Business context and reporting period
Gran Tierra Energy Inc. explores for and produces oil and natural gas primarily in Colombia and Ecuador. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; amounts are U.S. dollars unless noted. All reported revenue was from oil sales.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Oil and gas sales | $158.0M | $163.4M | $310.6M | $301.7M |
| Net income | $38.5M | $20.3M | $40.5M | $38.2M |
| Funds flow from operations (non-GAAP) | $88.3M | $94.5M | $163.7M | $169.3M |
| EBITDA (non-GAAP) | $115.3M | $102.3M | $207.8M | $190.9M |
| Operating netback (non-GAAP) | $106.6M; $40.02/BOE | $121.9M; $47.99/BOE | $210.0M; $37.99/BOE | $226.8M; $45.48/BOE |
| Net cash provided by operating activities | Not clearly provided for quarter | Not clearly provided for quarter | $93.0M | $130.9M |
Q2 production after royalties was 29,193 BOEPD, up 4%; sales were 29,277 BOEPD, up 5%. Q2 realized sales price was $59.30/BOE, down 8%, while Brent averaged $68.32/bbl, down 9%. Operating expense rose 26% to $33.7M and workover expense rose 53% to $12.8M; transportation expense fell 25% to $4.9M. Six-month DD&A was $114.6M, interest expense $18.5M, and income tax expense $34.2M (46% effective tax rate).
Liquidity, debt and cash flow
At June 30, cash and cash equivalents were $147.7M, current restricted cash $0.7M, working capital including cash $151.4M, and long-term debt carrying value (including lease obligations) $692.6M. The company reported $715M aggregate principal of senior and convertible notes and an undrawn $300M reserves-based revolving credit facility. Net debt to EBITDA was 1.4x on a trailing-12-month basis and 1.2x using annualized quarterly results. The company said it complied with its financial and operating covenants.
For the first half, operating cash flow of $93.0M was below $194.1M of capital additions and $77.8M of property acquisitions. Financing provided $265.2M, including net proceeds from $300M of 7.75% notes issued in May. Cash, cash equivalents and restricted cash increased $96.4M to $150.7M. The company repurchased $24.0M of shares in the first half.
Material changes versus comparable periods
- Q2 sales fell 3%, primarily as lower Brent prices more than offset higher sales volumes; first-half sales increased 3% on higher volumes and lower quality and transportation discounts.
- Q2 net income rose 90%, while funds flow fell 7%. A $18.3M Q2 gain on financial instruments, including unrealized PetroTal investment gains, contributed to reported earnings; Q2 operating netback per BOE fell 17%.
- First-half production rose 8%, supported by Acordionero development and the additional Suroriente working interest. Operating expenses and workovers increased, and operating cash flow declined from the prior-year period.
- Debt increased following the May issuance of $300M of 7.75% notes due 2027. Subsequent to quarter-end, on July 17, the company repurchased and canceled $115.0M principal of convertible notes for $1,075 per $1,000 principal plus $1.6M accrued interest; $3,000 principal remained.
Outlook, risks and unusual items
- Management expected Acordionero water-injection facilities commissioned in July and planned gas-to-power commissioning in August to reduce gas-oil ratios, improve power reliability, restore production and lower operating costs. The filing provides no clear quantified production or cost guidance.
- Suroriente production was temporarily suspended by community blockades from June 17 through July 9. Acordionero also experienced ESP failures and shut in two high-GOR producers; management expected recovery in coming months.
- Oil-price exposure is partly hedged: for July–December 2019, positions covered 5,000 bopd with $60 Brent puts and a separate 5,000 bopd collar with a $60 put and $71.53 call. Key risks include commodity prices, operating and transport disruptions, political and regulatory conditions, and exploration outcomes, particularly in Ecuador where the company had newly awarded exploration rights and no prior operating experience.
- The company and Colombia’s hydrocarbons agency were discussing whether certain transportation costs may be deducted in calculating an additional royalty. Potential exposure was estimated at up to $55.6M; no amount was accrued because management did not consider a loss probable. Letters of credit and other credit support totaled $122.5M.
- Adoption of lease accounting in January 2019 recognized a $3.8M right-of-use asset, $4.2M lease liabilities and a $0.4M retained-earnings adjustment. Management reported disclosure controls were effective and no material internal-control changes occurred during the quarter.
Important facts for investors to verify
- Whether Acordionero’s water injection and gas-to-power projects restore production and reduce operating and workover costs as expected.
- The outcome and potential timing or amount of the disputed HPR royalty claim, and the company’s basis for not accruing a loss.
- Post-quarter cash and debt effects of the convertible-note repurchase, including the premium paid and remaining credit-facility availability.
- Whether operating cash flow can support the capital program and acquisitions without further financing, particularly under lower oil prices.
- How much reported earnings depend on non-cash valuation gains and other non-GAAP measures; compare these with GAAP results and cash flows.