Gran Tierra Energy Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Gran Tierra is an international oil and gas exploration and production company with assets in Colombia and Ecuador. Figures are in U.S. dollars unless otherwise noted.
Financial and operating performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Oil sales | $157.9 million | $205.8 million | $302.1 million | $380.4 million |
| Net income (loss) | $(10.8) million | $53.0 million | $(20.5) million | $67.1 million |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $87.1 million | $247.0 million |
| Capital expenditures | $65.6 million | $65.2 million | $136.6 million | $106.7 million |
| Adjusted EBITDA (non-GAAP) | $84.5 million | $140.1 million | $173.2 million | $259.5 million |
| Funds flow from operations (non-GAAP) | $53.1 million | $103.6 million | $113.1 million | $190.9 million |
- Q2 NAR production rose 17% year over year to 27,204 BOPD; sales volumes increased 19% to 27,271 BOPD. Six-month NAR production increased 15% to 26,370 BOPD.
- Q2 Brent averaged $77.73/bbl, down 31% year over year. Average realized price fell 36% to $63.63/bbl; quality and transportation discounts widened to $14.10/bbl.
- Q2 operating netback, a non-GAAP measure, was $105.7 million, or $42.60/bbl, versus $163.8 million, or $78.77/bbl, a year earlier. Operating costs were $19.54/bbl, up from $19.00/bbl.
- Q2 income tax expense was $33.7 million against $22.9 million of pretax income; the reported effective tax rate was 147%. The six-month effective tax rate was 145%, with foreign exchange adjustments and other nondeductible items contributing to the elevated rate.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $68.5 million at June 30, 2023, down from $126.9 million at year-end 2022. Including restricted cash, cash and restricted cash totaled $76.2 million.
- Long-term debt and lease obligations totaled $585.8 million, including $271.9 million of 6.25% Senior Notes due 2025, $300.0 million of 7.75% Senior Notes due 2027, and lease obligations. The company also had a $100 million initially available credit facility, which was undrawn; an additional $50 million was subject to mutual agreement. Its draw availability expired August 20, 2023.
- Six-month operating cash flow of $87.1 million was below $136.6 million of capital additions. Cash declined by $57.2 million over the period. Working-capital movements included a $35.2 million use of cash related to taxes receivable and payable.
- The company repurchased $8.0 million principal amount of 2025 notes for $6.8 million cash, recognizing a $1.1 million gain. It also repurchased 1.33 million shares during the first half; the repurchase program reached its limit and expired in May. A 1-for-10 reverse stock split took effect May 5, 2023.
Material changes and management outlook
- Compared with Q2 2022, higher production did not offset lower Brent prices, wider differentials, increased operating and transportation costs, and realized foreign exchange losses. Oil sales declined 23%, Adjusted EBITDA declined 40%, and the company moved from profit to loss.
- Management attributed production growth to drilling and workover activity in Colombia. Q2 capital spending included $38.9 million for drilling and completions; the company spud four development and three water-injection wells in Colombia.
- Management stated that cash on hand, operating cash generation and available credit were expected to provide sufficient liquidity for strategic objectives and the planned capital program over the next 12 months, assuming current oil-price trends and production levels. The filing provides no specific earnings, production or capital-spending guidance figures.
Risks, contingencies and unusual items
- Key exposures include volatile oil prices and differentials, foreign exchange movements, operating and transportation disruption, and political, security, weather, labor or community-related interruptions in South America. The company reported that one Colombian customer represented 98% of Q2 sales volumes.
- The credit facility is secured by Colombian assets and subject to financial covenants. The filing says it remained undrawn at June 30; investors should note its August 20, 2023 draw-availability expiry.
- Letters of credit and other credit support totaled $109.4 million, primarily securing work commitments and other operating or capital requirements. The company disclosed pending lawsuits and claims but said their resolution was not expected to materially affect its financial position, results or cash flows.
- The company reported no ceiling-test impairment in the periods presented. It recorded no commodity-derivative gains or losses in 2023, unlike the prior-year period.
Important facts for investors to verify
- Whether production growth and planned drilling translate into sustained sales and cash generation amid lower realized prices and higher costs.
- Liquidity and covenant headroom after the credit facility’s draw-availability period expired, and the company’s plans for 2025 note refinancing or repayment.
- The extent of customer concentration and exposure to Colombian differentials, peso movements, taxes and operational disruptions.
- The sustainability of capital spending relative to operating cash flow, and the treatment of non-GAAP measures such as Adjusted EBITDA, operating netback and funds flow from operations.