Gran Tierra Energy Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Gran Tierra is an independent oil and gas company operating in Colombia, Argentina, Peru, and Brazil. Unless noted, amounts are U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue and other income | $168.9 million | $151.0 million | $440.0 million | $435.7 million |
| Net income | $44.6 million | $49.1 million | $57.4 million | $94.4 million |
| Basic/diluted EPS | $0.16/$0.16 | $0.18/$0.17 | $0.20/$0.20 | $0.35/$0.34 |
| Funds flow from operations (non-GAAP) | $89.9 million | $72.8 million | $206.5 million | $227.9 million |
| Production | 19,491 BOEPD | 18,369 BOEPD | 16,797 BOEPD | 17,033 BOEPD |
| Realized sales price | $94.03/BOE | $89.25/BOE | $95.26/BOE | $93.50/BOE |
For the nine months, operating expenses rose 44% to $88.1 million, while DD&A declined 14% to $138.0 million. The period included a $20.2 million Brazil ceiling-test impairment. Income tax expense was $82.3 million; the effective tax rate was 59%, versus 47% in the prior-year period. Nine-month foreign exchange loss was $27.9 million, compared with a $3.8 million loss in 2011.
Net cash provided by operating activities was $15.9 million for the nine months, compared with $140.6 million in 2011. Investing activities used $243.8 million, including $222.1 million of property additions and $21.7 million added to restricted cash. Cash and cash equivalents fell to $127.6 million from $351.7 million at year-end 2011. Working capital was $191.9 million, down from $213.1 million.
Total assets were $1.62 billion and shareholders’ equity was $1.25 billion at September 30. The company reported no debt outstanding and had not drawn on its reserve-based credit facility; its committed borrowing base was increased to $50 million in August, within a facility maximum of up to $100 million. The company reported covenant compliance.
Material changes and operating developments
- Q3 revenue increased 12%, supported by 6% higher production and a 5% increase in realized price per BOE. Nine-month revenue was nearly flat, while net income fell 39%.
- Colombian pipeline disruptions restricted deliveries for approximately 121 days in the nine-month period. The OTA pipeline shutdown for more than 120 days affected sales and production. Q3 production benefited from new wells and inventory sales, partly offset by disruptions.
- From February 1, 2012, Ecopetrol took title to most Colombian oil at the Port of Tumaco rather than at Orito Station. This increased reported inventory and shifted transportation charges into operating expenses; management said the higher transport cost was expected to be offset by an equivalent realized-price increase.
- Colombia generated 86% of revenue and other income for the nine months. Ecopetrol accounted for 77% of revenue in that period, underscoring customer concentration.
- In Q2, an arbitration ruling resulted in a $10.9 million payment for past production under a third-party net profits interest on Chaza Block production. The amount reduced Colombian revenue; the ruling also increases future payments, which management did not expect to materially affect future results.
- Costayaco proved reserves as of June 30, 2012, increased 33% from year-end 2011 to approximately 19.6 million barrels, net after royalties, attributed to waterflood performance and reservoir management.
Outlook, risks, and contingencies
Management’s 2012 capital program was approximately $380 million; $216.0 million had been spent through September 30. Management stated that cash on hand, operating cash flow, and the credit facility were expected to fund the current program, while warning that further delivery restrictions or lower oil and gas prices could prompt spending reductions or additional financing. Planned work included drilling, development, facilities, and exploration across the operating countries; budgets could change.
Key risks include continued Colombian pipeline disruption and guerrilla activity, dependence on Ecopetrol and limited transportation alternatives, oil-price volatility, foreign-exchange exposure, political and regulatory uncertainty in South America, and the execution and funding demands of the capital program. Argentina’s oil planning commission may review or reject investment plans. The company reported no formal currency hedging and no off-balance-sheet arrangements.
Two material disputes remained unaccrued because management did not consider a loss probable: Ecopetrol’s claim of approximately $5.8 million over allocation of Guayuyaco test production, and the Colombian ANH’s interpretation of additional royalty obligations for Moqueta. The ANH matter could require an estimated $13.1 million on production to date if its interpretation prevails. The company also had $144.6 million in purchase, drilling, completion, transport, facility, lease, and other commitments, plus $32.8 million in promissory notes securing letters of credit.
After quarter-end, on October 8, Gran Tierra acquired the remaining 30% working interest in four Brazilian blocks for $35.7 million, with up to $3.0 million of additional contingent consideration. The acquisition accounting was incomplete. The company also reported successful bids for two Colombian blocks, subject to finalization and approval.
Investor verification priorities
- Track OTA pipeline availability, production curtailments, oil inventory, and the actual economics of the revised Ecopetrol sales and transportation arrangements.
- Reconcile reported operating cash flow with non-GAAP funds flow, particularly the effects of receivables, inventory, and tax payments.
- Assess the $380 million capital plan against cash resources, the undrawn facility, contractual commitments, and the subsequent Brazil acquisition.
- Follow outcomes and potential financial exposure from the ANH royalty dispute, the Ecopetrol lawsuit, and the Chaza third-party royalty ruling.
- Monitor customer concentration, country-level political and currency risks, and the effect of realized prices and operating costs on profitability.