Business context and reporting period
Gran Tierra Energy Inc. is an independent oil and gas exploration, development and production company operating in Colombia, Argentina, Peru and Brazil. This Form 10-K covers the year ended December 31, 2011; figures are in U.S. dollars unless noted. The company completed its acquisition of Petrolifera on March 18, 2011, expanding its assets in Argentina, Colombia and Peru. Colombia generated 91% of 2011 revenue and other income.
Financial and operating performance
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue and other income | $597.4 million | $374.5 million |
| Net income | $126.9 million | $37.2 million |
| Basic / diluted EPS | $0.46 / $0.45 | $0.15 / $0.14 |
| Cash provided by operating activities | $356.9 million | $203.8 million |
| Funds flow from operations (non-GAAP) | $319.0 million | $203.1 million |
| Capital expenditures | $327.6 million | $177.0 million |
| Cash and cash equivalents at year-end | $351.7 million | $355.4 million |
| Working capital, including cash | $213.1 million | $265.8 million |
| Production, net after royalties | 17,408 BOEPD | 14,448 BOEPD |
| Average realized price | $93.83/BOE | $70.79/BOE |
Operating expense was $13.61/BOE, depletion, depreciation, accretion and impairment (DD&A) was $36.39/BOE, and general and administrative expense was $9.50/BOE in 2011. Income tax expense was $107.3 million; the reported effective tax rate was 46%. The filing does not provide a clear consolidated operating-margin measure.
For Q4 2011, revenue and other income was $161.7 million, income before tax was $55.2 million, income tax expense was $22.7 million and net income was $32.6 million ($0.12 per basic and diluted share).
At year-end, the company reported no debt outstanding. Its $20 million committed borrowing base under a Colombian reserve-backed facility was undrawn; the facility has a stated maximum borrowing base of up to $100 million. The Petrolifera reserve-backed debt and acquired credit lines were repaid during 2011. Approximately 91% of cash was held by foreign subsidiaries and was not available for domestic operations without repatriation and potential taxes.
Material changes versus the prior comparable period
- Revenue rose 60%, production increased 20%, and average realized price per BOE increased 33%, reflecting higher oil prices, production growth and Petrolifera’s contribution after acquisition.
- Net income increased substantially, but included a $21.7 million gain on acquisition. Results also included $42.0 million of Peru and $25.7 million of Argentina ceiling-test impairments, an $8.3 million Colombian equity tax, and higher operating, DD&A and G&A costs.
- Cash from operations increased, but capital spending rose to $327.6 million. Year-end cash declined modestly while working capital fell by $52.7 million, mainly due to higher taxes payable and accounts payable/accrued liabilities.
- Proved reserves were 34.0 MMBOE at year-end, up from 23.8 MMBOE, largely due to the Petrolifera acquisition and reserve revisions. Proved undeveloped reserves were 8.2 MMBOE, versus 4.1 MMBOE in 2010.
Outlook, commentary, risks and contingencies
Management planned a 2012 capital program of $367 million, including approximately $152 million for exploration, and expected to fund it from operating cash flow and cash on hand. Production for 2012, excluding potential exploration success, was forecast at 20,000–21,000 BOEPD. Management cautioned that budgets may change with operating results and opportunities, and that lower oil prices or other adverse events could prompt spending reductions or financing, asset sales or equity issuance.
- Concentration and logistics: Ecopetrol purchased 87% of 2011 revenue. Colombian production depends heavily on pipeline transportation; sabotage, outages, capacity constraints or changes in delivery arrangements could interrupt sales or raise costs.
- Country and regulatory exposure: The filing highlights political, tax, currency, permitting, environmental and community-relations risks across its South American operating countries. Argentina’s price and export-tax regime and restrictions on gas marketing may affect returns.
- Exploration and reserve risk: Exploration results are uncertain; several 2011 wells were plugged and abandoned. Reserve estimates and full-cost ceiling tests depend on technical and economic assumptions, and impairments cannot be reversed under the stated accounting method.
- Royalty and legal disputes: Colombia’s ANH challenged the company’s interpretation of additional royalties for the Moqueta discovery; any resulting payment could be material, and no loss was accrued. A separate Costayaco net-profits-interest dispute had $9.6 million at issue; the company considered a loss not probable. Ecopetrol claimed approximately $5.4 million in a contract dispute, also unaccrued based on management’s assessment.
- Post-year-end commitment: After withdrawing from the BM-CAL-10 farm-in, the company expected to pay approximately $26 million in March 2012 for a share of costs, primarily relating to the drilled well.
- Other unusual items: The company recorded an $8.3 million Colombian equity tax assessed every four years. It also disclosed 2011 oil spills and clean-up activity; management stated required environmental compliance costs were not expected to be material.
Most important facts for investors to verify
- Whether 2012 production, cash flow and the $367 million capital plan are achievable, particularly given exploration uncertainty and the expected $26 million BM-CAL-10 payment.
- The sustainability of earnings excluding the one-time $21.7 million acquisition gain, and the drivers of the Peru and Argentina impairments and higher unit costs.
- Cash accessibility: confirm the location and repatriation implications of the 91% of cash held in foreign subsidiaries, as well as compliance with credit-facility covenants.
- Developments in the Moqueta royalty matter and the Costayaco and Guayuyaco disputes, including any change in exposure or accrual assessment.
- Continued customer and transportation concentration, especially Ecopetrol’s 87% revenue share and the reliability and terms of Colombian oil delivery.
- Reserve additions, conversion and development progress, including the assumptions underlying the 34.0 MMBOE proved-reserve estimate and the 8.2 MMBOE proved undeveloped balance.