GTE - 2015.06.30 - 10Q


 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2015

or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from __________ to  __________
 
Commission file number 001-34018
 
GRAN TIERRA ENERGY INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
98-0479924
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
200, 150 13 Avenue S.W.
Calgary, Alberta, Canada T2R 0V2
 (Address of principal executive offices, including zip code)
(403) 265-3221
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.          Yes ý  No o

Indicate by check mark whether the registrant submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   
Yes   ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).      Yes o No ý
 

On July 31, 3015, the following number of shares of the registrant’s capital stock were outstanding: 277,748,335 shares of the registrant’s Common Stock, $0.001 par value; one share of Special A Voting Stock, $0.001 par value, representing 3,638,889 shares of Gran Tierra Goldstrike Inc., which are exchangeable on a 1-for-1 basis into the registrant’s Common Stock; and one share of Special B Voting Stock, $0.001 par value, representing 5,044,777 shares of Gran Tierra Exchangeco Inc., which are exchangeable on a 1-for-1 basis into the registrant’s Common Stock.


 




1


Gran Tierra Energy Inc.

Quarterly Report on Form 10-Q

Quarterly Period Ended June 30, 2015

Table of contents
 
 
 
Page
PART I
Financial Information
 
Item 1.
Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II
Other Information
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 6.
Exhibits
SIGNATURES
EXHIBIT INDEX

2


 CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q, particularly in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation statements in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, regarding our financial position, estimated quantities and net present values of reserves, business strategy, plans and objectives of our management for future operations, covenant compliance, capital spending plans and those statements preceded by, followed by or that otherwise include the words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “project”, “target”, “goal”, “plan”, “objective”, “should”, or similar expressions or variations on these expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct or that, even if correct, intervening circumstances will not occur to cause actual results to be different than expected. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements, including, but not limited to, those set out in Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q. The information included herein is given as of the filing date of this Form 10-Q with the Securities and Exchange Commission (“SEC”) and, except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based.

GLOSSARY OF OIL AND GAS TERMS
 
In this document, the abbreviations set forth below have the following meanings:
 
bbl
barrel
BOE
barrels of oil equivalent
Mbbl
thousand barrels
MBOE
thousand barrels of oil equivalent
MMbbl
million barrels
BOEPD
barrels of oil equivalent per day
bopd
barrels of oil per day
Mcf
thousand cubic feet
NAR
net after royalty
 
 
 
Sales volumes represent production NAR adjusted for inventory changes and losses. Our production and oil and gas reserves are also reported NAR, except as otherwise noted. NGL volumes are converted to BOE on a one-to-one basis with oil. Gas volumes are converted to BOE at the rate of 6 Mcf of gas per bbl of oil, based upon the approximate relative energy content of gas and oil. The rate is not necessarily indicative of the relationship between oil and gas prices. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf:1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.





3


PART I - Financial Information

Item 1. Financial Statements
 
Gran Tierra Energy Inc.
Condensed Consolidated Statements of Operations and Retained Earnings (Unaudited)
(Thousands of U.S. Dollars, Except Share and Per Share Amounts)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
REVENUE AND OTHER INCOME
 
 
 
 
 
 
 
 
Oil and natural gas sales (Note 4)
 
$
69,350

 
$
147,888

 
$
145,581

 
$
298,993

Interest income
 
382

 
638

 
803

 
1,388

 
 
69,732

 
148,526

 
146,384

 
300,381

EXPENSES
 
 
 
 
 
 
 
 
Operating
 
24,133

 
25,346

 
55,567

 
47,212

Depletion, depreciation, accretion and impairment
 
69,473

 
41,937

 
155,627

 
86,201

General and administrative (Note 6)
 
10,298

 
13,932

 
17,592

 
26,795

Severance (Note 11)
 
1,988

 
—

 
6,366

 
—

Equity tax (Note 8)
 
—

 
—

 
3,769

 
—

Foreign exchange loss (gain)
 
2,969

 
10,044

 
(8,569
)
 
5,834

Financial instruments gain (Note 10)
 
(1,366
)
 
(2,604
)
 
(1,408
)
 
(5,013
)
 
 
107,495

 
88,655

 
228,944

 
161,029

 
 
 
 
 
 
 
 
 
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
 
(37,763
)
 
59,871

 
(82,560
)
 
139,352

INCOME TAX (EXPENSE) RECOVERY
 
 
 
