Gran Tierra Energy Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Unaudited consolidated financial statements; amounts below are U.S. dollars in millions unless stated otherwise. Gran Tierra explores, develops and produces oil and natural gas in Colombia, Argentina, Peru and Brazil.
Financial and operating performance
| Metric | Q3 2010 | Nine months 2010 |
|---|---|---|
| Oil and gas sales | $84.1; up 12% year over year | $260.8; up 57% |
| Revenue and other income, including interest | $84.6; up 12% | $261.8; up 56% |
| Net income (loss) | $(3.3), or $(0.01) per diluted share | $24.1, or $0.09 per diluted share |
| Production, net after royalties | 13,536 BOE per day; up 5% | 13,949 BOE per day; up 16% |
| Realized oil and gas price | $67.54 per BOE; up 7% | $68.48 per BOE; up 35% |
| Funds flow from operations | $37.2; down 30% | $135.8; up 24% |
| Cash provided by operating activities | Not presented for the quarter | $101.4, versus $35.0 |
Operating costs increased substantially: operating expense was $19.4 million in Q3, up 113%, and $39.0 million year to date, up 56%. Operating expense per BOE rose 104% to $15.58 in Q3 and 34% to $10.25 year to date. Management attributed the increase to expanded operations, workovers, transportation and higher production. General and administrative expense rose 55% in Q3 to $11.0 million and 45% year to date to $27.8 million, primarily due to staffing and expanded activity. The filing does not provide a clearly stated operating-margin measure.
Q3 pre-tax income was $2.6 million, compared with $5.1 million a year earlier; the quarter ended in a net loss after $5.9 million of income tax expense. Nine-month pre-tax income was $54.0 million, versus a loss of $4.9 million in 2009, with income tax expense of $29.9 million. The reported nine-month effective tax rate was 55%.
Liquidity, capital spending and debt
- Cash and cash equivalents were $308.4 million at September 30, up from $270.8 million at year-end 2009. Working capital, including cash, was $270.2 million.
- Nine-month cash flow: $101.4 million provided by operations, $86.7 million used in investing and $22.9 million provided by financing; cash increased $37.6 million. Cash additions to property, plant and equipment were $89.0 million. Reported segment capital expenditures were $102.0 million.
- The company reported no debt outstanding. A July 2010 reserve-based BNP Paribas facility permits borrowing up to $100 million, with an initial committed borrowing base of $20 million; no amount had been drawn at quarter-end. The company reported covenant compliance.
- Contractual obligations totaled $72.9 million, including $65.6 million for drilling, completion, facilities and oil transportation services; $62.7 million was due in less than one year.
Changes, business developments and management outlook
- Nine-month revenue and production increased on higher output and oil prices. Colombia supplied 96% of revenue and other income; production growth mainly reflected additional Colombian development wells. Argentina production declined 19% year over year for the nine-month period.
- Q3 net loss widened to $3.3 million from $2.8 million. Higher sales were more than offset by higher operating and G&A expenses. Funds flow from operations fell 30% in the quarter, despite improved production and realized prices.
- Foreign exchange losses were $16.3 million in Q3 and $33.7 million year to date, primarily from translating a Colombian-peso-denominated deferred tax liability. Of the year-to-date loss, $27.1 million was unrealized and non-cash. The company said each one-peso decrease in the Colombian-peso-per-U.S.-dollar exchange rate would generate an estimated $116,000 foreign exchange loss.
- A $3.7 million ceiling-test impairment was recorded in Argentina in Q1 2010. The company also reported an Argentina pre-tax loss of $6.2 million for the first nine months.
- Management expected 2010 average production of 14,000–16,000 barrels per day, net after royalties, excluding potential exploration success. It expected the committed and discretionary 2010 capital program to be funded by operating cash flow and cash on hand, and believed liquidity was sufficient for at least the next 12 months. These expectations were subject to oil prices, operating conditions and project execution.
- Planned and ongoing activity included Costayaco and Moqueta wells and facilities in Colombia; Peru seismic acquisition and up to four test wells beginning in late 2010 and continuing into 2011; Argentina workover and sidetrack activity at VM.x-1001; and seismic work in Brazil. The Brazil transaction for a 70% interest in four blocks remained subject to regulatory approval. Three Colombian block awards also awaited final contract approval.
- In Argentina, producers were continuing oil deliveries without sales contracts while negotiating prices under regulatory uncertainty. Management noted that local oil prices were regulated and that the company was working with other producers, a refinery and provincial governments on the issue.
Risks, contingencies and unusual items
- Customer and infrastructure concentration: Ecopetrol accounted for 96% of Q3 and nine-month revenue. Gran Tierra relies heavily on Colombian pipeline routes; sabotage-related interruptions, including a 22-day reduction in Q3 deliveries, affected operations.
- Counterparty dispute: Ecopetrol sued over allocation of production from Guayuyaco well tests and claimed approximately $5.8 million in damages. The company had not accrued a loss, stating it did not consider a loss probable.
- Other risks include oil-price volatility, foreign-exchange exposure, political and regulatory change, security and labor disruptions, permitting, exploration and reserve uncertainty, environmental and operating hazards, and the ability to transport production. Management cautioned that funding or capital plans could be affected by adverse conditions.
- The filing reported no off-balance-sheet arrangements. Management stated disclosure controls were effective as of September 30, 2010 and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the 2010 production outlook of 14,000–16,000 barrels per day and planned drilling schedule were achieved, and how subsequent well results affected reserves and production.
- Whether operating and transportation costs remained elevated, particularly the sharp Q3 increase in operating expense per BOE.
- Progress on Argentina oil-sale pricing and contracts, and the resulting effect on realized prices, production and collections.
- Any change in the Ecopetrol dispute, potential damages, or pipeline reliability and customer concentration.
- Cash use, capital commitments, BNP Paribas facility availability and covenant compliance; also assess exposure to peso movements and the deferred tax liability.
- Effects of share issuance and outstanding options and warrants on dilution. At September 30, 2010, 11.4 million options and warrants to purchase approximately 4.6 million shares were reported outstanding.