Gran Tierra Energy Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Amounts are in U.S. dollars unless stated otherwise. Gran Tierra is an oil and gas exploration and production company operating in Colombia and Ecuador.
Financial and operating results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Oil and natural gas sales | $152.6 million | $138.2 million | +10% |
| Net income | $2.0 million | $17.9 million | -89% |
| Income before tax | $21.7 million | $43.6 million | -50% |
| Operating cash flow | $45.3 million | $71.1 million | -36% |
| Capital expenditures | $94.5 million | $72.7 million | +30% |
| Funds flow from operations (non-GAAP) | $75.5 million | $74.7 million | +1% |
| EBITDA (non-GAAP) | $92.5 million | $88.6 million | +4% |
| Production, net after royalties | 31,664 BOEPD | 28,189 BOEPD | +12% |
| Sales volume | 31,833 BOEPD | 27,203 BOEPD | +17% |
| Operating netback per BOE (non-GAAP) | $36.08 | $42.87 | -16% |
Oil sales were higher on increased volumes, partly offset by a 6% decline in realized sales price per BOE to $53.25. Brent averaged $63.90 per barrel, down 5% year over year. Operating expenses rose 60% to $34.8 million, reflecting power generation and equipment rental costs associated with Acordionero capacity constraints; workover costs also increased, partly due to submersible-pump failures. Depletion, depreciation and accretion increased 59% to $62.9 million. The 91% effective tax rate, versus 59% a year earlier, also weighed on earnings.
Liquidity, debt and cash flow
Cash and cash equivalents were $32.7 million at March 31, 2019, down from $51.0 million at year-end; current restricted cash was $1.1 million. Operating cash flow of $45.3 million was below the $94.5 million of capital expenditures, before $73.8 million of net acquisition cash outflow. Cash, cash equivalents and restricted cash decreased $18.2 million during the quarter.
Long-term debt was $516.9 million, including $300 million of 6.25% senior notes due 2025, $115 million of 5.00% convertible notes due 2021, and $114 million drawn on the revolving credit facility. The facility had a $300 million borrowing base and $186 million of availability at quarter-end; its next borrowing-base redetermination was due no later than May 2019. The company reported compliance with financial and operating covenants. Management stated that cash, operating cash generation and available facility capacity should support its 2019 plans, subject to current oil price trends and production levels.
Material changes, outlook and notable items
- Production growth reflected development activity at Acordionero and increased working interest in Suroriente. The company acquired a 36.2% interest in Suroriente and 100% of Llanos-5 for stated consideration of $80.6 million, including a $1.5 million promissory note. After quarter-end, it acquired the remaining 20% interest in VMM-2 for $3.5 million.
- The company said Acordionero facilities expansion was expected to be commissioned by the end of Q2 2019. It also reported successful bids for 100% interests in three prospective Ecuador exploration blocks; participation contracts and regulatory approvals remained outstanding, with execution expected in May 2019.
- Q1 capital expenditures were $94.5 million, mainly in Colombia. The filing provides no clear consolidated full-year production or capital-spending guidance figure.
- Commodity hedges for April–December 2019 covered 10,000 barrels per day in total: 5,000 bopd of purchased puts at a $60 Brent floor and 5,000 bopd of collars with a $60 floor and $71.53 ceiling.
- The company repurchased and canceled 2.59 million shares for $6.2 million during the quarter. Its 2019 program authorized purchases of up to approximately 19.35 million shares, subject to its terms.
- ASC 842 lease adoption on January 1, 2019 resulted in a $3.8 million right-of-use asset, $4.2 million of lease liabilities and a $0.4 million retained-earnings adjustment.
Risks and contingencies
The company was in ongoing discussions with Colombia’s National Hydrocarbons Agency over whether certain transportation and related costs may be deducted in calculating an additional royalty. Potential compensation could be up to $55.6 million if the agency’s interpretation is upheld; no liability was accrued because management did not consider a loss probable. Letters of credit and other credit support totaled $77.1 million, principally for work commitments and other requirements.
Key risks include volatile oil prices, production and transport interruptions, operating cost pressures, Colombian peso and floating-rate exposure, and exploration uncertainty. The company’s production was sold primarily to two major Colombian customers. Ecuador adds country-entry, regulatory, political, economic and exploration risks; the exploration contracts had not yet been signed. Management cautioned that actual results may differ from forward-looking statements.
Investor verification points
- Track Acordionero facility commissioning, production growth and whether elevated power, rental and workover costs moderate.
- Verify the May 2019 borrowing-base redetermination, remaining revolver availability and ongoing covenant compliance.
- Monitor the ANH royalty dispute and any change to the estimated exposure or probability of loss.
- Confirm execution and approval of Ecuador participation contracts, and assess the commitments and risks before exploration spending.
- Assess whether operating cash generation can fund the capital program and acquisitions without further borrowing, particularly if oil prices weaken.
- Review the 91% effective tax rate, substantial taxes receivable, and the concentration of sales among two customers.