 
 
 
 
 
Current
 
(5,684
)
 
(26,968
)
 
(8,109
)
 
(58,937
)
Deferred
 
4,883

 
(1,419
)
 
7,239

 
841


 
(801
)
 
(28,387
)
 
(870
)
 
(58,096
)
(LOSS) INCOME FROM CONTINUING OPERATIONS
 
(38,564
)
 
31,484

 
(83,430
)
 
81,256

Loss from discontinued operations, net of income taxes (Note 3)
 
—

 
(22,347
)
 
—

 
(26,990
)
NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
 
(38,564
)
 
9,137

 
(83,430
)
 
54,266

RETAINED EARNINGS, BEGINNING OF PERIOD
 
194,756

 
456,090

 
239,622

 
410,961

RETAINED EARNINGS, END OF PERIOD
 
$
156,192

 
$
465,227

 
$
156,192

 
$
465,227

 
 
 
 
 
 
 
 
 
(LOSS) INCOME PER SHARE
 
 
 
 
 
 
 
 
BASIC
 
 
 
 
 
 
 
 
  (LOSS) INCOME FROM CONTINUING OPERATIONS

$
(0.13
)
 
$
0.11

 
$
(0.29
)
 
$
0.29

LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
 
—

 
(0.08
)
 
—

 
(0.10
)
  NET INCOME (LOSS)
 
$
(0.13
)
 
$
0.03

 
$
(0.29
)
 
$
0.19

DILUTED
 
 
 
 
 
 
 
 
  (LOSS) INCOME FROM CONTINUING OPERATIONS

$
(0.13
)
 
$
0.11

 
$
(0.29
)
 
$
0.29

LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
 
—

 
(0.08
)

—


(0.10
)
  NET INCOME (LOSS)
 
$
(0.13
)
 
$
0.03

 
$
(0.29
)
 
$
0.19

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC (Note 6)
 
286,393,772

 
283,773,204

 
286,294,595

 
283,505,690

WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED (Note 6)
 
286,393,772

 
287,856,959

 
286,294,595

 
288,338,698


(See notes to the condensed consolidated financial statements)

4



Gran Tierra Energy Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(Thousands of U.S. Dollars, Except Share and Per Share Amounts)
 
June 30,
 
December 31,
 
2015
 
2014
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
166,399

 
$
331,848

Restricted cash
347

 
1,836

Accounts receivable
51,332

 
83,227

Marketable securities (Note 10)
9,686

 
7,586

Inventory (Note 5)
33,459

 
17,298

Taxes receivable
28,732

 
15,843

Prepaids
3,867

 
6,000

Deferred tax assets
1,416

 
1,552

Total Current Assets
295,238

 
465,190

 
 
 
 
Oil and Gas Properties
 

 
 

Proved
721,951

 
801,075

Unproved
324,979

 
316,856

Total Oil and Gas Properties
1,046,930

 
1,117,931

Other capital assets
10,339

 
11,013

Total Property, Plant and Equipment (Note 5)
1,057,269

 
1,128,944

 
 
 
 
Other Long-Term Assets
 

 
 

Restricted cash
3,847

 
2,037

Deferred tax assets
567

 
601

Taxes receivable
13,654

 
9,684

Other long-term assets
6,068

 
5,013

Goodwill
102,581

 
102,581

Total Other Long-Term Assets
126,717

 
119,916

Total Assets
$
1,479,224

 
$
1,714,050

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current Liabilities
 

 
 

Accounts payable
$
34,260

 
$
112,401

Accrued liabilities
53,346

 
75,430

Foreign currency derivative (Note 10)
—

 
3,057

Taxes payable
2,440

 
25,412

Deferred tax liabilities
23

 
1,040

Asset retirement obligation (Note 7)
5,582

 
8,026

Total Current Liabilities
95,651

 
225,366

 
 
 
 
Long-Term Liabilities
 

 
 

Deferred tax liabilities
156,194

 
175,324

Asset retirement obligation (Note 7)
25,657

 
27,786

Other long-term liabilities
7,178

 
8,889

Total Long-Term Liabilities
189,029

 
211,999

 
 
 
 
Contingencies (Note 9)


 


Shareholders’ Equity
 

 
 

