Gran Tierra Energy Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed February 21, 2023. This is an annual filing, not a standalone fourth-quarter report. Unless noted, amounts are U.S. dollars.
Business context
Gran Tierra is an international oil and gas exploration and production company operating in Colombia and Ecuador. Colombia accounted for 96% of proved reserves and all reported revenue in 2022. Production and reserves are concentrated: four Colombian fields supplied 89% of production and represented 80% of proved reserves.
Financial and operating performance
| Metric | 2022 | 2021 |
|---|---|---|
| Oil sales | $711.4 million | $473.7 million |
| Net income | $139.0 million; $0.38 per share | $42.5 million; $0.12 per share |
| Net cash from operating activities | $427.7 million | $244.8 million |
| Funds flow from operations (non-GAAP) | $366.0 million | $186.5 million |
| Capital expenditures | $236.6 million | $149.9 million |
| Free cash flow (non-GAAP) | $129.4 million | $36.6 million |
| Adjusted EBITDA (non-GAAP) | $489.6 million | $241.5 million |
Average net-after-royalty production rose 10% to 23,815 barrels per day; sales volumes rose 10% to 23,696 barrels per day. Realized oil price increased 37% to $82.25 per barrel, while Brent averaged $99.04 per barrel. Operating netback was $62.30 per barrel, up from $41.39. Operating expense rose 9% per barrel to $18.77; quality and transportation discounts increased to $16.79 per barrel from $10.86.
Income before tax was $244.9 million, and income tax expense was $105.9 million, a 43% effective rate. The result included $26.6 million of derivative losses; there were no outstanding derivative positions at year-end. The company recorded no ceiling-test impairment in 2022, compared with $560.3 million of oil and gas impairment and $102.6 million of goodwill impairment in 2020.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents were $126.9 million, current assets $168.6 million and current liabilities $241.6 million. The company reported $427.7 million of operating cash flow and spent $236.6 million on capital expenditures. Its cash-flow funding plan therefore produced $129.4 million of free cash flow, a non-GAAP measure.
Reported long-term debt was $589.6 million, including $279.9 million of 6.25% notes due 2025 and $300.0 million of 7.75% notes due 2027, net of issuance costs and including lease obligations. The revolving facility was undrawn at year-end; $100 million was initially available, within a $150 million borrowing base subject to mutual agreement for the additional $50 million. In 2022, the company repurchased $20.1 million principal of 2025 notes for $17.3 million and repurchased 22.7 million shares for approximately $27.3 million. Cash and cash equivalents were held entirely outside Canada and the United States.
Changes versus prior year and fourth-quarter context
Compared with 2021, higher Brent prices and 10% higher sales volumes drove oil sales up 50%. Production growth reflected drilling and workovers in Acordionero and Costayaco, fewer blockade disruptions, and Ecuador exploration results. Higher royalties, operating costs, discounts and taxes partly offset the revenue increase. Royalties rose to 23% of working-interest production from 19%, largely reflecting Colombia’s price-sensitive royalty regime.
Fourth-quarter 2022 net income was $33.3 million, versus $38.7 million in the third quarter and $62.5 million in fourth-quarter 2021. Fourth-quarter adjusted EBITDA was $108.8 million, versus $121.2 million in the third quarter and $81.5 million in fourth-quarter 2021. The filing’s quarterly comparison attributes the sequential earnings decline mainly to lower prices and higher expenses; annual results benefited from higher prices and volumes.
Outlook, risks and other notable items
- 2023 plan: Capital budget of $210 million–$250 million for 22–29 wells. Approximately 70% is planned for development and 30% for exploration; Colombia development is expected to represent 95% of production. Management expects operating cash flow to fund the program, assuming Brent is at least $60 per barrel.
- Tax change: Colombian tax reform effective January 1, 2023 eliminates specified royalty deductions and adds a Brent-price-linked surtax. The company expected the 2023 surtax to be 15%, implying an aggregate income tax rate of 50%.
- Operating and country risks: Blockades, community disputes, security incidents, permitting constraints and pipeline or transport interruptions could disrupt production. In 2022, localized blockades temporarily shut in Suroriente and Putumayo-7 production. Exploration licensing restrictions and suspension of some commitments are also disclosed.
- Market and execution risks: Oil-price volatility, higher costs, reserve-estimation uncertainty, concentrated assets, foreign-exchange exposure and access to capital could affect cash generation and investment plans. The 2023 funding plan is price-dependent.
- Debt and legal matters: The credit facility has financial covenants and is secured by Colombian assets. On February 20, 2023, its availability period and maturity were extended to August 20, 2023 and August 20, 2025, respectively; it remained undrawn as of February 21, 2023. Pending lawsuits and claims were not expected by management to have a material adverse effect, but outcomes are uncertain.
- Audit and controls: KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Estimated proved reserves’ effect on depletion and the ceiling test was identified as a critical audit matter.
Important facts for investors to verify
- Whether production, realized pricing, discounts and operating costs track the assumptions underpinning the $210 million–$250 million 2023 capital plan.
- Whether operating cash flow can fund planned spending at actual Brent prices, especially if prices fall below management’s $60-per-barrel planning threshold.
- The cash-flow and earnings effects of Colombia’s royalty and tax changes, including the expected 50% aggregate tax rate.
- Debt maturities, interest expense, covenant headroom and the terms and availability of the amended credit facility.
- Reserve replacement and development progress, including the timing and economics of proved undeveloped reserves and exploration commitments.
- Exposure to concentrated Colombian operations, customer concentration, blockades, security events and permitting or transportation disruptions.
- Reconciliations and definitions of adjusted EBITDA, funds flow and free cash flow, which are non-GAAP measures and may not be comparable across companies.