Gran Tierra Energy Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Gran Tierra is an independent oil and gas exploration and production company focused primarily on Colombia, with operations in Brazil and Peru. Colombia generated 97% of 2016 revenue and other income and held 87% of proved reserves.
Key financial and operating metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Oil and gas sales | $289.3 million | $276.0 million |
| Net loss | $465.6 million | $268.0 million |
| Net loss per share | $1.45 | $0.94 |
| Net cash from continuing operating activities | $93.0 million | $62.3 million |
| Funds flow from continuing operations (non-GAAP) | $105.0 million | $107.6 million |
| Capital expenditures | $127.8 million | $156.6 million |
| Cash and cash equivalents at year-end | $25.2 million | $145.3 million |
| Working capital, including cash | $(23.3) million | $160.4 million |
| Debt principal at year-end | $205.0 million | None reported |
- Sales volumes rose 32% to 23,955 BOE per day; production after royalties (NAR) rose 19% to 23,187 BOE per day. Acquisitions and successful drilling contributed to the increase.
- Average realized sales price fell 20% to $33.00 per BOE, broadly tracking weaker benchmark oil prices. Operating netback, a non-GAAP measure, increased 6% to $170.6 million, but declined to $19.46 per BOE from $24.04.
- Asset impairment charges were $616.6 million, up from $323.9 million, primarily reflecting the full-cost ceiling test, lower oil prices and impairment of unproved assets. These non-cash charges were the main driver of the larger net loss.
- Year-end debt comprised $115 million principal of 5% convertible notes due 2021 and $90 million drawn under a revolving credit facility; the balance-sheet carrying amount of long-term debt was $197.1 million after unamortized issuance costs. The revolver borrowing base was increased to $250 million, subject to redetermination no later than May 2017.
- Fourth-quarter oil and gas sales were $91.6 million and net loss was $127.4 million, including $146.9 million of impairment charges.
Material changes versus the prior period
- Completed acquisitions of Petroamerica, PetroGranada Colombia Limited (PGC) and PetroLatina; reported net purchase prices totaled approximately $616.6 million. PetroLatina added producing assets in Colombia’s Middle Magdalena Basin.
- Despite higher sales volumes, sales increased only 5% as realized prices remained substantially lower than in 2015. The operating netback per BOE also declined.
- Cash fell by $120.2 million during 2016 as acquisition and capital spending outflows exceeded operating cash generation and financing inflows. The company raised equity, issued convertible notes and used credit facilities to finance acquisitions and manage debt.
- Proved reserves increased 36% to 52.8 MMBOE, reflecting acquisitions and other reserve additions; 72% were proved developed and 98% were oil. Proved undeveloped reserves increased to 14.9 MMBOE from 7.6 MMBOE.
- Share count increased materially following subscription-receipt conversion, a public offering and acquisition consideration. The filing reports 390.8 million common shares outstanding at December 31, 2016, excluding exchangeable shares.
Outlook, risks and unusual items
- Management’s 2017 capital budget was $200–$250 million, including $185–$235 million for Colombia. The plan called for 23–30 gross wells, with Colombia expected to represent about 93% of the budget. Management expected to fund the program with operating cash flow and available credit capacity.
- Management planned facilities expansion at Acordionero to raise oil production capacity to 15,000 BOEPD by year-end 2017, assuming up to six active drilling rigs. This is a target, not a reported result.
- After year-end, the company announced an agreement to sell its Brazil business for $35 million, subject to adjustments, plus the purchaser’s assumption of certain liabilities. Completion depended on purchaser financing and regulatory and other closing conditions; the company would continue operating the business pending closing.
- The company reported an ongoing dispute with Colombia’s ANH over whether transportation and related costs may be deducted when calculating the HPR royalty. Potential compensation could be up to $45.9 million if the ANH’s interpretation prevails; no amount was accrued because management did not consider a loss probable. The company had received a favorable arbitration decision on a separate dispute concerning the Moqueta production threshold.
- Operational and financial risks include oil-price volatility, borrowing-base reductions, pipeline and transport disruptions, Colombian security and community-related interruptions, permitting delays, foreign-exchange movements, environmental obligations and concentration in Colombia. The OTA pipeline was shut for 89 days in 2016, primarily because of a landslide.
- At year-end, the company reported compliance with its credit-facility covenants. It had outstanding commodity collars covering portions of 2017 oil production, which limit some exposure to falling prices but also cap some upside. No dividends had been declared, and management did not anticipate paying them in the foreseeable future.
- Deloitte issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash flow and credit availability can support the 2017 capital program, particularly after the next borrowing-base redetermination.
- Progress and economics of Acordionero’s planned capacity expansion, and whether the production and drilling targets are achieved.
- Resolution and potential financial impact of the ANH HPR royalty cost-deduction dispute.
- Completion, final proceeds and liability assumptions for the Brazil divestiture, including required financing and regulatory approvals.
- Future impairment exposure, reserve revisions and the sustainability of production growth and operating netbacks amid oil-price and transport risks.
- Cash accessibility and liquidity: 93% of year-end cash was held outside Canada and the United States, and reported working capital was negative.