Common Stock (Note 6) (277,728,335 and 276,072,351 shares of Common Stock and 8,703,666 and 10,119,745 exchangeable shares, par value $0.001 per share, issued and outstanding as at June 30, 2015, and December 31, 2014, respectively)
10,190

 
10,190

Additional paid in capital
1,028,162

 
1,026,873

Retained earnings
156,192

 
239,622

Total Shareholders’ Equity
1,194,544

 
1,276,685

Total Liabilities and Shareholders’ Equity
$
1,479,224

 
$
1,714,050


(See notes to the condensed consolidated financial statements)

5


Gran Tierra Energy Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Thousands of U.S. Dollars)
 
Six Months Ended June 30,
 
2015
 
2014
Operating Activities
 
 
 
Net income (loss)
$
(83,430
)
 
$
54,266

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 

Loss from discontinued operations, net of income taxes (Note 3)
—

 
26,990

Depletion, depreciation, accretion and impairment
155,627

 
86,201

Deferred tax recovery
(7,239
)
 
(841
)
Non-cash stock-based compensation
582

 
2,624

Unrealized foreign exchange (gain) loss
(8,436
)
 
4,567

Unrealized financial instruments gain
(5,157
)
 
(351
)
Equity tax
—

 
(1,642
)
Cash settlement of asset retirement obligation (Note 7)
(1,964
)
 
—

Net cash provided by operating activities of continuing operations before changes in operating assets and liabilities
49,983

 
171,814

Net change in assets and liabilities from operating activities of continuing operations
 

 
 

Accounts receivable and other long-term assets
23,652

 
(67,862
)
Inventory
(7,697
)
 
(9,348
)
Prepaids
2,133

 
1,642

Accounts payable and accrued and other long-term liabilities
(21,102
)
 
9,747

Taxes receivable and payable
(44,273
)
 
(77,306
)
Net cash provided by operating activities of continuing operations
2,696

 
28,687

  Net cash used in operating activities of discontinued operations
—

 
(4,792
)
Net cash provided by operating activities
2,696

 
23,895

 
 
 
 
Investing Activities
 

 
 

(Increase) decrease in restricted cash
(320
)
 
351

Additions to property, plant and equipment
(91,785
)
 
(173,440
)
Changes in non-cash investing working capital
(76,642
)
 
15,269

Net cash used in investing activities of continuing operations
(168,747
)
 
(157,820
)
Proceeds from sale of Argentina business unit, net of cash sold and transaction costs
—

 
42,755

Net cash used in investing activities of discontinued operations
—

 
(12,384
)
Net cash used in investing activities
(168,747
)
 
(127,449
)
 
 
 
 
Financing Activities
 

 
 

Proceeds from issuance of shares of Common Stock (Note 6)
602

 
7,113

Net cash provided by financing activities
602

 
7,113

 
 
 
 
Net decrease in cash and cash equivalents
(165,449
)
 
(96,441
)
Cash and cash equivalents, beginning of period
331,848

 
428,800

Cash and cash equivalents, end of period
$
166,399

 
$
332,359

 
 
 
 
Non-cash investing activities:
 

 
 

Net liabilities related to property, plant and equipment, end of period
$
33,658

 
$
76,506


(See notes to the condensed consolidated financial statements)

6


Gran Tierra Energy Inc.
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(Thousands of U.S. Dollars)
 
 
Six Months Ended June 30,
 
Year Ended December 31,
 
2015
 
2014
Share Capital
 
 
 
Balance, beginning of period
$
10,190

 
$
10,187

Issue of shares of Common Stock (Note 6)
—

 
3

Balance, end of period
10,190

 
10,190

 
 
 
 
Additional Paid in Capital
 

 
 

Balance, beginning of period
1,026,873

 
1,008,760

Exercise of stock options (Note 6)
602

 
11,137

Stock-based compensation (Note 6)
687

 
6,976

Balance, end of period
1,028,162

 
1,026,873

 
 
 
 
Retained Earnings
 

 
 

Balance, beginning of period
239,622

 
410,961

Net loss
(83,430
)
 
(171,339
)
Balance, end of period
156,192

 
239,622

 
 
 
 
Total Shareholders’ Equity
$
1,194,544

 
$
1,276,685


(See notes to the condensed consolidated financial statements)


7


Gran Tierra Energy Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars, unless otherwise indicated)
 
1. Description of Business
 
Gran Tierra Energy Inc., a Nevada corporation (the “Company” or “Gran Tierra”), is a publicly traded oil and gas company engaged in the acquisition, exploration, development and production of oil and natural gas properties. The Company’s principal business activities are in Colombia, Peru and Brazil.
 
