Gran Tierra Energy Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Amounts are in U.S. dollars unless noted. Gran Tierra is an oil and gas exploration and production company focused primarily on Colombia, with operations in Peru and Brazil.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Oil and natural gas sales | $94.7 million | $57.4 million |
| Net income (loss) | $12.8 million | $(45.0) million |
| Net income (loss) per diluted share | $0.03 | $(0.15) |
| Cash provided by operating activities | $49.9 million | $10.8 million |
| Funds flow from operations (non-GAAP) | $45.0 million | $11.6 million |
| Capital expenditures | $46.2 million | $26.2 million |
- Sales rose 65%, primarily because average realized oil and gas prices increased to $42.40/BOE from $24.81/BOE. Average Brent was $54.66/bbl, versus $33.70/bbl.
- Production NAR increased 9% to 24,790 BOEPD, reflecting acquired Acordionero production and drilling success in Colombia, among other factors. Sales volumes declined 2% to 24,808 BOEPD, in part because Q1 2016 sales benefited from a substantially larger inventory draw.
- Operating netback, a non-GAAP measure, was $63.8 million, or $28.57/BOE, compared with $26.0 million, or $11.24/BOE. Operating costs rose 26% to $23.9 million; transportation costs fell 44% to $6.9 million.
- EBITDA, a non-GAAP measure, was $61.5 million, versus $24.2 million. DD&A declined to $26.6 million from $36.9 million. Asset impairment was $0.3 million, compared with $56.9 million in Q1 2016, when low oil prices drove significant Colombia and Brazil ceiling-test charges.
Balance sheet, liquidity and debt
- At March 31, cash and cash equivalents were $26.7 million; current restricted cash was $7.7 million. Cash plus current restricted cash totaled $34.4 million; total cash and restricted cash, including long-term restricted amounts, was $44.7 million.
- Long-term debt carrying value was $193.2 million, comprising $115 million of convertible notes and $85 million drawn on the revolving facility, less unamortized issuance costs. The facility borrowing base was $250 million, with a potential increase to $300 million subject to documentation and redetermination.
- Current assets were $117.7 million and current liabilities $151.8 million. Shareholders’ equity was $996.9 million. The company reported compliance with its credit agreement covenants at quarter-end.
- Operating cash flow exceeded capital spending by $3.8 million before financing and other investing cash flows. The company received an $3.5 million deposit toward the proposed Brazil divestiture and repaid $23.0 million while drawing $18.5 million on bank debt during the quarter.
Material changes and unusual items
- Gran Tierra early adopted ASU 2016-16 on January 1, 2017. The adoption resulted in a $124.5 million cumulative adjustment to opening deficit; management stated it had no cash-flow effect. The filing also describes tax balances and valuation allowances associated with the change.
- The effective tax rate was 60%. Income tax expense was $18.8 million, including $11.4 million deferred expense, despite pretax income of $31.6 million. Management attributed the rate principally to valuation allowances, foreign and local taxes, a non-deductible Colombian royalty, and other items.
- On February 6, Gran Tierra announced an agreement to sell its Brazil business for $35 million, subject to adjustments, plus assumption of certain liabilities. Closing depends on purchaser financing, regulatory approval and other conditions; the company had received a $3.5 million deposit. The filing states the transaction’s economic effective date would be on or before August 1, 2017.
- Subsequent to quarter-end, on April 27, the company acquired the Santana and Nancy-Burdine-Maxine Blocks in Colombia for $30.4 million cash.
- An ongoing dispute with Colombia’s ANH over deductions in calculating an additional royalty could result in estimated compensation of up to $46.4 million if the agency’s interpretation prevails. No amount was accrued because management did not consider a loss probable.
Guidance, outlook and risks
- Gran Tierra’s 2017 capital budget was $200–$250 million, including $185–$235 million for Colombia. It planned 23–30 gross wells company-wide and expected to fund the program with operating cash flow and credit-facility capacity.
- The company expected facilities investment to support Acordionero production capacity of 15,000 BOEPD by year-end 2017. It stated that capital resources should be sufficient for its plans, subject to current oil-price trends and production levels.
- Commodity-price collars covered specified volumes of 10,000, 5,000 and 10,000 bopd over overlapping periods, with Brent put/call terms of $35/$45/$65 per barrel. These instruments reduce, but do not eliminate, exposure to oil-price changes. The company also hedged certain Colombian peso costs.
- Key exposures include volatile oil prices, production interruptions and well downtime, foreign exchange, floating interest rates, and the reserves-based borrowing-base redetermination. The company said 86% of cash and cash equivalents were held outside Canada and the United States and were generally not available for domestic use without repatriation.
- Management said it did not expect Colombia or Brazil ceiling-test impairment in Q2 under its stated assumptions, but emphasized the estimate’s sensitivity to prices, costs, exchange rates, production, reserves and other inputs. Forward-looking statements are subject to these and other risks.
Important facts for investors to verify
- Whether the Brazil divestiture closes, its final proceeds and liability assumptions, and the purchaser’s financing and required regulatory approvals.
- Progress against the 2017 capital budget, Acordionero capacity target, production plans and the impact of downtime or royalty changes.
- Oil-price and reserve assumptions underlying future ceiling tests, and the status of the potential ANH royalty exposure of up to $46.4 million.
- Available borrowing capacity after redetermination, covenant headroom, and the accessibility of cash held outside Canada and the United States.
- The realization of deferred tax assets and the continuing effects of the accounting change and valuation allowances.