GTE

Gran Tierra Energy Inc. - Q1 2010 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2010. Gran Tierra Energy Inc. is an independent international energy company engaged in the acquisition, exploration, development, and production of oil and natural gas. Its principal operations are located in Colombia and Argentina, with emerging activities in Peru and Brazil. The company is incorporated in Nevada and headquartered in Calgary, Alberta.

Key Financial Metrics

Production: Average production was 14,949 barrels of oil equivalent per day (BOEPD), a 43% increase year-over-year.

Realized Price: Average realized price was $69.07 per BOE, a 97% increase year-over-year.

Material Changes vs. Prior Period

• Revenue Surge: Revenue increased 177% to $93.1 million, driven by a 43% increase in production (primarily from three new development wells in Colombia's Costayaco field) and a 96% increase in realized oil prices.
• Net Income Decline: Despite higher revenues, Net Income decreased 30% to $10.0 million. This was primarily due to a $14.3 million foreign exchange loss (of which $12.7 million was unrealized/non-cash) resulting from the devaluation of the U.S. dollar against the Colombian Peso, impacting a deferred tax liability. In Q1 2009, the company recorded a $20.2 million foreign exchange gain.
• Impairment: The company recorded a $3.7 million ceiling test impairment loss in its Argentina cost center.
• Working Capital: Working capital increased 24% to $267.0 million, largely due to higher accounts receivable reflecting two months of oil sales in Colombia at period end.

Guidance, Outlook, and Risks

2010 Outlook:

• Production: Expected to range between 14,000 and 16,000 BOEPD net after royalty.
• Capital Program: Planned 2010 capital expenditures are $195 million ($129M Colombia, $41M Peru, $23M Argentina). Management expects to fund this from cash flow and existing cash on hand.
• Colombia: Focus on development of Costayaco field and exploration drilling. New infrastructure and water injection wells are planned.
• Argentina: Production expected to be maintained between 800-1,000 BOEPD. A re-entry and sidetrack of the Valle Morado gas well is planned for Q3 2010.

Risks and Contingencies:

• Legal Dispute: Ongoing dispute with Ecopetrol regarding oil allocation procedures for the Guayuyaco wells. Ecopetrol claims approximately $5.4 million in damages; no accrual has been made as a loss is not considered probable.
• Argentina Regulatory Environment: Producers are operating without sales contracts due to regulatory uncertainty regarding pricing and withholding taxes. The company is negotiating spot prices.
• Security: Operations in Colombia face risks from guerrilla activity, which has historically disrupted pipeline transportation.
• Customer Concentration: 96% of Q1 2010 revenue was derived from a single customer, Ecopetrol S.A.

Investor Verification Checklist

• Foreign Exchange Impact: Verify the sensitivity of future earnings to USD/COP exchange rate fluctuations, given the significant non-cash FX loss recorded this quarter.
• Argentina Pricing Resolution: Monitor the status of sales contract negotiations in Argentina and the potential impact of the "Petroleum Plus" fiscal credits.
• Colombia Production Growth: Confirm the sustained production levels from the new Costayaco wells and the timeline for the Juanambu-2 well.
• Capital Expenditure Execution: Track the $195 million 2010 capital program against cash flow generation to ensure liquidity remains sufficient without debt financing.
• Legal Proceedings: Review updates on the Ecopetrol dispute to assess potential future liabilities.