Gran Tierra Energy Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unless stated otherwise, amounts are in U.S. dollars. Gran Tierra is an oil and gas exploration and production company focused on Colombia, with activities in Peru; it sold its Brazil business effective June 30, 2017.
Financial and operating performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Oil and natural gas sales | $103.8 million | $68.5 million | $294.6 million | $197.7 million |
| Net income (loss) | $3.1 million | $(229.6) million | $9.1 million | $(338.2) million |
| Adjusted EBITDA (non-GAAP) | $60.5 million | $24.6 million | $163.7 million | $89.4 million |
| Funds flow from operations (non-GAAP) | $55.1 million | $23.5 million | $151.1 million | $68.8 million |
| Cash provided by operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $122.5 million | $86.4 million |
- Q3 production net after royalties (NAR) was 27,515 BOEPD, up 25% year over year; sales were 27,447 BOEPD, up 28%. Nine-month production NAR rose 19% to 26,253 BOEPD and sales rose 13% to 26,189 BOEPD.
- Q3 average realized sales price was $41.09 per BOE, up 18% year over year. Operating netback, a non-GAAP measure, was $70.4 million, or $27.88 per BOE, versus $37.1 million, or $18.79 per BOE, in Q3 2016.
- Q3 operating expenses were $27.3 million and transportation expense was $6.0 million. Q3 depletion, depreciation and accretion was $34.5 million; interest expense was $4.0 million. Nine-month G&A was $26.9 million, up 30% year over year.
- Capital expenditures were $71.7 million in Q3 and $175.7 million for the first nine months. The company also spent $30.4 million on property acquisitions during the nine-month period.
- At September 30, cash and cash equivalents were $15.1 million, plus $3.9 million of current restricted cash. Long-term restricted cash was $10.3 million. Long-term debt carrying value was $229.2 million, comprising $120.0 million drawn on the revolving facility and $115.0 million principal of convertible notes.
- Operating cash flow of $122.5 million was below nine-month property, plant and equipment additions of $175.7 million. Cash, cash equivalents and restricted cash together declined $13.9 million during the period to $29.4 million.
Changes versus comparable periods
- Revenue increased 51% in Q3 and 49% for the first nine months, reflecting higher sales volumes and realized oil prices. Production gains were attributed primarily to the PetroLatina acquisition and drilling at Colombia’s Acordionero field.
- Net income was positive in Q3 and for the nine-month period, compared with large losses in 2016. The prior-year losses included asset impairments of $320.0 million in Q3 and $469.7 million for the first nine months; 2017 impairment was $0.8 million and $1.2 million, respectively.
- Nine-month operating cash flow increased from $86.4 million to $122.5 million, while capital expenditures rose substantially from $69.7 million to $175.7 million.
- The Brazil sale generated net proceeds of $34.5 million and a $9.1 million loss on sale. The business contributed no Q3 sales after the June 30 closing.
- Gross revolving-facility borrowings rose from $90.0 million at year-end 2016 to $120.0 million at September 30, 2017. The company repurchased $10.0 million of common stock during the nine-month period.
Outlook, commentary and risks
- Management expected its 2017 capital program to total $225 million to $250 million, financed by operating cash flows and available credit capacity. Management stated that resources were expected to support the plan at then-current oil prices and production levels.
- The revolving credit facility had a $300 million borrowing base, subject to lender redetermination due no later than November 2017. The September amendment extended maturity to October 1, 2018; a further extension to November 2020 and confirmation of the borrowing base through May 2018 were expected subject to documentation. The company reported compliance with financial and operating covenants at September 30.
- Management was evaluating alternatives for Peru assets, potentially including a contribution to a separate entity while retaining a non-controlling interest. No definitive agreement had been reached and completion was not assured.
- Electrical-system instability in Putumayo had required gas and diesel generators, increasing costs and affecting production and water injection. Management expected an expanded Costayaco gas-to-power facility to be in place by year-end 2017.
- A dispute with Colombia’s National Hydrocarbons Agency over deductible transportation and related costs in calculating an additional royalty could result in compensation of up to $49.8 million if the agency’s interpretation prevails. No amount was accrued because the company did not consider a loss probable.
- Other key exposures include oil-price volatility, foreign-exchange and floating-rate risk, operational and transportation disruptions, and political, weather and security risks in South America. Letters of credit and other credit support totaled $74.5 million.
- The company reported no material change in its risk factors and no off-balance-sheet arrangements. It early adopted a tax accounting standard, recording a cumulative adjustment to opening deficit; adoption had no cash-flow impact.
Important facts for investors to verify
- Review the November 2017 borrowing-base redetermination, facility availability after letters of credit, and the status of the anticipated maturity extension.
- Track delivery of the Costayaco power expansion and whether production and water-injection performance recover from electrical disruptions.
- Monitor the ANH royalty dispute, including any change in the company’s probability assessment or accrual.
- Assess execution and funding of the $225 million–$250 million capital program against operating cash flow, debt levels and oil prices.
- Confirm whether a Peru asset transaction is pursued and its effect on retained interests, funding and reported results.
- Consider the non-GAAP nature of adjusted EBITDA, funds flow and operating netback, and compare them with GAAP earnings and cash flows.