Gran Tierra Energy Inc. — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. Gran Tierra explores, develops and produces oil and natural gas in Colombia, Argentina, Peru and Brazil. Colombia generated 85% of revenue and other income.
Key financial and operating metrics
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Oil and gas sales | $168.5 million | $204.8 million |
| Revenue and other income | $169.7 million | $205.4 million |
| Net income | $45.1 million; $0.16 per basic and diluted share | $57.9 million; $0.21 basic, $0.20 diluted |
| Production, NAR adjusted for inventory changes | 21,819 BOEPD | 23,424 BOEPD |
| Average realized price | $85.82 per BOE | $97.14 per BOE |
| Operating expenses | $28.3 million; $14.41 per BOE | $41.0 million; $19.46 per BOE |
| DD&A, accretion and impairment | $53.2 million | $58.4 million |
| General and administrative expenses | $15.2 million | $11.4 million |
| Cash from operating activities | $36.2 million | $109.8 million |
| Funds flow from operations (non-GAAP) | $91.0 million | $108.6 million |
| Capital expenditures | $88.6 million | $79.0 million |
| Cash and cash equivalents | $391.0 million at March 31, 2014 | $428.8 million at December 31, 2013 |
| Working capital, including cash | $257.3 million | $245.8 million at December 31, 2013 |
| Total assets / shareholders’ equity | $2.0 billion / $1.48 billion | $1.90 billion / $1.43 billion at December 31, 2013 |
Debt and liquidity. The company reported no debt and had not drawn on its reserve-based credit facility, with a current borrowing base of $150 million and a maximum borrowing base of up to $300 million. Management stated that cash on hand and operating cash flow should fund its 2014 program under current oil-price and production assumptions. 92% of cash was held outside Canada and the United States; $15.1 million was in Argentina and subject to currency-transfer restrictions.
Material changes and management commentary
- Revenue and other income fell 17%, net income fell 22%, production fell 7%, and realized price per BOE fell 12% versus Q1 2013. Management attributed the revenue decline to lower adjusted production and lower realized prices.
- Production before inventory adjustments rose to 22,188 BOEPD from 21,869 BOEPD; the reported adjusted measure was lower year over year partly because Q1 2013 benefited from an oil-inventory drawdown while Q1 2014 had an inventory build.
- Operating expenses declined 31%, primarily due to lower transportation costs and operating costs per BOE. G&A increased 33%, reflecting personnel, consulting and stock-based compensation costs, including RSU grants.
- Operating cash flow decreased substantially, to $36.2 million from $109.8 million. The company cited a $54.7 million increase in receivables and other long-term assets, mainly from longer collection terms on a higher proportion of Colombian sales to Ecopetrol, as well as timing of payments and taxes.
- Cash declined by $37.8 million during the quarter, primarily reflecting $75.1 million of cash capital expenditures and working-capital movements, partly offset by $91.0 million of funds flow from operations. Property, plant and equipment increased to $1.30 billion.
Outlook, risks and contingencies
- The 2014 capital program was revised upward to $495 million from $467 million: Colombia $246 million, Peru $161 million, Argentina $48 million, Brazil $38 million and corporate $2 million. Management expects to fund it with operating cash flow and cash on hand; spending may change with results, opportunities and operating conditions.
- Planned work includes development and exploration drilling in Colombia; drilling, facilities and seismic work in Peru; development drilling and workovers in Argentina; and facilities, seismic and unconventional-resource evaluation in Brazil. Q1 drilling included problems at Zapotero-1 and abandonment of Corunta-1 before reaching its target; management expected to revisit Corunta-1 with a revised plan.
- Material risks include oil-price volatility; Colombian pipeline outages, sabotage and reliance on alternative, lower-priced trucking; concentrated customers and Colombian revenue exposure; political, regulatory, currency and transfer restrictions in operating countries; delays in permits and community consultation; and production limits from Brazilian gas-flaring restrictions.
- In Colombia, an arbitration with the national hydrocarbons agency (ANH) concerns the Moqueta high-price royalty. The company estimated potential compensation of $44.9 million if the ANH prevails on its principal interpretation, plus up to $31.7 million concerning allowable transportation-cost deductions. No accrual was recorded because management did not consider a loss probable. The ANH counterclaim also seeks remedies including a declaration of breach and possible contract termination.
- Argentina concession extensions may entail higher royalties and an undetermined bonus payment in Rio Negro Province. Brazil exploration-phase extension or suspension applications remained undecided; $71.9 million of unproved property costs related to the affected blocks, which management assessed for impairment and found not impaired.
- Colombian peso forward contracts had a total notional value of COP 149.8 billion to help fix exchange rates for April and June tax installments; their reported fair value was a $2.4 million asset and gain. Argentina’s peso weakened 23% against the U.S. dollar in Q1, contributing to a $4.3 million segment foreign-exchange loss.
- Management reported effective disclosure controls as of March 31, 2014, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Colombian pipeline disruptions, delivery restrictions and dependence on a small number of customers continue to affect volumes, realized prices and collections.
- Progress on the $495 million capital program, including funding against operating cash flow, project timing, drilling outcomes and any budget revisions.
- Developments and potential financial or operating consequences in the ANH royalty arbitration, including the unaccrued exposures of $44.9 million and up to $31.7 million.
- Cash accessibility and repatriation constraints, particularly the 92% held outside Canada and the United States and Argentine exchange controls.
- Changes in production, realized prices, receivables and operating cash flow, and whether the Q1 working-capital outflow reverses.
- Decisions on Brazil concession extensions, Argentina concession renewals and royalty terms, and permitting or community-consultation matters in Colombia and Peru.