Gran Tierra Energy Inc. — Q3 2019 Form 10-Q
Business and period: Gran Tierra explores for and produces oil and natural gas in Colombia and Ecuador. This unaudited report covers the three and nine months ended September 30, 2019. All amounts are U.S. dollars unless stated otherwise.
Financial and operating performance
- Q3 revenue: Oil and natural gas sales were $132.5 million, down 24% year over year. The decline reflected an 18% drop in Brent prices, 3% lower sales volumes, and higher quality and transportation discounts. All revenue came from oil sales.
- Nine-month revenue: $443.0 million, down 7% from $476.8 million. Sales volumes rose 6%, partly offsetting lower Brent prices and realized prices.
- Production and pricing: Q3 production net after royalties (NAR) averaged 27,763 BOEPD, down 3%; sales averaged 27,705 BOEPD. Nine-month NAR production averaged 29,525 BOEPD, up 4%. Q3 Brent averaged $62.03/bbl, down 18%; realized sales were $51.98/BOE, down 22%.
- Operating netback: Q3 was $82.7 million, or $32.45/BOE, down 34% and 32%, respectively. Nine-month netback was $292.7 million, down 17%, or $36.24/BOE, down 21%. Operating expense per BOE rose 25% in Q3 to $13.97, while transportation expense per BOE fell 56% to $1.25.
- Profit: Q3 net loss was $28.8 million, versus $75.3 million net income a year earlier; loss per share was $0.08. The Q3 result included an $11.3 million convertible-note redemption loss and an $12.0 million unrealized investment loss, among other items. Nine-month net income was $11.7 million, down from $113.5 million; diluted earnings per share were $0.03 versus $0.28.
- Cash flow and investment: Nine-month operating cash flow was $138.4 million, versus $213.2 million. Funds flow from operations, a non-GAAP measure, was $222.7 million, down 12%. Capital expenditures were $310.6 million, up 20%; investing cash outflow was $368.2 million. Cash, cash equivalents and restricted cash ended at $16.8 million, down from $54.3 million at year-end 2018.
- Balance sheet and liquidity: At September 30, cash and cash equivalents were $14.0 million; working capital, including cash, was a $5.0 million deficiency. Long-term debt and lease obligations totaled $637.6 million carrying value. Principal debt included $300 million of 6.25% notes due 2025, $300 million of 7.75% notes due 2027, and $57 million drawn on the revolver. The company reported $243 million of revolver availability, no near-term maturities, and compliance with financial and operating covenants.
- Margins and costs: Q3 operating expenses rose 21% to $35.6 million, primarily due to power generation, maintenance, freight and logistics costs, and lower production. Nine-month DD&A rose 19% to $164.4 million. The nine-month effective tax rate was 79%, compared with 24% in 2018, largely reflecting deferred tax effects, valuation allowance changes and foreign currency translation.
Material changes and notable transactions
- During the quarter, the company purchased and canceled essentially all $115.0 million of convertible notes, paying $1,075 per $1,000 principal plus accrued interest. It issued $300 million of 7.75% senior notes due 2027 in May 2019.
- The company acquired a 36.2% working interest in Suroriente and 100% in Llanos-5 in February for $79.1 million cash plus a $1.5 million promissory note.
- It repurchased 20.1 million shares for $37.6 million during the first nine months; the 2019 repurchase program reached its 5% maximum and expired in September.
- Q3 production was affected by ESP failures and high gas production at Acordionero, and temporary Suroriente downtime related to community issues. The company commissioned Acordionero water-injection and gas-to-power facilities during the quarter.
Outlook, risks and contingencies
- Management said cash on hand, operating cash generation and available revolver capacity should fund strategic objectives and the planned capital program for the next 12 months, assuming current oil-price trends and production levels.
- Management expected Acordionero facility commissioning to support higher production beginning in Q4 2019. It expected operating-cost reductions to begin in November 2019, with the full benefit in 2020.
- Oil-price exposure is partly hedged: Q4 2019 positions covered 10,000 bopd through puts and collars, with a $60/bbl purchased-put level and collar sold-call level of $71.53/bbl. Currency collars also covered forecast Colombian peso expenses. These hedges do not eliminate price or currency risk.
- The company is in discussions with Colombia’s National Hydrocarbons Agency over whether certain transportation costs may be deducted in calculating an additional royalty. Potential compensation could be up to $56.2 million; no amount was accrued because management did not consider a loss probable.
- Letters of credit and other credit support totaled $123.9 million for work commitments and other requirements. Management cited commodity-price volatility, South American political and operating conditions, production and transport disruptions, foreign exchange, financing access and development execution among key risks.
Important facts for investors to verify
- Whether Acordionero production recovery and the forecast cost savings materialize, and how subsequent operating data compare with management’s expectations.
- Whether oil prices, realized discounts, sales volumes and operating costs sustain the cash generation needed for the capital program and debt service.
- The revolver borrowing-base redetermination, covenant headroom and liquidity after the period-end debt refinancing and share repurchases.
- Developments in the ANH royalty-cost dispute and the potential exposure of up to $56.2 million.
- Effects of PetroTal share-price movements on the investment value and reported earnings; the filing notes that a CAD $0.01 share-price change would alter the investment’s value by about $1.8 million.