GTE

Business Context and Reporting Period

Company: Gran Tierra Energy Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: An independent international energy company engaged in the acquisition, exploration, development, and production of oil and natural gas. Principal operations are located in Colombia, Argentina, Peru, and Brazil. The company completed the acquisition of Solana Resources Limited in November 2008, significantly expanding its Colombian assets.

Key Financial Metrics (Nine Months Ended Sept 30, 2009)

Material Changes vs. Prior Period

• Production Surge: Average production increased 245% to 12,000 barrels of oil equivalent per day (boe/d) compared to 3,482 boe/d in the prior year, driven primarily by the Solana acquisition and new wells in the Costayaco field (Colombia).
• Revenue Growth: Revenue increased 78% year-over-year due to higher production volumes, partially offset by a 48% decrease in average realized oil prices ($50.86/bbl in 2009 vs. $98.40/bbl in 2008).
• Net Loss: The company reported a net loss of $16.9 million, a reversal from the $36.2 million net income in the prior year. This was primarily caused by:
• A non-cash foreign exchange loss of $32.4 million (due to the translation of a deferred tax liability denominated in Colombian pesos).
• A significant increase in Depletion, Depreciation, and Accretion (DD&A) of $80.2 million, largely due to the fair value adjustment of Solana assets.
• Capital Spending: Capital expenditures nearly doubled to $63.4 million, reflecting aggressive development in Colombia.

Guidance, Outlook, and Risks

• Liquidity: Management states that cash on hand ($151.6 million) and access to credit facilities are sufficient to fund the planned capital program for at least the next 12 months without debt.
• Credit Facilities: The company increased its credit facility with Standard Bank Plc to a maximum of $200 million (initial borrowing base $7 million, capacity to increase to $120 million). No amounts were drawn as of September 30, 2009. A previous facility with BNP Paribas was cancelled.
• Operational Outlook:
  • Colombia: Targeting 14,000–16,000 BOPD net production for the remainder of 2009. Total 2009 capital expenditure planned is $87 million.
  • Argentina: Production expected to remain at ~1,000 BOPD. 2009 capital expenditure planned is $5 million.
  • Peru: Environmental assessments submitted; exploration drilling expected in 2010. 2009 capital expenditure planned is $2 million.
• Risks and Contingencies:
  • Legal Dispute: Ongoing litigation with Ecopetrol regarding the allocation of oil produced during the long-term test of Guayuyaco wells. Ecopetrol claims approximately $5.4 million in damages; no accrual has been made as a loss is not considered probable.
  • Operational Disruptions: Pipeline damage and strikes in Colombia have historically caused temporary production shut-ins.
  • Argentina Pricing: Operating without long-term sales contracts due to regulatory changes and withholding tax disputes; prices are negotiated on a spot basis.

Investor Verification Checklist

• Foreign Exchange Impact: Verify the magnitude of the non-cash foreign exchange loss ($32.4M) and its sensitivity to the Colombian Peso/USD exchange rate, as this significantly distorts reported net income.
• DD&A Sustainability: Confirm the long-term impact of the increased depletion and depreciation charges resulting from the Solana acquisition on future margins.
• Argentina Revenue Realization: Monitor the resolution of the pricing dispute in Argentina and the ability to secure long-term sales contracts to ensure revenue stability.
• Capital Expenditure Execution: Track the $87 million planned spend in Colombia against actual cash burn to ensure liquidity remains sufficient without drawing on credit facilities.
• Legal Exposure: Review the status of the Ecopetrol lawsuit to assess potential future cash outflows or production restrictions.