Gran Tierra Energy Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited; amounts below are U.S. dollars. Gran Tierra explores for and produces oil and natural gas in Colombia, Argentina, Peru and Brazil.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Oil and gas sales | $161.7 million | $83.7 million | $284.0 million | $176.6 million |
| Revenue and other income | $162.1 million | $84.1 million | $284.6 million | $177.2 million |
| Income before tax | $59.6 million | $30.2 million | $100.0 million | $51.4 million |
| Net income | $31.6 million | $17.4 million | $45.3 million | $27.3 million |
| Basic / diluted EPS | $0.11 / $0.11 | $0.07 / $0.07 | $0.17 / $0.16 | $0.11 / $0.10 |
| Funds flow from operations (non-GAAP) | $88.6 million | $44.3 million | $155.1 million | $98.6 million |
Q2 production averaged 18,141 boe/day, up 36%; first-half production averaged 16,354 boe/day, up 16%. Realized prices were $97.93/boe in Q2 and $95.93/boe for the first half, increases of 42% and 39%, respectively. The filing does not present a conventional operating-margin percentage; reported income before tax per boe was $36.09 for Q2 (versus $24.83) and $33.78 for the first half (versus $20.04).
Operating expenses rose to $23.2 million in Q2 and $39.6 million for the first half; operating cost per boe was $14.03 and $13.36, respectively, versus $7.83 and $7.69 a year earlier. First-half DD&A was $110.3 million, including a $33.4 million Peru ceiling-test impairment. First-half income tax expense was $54.7 million, with a 55% effective rate; Colombian equity tax expense was $8.3 million.
Cash, debt and liquidity
- Cash and equivalents were $211.4 million at June 30, down from $355.4 million at December 31, 2010. Working capital, including cash, was $215.4 million, down from $265.8 million.
- First-half operating cash flow was $33.1 million, versus $53.0 million in 2010. Investing cash outflow was $156.9 million, including $179.2 million of property additions; financing outflow was $20.3 million. Cash declined by $144.1 million.
- Accounts receivable increased to $156.4 million from $43.0 million, primarily reflecting the timing of Ecopetrol payments.
- Balance-sheet bank debt was $31.3 million at June 30, associated with the Petrolifera acquisition. The company repaid it on August 5, 2011; it reported being debt-free thereafter. Its separate Colombian reserve-based BNP Paribas facility, with a $20 million initial committed borrowing base, was undrawn at quarter-end.
Material changes and unusual items
- Gran Tierra acquired Petrolifera on March 18, 2011, issuing shares and replacement warrants for consideration of approximately $143.0 million. Petrolifera results are included only from the acquisition date, limiting direct comparability with 2010.
- The acquisition generated a $21.7 million gain in first-half results, subject to final purchase-price allocation. Q2 included a $1.3 million unrealized gain from revaluing acquisition-related warrants.
- First-half results also include the $33.4 million Peru impairment, Colombian equity tax, and $19.7 million of foreign-exchange losses, primarily from translating Colombian-peso-denominated deferred tax liabilities. The first-half FX loss was largely non-cash.
- The 70% interest in four Brazilian blocks received final approval in June; production contribution from the producing block began that month. The acquisition and exploration spending contributed to higher capital expenditures and expanded the asset base.
Outlook, risks and contingencies
- Management maintained 2011 average net-after-royalty production guidance of 17,500–19,000 boe/day and planned a $357 million capital program: Colombia $196 million, Peru $49 million, Argentina $50 million and Brazil $62 million. Management expected operating cash flow and cash on hand to fund the program, subject to oil prices and other uncertainties.
- Moqueta production was expected to average about 500 barrels/day in the second half of 2011 pending further reservoir evaluation and facilities; management anticipated possible ramp-up in 2012, dependent on results. Two gross Brazilian development wells and two exploration wells were planned for 2011.
- Revenue is exposed to oil-price volatility and is highly concentrated: Ecopetrol accounted for 88% of Q2 revenue and 89% for the first half of 2011. Colombian pipeline disruption, security incidents, and political, regulatory, currency and operating risks across the region could affect production, sales and costs. Argentine oil pricing and sales remain subject to regulation and short-term contracting.
- Two disputes were unaccrued because management did not consider loss probable: Ecopetrol’s claim of approximately $5.8 million over allocation of Guayuyaco test production, and a $7.0 million disputed Costayaco net-profits-interest calculation expected to proceed to arbitration in Q4 2011. The ANH also challenged royalty treatment for Moqueta production; the company’s interpretation may not prevail and any resulting payment could be material.
- Other exposures include $13.1 million of unrecognized tax benefits and uncertainty in acquisition valuations, reserves, impairment estimates and asset-retirement obligations. Management said disclosure controls were effective; Petrolifera integration into internal controls was ongoing.
Important facts for investors to verify
- Whether the August 5 repayment of the $31.3 million Petrolifera facility was completed as reported, and the resulting post-quarter liquidity and debt position.
- Collection timing for the large Ecopetrol receivable balance and whether customer concentration or pipeline interruptions change.
- Progress against the $357 million capital plan and 17,500–19,000 boe/day production outlook, including well results and production ramp-up assumptions.
- Final Petrolifera purchase-price allocation and the impact of the one-time $21.7 million acquisition gain on comparisons of recurring earnings.
- Developments in the Guayuyaco, Costayaco and ANH royalty matters, as well as the Peru impairment and tax exposures.