Gran Tierra Energy Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports fourth-quarter results. All dollar figures are U.S. dollars unless otherwise noted.
Business context and reporting period
Gran Tierra is an independent oil and gas exploration, development and production company operating in Colombia, Argentina, Peru and Brazil. Colombia was the core producing business, generating 96% of 2010 revenue and other income. Peru and Brazil were primarily exploration and development investments at year-end. The company’s strategy is to grow production and reserves through drilling and acquisitions.
- Net production averaged 14,448 boe per day for 2010, up 14% from 2009; oil and NGL production averaged 14,325 barrels per day.
- Year-end proved reserves were 23.8 million boe, up 6% year over year. Proved oil reserves were 23.6 million barrels; proved natural gas reserves were 1.2 bcf.
Financial performance and liquidity
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Oil and gas sales | $373.3 million | $262.6 million | Up 42% |
| Revenue and other income | $374.5 million | $263.7 million | Up 42% |
| Operating expenses | $59.4 million | $40.8 million | Up 46% |
| DD&A and impairment | $163.6 million | $135.9 million | Up 20% |
| Income before tax | $94.4 million | $38.3 million | Up 147% |
| Income tax expense | $57.2 million | $24.4 million | Up 135% |
| Net income | $37.2 million | $13.9 million | Up 167% |
| Basic / diluted EPS | $0.15 / $0.14 | $0.06 / $0.05 | |
| Funds flow from operations (non-GAAP) | $203.4 million | $159.5 million | Up 28% |
| Cash from operating activities | $203.8 million | $165.5 million | |
| Capital expenditures | $177.0 million | $88.1 million | Up 101% |
- Average realized oil and NGL price rose 25% to $71.19 per barrel. Higher production and prices drove revenue growth.
- Operating expense was $11.27 per boe, up 28%; DD&A was $31.02 per boe, up 6%. Higher operating costs reflected Costayaco workovers, transportation and pipeline maintenance.
- Cash and cash equivalents were $355.4 million, versus $270.8 million at year-end 2009. Working capital was $265.8 million, up from $215.2 million.
- Total assets were $1.249 billion and shareholders’ equity was $886.9 million. The company reported no drawn debt at year-end. Its BNP Paribas reserve-based facility had a $20 million initial committed borrowing base, within a potential borrowing base of up to $100 million; no amount was drawn.
- Cash increased $84.6 million during 2010: operating inflows of $203.8 million and financing inflows of $24.8 million exceeded investing outflows of $143.9 million.
Material changes and fourth-quarter results
- Net income increased from 2009, primarily reflecting higher production and realized oil prices. Results also included a $23.6 million Argentina ceiling-test impairment, compared with $1.9 million in 2009. The 2010 charge included $17.9 million associated with the planned abandonment of the Valle Morado sidetrack and a further reserve and cost-related impairment.
- Foreign exchange loss was $16.8 million, including $14.8 million unrealized and non-cash, mainly from translating a Colombian-peso-denominated deferred tax liability. The 2009 foreign exchange loss was $19.8 million, mostly unrealized.
- Income tax expense rose to $57.2 million; the reported effective tax rate was 61%. The filing cites higher profits and valuation allowances, including against Argentina-related deferred tax assets.
- Fourth-quarter 2010 revenue and other income was $112.7 million, up 17% year over year; production averaged 15,928 boe per day and realized price was $76.79 per boe. Net income was $13.1 million, down from $30.8 million in Q4 2009, as expenses and income tax expense increased. Quarterly results included the Argentina impairment.
- Colombia’s 2010 pre-tax segment income was $142.5 million, versus $55.8 million in 2009. Argentina recorded a pre-tax loss of $27.2 million, versus a $4.2 million loss.
Outlook, commentary, risks and contingencies
- Management expected 2011 net production of 16,000–18,000 boe per day, excluding potential exploration success, and planned $299 million of capital spending: $148 million in Colombia, $56 million in Peru, $39 million in Argentina and $55 million in Brazil. The Argentina plan was subject to reassessment following suspension and planned abandonment of the Valle Morado well.
- Management said planned operations and capital spending could be funded from operating cash flow and cash on hand, barring unforeseen events or a severe oil and gas price downturn. The stated 2011 program did not include the impact of Petrolifera’s assets, work commitments or capital needs.
- In January 2011, Gran Tierra agreed to acquire Petrolifera for approximately $195 million in total consideration, including assumed debt, working capital and investments. The transaction was subject to approvals and expected to close in March 2011. Approximately 19 million Gran Tierra shares were expected to be issued, an estimated 8% increase in shares outstanding; management also expected to retire Petrolifera bank debt, with an estimated cash outflow of about $60 million.
- Key operating risks include dependence on Ecopetrol and Colombian transportation infrastructure, guerrilla activity and pipeline sabotage, regulatory and political uncertainty across operating countries, oil-price and foreign-exchange exposure, exploration and reserve-estimation uncertainty, and reliance on local permits and partners. Ecopetrol accounted for 96% of company revenue in 2010.
- An Ecopetrol contract dispute over allocation of Guayuyaco well-test production remained pending. Ecopetrol claimed approximately $5.5 million; Gran Tierra had accrued no amount because it did not consider a loss probable. Other claims were disclosed, with outcomes not clearly determinable.
- The company reported a limited number of 2010 environmental incidents in Colombia, including a tanker rollover and oil spill with estimated costs of $0.5 million; cleanup was completed. It planned approximately $8.2 million of 2011 environmental capital spending across Colombia, Argentina, Peru and Brazil.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective. No dividends were anticipated for the foreseeable future.
Important facts for investors to verify
- Whether the Petrolifera acquisition closed on the expected terms and how assumed debt repayment, share issuance, integration and additional capital commitments affected liquidity and dilution.
- Whether 2011 production guidance and the $299 million capital program were achieved, particularly given pending approvals and the program’s exclusion of Petrolifera-related needs.
- Production, transport availability and realized pricing in Colombia, including customer concentration, pipeline disruptions and the terms or renewal of Ecopetrol sales arrangements.
- Whether Argentina’s Valle Morado abandonment and impairment estimates, remaining reserves and regulatory pricing constraints changed materially.
- Progress on exploration and development, including Moqueta first production, Peru and Brazil approvals and drilling results, and conversion of undeveloped reserves into production.
- Developments in the Ecopetrol litigation, tax valuation allowances, foreign-exchange exposure and any further ceiling-test impairments.