Gran Tierra Energy Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial amounts are shown in millions unless stated otherwise. The company focuses on oil and gas exploration and production, primarily in Colombia, with activities in Peru and Brazil.
Financial and Operating Results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Oil and gas sales | $68.5 | $75.7 | $197.7 | $221.2 |
| Net loss | $(229.6) | $(101.9) | $(338.2) | $(185.3) |
| Net loss per share | $(0.71) | $(0.36) | $(1.11) | $(0.65) |
| Net cash from operating activities | $48.2 | $53.0 | $86.4 | $58.6 |
| Funds flow from operations (non-GAAP) | $23.5 | $36.7 | $68.8 | $90.7 |
| Capital expenditures | $25.1 | $23.5 | $69.7 | $114.8 |
- Impairments and margins: Asset impairment was $320.0 million in Q3 and $469.7 million year to date, mainly reflecting lower oil prices and the full-cost ceiling test, including PetroLatina assets added at acquisition fair value. Nine-month depletion, depreciation and accretion was $104.5 million, down from $143.3 million. Operating netback, a non-GAAP measure, was $37.1 million in Q3 and $110.9 million year to date, down 11% and 16%, respectively, from comparable 2015 periods.
- Production and pricing: Q3 production NAR averaged 21,980 BOEPD, up 12% year over year; sales averaged 21,485 BOEPD, approximately flat. Nine-month production and sales averaged 22,154 and 23,105 BOEPD, up 14% and 24%. Q3 realized oil and NGL price was $34.79/bbl; the nine-month average was $31.34/bbl, down 28% year over year.
- Liquidity and debt: At September 30, cash and equivalents were $48.1 million and current restricted cash was $13.2 million. Working capital excluding short-term debt was $29.4 million, versus $160.4 million at year-end 2015. Debt carrying value was $300.3 million, comprising $127.5 million short-term and $172.8 million long-term debt. This includes $115 million principal of 5% convertible notes due 2021, a $130 million bridge loan due August 2017, and $65 million drawn on the revolving facility. The company reported compliance with debt covenants.
Material Changes and Unusual Items
- Gran Tierra acquired Petroamerica in January, PGC in January, and PetroLatina in August 2016. PetroLatina’s purchase price was reported as $525 million; its preliminary purchase-price allocation remains subject to change. It added assets in Colombia’s Middle Magdalena Basin. PetroLatina contributed $5.3 million of sales and a $193.5 million after-tax loss after acquisition through September 30.
- Acquisition funding included $165.8 million net proceeds from subscription receipts, $109.1 million net proceeds from convertible notes, and additional credit-facility borrowings. The subscription receipts converted into approximately 57.8 million common shares; Petroamerica consideration included approximately 13.7 million shares.
- Q3 sales fell 9% year over year, primarily because realized prices declined; nine-month sales fell 11% despite higher sales volumes. Q3 operating expense rose 23%, chiefly due to workover costs. Lower transportation costs partly offset these pressures.
- Q3 net loss included a $320.0 million impairment charge, partly offset by a $106.6 million income-tax recovery. The nine-month results also included an $11.7 million gain on the Petroamerica acquisition and $7.3 million of transaction expenses.
Outlook, Risks and Contingencies
- Management raised its 2016 capital budget to $140–$150 million, with the increase directed to Colombia, and expected to fund the program from operating cash flow, cash on hand and credit availability.
- Management warned that further ceiling-test impairments in Q4 2016 were reasonably likely. Holding other factors constant, it estimated potential charges could exceed $30 million in Colombia and $0.1 million in Brazil; actual amounts depend on prices, costs, production, reserves, foreign exchange and other assumptions.
- The company expected available resources to cover its $25 million deferred PetroLatina payment due before December 31, 2016, and stated it believed resources and credit capacity would be sufficient to repay the bridge loan. The revolving borrowing base was due for redetermination in late November 2016.
- Commodity and currency collars provide partial protection but can limit gains; derivatives are not designated as accounting hedges, so fair-value changes may add earnings volatility. Floating-rate borrowings expose the company to interest-rate risk.
- A Colombian royalty dispute concerns eligible transportation-cost deductions. The company estimated potential payment of up to $45.4 million if the agency’s interpretation prevails, but recorded no accrual because management did not consider a loss probable.
- Colombian guerrilla activity and pipeline disruptions pose operational, personnel-safety and transportation risks. The FARC peace agreement was rejected in an October 2016 referendum. The company also cited oil-price volatility, access to capital, acquisition-integration risks and possible delays in permits or contractor availability.
Important Facts for Investors to Verify
- Whether Q4 ceiling-test impairments materialize, and how commodity-price assumptions affect reserve values and reported assets.
- Liquidity after the PetroLatina deferred payment, bridge-loan repayment requirements and the revolving borrowing-base redetermination.
- Whether acquired assets deliver expected production and cash flows, and whether PetroLatina’s provisional fair-value allocation changes materially.
- Outcome and potential financial impact of the Colombian royalty dispute, alongside pipeline availability and security conditions.
- Underlying operating cash generation and cost trends, distinguishing GAAP results from non-GAAP measures such as operating netback and funds flow.