Gran Tierra Energy Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited U.S. GAAP financial statements; amounts below are U.S. dollars. Gran Tierra explores and produces oil and natural gas in Colombia, Argentina, Peru and Brazil. Colombia generated 87% of revenue and other income in the first nine months.
Financial and operating performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Oil and gas sales | $189.0 million | $168.6 million | $561.9 million | $438.4 million |
| Net income | $33.1 million | $44.6 million | $138.8 million | $57.4 million |
| Diluted EPS | $0.12 | $0.16 | $0.49 | $0.20 |
| Funds flow from operations (non-GAAP) | $84.5 million | $89.9 million | $284.7 million | $206.5 million |
| Production | 21,978 BOEPD | 19,491 BOEPD | 22,505 BOEPD | 16,797 BOEPD |
| Realized sales price per BOE | $93.46 | $94.03 | $91.46 | $95.26 |
Q3 revenue and other income increased 12%, while net income fell 26%. Higher production and sales were outweighed in part by higher DD&A and G&A, income tax expense and foreign-exchange losses. For the nine-month period, revenue and other income rose 28% and net income rose 142%, helped by higher production, foreign-exchange gains and lower G&A, partly offset by higher operating, DD&A and tax expenses. Nine-month effective tax rate was 44%, versus 59% a year earlier.
Production increased 13% in Q3 and 34% year to date, mainly from Colombia; realized prices declined 1% and 4%, respectively. Q3 operating expense was $35.6 million (down 2%); nine-month expense was $108.5 million (up 23%). DD&A was $58.9 million in Q3 and $180.3 million year to date, up 31% in each comparison. The nine-month results included a $4.4 million accrued loss related to an adverse ruling in a Colombian dispute.
Cash, liquidity and capital
- Cash and cash equivalents were $353.1 million at September 30, up from $212.6 million at December 31, 2012. Working capital was $289.6 million, up from $222.5 million.
- Nine-month operating cash flow was $349.1 million, investing cash outflow $212.1 million and financing cash inflow $3.5 million; cash increased $140.4 million. Investing included $267.6 million of property additions and $59.6 million of proceeds from oil and gas properties.
- Property, plant and equipment was $1.234 billion, compared with $1.205 billion at year-end. Net capital expenditures were $203.6 million for the nine months.
- The company reported no debt at September 30. A reserve-based facility with a $150 million current borrowing base and capacity up to $300 million became effective October 31, 2013; no amounts had been drawn after effectiveness. It carries LIBOR plus 2.25%–3.25%, subject to covenants.
- About 94% of cash was held outside Canada and the United States and generally was not available for domestic or head-office use without repatriation. Argentina exchange controls may limit transfers; $20.3 million was held in Argentine banks.
Outlook, risks and unusual items
- Management revised the 2013 capital program to $420 million from $454 million, funded from operating cash flow and cash on hand, assuming current production and oil-price conditions. The filing says spending may vary with results and opportunities.
- Q3 Brazil results included a $54.0 million pre-tax payment following termination of a farm-in agreement; the company retained 100% working interests in the four affected blocks. The payment generated an estimated $10.4 million current tax liability. Gran Tierra also paid $14.4 million in signature bonuses for three newly awarded Brazilian blocks.
- Colombian pipeline disruption and security risks remain significant. The OTA pipeline was shut for about 150 days in the first nine months; trucking and alternative pipeline arrangements mitigated production impacts but reduced realized prices. The filing reports increased guerrilla activity, facility damage and contractor abductions; affected workers were returned safely.
- Two disputed Colombian royalty matters remain unaccrued because management did not consider a loss probable: estimated exposure was $31.7 million concerning ANH’s interpretation of the Moqueta royalty and $23.4 million concerning transportation-cost deductions. The $4.4 million Ecopetrol dispute accrual reflects an appealed judgment awarding 44,025 barrels.
- Other risks include oil-price volatility, customer concentration, political and regulatory uncertainty, currency controls and depreciation, permitting delays, and work interruptions. In Argentina, concession extensions may entail higher royalties and an undetermined bonus. Brazil production was shut in for three weeks in October due to a Petrobras-related strike; the company expected a Q4 production impact. Gas-flaring restrictions also limit Brazilian output.
- Management said cash and expected operating cash flow should fund the 2013 program under current conditions. It noted that lower prices, additional pipeline restrictions or other unforeseen events could prompt spending cuts or use of the credit facility, asset sales, or external financing. No formal foreign-currency hedging was in place.
Important facts for investors to verify
- Whether production growth and alternative Colombian transportation arrangements can be sustained, and their effect on realized prices and cash flow.
- Actual capital spending against the revised $420 million program and the results of planned drilling, appraisal and development work.
- Outcomes and potential financial effects of the Colombian royalty disputes and the appealed Ecopetrol judgment.
- Availability of cash held abroad, including the effects of Argentine exchange controls, and the terms and covenant compliance of the newly effective credit facility.
- Whether Brazilian exploration concessions receive extensions, and the production impact of flaring restrictions and the October strike.