabilities were $18.9 million.
- Letters of credit and other credit support totaled $105.7 million, primarily securing work commitments in Colombia and Ecuador. The company reported no ceiling-test impairment in either Q1 2022 or Q1 2021.
Outlook, risks and contingencies
Management stated that cash on hand, operating cash generation and available credit were expected to support strategic objectives and the planned capital program for the next 12 months and beyond, assuming current oil-price trends and production levels. The filing provides no specific forward production, revenue or capital-spending guidance. Q1 capital additions included $39.0 million in Colombia and $2.5 million for corporate and Ecuador activities; six development wells and two water-injection wells were spud.
Key risks include oil-price and demand volatility; the May 2022 borrowing-base redetermination and November 2022 revolver maturity; covenant compliance and the potential for acceleration or cross-default consequences; production, transport and permitting disruptions in South America; foreign-exchange and interest-rate exposure; and execution, drilling and acquisition risks. Commodity hedges reduce some price variability but can also produce losses and limit upside. Two Colombian customers represented 57% and 43% of Q1 sales volumes. The company disclosed pending legal claims, including a dispute with Colombia’s National Hydrocarbons Agency over high-price-share royalties, and stated it did not expect their resolution to have a material adverse effect.
Important facts for investors to verify
- Subsequent revolver repayments, borrowing-base redetermination results, available borrowing capacity and progress toward the November 2022 maturity.
- Whether elevated Brent prices persist and how price-sensitive royalties, crude differentials and transportation costs affect realized prices and per-barrel netbacks.
- Production trends, including the sustainability of drilling and workover gains and the impact of higher royalties.
- Cash tax payments and the drivers of the unusually high 74% effective tax rate.
- Hedge volumes, prices, settlements and resulting exposure to oil-price movements; also monitor customer concentration.
- Developments in the ANH royalty dispute and the use of $105.7 million in letters of credit and other credit support.
- Non-GAAP measures—including adjusted EBITDA, funds flow and free cash flow—are company-defined and may not be comparable with other issuers’ measures.