Gran Tierra Energy Inc. — Q3 2021 Form 10-Q
Business and period: Gran Tierra is an international oil and gas exploration and production company operating in Colombia and Ecuador. This unaudited quarterly report covers the three and nine months ended September 30, 2021. Amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Oil sales | $135.3 million | $53.1 million | $327.4 million | $173.0 million |
| Net income (loss) | $35.0 million | $(107.8) million | $(20.0) million | $(730.1) million |
| Operating cash flow | Not clearly reported by quarter | Not clearly reported by quarter | $138.8 million | $59.3 million |
| Capital expenditures | $34.8 million | $7.4 million | $109.7 million | $56.4 million |
| Funds flow from operations (non-GAAP) | $69.1 million | $8.1 million | $121.3 million | $36.3 million |
| Free cash flow (non-GAAP) | $34.3 million | $0.7 million | $11.7 million | $(20.1) million |
Q3 production net after royalties was 23,372 barrels per day, up 37% year over year; sales volumes were 23,833 barrels per day, up 40%. Average Brent was $73.23 per barrel versus $43.34. Realized oil sales price was $61.72 per barrel, and operating netback was $43.21 per barrel versus $19.83 a year earlier. Operating netback, adjusted EBITDA, funds flow and free cash flow are non-GAAP measures and may not be comparable across companies.
Q3 operating expenses rose 81% to $37.6 million and transportation expenses rose 135% to $3.0 million year over year. Per-barrel operating costs increased, primarily due to higher power-generation costs and activity; transportation costs reflected use of more expensive routes during terminal maintenance. Q3 adjusted EBITDA was $81.8 million versus $21.9 million.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $16.6 million; cash plus restricted cash was $20.1 million. Current assets were $152.1 million and current liabilities were $137.6 million.
- Long-term debt and lease obligations totaled $735.4 million, including $300 million of 6.25% notes due 2025, $300 million of 7.75% notes due 2027, and $150 million drawn on the revolving credit facility. The company repaid $40 million of revolver borrowings in the first nine months, including $25 million in Q3. Revolver borrowings were $130 million as of October 29, 2021.
- The revolver borrowing base was $215 million, with $65 million available at quarter-end. The facility matures in October 2022; its next borrowing-base redetermination was due no later than November 2021.
- Shareholders’ equity was $238.9 million, down from $257.0 million at December 31, 2020. Total assets were $1.18 billion.
Changes and notable items
- Oil sales rose 155% in Q3 and 89% for the nine-month period, driven chiefly by higher benchmark prices and increased Q3 volumes. The nine-month production increase was modest, at 3%; Q3 volumes also benefited from recovery after Colombia’s second-quarter blockades.
- The company recorded no oil-and-gas ceiling-test or inventory impairment in 2021. Comparative 2020 periods included substantial impairments, including $502.9 million of oil-and-gas impairment and $102.6 million of goodwill impairment over the first nine months. These charges materially affect year-over-year earnings comparisons.
- Nine-month derivative losses were $47.5 million, compared with a $9.4 million gain in 2020; other financial instruments recorded a $12.4 million gain, compared with a $61.3 million loss. Q3 results included a $13.6 million gain on other financial instruments, principally from the PetroTal investment valuation.
- Gran Tierra sold 44% of its PetroTal holding during the first nine months for net proceeds of $14.6 million, recognizing a $5.1 million loss on sale; it retained approximately 17% of PetroTal at quarter-end.
- Colombia enacted a corporate tax-rate increase from 31% to 35%, effective January 1, 2022. The nine-month effective tax rate was 397%, reflecting, among other items, non-deductible derivative losses and financing costs, foreign-currency effects, and stock compensation.
Outlook, risks and contingencies
The filing provides no specific forward production or capital-spending guidance. Management stated that, based on forecast Brent prices and production, it expected to comply with revolver covenants for at least the next year from the financial-statement date. This expectation is subject to commodity-price and operating assumptions.
- Covenant relief expired October 1, 2021. Requirements thereafter include maximum total debt to EBITDAX of 4.0:1, maximum senior secured debt to EBITDAX of 3.0:1, and minimum EBITDAX to interest expense of 2.5:1. A breach could trigger default and acceleration; a revolver default could also affect the senior notes. The company reported compliance with applicable covenants at September 30.
- Borrowing-base reductions, covenant compliance, oil-price volatility, COVID-19 effects, operating and transport interruptions, political and security conditions in South America, and access to capital are identified risks. The company also cautions that future impairments and reserve-value reductions are possible.
- Outstanding Q4 2021 oil hedges covered 7,000 barrels per day through three-way collars and 3,000 barrels per day through swaps. Derivatives had a $14.7 million liability at quarter-end.
- Legal matters include a dispute with Colombia’s National Hydrocarbons Agency concerning high-price-share royalty calculations. Management does not expect pending claims and disputes to have a material adverse effect, although outcomes cannot be predicted. Letters of credit and other credit support totaled $102.4 million, principally for work commitments and other requirements.
- Oil sales were primarily to two major Colombian customers. COVID-19-related operating and transportation costs were $3.0 million for the first nine months. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Facts investors should verify
- Post-quarter borrowing levels, the November 2021 borrowing-base redetermination, and covenant headroom after covenant relief expired.
- Whether production and sales volumes remain stable after the blockade-related recovery, and how Colombian royalties, differentials, and transport routes affect realized prices and costs.
- Cash conversion and capital-spending requirements: nine-month GAAP operating cash flow was $138.8 million, while reported non-GAAP free cash flow was $11.7 million.
- Oil-price hedge settlements and exposure after the disclosed Q4 2021 positions expire.
- Developments in the ANH royalty dispute, Colombian tax changes, PetroTal valuation, and customer concentration.