Gran Tierra Energy Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unless stated otherwise, financial amounts are in U.S. dollars. Gran Tierra explores for and produces oil and natural gas in Colombia, Argentina, Peru and Brazil.
Financial and operating results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue and other income | $151.0m | $84.6m | $435.7m | $261.8m |
| Net income (loss) | $49.1m | $(3.3)m | $94.4m | $24.1m |
| Basic EPS | $0.18 | $(0.01) | $0.35 | $0.10 |
| Funds flow from operations (non-GAAP) | $72.8m | $37.2m | $227.9m | $135.5m |
| Production, net after royalties | 18,369 boe/day | 13,536 boe/day | 17,033 boe/day | 13,949 boe/day |
| Realized sales price | $89.25/boe | $67.54/boe | $93.50/boe | $68.48/boe |
Net income margin was approximately 32.5% in Q3 and 21.7% for the nine months, based on revenue and other income. Nine-month operating cash flow was $140.5m; investing cash outflow was $218.1m and financing cash outflow was $51.5m. Cash and cash equivalents ended the period at $226.4m, down from $355.4m at December 31, 2010. Accounts receivable rose to $143.5m from $43.0m, primarily reflecting payment timing from Ecopetrol.
At September 30, current assets were $405.0m and current liabilities were $174.5m, with reported working capital of $230.5m. The company had no outstanding borrowings at period-end. Its BNP Paribas reserve-based facility was undrawn; the initial committed borrowing base was $20m, within a maximum borrowing base of up to $100m. Property, plant and equipment was $1.02bn. Nine-month capital expenditures were $229.2m.
Changes versus comparable periods
- Q3 revenue and other income increased 79%; nine-month revenue and other income increased 66%. Higher production and realized oil prices drove the gains.
- Q3 net income improved from a loss to $49.1m; nine-month net income rose 292% to $94.4m.
- Production increased 36% in Q3 and 22% year to date, reflecting Petrolifera production, stronger Costayaco output and fewer transportation disruptions.
- Operating expenses rose 12% in Q3 and 57% year to date; DD&A rose 41% and 49%, respectively. G&A increased 49% in Q3 and 66% year to date.
- Year-to-date results include a $21.7m Petrolifera acquisition gain, a $40.8m Peru impairment and $8.3m of Colombian equity tax. The acquisition gain is nonrecurring; the Peru impairment relates to dry-well and seismic costs, including a relinquished block.
Outlook, commentary and risks
- Management expected cash on hand and operating cash flow to fund the planned program and strategic objectives for at least the next 12 months. The 2011 capital program was approximately $379m, allocated to Colombia ($233m), Brazil ($61m), Argentina ($42m) and Peru ($43m). Management said it expected to fund the program from cash flow and cash on hand; spending could change with circumstances.
- Management cautioned that oil-price volatility and economic uncertainty could affect results. If operating cash flow declined, potential responses included reducing capital spending, issuing debt or equity, or selling assets.
- Colombia generated 88% of Q3 and 92% of nine-month revenue and other income. Ecopetrol accounted for 87% of oil and gas sales in 2011, creating significant customer and transportation concentration.
- Argentina’s oil pricing and sales arrangements were subject to regulation and short-term negotiations. The company also cited political, regulatory, currency, security, infrastructure, staffing and exploration risks across its operating countries.
- Two material disputes were unaccrued because management did not consider a loss probable: Ecopetrol’s approximately $5.4m claim over Guayuyaco production allocation, and an $8.2m disputed net-profits-interest calculation relating to Costayaco, expected to go to arbitration in Q4 2011.
- Contractual commitments totaled $124.5m, including $112.5m for drilling, completion, facility construction and oil transportation services; $88.1m was due within one year. The filing reported no off-balance-sheet arrangements.
- Management reported effective disclosure controls as of September 30, 2011. Petrolifera’s integration into internal controls was ongoing, with no material control change reported during the quarter.
Important facts for investors to verify
- Whether Ecopetrol receivable balances are collected on schedule and whether customer concentration or pipeline constraints affect sales.
- Actual capital spending against the $379m 2011 plan, and whether operating cash flow and liquidity remain sufficient to fund it.
- Production, reserve and impairment developments in Peru, and the results of planned exploration and appraisal wells.
- Progress and financial effects of the Ecopetrol contract dispute and Costayaco arbitration, including any change in management’s loss assessment.
- Integration of Petrolifera, including its operating performance, acquisition accounting adjustments and any further dilution from shares or awards.
- Changes in oil prices, Argentine pricing and exchange restrictions, Colombian operating/security conditions, taxes and unrecognized tax benefits.