Gran Tierra Energy Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Gran Tierra is an oil and gas exploration and production company focused primarily on Colombia, with operations in Peru and Brazil. Financial figures below are in U.S. dollars; amounts are rounded to millions unless otherwise stated.
Financial performance and position
- Revenue: Q2 oil and gas sales were $71.7 million, up 3% from $69.4 million a year earlier. For the first half, sales were $129.1 million, down 11% from $145.6 million.
- Prices and volumes: Q2 realized sales price fell 31% to $35.15/BOE, while sales volume rose 50% to 22,418 BOEPD. First-half realized price fell 37% to $29.65/BOE, partly offset by sales volume growth of 39% to 23,924 BOEPD. Production growth reflected the Petroamerica acquisition and Colombian drilling.
- Operating netback: Q2 netback was $47.7 million, or $23.40/BOE, versus $45.2 million, or $33.19/BOE, in Q2 2015. First-half netback declined to $73.8 million, or $16.93/BOE, from $90.0 million, or $28.96/BOE. These are non-GAAP measures.
- Profitability: Q2 net loss was $63.6 million ($0.21 per share), versus a $38.6 million loss ($0.13 per share). First-half net loss was $108.6 million ($0.37 per share), versus an $83.4 million loss ($0.29 per share). The larger losses primarily reflect asset impairments.
- Impairments and taxes: First-half asset impairment was $149.7 million, including $132.8 million in Colombia and $15.4 million in Brazil, primarily due to lower oil prices; Peru impairment related to Block 95 costs. A $48.0 million first-half income tax recovery, largely related to Colombia impairment, partly offset the pretax loss.
- Cash flow and spending: First-half operating cash flow was $38.2 million, compared with $5.6 million in 2015. Investing used $128.3 million, including acquisitions and $44.6 million of capital expenditures; financing provided $114.3 million, mainly from the notes offering. Cash increased $26.1 million to $171.5 million.
- Liquidity and debt: Working capital was $210.8 million at June 30, versus $160.4 million at year-end 2015. The company issued $115 million of 5.00% convertible notes due 2021; their balance-sheet carrying value was $109.1 million after issuance costs. No amounts were drawn on the revolving credit facility. Its borrowing base was reduced to $185 million, of which $160 million was readily available and $25 million required lender consent.
- Other balance-sheet items: Total assets were $1.16 billion and shareholders’ equity was $926.0 million. Asset retirement obligations totaled $43.8 million.
Material changes versus the prior comparable period
- Production NAR rose 17% in Q2 and 15% for the first half year over year, while sales volumes rose more sharply, partly because inventory declined rather than increased as in 2015.
- Lower benchmark oil prices reduced realized prices and first-half sales and netbacks. Q2 sales increased modestly because higher volumes more than offset lower prices.
- Impairments increased materially: first-half charges were $149.7 million versus $67.3 million in 2015.
- First-half DD&A fell to $68.8 million from $88.3 million; operating expenses fell 9% to $36.8 million, while transportation costs rose 22% to $18.5 million.
- Gran Tierra acquired Petroamerica in January for cash and shares and acquired PetroGranada Colombia Limited (PGC) for cash. Petroamerica contributed $8.9 million of sales and an $18.2 million after-tax loss after acquisition through June 30. The Petroamerica purchase-price allocation remained preliminary.
Outlook, commentary, risks and unusual items
- Management increased the 2016 capital budget by $33 million to $140–$150 million, directing the increase to Colombian exploration. It expected to fund the program with operating cash flow and cash on hand, while retaining financing options.
- Management cautioned that, holding other factors constant, further ceiling-test impairments in Q3 2016 were reasonably likely; estimated potential charges could exceed $92 million in Colombia and $5 million in Brazil. These estimates depend on prices and other assumptions and are not forecasts of cash losses.
- On June 30, the company agreed to acquire PetroLatina for $525 million, subject to adjustments and closing conditions. Regulatory approval from Colombia’s ANH was received July 29; closing was expected before August 31, 2016. Funding was expected from cash, $173.5 million of July subscription-receipt proceeds, the existing revolver, and a proposed $130 million term loan. The acquisition had not closed as of the filing.
- The company hedged 10,000 bopd of Brent-linked production from June 2016 through May 2017 with a collar (sold put at $35, purchased put at $45, sold call at $65 per barrel). It also entered Colombian peso derivatives. Derivatives were not designated as accounting hedges, so fair-value changes may add earnings volatility and hedges may limit gains when prices or currencies move favorably.
- A Colombian royalty interpretation dispute remained unresolved. The company estimated potential compensation of up to $45.2 million if ANH’s interpretation of deductible transportation and related costs prevails; no amount was accrued because management did not consider a loss probable. Separately, a tribunal ruled that the additional royalty applied only after cumulative Moqueta production exceeded 5.0 million barrels.
- Other risks include volatile oil prices, Colombian pipeline disruption and security threats, foreign-exchange movements, access to capital, and acquisition execution and integration. The company had $72.4 million of promissory notes supporting letters of credit for work commitments and other requirements.
- Management reported effective disclosure controls as of June 30, 2016. It stated that no material change in internal control over financial reporting occurred during the quarter, while integration of the two acquired businesses continued.
Most important facts for investors to verify
- Whether oil prices, production, and sales volumes support operating cash flow and the $140–$150 million 2016 capital program.
- The assumptions behind the disclosed potential Q3 ceiling-test impairments, and whether further impairment is recorded.
- Completion, final funding terms, dilution, and expected benefits of the PetroLatina acquisition; the purchase was pending at the filing date.
- Outcome and potential financial exposure of the ANH royalty-cost dispute, including the unaccrued estimate of up to $45.2 million.
- Revolver availability and covenant compliance after the borrowing-base reduction and any new acquisition-related borrowing.