Gran Tierra Energy Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Gran Tierra is an international oil and gas exploration and production company with operations in Colombia and Ecuador. Financial statement amounts below are in U.S. dollars; millions are identified as such.
Financial and operating performance
- Revenue: Oil sales were $144.2 million, down 17% from $174.6 million in Q1 2022. The decline primarily reflected a 16% decrease in Brent prices and wider quality and transportation differentials. All revenue came from oil sales.
- Production and sales: Net-after-royalty production averaged 25,526 BOPD, up 12%; sales averaged 25,171 BOPD, up 11%. Ecuador contributed $3.2 million of oil sales. One Colombian customer accounted for 97% of sales volumes, versus two customers accounting for 57% and 43% a year earlier.
- Profitability: Gran Tierra reported a net loss of $9.7 million, or $0.03 per share, compared with net income of $14.1 million, or $0.04 per share. Pretax income fell 57% to $23.2 million. Income tax expense was $32.9 million, producing a 142% effective tax rate.
- Operating costs and netback: Operating expenses rose 18% to $41.4 million; transportation expenses rose 8% to $3.1 million. Operating netback, a non-GAAP measure, fell 27% to $99.8 million, or $44.04 per sales barrel from $66.87. Adjusted EBITDA fell 26% to $88.7 million; funds flow from operations fell 31% to $60.0 million. These are non-GAAP measures and may not be comparable with similarly named measures at other companies.
- Cash flow and capital spending: Operating cash flow was $49.3 million, down from $103.8 million. Capital additions were $71.1 million, up 71%; cash used in investing activities was $56.2 million. Cash, cash equivalents and restricted cash ended the quarter at $112.5 million, down from $133.4 million at year-end 2022; unrestricted cash was $105.7 million.
- Debt and liquidity: Long-term debt and lease obligations totaled $581.4 million, compared with $589.6 million at December 31, 2022. The company had $271.9 million of 6.25% Senior Notes due 2025 and $300.0 million of 7.75% Senior Notes due 2027. Its credit facility was undrawn, with $100 million initially available and a possible additional $50 million by mutual agreement. The company said cash, operating cash generation and facility availability should meet its strategic objectives and planned capital program for the next 12 months, based on current oil-price trends and production levels.
Material changes and notable items
- Compared with Q1 2022, higher production and sales volumes did not offset lower Brent pricing, wider differentials, higher operating costs and increased DD&A. Operating expenses per barrel rose to $18.26 from $17.07; DD&A rose 26% to $51.7 million.
- Capital additions included $45.1 million for drilling and completions. Gran Tierra spud 10 development wells and four water-injection wells in Colombia; six development wells were completed and four remained in progress at quarter-end.
- The company repurchased $8.0 million principal amount of 6.25% Senior Notes for cash consideration of $6.8 million, recording a $1.1 million gain. It also repurchased 13.1 million common shares at a weighted-average $0.82 per share for $10.7 million; the shares were held as treasury stock.
- Foreign exchange was a $1.7 million loss, versus a $3.7 million gain in Q1 2022. No commodity derivative losses were recorded in Q1 2023; Q1 2022 included a $21.4 million derivative loss.
Outlook, risks and contingencies
- No specific production, earnings or capital-spending guidance is provided in the supplied filing text. Management’s liquidity outlook is conditional on oil-price trends and production levels.
- On April 11, 2023, Gran Tierra announced a renegotiated 20-year Suroriente Block contract with Ecopetrol, following the existing contract’s scheduled 2024 end. The agreement is subject to conditions precedent, including Colombian regulatory approval; its effective date depends on those conditions being satisfied.
- Key exposures include volatile oil prices and quality differentials, foreign exchange, operational and transportation disruptions, and political, security, regulatory and weather risks in South America. The company’s high customer concentration is also a material consideration.
- Letters of credit and other credit support totaled $109.6 million, primarily securing work commitments in Colombia and Ecuador. Gran Tierra disclosed pending lawsuits and claims but said it did not expect their resolution to materially adversely affect its financial position, results or cash flows.
- The credit facility has financial covenants and a draw availability period that expires August 20, 2023; its stated maturity is August 15, 2024, potentially extendable subject to conditions. The company also noted the need to refinance or otherwise address Senior Notes as they mature.
Important facts for investors to verify
- Whether production growth and the Ecuador contribution can offset lower benchmark prices and widened crude differentials.
- Customer concentration, and the status and approval of the Suroriente agreement with Ecopetrol.
- Liquidity and covenant headroom after capital spending, share repurchases, and the credit facility’s August 2023 draw deadline.
- The sustainability of cash generation relative to the capital program and debt maturities.
- The drivers of the 142% effective tax rate and the $32.9 million tax expense despite pretax income of $23.2 million.