Gran Tierra Energy Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited U.S. GAAP results; financial amounts are U.S. dollars. Gran Tierra explores and produces oil and natural gas in Colombia, Argentina, Peru and Brazil, with Colombia its largest operating and revenue base.
Key financial and operating metrics
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Oil and gas sales | $155.2 million | $122.3 million |
| Revenue and other income | $156.0 million | $122.5 million |
| Income before income taxes | $30.8 million | $40.4 million |
| Net income (loss) | $(0.3) million; $(0.00) per share | $13.7 million; $0.05 per share |
| Production, net after royalty and adjusted for inventory | 16,742 BOEPD | 14,546 BOEPD |
| Realized sales price | $101.90 per BOE | $93.41 per BOE |
| Funds flow from operations, non-GAAP | $78.9 million | $66.6 million |
| Net cash from operating activities | $(13.5) million | $(31.2) million |
| Capital expenditures | $87.6 million | $69.1 million |
| Cash and cash equivalents | $230.1 million | $351.7 million at Dec. 31, 2011 |
| Working capital | $171.5 million | $213.1 million at Dec. 31, 2011 |
| Debt | No amounts drawn | — |
Operating expenses were $24.5 million, up 49%; DD&A was $60.4 million, including a $20.2 million Brazil ceiling-test impairment; and G&A was $15.9 million. Income tax expense was $31.1 million, producing a reported effective tax rate of 101% against pretax income. The filing attributes the unusually high rate mainly to nondeductible foreign-exchange translation losses and valuation allowances.
Material changes versus the prior comparable period
- Revenue and other income rose 27%, reflecting 15% higher average production and a 9% increase in realized revenue per BOE. Oil and NGL prices averaged $105.36 per barrel, up 12%.
- The company moved from net income to a small net loss. The comparison is affected by the absence of the prior-year $24.3 million Petrolifera acquisition gain and by a $24.4 million foreign-exchange loss in Q1 2012 versus $5.2 million in Q1 2011. Q1 2011 also included $8.1 million of Colombian equity tax; none was recorded in Q1 2012.
- Operating cash flow remained negative despite higher funds flow, primarily because of working-capital movements, including increased receivables and inventory and reductions in payables. Cash declined $121.6 million during the quarter, including $31.0 million placed in restricted cash.
- Operating costs per BOE increased to $16.07 from $12.52. In Colombia, a February sales and transportation agreement shifted the sales point to Tumaco and made pipeline transportation costs separately recorded as operating expense.
- Reported production was affected by about 26 days of Colombian pipeline disruptions and a one-time increase in pipeline inventory following the sales-point change. Management estimated these effects reduced reported production by approximately 800 BOEPD and 1,040 BOEPD, respectively.
Outlook, risks and unusual items
- Outlook: The 2012 capital program was increased to $444 million from $367 million. Management expected average 2012 production of 20,000–21,000 BOEPD, net after royalty, excluding potential exploration success. Management said cash on hand and operating cash flow should fund the program at current oil prices and production, barring unforeseen events or a downturn.
- Capital allocation: The revised program includes $196 million for Colombia, $122 million for Brazil, $78 million for Peru, $47 million for Argentina and $1 million for corporate activities. Actual spending may change with results and opportunities.
- Brazil impairment and farmout: Gran Tierra withdrew from the BM-CAL-10 farmout and recorded a $20.2 million impairment after recognizing $23.8 million of related costs. Management reported the $23.8 million payment in Q2 2012. The BM-CAL-7 assignment became effective April 3, 2012.
- Exploration and development: Ramiriqui-1 in Colombia tested at up to 2,525 gross BOPD under stated test conditions, but working-interest transfer approval and further evaluation remained outstanding. Argentina’s Proa-2 was reported on production in Q2 at a constrained gross rate of approximately 2,000 BOPD while transport capacity was evaluated. Brazil appraisal wells encountered oil-bearing intervals; further testing and development decisions were pending.
- Liquidity and financing: The company reported no debt and had not drawn its reserve-based facility. The facility’s initial committed borrowing base was $20 million, with a maximum borrowing base up to $100 million; covenants were reported in compliance. The lender’s business sale to Wells Fargo was expected to close in Q2. About 79% of cash was held by foreign subsidiaries and was not available for domestic operations unless repatriated, which could entail taxes.
- Concentration and operating risks: Colombia generated 89% of revenue and other income; Ecopetrol accounted for 85% of total revenue. Pipeline interruptions, transportation capacity, oil prices, foreign exchange, and political and regulatory developments in South America could affect results. The filing also describes changing Argentine sales arrangements and the government’s April 2012 announcement regarding YPF.
- Unaccrued disputes: The company reported no accrual because it did not consider losses probable for the Ecopetrol Guayuyaco dispute (claim approximately $5.8 million), the Costayaco net-profits-interest arbitration (disputed amount $10.9 million), and the ANH’s Moqueta royalty interpretation (estimated $7.4 million on production to date if ANH prevails). Outcomes remain uncertain.
- Commitments: Purchase obligations, firm agreements and leases totaled $175.9 million, including $112.8 million due in less than one year. Promissory notes totaling $24.5 million secured letters of credit for exploration work commitments.
- Other filing updates: On May 2, 2012, James Rozon was appointed CFO after serving as acting CFO; this occurred after quarter-end. Management reported effective disclosure controls and no material quarter changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the production outlook and $444 million capital plan remain achievable, and how future spending will be funded if oil prices or operating cash flow weaken.
- Whether Colombian pipeline reliability, the new Tumaco delivery arrangement and customer concentration affect realized sales, working capital or production.
- Whether foreign-exchange losses and unusually high tax expense persist, and how much reported earnings volatility is noncash.
- Results and approvals for key wells, acreage transactions and the pending Brazilian acquisition of the remaining 30% interests in four blocks.
- Developments in the three unaccrued disputes, Argentine regulatory and market conditions, and the restricted availability of foreign-held cash.
- That funds flow from operations is a non-GAAP measure and should be assessed alongside GAAP cash flow; Q1 operating cash flow was negative despite positive funds flow.