GRAN TIERRA ENERGY INC. annual report, FY2015

Gran Tierra Energy Inc. — 2015 Form 10-K

Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2015, not a standalone fourth-quarter filing. Gran Tierra is an independent oil and gas company operating primarily in Colombia, with properties in Brazil and Peru. Colombia generated 97% of 2015 revenue and other income and held 87% of year-end proved reserves. All amounts below are U.S. dollars unless indicated.

Financial and operating results

  • Revenue: Oil and gas sales were $276.0 million, down 51% from $559.4 million in 2014. Average realized sales price fell 50% to $41.41 per BOE; sales volume declined 1% to 18,260 BOE per day.
  • Profit and impairment: Net loss was $268.0 million, or $0.94 per share, versus a $171.3 million loss in 2014. The 2015 result included $323.9 million of impairment charges: $232.4 million in Colombia, $46.9 million in Brazil, $41.9 million in Peru and $2.6 million on inventory. The company recorded a $100.1 million income tax recovery.
  • Cash generation and operating economics: Cash from continuing operating activities was $62.3 million, down from $221.0 million in 2014. Funds flow from continuing operations, a non-GAAP measure, was $108.3 million versus $319.6 million. Operating netback, also non-GAAP, was $24.04 per BOE versus $65.88; transportation costs rose to $6.03 per BOE from $3.58.
  • Cash flow and capital spending: Cash and cash equivalents decreased by $186.5 million to $145.3 million. Investing activities used $233.0 million; reported net capital expenditures for continuing operations were $159.2 million, compared with $416.2 million in 2014. Financing activities used $9.3 million, mainly for share repurchases.
  • Liquidity and debt: Working capital, including cash, was $160.4 million, down from $239.3 million. The company reported no borrowings under its reserves-based credit facility. Its initial borrowing base was $200 million, subject to semiannual redetermination and a $500 million maximum; the facility matures in September 2018. It reported covenant compliance at year-end.
  • Reserves: Year-end proved reserves were 38.9 MMBOE, up 5% from 37.0 MMBOE; approximately 98% were oil and 80% were developed. The standardized measure of discounted future net cash flows for proved reserves fell to $464.8 million from $1.02 billion, primarily reflecting lower prices. This measure is not presented as current market value.

Material changes versus the prior comparable period

  • Lower benchmark and realized oil prices drove the sales decline and sharply reduced operating netback and funds flow. Average realized oil and NGL price was $41.56 per barrel versus $83.22 in 2014.
  • Impairment charges increased to $323.9 million from $265.1 million. Colombia and Brazil impairments reflected lower prices; Peru impairment related to Block 95.
  • Production NAR edged up 1% to 19,489 BOE per day, but oil sales volumes fell 1%. Colombia’s Trans-Andean pipeline was disrupted for approximately 213 days; greater use of alternative transport increased costs.
  • Operating expenses fell 16% to $75.6 million, and G&A fell 37% to $32.4 million. The company also recorded $9.0 million of severance expense and $3.8 million of Colombian equity tax.
  • In February 2015, the company halted most development spending at Peru’s Bretaña Field after disappointing appraisal results and low oil prices; associated probable and possible reserves were reclassified as contingent resources.

Outlook, risks and unusual items

  • 2016 plan: Management set a $107 million base capital budget—$76 million for Colombia, $8 million for Brazil, $6 million for Peru and $17 million for other activities—and a discretionary $61 million program dependent on stronger commodity prices. Management expected to fund the base program with operating cash flow and cash on hand.
  • Acquisitions after year-end: Gran Tierra acquired Petroamerica on January 13, 2016, for cash and shares, with stated total consideration of $96.4 million, and acquired PetroGranada Colombia Limited on January 25, 2016, for a net purchase price of $19.0 million. The acquired companies had combined proved reserves of 3.9 MMBOE as of December 31, 2015. Acquisition accounting was incomplete when the report was prepared.
  • Royalty arbitration: Gran Tierra disputes the Colombian ANH’s interpretation of the high-price royalty for the Moqueta area. If the ANH prevails on past production, the company estimated compensation of $66.3 million plus interest; it estimated interest at $6.4 million using its asserted contractual rate, versus $26.5 million under the ANH’s calculation. The company had accrued no amount, stating a loss was not considered probable. A separate interpretation dispute over deductible transportation costs could involve up to $44.8 million; no amount was accrued.
  • Key operating and financial risks: Oil-price volatility; pipeline interruptions, sabotage and transport constraints in Colombia; political, regulatory, permitting and community-consultation risks; foreign-exchange movements; and dependence on South American operations. The company warned that lower prices could lead to further ceiling-test impairments and said first-quarter 2016 impairments could exceed $131 million in Colombia and $8 million in Brazil under stated assumptions.
  • Other considerations: 92% of year-end cash was held outside Canada and the United States. The company had $33.6 million in disclosed contractual obligations and $76.5 million of promissory notes securing letters of credit. It reported no off-balance-sheet arrangements. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

  1. Whether cash generation, oil prices and transportation access support the $107 million 2016 base capital program and preserve liquidity.
  2. Credit-facility borrowing-base redetermination, covenant headroom and any subsequent borrowing or repayment requirements.
  3. Developments and potential financial exposure in the ANH royalty arbitration and transportation-cost dispute.
  4. Final purchase accounting, integration results and realized benefits from the Petroamerica and PGC acquisitions, including regulatory approval of relevant interests.
  5. Subsequent reserve revisions, ceiling-test impairments and production performance, particularly in Colombia and Brazil.