Business Context and Reporting Period
Company: Gran Tierra Energy Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: An independent international energy company engaged in the acquisition, exploration, and development of oil and natural gas properties. Principal operations are located in Colombia and Argentina, with exploration interests in Peru. The company utilizes the full cost method of accounting for oil and gas properties.
Key Financial Metrics
| Metric (in thousands USD) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Revenue (Oil & Gas Sales) | $40,082 | $93,873 |
| Total Revenue & Interest | $40,339 | $94,302 |
| Net Income | $22,987 | $36,189 |
| Net Income Per Share (Basic) | $0.20 | $0.34 |
| Net Income Per Share (Diluted) | $0.18 | $0.30 |
| Operating Cash Flow | N/A | $44,445 |
| Capital Expenditures | $14,550 | $32,321 |
| Cash and Cash Equivalents (Sep 30, 2008) | $57,760 | |
| Total Assets (Sep 30, 2008) | $202,864 | |
| Total Liabilities (Sep 30, 2008) | $66,456 | |
| Shareholders' Equity (Sep 30, 2008) | $136,408 |
Production Highlights (Nine Months 2008): Total production averaged 3,482 barrels of oil equivalent (boe) per day, a 193% increase year-over-year. Realized prices averaged $98.40 per boe, a 100% increase year-over-year.
Material Changes vs. Prior Period
- Revenue Surge: Revenue increased 402% for the quarter and 478% for the nine-month period compared to 2007. This was driven by a 181% increase in production volumes and a 78% increase in realized oil prices.
- Profitability Turnaround: The company reported a net income of $23.0 million for the quarter and $36.2 million for the nine months, compared to a net income of $1.1 million and a net loss of $10.6 million, respectively, in the prior year periods.
- Segment Performance:
- Colombia: Generated 94% of total revenue. Pre-tax income increased to $30.0 million (quarter) and $66.8 million (nine months) due to new production from Costayaco and Juanambu fields.
- Argentina: Reported a pre-tax loss of $0.9 million (quarter) and $1.6 million (nine months). Production remained relatively flat, and realized prices were constrained by local government regulations and withholding taxes.
- Derivative Gains/Losses: Recorded a $4.5 million gain on derivative financial instruments for the quarter due to a decrease in WTI prices relative to the collar ceiling. For the nine months, a $3.0 million loss was recorded.
- Restatement: Prior year (2007) cash flow statements were restated to reclassify $4.3 million of cash flows from operating to investing activities. This had no impact on net cash or net income.
Outlook, Risks, and Contingencies
- Business Combination: Entered into a definitive agreement to combine with Solana Resources Limited. Upon closing, Solana shareholders will own approximately 49% of the combined company. The transaction is subject to shareholder approval scheduled for November 14, 2008. A termination fee of $21 million applies if the deal fails due to Gran Tierra's fault.
- Liquidity and Capital: The company holds $57.8 million in cash and has an undrawn $20 million credit facility with Standard Bank Plc. Management believes current cash flow and liquidity are sufficient to fund operations and capital programs, barring severe price downturns.
- Legal Proceedings: A dispute exists with Ecopetrol regarding the allocation of oil produced during long-term testing of Guayuyaco wells. Ecopetrol claims approximately $5.8 million in damages; Gran Tierra has not accrued a loss as it does not consider a loss probable.
- Internal Controls: Management identified a material weakness in internal controls over financial reporting related to the classification of cash flows. Remediation steps have been taken, but the weakness was not fully tested as of September 30, 2008.
- Operational Risks: Significant risks include guerrilla activity in Colombia, regulatory changes and price controls in Argentina, and volatility in global oil prices.
Investor Verification Checklist
- Solana Merger Approval: Verify the outcome of the shareholder vote scheduled for November 14, 2008, regarding the Solana Resources Limited combination.
- Argentina Pricing: Monitor negotiations with Refineria del Norte S.A. and the Argentine government regarding oil pricing and withholding taxes, which currently cap realized prices significantly below global benchmarks.
- Colombia Security: Assess the impact of ongoing guerrilla activity and pipeline security on the Costayaco and Juanambu production fields.
- Internal Control Remediation: Confirm in the next filing whether the material weakness regarding cash flow classification has been fully remediated and tested.
- Reserve Additions: Review the upcoming year-end 2008 reserve report to confirm the impact of the Costayaco development drilling on proved reserves.