GTE

Business Context and Reporting Period

Company: Gran Tierra Energy Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Gran Tierra is an independent international energy company engaged in oil and gas exploration, development, and production. Operations are concentrated in Colombia, Argentina, and Peru. The company is headquartered in Calgary, Alberta, Canada, and incorporated in Nevada, USA.

Key Event: On November 14, 2008, Gran Tierra completed the acquisition of Solana Resources Limited ("Solana") for approximately $671.8 million in stock and other consideration. This transaction significantly expanded Gran Tierra's asset base in Colombia, adding seven new blocks and increasing working interests in existing producing blocks.

Key Financial Metrics (Year Ended Dec 31, 2008)

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 254% to $112.8 million, driven by a 145% increase in crude oil production and a 44% increase in realized prices (avg $84.89/bbl vs $58.79/bbl in 2007). The acquisition of Solana contributed to production levels post-November 14, 2008.
• Profitability Turnaround: The company reported a net income of $23.5 million in 2008, reversing a net loss of $8.5 million in 2007. This was primarily due to higher oil revenues and the absence of $7.4 million in liquidated damages recorded in 2007.
• Balance Sheet Expansion: Total assets grew from $112.8 million to $1.07 billion, largely due to the fair value recording of Solana assets ($682.0 million) and a significant increase in cash reserves ($176.8 million).
• Reserve Growth: Proved reserves tripled to 19.2 million barrels, a 200% increase, resulting from successful development drilling in Colombia (Costayaco and Juanambu fields) and the Solana acquisition.
• Operational Disruption: Production in Colombia was temporarily suspended from late November to mid-December 2008 due to a general strike and force majeure declaration by Ecopetrol. Production resumed in January 2009.

Guidance, Outlook, and Risks

2009 Outlook:

• Production Target: Management aims to grow production to approximately 20,000 barrels of oil per day (net) in the second half of 2009 (19,000 from Colombia, 1,000 from Argentina).
• Capital Program: Planned capital expenditures for 2009 are $198 million ($178M Colombia, $10M Peru, $10M Argentina). The company expects to fund this from operating cash flow if WTI averages above $61/barrel, or from cash flow plus cash balances if WTI averages between $22 and $61.
• Focus: Continued development of the Costayaco field in Colombia, including four new development wells and infrastructure upgrades.

Key Risks and Contingencies:

• Geopolitical & Security: Operations in Colombia face risks from guerrilla activity and general strikes, as evidenced by the late 2008 production suspension. Argentina faces regulatory uncertainty regarding export controls and pricing.
• Customer Concentration: 89% of 2008 revenue came from a single customer, Ecopetrol (Colombia). In Argentina, 9% came from Refineria del Norte S.A.
• Commodity Price Volatility: Revenue is highly sensitive to WTI oil prices. A significant drop in prices could impact the ability to fund the capital program without additional financing.
• Legal Proceedings: A dispute with Ecopetrol regarding the Guayuyaco Association Contract involves a claim of approximately $4.7 million; no loss has been accrued as it is not considered probable.
• Environmental Liabilities: The company is settling several environmental matters inherited from Solana, with expected penalties totaling approximately $350,000.

Investor Verification Checklist

• Solana Integration: Verify the progress of integrating Solana's operations and financial controls, noting the exclusion of Solana from the 2008 internal control audit.
• Colombian Production Stability: Monitor the status of the Putumayo Basin infrastructure and the impact of any future strikes or security incidents on the Costayaco and Juanambu fields.
• Argentina Regulatory Environment: Track developments in Argentine export tax regimes and pricing agreements with Refineria del Norte S.A., as these directly impact realized prices.
• Capital Expenditure Execution: Confirm that the $198 million 2009 capital program is being executed as planned, particularly the drilling of the Costayaco-7 through 10 wells.
• Liquidity Management: Review the utilization of the $176.8 million cash balance and the status of the $33 million combined borrowing base under credit facilities with Standard Bank and BNP Paribas.