Gran Tierra Energy Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2015. Gran Tierra explores for and produces oil and natural gas, principally in Colombia, Peru and Brazil; Argentina was sold in June 2014 and is presented as discontinued operations in the prior-year comparison. Figures are in U.S. dollars unless stated otherwise.
Financial and operating performance
- Oil and natural gas sales were $76.2 million, down 50% from $151.1 million; revenue and other income totaled $76.7 million.
- Net loss was $44.9 million, or $0.16 per basic and diluted share, versus net income of $45.1 million, or $0.16 per share, in Q1 2014. Continuing-operations results shifted from $49.8 million income to a $44.9 million loss.
- Production rose 3% to 19,399 BOE per day. Realized price fell 51% to $43.66 per BOE; average realized oil price was $43.79 per barrel versus $89.89.
- Operating expenses increased 44% to $31.4 million, or $18.00 per BOE versus $12.96. DD&A, accretion and impairment increased to $86.2 million from $44.3 million, including $32.7 million for Peru’s Block 95 and $4.3 million for Brazil. G&A declined 43% to $7.3 million.
- Funds flow from continuing operations, a non-GAAP measure, fell 71% to $25.6 million from $86.7 million. Net cash used in operating activities was $0.6 million, versus $34.9 million provided in Q1 2014.
- Capital expenditures for continuing operations were $74.0 million, down from $82.1 million. Investing activities used $128.3 million, including $53.8 million of net cash outflows from changes in investing-related assets and liabilities.
- Cash and cash equivalents were $203.5 million, down from $331.8 million at year-end. Working capital, including cash, was $181.3 million, down from $239.8 million. Total assets were $1.55 billion and shareholders’ equity was $1.23 billion.
- The company reported no debt and had no amounts drawn on its reserve-based credit facility, with a current borrowing base of $150 million. Current liabilities were $126.0 million; current assets were $307.2 million.
Material changes versus the prior comparable period
- The sharp fall in realized oil prices drove the 50% sales decline despite 3% production growth. The company cited average Brent prices of $53.91 per barrel versus $108.17, and WTI of $48.63 versus $98.68.
- Profitability was also pressured by higher operating costs, impairment charges, $4.4 million of severance costs and $3.8 million of Colombian equity tax. Foreign-exchange gains increased to $11.5 million from $4.2 million, partly offsetting these effects.
- Management reduced full-time staff by 20% in March and reported cost-reduction initiatives. Argentina’s prior-year operating loss of $4.6 million did not recur after its 2014 sale.
- Cash declined by $128.4 million during the quarter, primarily reflecting investment spending and working-capital movements.
Outlook, risks and unusual items
- The 2015 capital program remained at $140 million: $60 million in Colombia, $55 million in Peru, $24 million in Brazil and $1 million corporate. Management expected to fund it from operating cash flow and cash on hand, but said spending could change with business conditions.
- On February 19, the company stopped further development spending on Peru’s Bretaña field on Block 95, except for asset integrity and security. It cited high capital requirements, financing needs and a long payout horizon; associated probable and possible reserves were reclassified as contingent resources. Management expected further Peru impairment charges and said continued low Brent prices could prompt additional ceiling-test impairments in Brazil and possibly Colombia.
- Brazil’s Tiê field operations were suspended by the regulator in March over alleged health and safety management-system non-compliance; the company was awaiting approval to resume. Brazilian production was also constrained by gas-flaring restrictions.
- Colombian pipeline interruptions, guerrilla activity, transportation costs and reliance on a small customer base remain significant risks. Ecopetrol accounted for 79% of Q1 continuing oil and gas sales.
- A Colombian ANH arbitration concerns the HPR royalty. The company estimated potential compensation of $65.6 million plus interest of $21.3 million if the ANH prevails; it also estimated up to $41.2 million relating to a separate disagreement over deductible transportation costs. No amount was accrued because management did not consider a loss probable. A separate Guayuyaco dispute had $2.4 million accrued.
- West Face Capital initiated a proxy contest seeking election of six director nominees and calling for a CEO replacement. Management warned that the contest could be costly and distracting.
- 82% of cash was held outside Canada and the United States and was generally not available for head-office use without repatriation, which could trigger withholding taxes. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether oil prices and production support the $140 million capital plan and preserve liquidity; monitor cash use, working capital and operating cash flow.
- Whether further property impairments are required, particularly in Peru’s Block 95 and the Brazil and Colombia cost centers.
- Developments in the ANH HPR royalty arbitration and transportation-cost dispute, including potential financial exposure and contract consequences.
- When Brazil’s Tiê field may resume operations and whether flaring restrictions or pipeline disruptions constrain production and sales.
- Customer concentration, access to cash held abroad, and the outcome and costs of the proxy contest.