Gran Tierra Energy Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unless otherwise stated, financial amounts below are in U.S. dollars. Gran Tierra is an oil and gas exploration and production company focused on Colombia, with activities in Peru and Brazil.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Oil and gas sales | $57.4 million | $76.2 million |
| Net loss | $45.0 million | $44.9 million |
| Net loss per share, basic and diluted | $0.15 | $0.16 |
| Cash from operating activities | $10.8 million | $2.3 million |
| Capital expenditures | $26.2 million | $73.4 million |
| Funds flow from operations (non-GAAP) | $11.4 million | $29.0 million |
| Adjusted EBITDA (non-GAAP) | $12.7 million | $29.8 million |
- Sales volumes rose 31% to 25,430 BOEPD, while production NAR increased 13% to 22,788 BOEPD. Sales benefited in part from drawing down oil inventory.
- Average realized sales price fell 43% to $24.81 per BOE. Operating netback declined 42% to $26.0 million, or $11.24 per BOE from $25.66 a year earlier. Transportation expense increased 41% to $12.3 million, partly reflecting alternative routes during OTA pipeline disruptions.
- Asset impairment was $56.9 million, versus $37.0 million in Q1 2015, primarily reflecting lower oil prices. Depletion, depreciation and accretion fell 25% to $36.9 million.
- At March 31, cash and cash equivalents were $51.3 million; current and long-term restricted cash totaled $24.9 million. Working capital was $80.6 million, down from $160.4 million at December 31, 2015. Total assets were $1.15 billion and shareholders’ equity was $984.6 million.
- Cash and cash equivalents decreased $94.0 million during the quarter. Investing activities used $107.2 million, including acquisition-related spending and capital expenditures; financing activities provided $1.2 million.
- No amounts were drawn on the reserve-based credit facility at quarter-end. Its initial borrowing base was $200 million, with redetermination scheduled for late May 2016. The filing reports no material change to contractual obligations outside the ordinary course.
Material changes and transactions
- Gran Tierra acquired Petroamerica on January 13, 2016, issuing approximately 13.7 million shares and paying approximately $70.6 million cash. The preliminary net purchase price was $72.2 million, and the company recorded an $11.7 million bargain-purchase gain. Petroamerica contributed $2.7 million in sales and an $11.8 million after-tax loss after acquisition. Purchase-price allocation remained subject to change.
- On January 25, 2016, Gran Tierra acquired PetroGranada Colombia Limited (PGC) for cash. The net purchase price was $19.4 million after working capital; up to $4.0 million of contingent consideration may be payable if specified production and reserves thresholds are met.
- After quarter-end, Gran Tierra issued $115 million principal amount of 5.00% convertible senior notes due 2021, with approximately $109 million net proceeds. The initial conversion price was approximately $3.21 per share. Proceeds were designated for general corporate purposes, potentially including acquisitions or capital expenditures.
Outlook, risks and unusual items
- The 2016 base capital program was $107 million: $76 million for Colombia, $8 million for Brazil, $6 million for Peru and $17 million for other items. A further $61 million discretionary program could be deployed if commodity prices improve. Management expected to fund the program from operating cash flow and cash on hand, while retaining options to borrow, sell assets, raise capital or reduce spending if conditions weaken.
- Management warned that, holding factors other than benchmark oil prices constant, Q2 2016 ceiling-test impairments could exceed $109 million in Colombia and $11 million in Brazil. These were scenario estimates, not recorded amounts or a full forecast; actual impairment depends on multiple assumptions.
- A Colombian HPR royalty arbitration remained unresolved. The tribunal was expected to issue an award June 8, 2016. If the ANH’s royalty interpretation is accepted, estimated compensation was $66.3 million plus interest; Gran Tierra estimated interest of $7.1 million using its preferred rate, versus $30.7 million under the ANH’s rate. A separate dispute over eligible transportation and related deductions could involve up to $44.8 million. No amounts were accrued because management did not consider a loss probable.
- Oil-price volatility, pipeline interruptions, transportation costs, foreign exchange movements, Colombian security conditions, and access to capital markets are material risks. The OTA pipeline was shut for approximately six days in Q1 for operational reasons; the company also described prior disruptions and reliance on alternative transport routes.
- Management stated that disclosure controls and procedures were effective as of March 31, 2016. Integration of the acquired companies into existing internal controls was ongoing.
Important facts for investors to verify
- Progress and results of the HPR royalty arbitration and the separate cost-deduction discussions, including any subsequent accounting or payment implications.
- Whether the anticipated Colombia and Brazil impairment scenarios materialized, and the sensitivity of ceiling-test values to oil prices and other assumptions.
- Post-acquisition production, costs, cash generation and final purchase-price allocations for Petroamerica and PGC.
- Use of the convertible-note proceeds, potential dilution at the conversion price, and liquidity after acquisitions and capital spending.
- Actual 2016 capital spending and production performance versus management’s budget and operating plans.