Gran Tierra Energy Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Gran Tierra is an oil and gas exploration and production company focused on Colombia; 2018 is reported as one geographic segment. Figures below are in U.S. dollars unless noted.
Financial and operating results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Oil and gas sales | $175.1 million | $103.8 million | $476.8 million | $294.6 million |
| Net income | $75.3 million | $3.1 million | $113.5 million | $9.1 million |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $213.2 million | $122.5 million |
| Capital expenditures | $101.5 million | $71.7 million | $258.6 million | $175.7 million |
- Q3 sales increased 69% year over year, reflecting higher realized prices and sales volumes. Brent averaged $75.97 per barrel, up 46%; realized sales price was $66.42 per BOE, up 62%.
- Q3 sales volumes averaged 28,659 BOEPD, up 4%; production net after royalties averaged 28,599 BOEPD, also up 4%. Colombia working-interest production before royalties reached 36,170 BOEPD, up 11%, with Acordionero production averaging 18,885 bopd before royalties.
- Q3 operating netback, a non-GAAP measure, was $47.41 per BOE versus $27.88; EBITDA was $116.7 million versus $60.5 million; funds flow from operations was $85.0 million versus $55.1 million. These measures are not GAAP substitutes and may not be comparable across companies.
- Q3 income included a $17.7 million income tax recovery, primarily from releasing part of Colombia’s valuation allowance. Nine-month income tax expense was $36.1 million, with a 24% effective tax rate versus 85% in 2017.
- Operating costs rose: Q3 operating expense was $11.19 per BOE, workover expense $4.97 per BOE, and transportation expense $2.85 per BOE. Workover costs rose sharply after nine electric submersible pump replacements. G&A before stock-based compensation declined, but stock-based compensation increased substantially.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $130.2 million, versus $12.3 million at year-end 2017; restricted cash was $1.2 million current, plus $2.3 million long-term. Cash, cash equivalents and restricted cash totaled $133.6 million.
- Current assets were $318.0 million and current liabilities $208.9 million. The company reported total assets of $1.75 billion and shareholders’ equity of $1.05 billion.
- Long-term debt carrying value was $399.0 million: $300 million principal of 6.25% senior notes due 2025 and $115 million principal of 5.00% convertible notes due 2021, net of issuance costs. The $300 million-borrowing-base revolving facility was undrawn; the prior $148 million balance was repaid.
- Nine-month financing cash flow was $140.2 million, including $288.1 million net proceeds from the senior notes, partly offset by $153.0 million of bank-debt repayments. Operating cash flow less property additions was approximately negative $45.3 million, before acquisitions and other investing items.
- The company said it complied with applicable debt covenants at quarter-end. It held 96% of cash outside Canada and the United States.
Changes, outlook and risks
- Revenue and earnings improved substantially from 2017, driven by stronger oil prices and higher production. Nine-month operating cash flow and funds flow also increased. Royalties as a share of working-interest production rose to 21% in Q3 from 16%, reflecting higher prices, Acordionero’s production characteristics and high-price royalty thresholds.
- Gran Tierra forecast 2018 capital spending of $320–$330 million, expected to be funded by $330–$340 million of operating cash flow, excluding acquisitions; approximately 70–75% of the program was planned for development. This is management’s forecast, not a guarantee.
- Management cited higher power-generation costs and field maintenance as operating-cost pressures. A gas-to-power facility was expected to be completed in Q2 2019, which management anticipated would improve power consistency and reduce costs.
- An unresolved dispute with Colombia’s National Hydrocarbons Agency concerns whether certain transportation costs may be deducted when calculating an additional royalty. Potential compensation could be up to $53.7 million; no amount was accrued because management did not consider a loss probable.
- After quarter-end, Gran Tierra acquired the remaining 45% working interest in the PUT-1 block for $28.1 million. A sabotage incident damaged a flow line near Costayaco; it was repaired and operating within 24 hours. No company or community members were injured; three Civil Defense personnel sustained minor injuries.
- Other material risks include oil-price volatility, operational and transportation disruptions, political, weather and security conditions in South America, exploration outcomes, regulatory approvals, and foreign-exchange exposure. The company hedged 5,000 bopd under each of two Brent derivative arrangements for Q4 2018 and had no commodity hedges for 2019 at quarter-end.
- Disclosure controls were assessed as effective. A company-wide ERP system was implemented during the quarter, with related control modifications. The company also identified possible share-price and trading-volume volatility across its NYSE American, TSX and London Stock Exchange listings.
Important facts for investors to verify
- Whether production growth and the 2018 capital and operating-cash-flow forecasts were achieved, and how the PUT-1 acquisition affected funding needs.
- Underlying earnings and cash generation excluding the Q3 deferred-tax recovery, derivative movements, investment gains and stock-based compensation.
- The outcome and potential financial impact of the ANH royalty-cost dispute, including the unaccrued exposure of up to $53.7 million.
- Debt-service capacity, covenant headroom, revolver borrowing-base redetermination, and potential dilution from the convertible notes and equity awards.
- Whether higher power, workover and transportation costs are contained, and whether the planned gas-to-power facility delivers the expected savings.
- Operational security and continuity, including the repaired flow line and any further transport or production disruptions.