Gran Tierra Energy Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. All financial amounts below are in U.S. dollars; financial-statement figures are in thousands unless noted. Gran Tierra explores and produces oil and natural gas in Colombia, Argentina, Peru and Brazil.
Financial and operating performance
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Oil and gas sales | $122.3 million | $92.9 million; up 32% |
| Net income | $13.7 million; $0.05 per basic and diluted share | $10.0 million; $0.04 per share |
| Operating cash flow | $(31.2) million | $2.4 million |
| Funds flow from operations, non-GAAP | $66.6 million | $54.3 million; up 23% |
| Production, net after royalties and inventory adjustments | 14,546 boe/day | 14,949 boe/day; down 3% |
| Realized oil and gas sales per boe | $93.41 | $69.07; up 35% |
| Cash and cash equivalents, March 31 | $253.9 million | $355.4 million at December 31, 2010 |
| Working capital, including cash | $224.6 million | $265.8 million at December 31, 2010 |
| Bank debt, March 31 | $31.3 million | None at December 31, 2010 |
Revenue growth primarily reflected higher realized oil prices; production was constrained by Colombian pipeline maintenance. Operating expenses rose 61% to $16.4 million, and general and administrative expense rose 90% to $13.6 million. Net income margin was approximately 11% of revenue, versus approximately 11% in Q1 2010. Income tax expense was $26.7 million, including an effective tax rate of 66%; the rate was affected by valuation allowances and other tax items. The filing reports DD&A of $63.4 million, including a $31.9 million Peru ceiling-test impairment.
Investing cash outflow was $49.4 million, including $74.3 million of property, plant and equipment additions, partly offset by $22.7 million of proceeds from selling acquired asset-backed commercial paper notes and $7.7 million of acquired cash. Financing cash outflow was $20.9 million, principally the $22.9 million repayment of acquired debt. The company reported $69.1 million of segment capital expenditures; the filing does not clearly reconcile this figure to cash additions to property, plant and equipment.
Material changes and unusual items
- Gran Tierra acquired Petrolifera on March 18, 2011 for approximately $143.0 million, issuing about 18.1 million shares and 4.1 million replacement warrants. Petrolifera’s results were consolidated only from the acquisition date; its post-acquisition operating results were described as insignificant.
- The acquisition generated a $24.3 million bargain-purchase gain, which materially supported reported earnings. The purchase-price allocation remained provisional.
- Peru recorded a $31.9 million ceiling-test impairment associated with dry-well and seismic costs. Peru’s reported pretax loss was $32.6 million.
- An $8.1 million Colombian equity tax was expensed in Q1 for the 2011–2014 tax period; it is payable in installments.
- Pro forma results assuming the Petrolifera acquisition occurred January 1, 2010 showed a Q1 2011 net loss of $21.7 million, or $0.08 per share. Management said this pro forma figure excludes acquisition costs and the bargain-purchase gain.
Liquidity, debt and outlook
Management said cash and operating cash generation should fund the planned capital program and debt repayment for at least the next 12 months, barring unforeseen events or a severe oil-price downturn. The $31.3 million Petrolifera reserve-backed facility bears interest at LIBOR plus 8.25%; repayment was restricted by Argentine rules until August 2011. The company intended to repay it at the first opportunity then. A separate Colombian reserve-backed facility had no amounts drawn at quarter-end. The filing states the company was in compliance with applicable covenants.
For 2011, management raised production guidance to 17,500–19,000 boe/day, net after royalty, and planned $357 million of exploration and development spending: $190 million for drilling, $79 million for infrastructure, $87 million for seismic and $1 million for other activities. These are plans, not guaranteed results. Management cited oil-price volatility and said it could reduce capital spending or seek debt, asset-sale or equity financing if operating cash flow declined. No earnings guidance was provided.
Risks, contingencies and management commentary
- Colombia generated 96% of Q1 revenue and sales to Ecopetrol accounted for 96% of company revenue. Pipeline interruptions, including maintenance that restricted sales, create concentration and transportation risks.
- Oil prices, political and regulatory developments, currency movements, exploration outcomes, permitting, staffing and integrating Petrolifera could affect operations and results. Argentina sales prices and contracts remained subject to regulatory uncertainty and short-term negotiations.
- Two disclosed disputes had no recorded accrual because management did not consider a loss probable: Ecopetrol’s claim of approximately $5.5 million over Guayuyaco production allocation, and a $5.4 million disputed Costayaco net-profits-interest calculation scheduled for arbitration in Q4 2011.
- Several exploration wells were plugged and abandoned, including Canangucho-1, Taruka-1, San Angel-1 and Kanatari-1. The Valle Morado sidetrack was suspended and the well was being abandoned.
- Management reported disclosure controls were effective at March 31, 2011. Petrolifera’s internal controls were still being integrated; no material control change during the quarter was reported.
Important facts for investors to verify
- Whether the provisional Petrolifera purchase-price allocation, including the $24.3 million gain, changes in subsequent reporting.
- Whether the planned August 2011 repayment of the $31.3 million facility occurred, and the final borrowing-base and repayment terms.
- Whether production reaches the 17,500–19,000 boe/day target and the $357 million capital program remains funded and on schedule.
- How the Peru impairment, further exploration results and future ceiling tests affect asset values and earnings.
- Developments in Colombian pipeline access and customer concentration, Argentina pricing and regulation, and the disclosed legal and arbitration matters.
- The working-capital and cash-flow impact of receivables: Q1 operating cash flow was negative despite positive net income and funds flow from operations.