Gran Tierra Energy Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 27, 2015. This is an annual report, not a standalone fourth-quarter filing. Amounts are U.S. dollars unless stated otherwise. Operations were in Colombia, Peru and Brazil; Argentina was sold during the year and reported as discontinued operations.
Financial performance and condition
- Revenue: Continuing-operations oil and gas sales were $559.4 million, down 14% from $647.0 million in 2013. Revenue and other income totaled $562.3 million, down 13%. The decline reflected lower realized prices and slightly lower production.
- Production and pricing: Production, net after royalties and adjusted for inventory changes and losses, averaged 18,523 BOEPD, down 4% from 19,239 BOEPD. Average realized price was $82.74/BOE versus $92.13. Brent averaged $99.02/bbl for the year, but fell to $55.27/bbl at year-end.
- Earnings: Continuing operations recorded a $144.3 million net loss, compared with $181.0 million income in 2013. Consolidated net loss was $171.3 million, or $0.60 per share, versus net income of $126.3 million, or $0.45 per share. Results included a $265.1 million impairment of Peru Block 95 unproved properties. Income tax expense was $127.2 million despite a pretax continuing-operations loss of $17.1 million, principally reflecting valuation allowances and tax effects.
- Costs: Operating expenses were $113.9 million, up 3%; operating cost increased to $16.85/BOE from $15.69. General and administrative expense rose 25% to $51.2 million. DD&A, depletion and impairment expense increased to $451.0 million from $202.9 million, largely due to the Block 95 impairment. The filing does not provide a single operating-margin measure.
- Cash flow and investment: Cash provided by continuing-operations operating activities was $213.5 million; total operating cash flow, including discontinued operations, was $208.7 million. Funds flow from continuing operations, a non-GAAP measure, was $311.3 million, down 9%. Cash capital expenditures for continuing operations were $347.0 million; reported capital expenditures were $416.2 million excluding non-cash working-capital changes.
- Liquidity and debt: Cash and cash equivalents were $331.8 million, down from $428.8 million; working capital including cash was $239.8 million. The company reported no debt outstanding and had not drawn its reserve-based credit facility, with a current borrowing base of $150 million and a maximum of $300 million, subject to reserve value and covenants. 87% of cash was held outside Canada and the United States.
- Reserves and assets: Year-end proved reserves were 37.0 MMBOE, about 100% oil, with 79% developed, versus 42.1 MMBOE a year earlier. The decline primarily reflected the Argentina sale; additions in Colombia and Brazil partly offset it. Year-end total assets were $1.714 billion and shareholders’ equity was $1.277 billion.
Material changes versus 2013
- Revenue, realized prices, adjusted production and funds flow declined; the company moved from continuing-operations income to a continuing-operations loss.
- The $265.1 million Block 95 impairment drove a sharp increase in DD&A and the annual loss. Fourth-quarter continuing-operations loss was $269.8 million on $98.9 million of oil and gas sales; the filing attributes the quarter’s loss principally to the impairment.
- Gran Tierra sold its Argentina business unit on June 25, 2014, for $69.3 million in aggregate consideration ($55.4 million cash and $13.9 million in Madalena shares). The sale generated a $19.3 million after-tax disposal loss; Argentina’s results are classified as discontinued operations.
- Capital expenditures for continuing operations increased from $295.3 million to $416.2 million, while year-end cash declined by $97.0 million.
- Colombia generated 95% of continuing-operations revenue and 83% of consolidated production came from the Chaza Block, leaving substantial geographic and asset concentration.
Outlook, management commentary and key risks
- Strategy and 2015 program: Management emphasized balance-sheet preservation, lower costs, renegotiated service and transportation costs, and prioritizing projects with immediate value or contractual commitments. The preliminary 2015 capital program was reduced to $140 million from $310 million, intended to be funded by operating cash flow and cash on hand. Management cautioned that spending could change with conditions.
- Peru / Block 95: In February 2015, the company halted further Bretaña field development spending except for asset integrity and security. A post-year-end appraisal well found approximately six feet of oil pay, less than anticipated. Probable and possible reserves associated with the field were reclassified as contingent resources effective January 31, 2015. Management said it would evaluate options; additional 2015 impairment was expected for remaining appraisal and field costs.
- Commodity-price and impairment exposure: Management warned that sustained low prices could reduce cash generation, reserve-based borrowing capacity and economically recoverable reserves. It said Brent averaging $52/bbl or below could make a ceiling-test impairment reasonably likely in Brazil in the first or second quarter of 2015 and Colombia in the fourth quarter of 2015.
- Colombia operations and transport: The OTA pipeline was shut for approximately 180 days in 2014, from sabotage and a landslide. Alternative transport helped maintain deliveries but may reduce realized prices or prove unsustainable. Ecopetrol and related transport infrastructure are important counterparties; customer concentration and contract renewals are risks.
- Contingencies: Gran Tierra disputed the ANH’s interpretation of the Chaza Block HPR royalty for Moqueta. If the ANH prevails, estimated compensation was $64.1 million at year-end; a separate interpretation dispute over deductible transportation costs could involve up to $40.6 million. Neither amount was accrued because management did not consider a loss probable. The ANH counterclaim also sought remedies including termination of the Chaza Contract.
- Other risks: Political, regulatory, permitting, community-consultation and security risks in South America; oil-price volatility; environmental and decommissioning obligations; foreign-exchange exposure; and reliance on a limited number of oil buyers. Colombian tax legislation raised scheduled income-tax rates to 39% in 2015, rising to 43% by 2018.
- Audit and controls: Deloitte issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also concluded controls were effective at December 31, 2014.
Most important facts for investors to verify
- Whether the $140 million 2015 capital plan and stated funding assumptions remained feasible under subsequent oil prices and operating results.
- The status and economic options for Block 95, including further impairment, decommissioning costs and the treatment of its contingent resources.
- Developments and potential financial exposure in the ANH HPR royalty arbitration and related transportation-cost dispute.
- Actual production, realized pricing, inventory movements and transportation interruptions, particularly in Colombia and the Chaza Block.
- Compliance with credit-facility covenants, borrowing-base availability and access to cash held outside Canada and the United States.
- Changes in reserves, customer concentration and potential ceiling-test impairments in Colombia or Brazil.