Gran Tierra Energy Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Gran Tierra is an independent oil and gas exploration, development and production company operating in Colombia, Argentina, Peru and Brazil. Colombia generated 88% of revenue and other income.
Financial and operating performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Oil and gas sales | $204.8 million | $155.2 million |
| Revenue and other income | $205.4 million | $156.0 million |
| Net income (loss) | $57.9 million | $(0.3) million |
| Basic / diluted EPS | $0.21 / $0.20 | $(0.00) / $(0.00) |
| Production | 23,424 BOEPD | 16,742 BOEPD |
| Realized sales price | $97.14 per BOE | $101.90 per BOE |
| Funds flow from operations (non-GAAP) | $108.6 million | $78.9 million |
| Cash from operating activities | $109.8 million | $(13.5) million |
| Capital expenditures | $79.0 million | $87.6 million |
- Income before tax was $95.4 million, compared with $30.8 million. Income tax expense was $37.4 million; the reported effective tax rate was 39%, versus 101% in Q1 2012.
- Net income was approximately 28% of revenue and other income. Operating expenses increased 67% to $41.0 million; DD&A declined 3% to $58.4 million; G&A declined 28% to $11.4 million. The period included a $5.2 million foreign-exchange gain, compared with a $24.4 million loss in Q1 2012.
- Cash and cash equivalents were $235.9 million at quarter-end, up from $212.6 million at December 31, 2012. Working capital, including cash, was $246.8 million. Total assets were $1.77 billion and shareholders’ equity was $1.35 billion.
- The company reported no debt and had drawn none of its reserve-based credit facility, which had a borrowing base of up to $100 million. The facility bears interest at LIBOR plus 3.5% when drawn.
- Operating cash flow and $1.6 million of share-issuance proceeds more than funded $88.1 million of investing cash outflows, producing a $23.3 million increase in cash.
Changes versus the prior-year quarter
- Production rose 40%, supported by new wells in Colombia and Argentina, reduced pipeline-disruption impacts, alternative transport, and lower Colombian oil inventory. The inventory reduction contributed about 1,554 BOEPD to reported production growth.
- Revenue and other income rose 32%, while realized price per BOE fell 5%. Higher production outweighed lower prices.
- Net income improved from a small loss to $57.9 million. The comparison benefited from the absence of the $20.2 million Brazil ceiling-test impairment recorded in Q1 2012 and the reversal from a large foreign-exchange loss to a gain.
- Operating costs increased 67%, partly reflecting higher production and Colombian transportation costs being recorded as operating expense under the sales-point arrangements. Capital expenditures were 10% lower year over year.
Outlook, commentary and risks
- Management revised its 2013 capital program to $424 million from $363 million, including $223 million for Colombia, $101 million for Peru, $77 million for Brazil and $20 million for Argentina. The increase was largely for Peru’s Bretaña Norte sidetrack and additional seismic work. Management expects to fund the plan with operating cash flow, cash on hand and possible facility draws; spending may change with operating results and opportunities.
- Management said current cash resources and the undrawn facility were expected to support the 2013 program under current oil-price and production assumptions. Lower prices, reduced operating cash flow or further Colombian delivery restrictions could require spending cuts, asset sales, or debt or equity financing.
- Colombian pipeline disruptions remained material: production reflected about 44 days of delivery restrictions. The filing reports guerrilla-related pipeline sabotage from October 2012 through May 2013, a March facility fire causing approximately $1.1 million in damage and a 39-day shut-in of about 330 BOPD, and a January abduction of three contractor personnel who were returned unharmed.
- Gran Tierra accrued $4.4 million after an adverse tribunal ruling in the Guayuyaco allocation dispute, involving an award of 44,025 barrels to Ecopetrol. The company appealed.
- Two Colombian royalty disputes with the ANH remained unaccrued because management did not consider a loss probable: estimated exposure was $20.0 million if the ANH prevails on its interpretation concerning Moqueta production, and $15.7 million concerning deductible transportation and related costs.
- Other risks include oil-price volatility, concentration of revenue and customers in Colombia, Argentina’s price and currency controls and limits on transferring funds, Brazilian gas-flaring restrictions, permitting delays, political and regulatory uncertainty, and exploration and reserve-estimation risks. The filing also identifies security and cybersecurity threats.
- At March 31, 93% of cash was held by foreign subsidiaries; $22.8 million was held in Argentina, where transfer restrictions apply. Management expected the Argentine funds to support local operations and the 2013 work program.
Important facts for investors to verify
- Whether Colombian pipeline access and security conditions improve, and whether reported production growth is sustainable apart from inventory changes and alternative transport.
- Progress, costs and results of the expanded $424 million capital program, particularly the Peru Bretaña Norte sidetrack and exploration activity.
- Outcomes of the Ecopetrol appeal and the ANH royalty disputes, including potential exposure and any changes in accruals.
- Oil-price and realized-price trends, Colombian customer concentration, and Argentina’s sales, currency and cash-transfer constraints.
- Cash generation and liquidity through the year, including foreign cash availability, facility terms and any need for external financing.