Gran Tierra Energy Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Amounts are U.S. dollars unless noted. Gran Tierra is an oil and gas exploration and production company operating principally in Colombia, Peru and Brazil. On June 25, 2014, it sold its Argentina business; Argentina results are presented as discontinued operations.
Key financial metrics
| Metric | Q2 2014 | Six months 2014 |
|---|---|---|
| Oil and gas sales from continuing operations | $147.9 million | $299.0 million |
| Revenue and other income | $148.5 million | $300.4 million |
| Income from continuing operations | $31.5 million | $81.3 million |
| Net income, including discontinued operations | $9.1 million | $54.3 million |
| Basic net income per share | $0.03 | $0.19 |
| Funds flow from continuing operations (non-GAAP) | $85.1 million | $171.8 million |
| Production from continuing operations, NAR adjusted for inventory changes and losses | 17,524 BOEPD | 18,135 BOEPD |
| Realized oil and gas sales price | $92.74 per BOE | $91.09 per BOE |
For the six months, cash provided by operating activities was $23.9 million overall, including $28.7 million from continuing operations and $4.8 million used by discontinued operations. Cash used in investing activities was $127.4 million, including $158.2 million of continuing-operations capital expenditures and $42.8 million of net proceeds from the Argentina sale. Cash declined $96.4 million to $332.4 million.
At June 30, cash and cash equivalents were $332.4 million, total current assets were $504.8 million, current liabilities were $176.7 million, and working capital was $328.0 million. The company reported no debt and had not drawn on its reserve-based credit facility; the current borrowing base was $150 million, with a maximum of $300 million. Approximately 72% of cash was held outside Canada and the United States and was generally not available for head-office use without repatriation.
Changes versus prior comparable periods
- Q2 continuing revenue and other income declined 1% year over year; six-month revenue declined 11%. Continuing income fell 37% in Q2 and 26% for the first half.
- Net income declined 81% in Q2 and 49% for the first half, reflecting lower continuing income and the Argentina disposal loss. The sale generated a $19.3 million after-tax loss; discontinued operations’ total after-tax losses were $22.3 million for Q2 and $27.0 million for the first half.
- Continuing production fell 8% in Q2 and 7% for the first half. Management said new Colombian wells and fewer pipeline-disruption days lifted production before inventory adjustments, but inventory increases reduced reported production and sales.
- Average realized price per BOE rose 7% in Q2 but fell 4% for the first half. Funds flow from continuing operations was down 1% in Q2 and 9% for the first half.
- Six-month G&A rose 48% to $26.8 million; foreign exchange shifted from gains in 2013 to a $5.8 million loss in 2014. Lower operating and DD&A expenses partly offset these pressures.
Outlook, management commentary and risks
- Management revised the 2014 capital program to $482 million from $495 million, including $249 million for Colombia, $173 million for Peru, $37 million for Brazil, $18 million for Argentina and $5 million for corporate activities. It expected to fund the program from operating cash flow and cash on hand, and stated that liquidity was expected to support planned operations for the next 12 months under current price and production assumptions.
- Planned activity included Colombian exploration and development drilling; a Peru appraisal well and facilities intended to support a long-term production test in Q4 2014; and Brazil facilities and seismic work. The filing cautions that budgets and actual spending may change.
- Colombian pipeline interruptions remain a significant operational risk: the OTA pipeline was shut down for about 92 days in the first half. Alternative trucking and pipeline routes helped maintain deliveries but can reduce realized prices, raise costs and may not remain available.
- A royalty dispute with Colombia’s ANH could result in estimated compensation of $52.9 million; a separate dispute over deductible transportation costs could add up to $35.6 million. Gran Tierra recorded no accrual for either matter because management did not consider a loss probable. The filing also describes an Ecopetrol dispute with a $4.4 million contingent liability recorded.
- Other risks include oil-price volatility, concentration of production and sales in Colombia, reliance on a small number of customers, political and security conditions, permitting and community-consultation delays, and Brazil gas-flaring restrictions. Four Brazilian exploration-block extension or suspension applications remained undecided; $59.0 million of unproved costs related to those blocks, with no impairment recorded.
- The company held 29.8 million Madalena shares valued at $14.3 million from the Argentina sale. It could not trade the shares before October 26, 2014, and their market value and liquidity could fluctuate.
- Management reported effective disclosure controls as of June 30, 2014, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Colombian pipeline reliability, inventory levels and customer payment timing improve; receivables increased substantially during the first half.
- Developments in the ANH royalty arbitration and transportation-cost interpretation, including potential exposure and any change to the company’s accrual assessment.
- Progress and cost execution against the $482 million capital program, and whether operating cash flow and geographically restricted cash adequately fund it.
- Results of planned Colombian and Peruvian wells, the timing and outcome of Peru’s planned long-term production test, Brazilian flaring constraints, and pending Brazilian concession decisions.
- The market value and eventual saleability of the Madalena share consideration, as well as the final financial effects of the Argentina disposal.