Gran Tierra Energy Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; financial amounts are in U.S. dollars unless noted. Gran Tierra explores, develops and produces oil and natural gas in Colombia, Argentina, Peru and Brazil. Colombia generated 87% of revenue and other income in the first half of 2013.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Oil and gas sales | $168.2 million | $114.5 million | $373.0 million | $269.8 million |
| Net income | $47.8 million | $13.1 million | $105.7 million | $12.8 million |
| Basic and diluted EPS | $0.17 | $0.05 | $0.37 | $0.05 |
| Funds flow from operations (non-GAAP) | $91.5 million | $37.6 million | $200.1 million | $116.6 million |
| Production (BOEPD) | 22,131 | 14,127 | 22,775 | 15,435 |
| Realized sales price per BOE | $83.51 | $89.10 | $90.48 | $96.04 |
- Revenue and other income rose 47% in Q2 and 38% in the first half, mainly due to higher production; lower realized prices partly offset the increase. Net income rose substantially, supported by higher sales, lower G&A and foreign-exchange gains.
- Operating expenses increased 17% in Q2 and 41% in the first half, while operating cost per BOE fell 25% and 4%, respectively. DD&A rose 93% in Q2 and 31% in the first half. G&A fell 33% and 31%.
- Cash from operating activities was $248.8 million for the first half, versus cash used of $25.3 million in the comparable 2012 period. Investing used $182.4 million, including $184.6 million of property, plant and equipment additions; financing provided $3.0 million. Cash and cash equivalents increased $69.4 million to $282.0 million.
- At June 30, current assets were $426.2 million and current liabilities $188.7 million; reported working capital, including cash, was $237.5 million. Total assets were $1.81 billion and shareholders’ equity $1.40 billion.
- The company reported no drawn debt. Its reserve-based credit facility had a borrowing base of up to $100 million and was undrawn; management intended to replace it before expiration. The facility was scheduled for a three-year term from September 2010.
Material changes and operating developments
- Production increased 57% in Q2 and 48% in the first half. New Colombian wells, fewer transport constraints relative to production growth, alternative transportation and lower oil inventory contributed. Colombia’s OTA pipeline was restricted for about 70 days in Q2 and 115 days in the first half.
- Realized price per BOE declined 6% in both periods. Colombian oil was increasingly moved by trucking and an alternative pipeline; some deliveries incurred trucking-related price reductions.
- Net income included a $17.2 million first-half foreign-exchange gain, largely unrealized, compared with a $29.2 million loss in the first half of 2012. A $4.4 million loss was accrued for an adverse first-quarter ruling in a dispute with Ecopetrol; the company appealed.
- A $2.0 million ceiling-test impairment was recorded in Brazil, compared with a $20.2 million impairment in the first half of 2012. The 2013 charge reflected lower realized prices and higher estimated operating costs.
- Q2 included a $1.0 million reduction to corporate G&A for compensation received from the U.S. federal government for damages related to former securities counsel.
- Gran Tierra assumed its partner’s 50% working interest in Argentina’s Santa Victoria Block and received $4.1 million in consideration; it also received $1.5 million from selling its 15% interest in Colombia’s Mecaya Block.
Outlook, risks and contingencies
- Management revised the 2013 capital program to $454 million from $424 million: Colombia $216 million, Brazil $94 million, Argentina $33 million, Peru $109 million and corporate $2 million. It expected to fund the program from operating cash flow and cash on hand, subject to review of budgets and opportunities.
- Management cited oil-price volatility and Colombian pipeline disruptions as key uncertainties. If cash flow weakens, possible responses include reducing capital spending, drawing the credit facility, issuing debt or equity, or selling assets.
- About 90% of cash and cash equivalents was held outside Canada and the United States and generally was not available for head-office use unless repatriated. Argentina exchange controls may restrict transfers; $16.4 million remained in Argentina at period end.
- Two Colombian royalty disputes with the ANH were unaccrued because management did not consider losses probable. Potential compensation was estimated at $24.8 million for the Moqueta interpretation dispute and $19.6 million concerning allowable transportation-cost deductions.
- Principal disclosed risks include Colombian security incidents and pipeline access, customer concentration, oil-price and foreign-exchange exposure, regulatory and political changes in South America, permitting delays, exploration uncertainty, and environmental and operational hazards. Two Colombian customers accounted for 78% of first-half consolidated oil and gas sales.
- Management stated that disclosure controls were effective at June 30, 2013, and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether production growth and cash generation are sustainable after separating inventory effects, alternative-transport impacts and non-cash foreign-exchange gains.
- Progress on OTA pipeline reliability, alternative transport costs and the concentration of sales among Colombian customers.
- Execution, permitting and funding of the revised $454 million capital program, including planned spending in Peru and Brazil.
- Developments in the Ecopetrol appeal and ANH royalty disputes, including potential liabilities and effects on reserves.
- Replacement terms and availability of the undrawn credit facility, plus the practical accessibility of cash held in foreign subsidiaries.
- Brazil impairment exposure and whether the reported exploration and development results support planned investment.