Business context and reporting period
Gran Tierra Energy Inc. is an oil and natural gas exploration and production company focused primarily on Colombia, with activities in Peru. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; amounts are in U.S. dollars unless noted. The company completed the sale of its Brazil business unit on June 30, 2017.
Key financial and operating metrics
| Metric | Q2 2017 | Six months 2017 |
|---|---|---|
| Oil and natural gas sales | $96.1 million | $190.8 million |
| Net income (loss) | $(6.8) million | $6.0 million |
| Operating cash flow | Not separately stated for the quarter | $67.5 million |
| Funds flow from operations (non-GAAP) | $50.9 million | $95.9 million |
| Capital expenditures | $57.9 million | $104.0 million |
| Sales volumes | 26,283 BOEPD | 25,551 BOEPD |
| Operating netback (non-GAAP) | $26.10 per BOE | $27.29 per BOE |
Q2 oil and NGL realized price was $40.44 per barrel; average Brent was $50.92 per barrel. Q2 operating expenses were $27.2 million, or $11.38 per BOE; transportation was $6.5 million, or $2.71 per BOE. DD&A was $31.6 million and interest expense was $3.3 million. The filing does not present a single standardized operating-margin measure; operating netback is a non-GAAP measure.
At June 30, cash and cash equivalents were $53.3 million, with $5.8 million of current restricted cash and $9.9 million of long-term restricted cash. Current assets were $131.9 million and current liabilities were $98.9 million. Long-term debt was $263.6 million, comprising $155.0 million drawn on the revolving facility and $115.0 million principal of convertible notes, net of issuance costs. The facility borrowing base was $300 million. Total assets were $1.430 billion and shareholders’ equity was $980.8 million.
Material changes versus prior comparable periods
- Q2 sales rose 34% year over year and six-month sales rose 48%, reflecting higher production and realized oil prices. Q2 production NAR increased 22% to 26,423 BOEPD; six-month production NAR increased 15% to 25,612 BOEPD.
- Q2 net loss improved from $63.6 million in 2016 to $6.8 million; six-month results improved from a $108.6 million loss to $6.0 million of net income. Lower impairment charges were a major factor: $0.2 million in Q2 and $0.5 million for the half, versus $92.8 million and $149.7 million, respectively, in 2016.
- Six-month operating netback increased 71% to $126.2 million. Per-BOE operating expenses rose 31% year over year in both Q2 and the first half, while six-month transportation expense per BOE fell 32%.
- Debt increased: revolving-facility borrowings rose from $90 million at year-end 2016 to $155 million; the $115 million convertible notes remained outstanding. The company reported a $10 million share repurchase during the first half.
- The Santana and Nancy-Burdine-Maxine Blocks were acquired for $30.4 million in April. The Brazil sale generated approximately $38 million cash consideration after closing adjustments and a $9.1 million loss on sale.
- Six-month cash from operations was $67.5 million, while investing activities used $95.9 million; financing activities provided $55.3 million. Cash, cash equivalents and restricted cash rose by $25.8 million to $69.1 million.
Outlook, commentary, risks and unusual items
- Management narrowed its 2017 capital program range to $200 million–$225 million, expected to be funded by operating cash flow and available credit capacity. The company said existing liquidity was sufficient for its plans, subject to current oil-price trends and production levels.
- The next reserve-based credit borrowing-base redetermination was due no later than November 2017; the facility matures September 18, 2018. The company reported compliance with its financial and operating covenants at June 30, 2017.
- Management said it did not expect a Colombia ceiling-test impairment in Q3 2017, assuming other factors remained constant, but emphasized uncertainty from commodity prices, royalties, costs, foreign exchange, capital spending, production, reserves and tax attributes.
- April landslides near Mocoa damaged regional electrical infrastructure and disrupted Putumayo operations. Costayaco and Moqueta relied on diesel and gas-fired generation during outages; the company expected an expanded gas-to-power facility by year-end 2017.
- The company reported an ongoing dispute with Colombia’s National Hydrocarbons Agency over deductible transportation costs in calculating an additional royalty. Potential compensation could be up to $49.2 million; no amount was accrued because management did not consider a loss probable.
- Letters of credit and other credit support totaled $74.5 million. The company stated that 99% of cash and cash equivalents were held outside Canada and the United States and generally were not available for domestic or head-office use without repatriation, which could trigger withholding taxes.
- Commodity collars covered 15,000 bopd through December 2017, with stated put and call terms of $35, $45 and $65 per barrel. No foreign-currency derivatives were outstanding at quarter-end; contracts hedging up to COP 124 billion of costs were entered into after quarter-end.
- The six-month effective tax rate was 84%, reflecting foreign taxes, permanent differences, valuation allowances and other items. Early adoption of an intercompany-transfer tax accounting standard resulted in a $124.5 million cumulative adjustment to opening deficit, with no cash-flow effect. The Brazil sale loss and derivative gains were also notable period items.
Important facts for investors to verify
- Whether production growth and higher realized prices can offset rising operating costs, workover spending and ongoing infrastructure-related disruption.
- The status and potential financial outcome of the ANH royalty interpretation dispute, for which the filing cites exposure of up to $49.2 million.
- Available borrowing capacity after the next reserve-based redetermination, covenant headroom, and plans to address the September 2018 facility maturity.
- Progress against the $200 million–$225 million 2017 capital program and the expected timing and benefits of the gas-to-power expansion.
- Oil-price sensitivity, hedge coverage, and the assumptions underlying management’s Q3 ceiling-test impairment outlook.
- The final settlement of Brazil-sale-related arrangements, including the $4.7 million cash deposit tied to release from letter-of-credit obligations.