Gran Tierra Energy Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The filing is an annual report, not a standalone fourth-quarter report. Unless otherwise noted, financial amounts are U.S. dollars.
Business context
Gran Tierra is an oil and gas exploration and production company operating in Colombia and Ecuador. Colombia accounted for 94% of proved reserves and 97% of 2023 revenue. The company’s assets and production are concentrated in a small number of Colombian fields; oil represented all 2023 revenue.
Financial and operating performance
- Revenue and realized prices: Oil sales were $637.0 million, down 10% from $711.4 million in 2022. Sales volumes increased 9% to 25,947 barrels per day, but the average realized price fell 18% to $67.26 per barrel, mainly reflecting lower Brent prices and wider differentials.
- Production: Net-after-royalty production averaged 26,099 barrels per day, up 10% year over year, following drilling and workover activity and increased Ecuador production.
- Profit: Gran Tierra recorded a net loss of $6.3 million, versus net income of $139.0 million in 2022. Income before tax declined to $106.2 million from $244.9 million; income tax expense was $112.4 million, including $56.8 million of deferred tax expense. The effective tax rate was 106%.
- Operating performance: Operating netback, a non-GAAP measure, was $435.5 million, down 19%; per-barrel netback fell to $45.99 from $62.30. Operating expenses rose 15% to $186.9 million, and transportation expenses rose 43% to $14.5 million. Higher power, maintenance, rental and transportation costs contributed.
- Cash flow and investment: Cash provided by operations was $228.0 million, down 47%. Capital expenditures were $218.9 million; free cash flow, as defined by the company, was $57.9 million, compared with $129.4 million in 2022.
- Liquidity: Year-end cash and cash equivalents were $62.1 million, compared with $126.9 million a year earlier. Current assets were $112.5 million and current liabilities $260.3 million. The company reported $36.4 million drawn on its credit facility at year-end; it repaid the facility and terminated it on February 6, 2024. Restricted cash was separate from reported cash.
- Debt: At year-end, senior-note principal totaled approximately $536.6 million, including $487.6 million of 9.50% notes due 2029; the company also had $24.8 million of 6.25% notes due 2025 and $24.2 million of 7.75% notes due 2027. The 2023 exchange of older notes for 9.50% notes and related cash consideration reshaped the maturity and interest-cost profile. In February 2024, the company issued another $100 million of 9.50% notes, receiving $88 million net.
- Reserves: Proved reserves increased 13% to 74.3 million barrels of oil equivalent, all oil; 53% were proved developed. Proved undeveloped reserves rose to 34.7 million BOE from 25.0 million.
Changes and notable items
- Lower benchmark oil prices drove the year-over-year decline in sales and earnings despite higher production and sales volumes.
- Higher DD&A, interest expense and foreign-exchange losses also weighed on results. Foreign-exchange loss increased to $11.8 million from $2.6 million.
- The Colombian tax regime and non-deductible items contributed to the 106% effective tax rate and the reported net loss.
- The company completed a 1-for-10 reverse stock split in May 2023 and repurchased shares under its buyback programs.
- The Suroriente Block contract was extended for 20 years from September 2023. Gran Tierra paid $6.2 million and provided $123.0 million of letters of credit for committed investments.
- No ceiling-test impairment was recorded in 2023. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also reported effective disclosure controls and internal control over financial reporting.
Outlook, risks and contingencies
Gran Tierra budgeted $210–$240 million for 2024 exploration and development, including 13–17 gross development wells in Colombia and 6–9 gross exploration wells in Colombia and Ecuador. Management expects operating cash flow to fund the program, conditional in part on Brent averaging $70 per barrel. Colombian development is expected to represent 93% of production and approximately 60%–70% of capital spending. The filing does not provide a clear numerical 2024 production target.
Key risks include oil-price and differential volatility; political, regulatory, licensing and tax changes in Colombia and Ecuador; security incidents, protests and blockades; transportation and infrastructure interruptions; concentrated operations and customer exposure; reserve-estimation uncertainty; currency and cost inflation; environmental obligations; and access to financing. Some exploration commitments were suspended because of licensing restrictions, security issues or social conditions. Pending lawsuits and claims were described by the company as not expected to have a material adverse effect, though outcomes are uncertain.
Important facts for investors to verify
- Whether 2024 operating cash flow can fund the $210–$240 million capital program at realized prices and production levels, especially if Brent is below the $70-per-barrel planning assumption.
- The post-February 2024 debt balance, cash position and interest burden after the additional note issuance and repayment of the credit facility.
- Whether production growth, reserve additions and conversion of proved undeveloped reserves proceed as planned, given permitting and social constraints.
- The durability of sales arrangements and customer diversification; the filing reports that one customer accounted for over 95% of sales.
- The drivers and potential reversals of deferred tax expense, foreign-exchange exposure and the unusually high 2023 effective tax rate.