2. Significant Accounting Policies
 
These interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The information furnished herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of results for the interim periods.

The note disclosure requirements of annual consolidated financial statements provide additional disclosures to that required for interim unaudited condensed consolidated financial statements. Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements as at and for the year ended December 31, 2014, included in the Company’s 2014 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 2, 2015.

The Company’s significant accounting policies are described in Note 2 of the consolidated financial statements which are included in the Company’s 2014 Annual Report on Form 10-K and are the same policies followed in these interim unaudited condensed consolidated financial statements. The Company has evaluated all subsequent events through to the date these interim unaudited condensed consolidated financial statements were issued.

Recently Issued Accounting Pronouncements

Simplifying the Measurement of Inventory

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory". The ASU provides guidance for the subsequent measurement of inventory and requires that inventory that is measured using average cost be measured at the lower and cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The ASU will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The implementation of this update is not expected to materially impact the Company’s consolidated financial position, results of operations or cash flows or disclosure.

3. Discontinued Operations

On June 25, 2014, the Company, through several of its indirect subsidiaries, sold its Argentina business unit to Madalena Energy Inc. ("Madalena") for aggregate consideration of $69.3 million, comprising $55.4 million in cash and $13.9 million in Madalena shares.

Accordingly, the results of the Company’s Argentina business unit are classified as “Loss from discontinued operations, net of income taxes” on the consolidated statements of operations for the three and six months ended June 30, 2014. Additionally, cash flows of the Company’s Argentina business unit are presented separately in the interim unaudited condensed consolidated statement of cash flows for the six months ended June 30, 2014, as cash provided by or used in operating and investing activities of discontinued operations.

Revenue and other income and loss from discontinued operations, net of income taxes, for the three and six months ended June 30, 2014, were as follows:


8


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Thousands of U.S. Dollars)
 
2014
 
2014
Revenue and other income
 
$
14,161

 
$
31,985

 
 
 
 
 
Loss from operations of discontinued operations before income taxes
 
$
(2,079
)
 
$
(6,252
)
Income tax expense
 
(988
)
 
(1,458
)
Loss from operations of discontinued operations
 
(3,067
)
 
(7,710
)
 
 
 
 
 
Loss on sale before income taxes
 
(18,235
)
 
(18,235
)
Income tax expense
 
(1,045
)
 
(1,045
)
Loss on sale
 
(19,280
)
 
(19,280
)
Loss from discontinued operations, net of income taxes
 
$
(22,347
)

$
(26,990
)

4. Segment and Geographic Reporting
 
The Company is primarily engaged in the exploration and production of oil and natural gas. The Company’s reportable segments are Colombia, Peru and Brazil based on geographic organization. Prior to classifying the Company’s Argentina business unit as discontinued operations, Argentina was a reportable segment. The All Other category represents the Company’s corporate activities. The amounts disclosed in the tables below exclude the results of the Argentina business unit. Certain subsidiaries which were previously included in the All Other category were sold as part of the Argentina business unit, and therefore amounts disclosed in the All Other category have been reclassified to exclude amounts reported in loss from discontinued operations. The Company evaluates reportable segment performance based on income or loss from continuing operations before income taxes.

The following tables present information on the Company’s reportable segments and other activities:

9


 
Three Months Ended June 30, 2015
(Thousands of U.S. Dollars)
Colombia
 
Peru
 
Brazil
 
All Other
 
Total
Oil and natural gas sales
$
67,627

 
$
—

 
$
1,723

 
$
—

 
$
69,350

Interest income
93

 
2

 
78

 
209

 
382

Depletion, depreciation, accretion and impairment
37,061

 
5,432

 
26,575

 
405

 
69,473

Income (loss) from continuing operations before income taxes
3,197

 
(8,261
)
 
(28,211
)
 
(4,488
)
 
(37,763
)
Segment capital expenditures
8,087

 
6,856

 
2,505

 
316

 
17,764

 
Three Months Ended June 30, 2014
(Thousands of U.S. Dollars)
Colombia
 
Peru
 
Brazil
 
All Other
 
Total
Oil and natural gas sales
$
139,350

 
$
—

 
$
8,538

 
$
—

 
$
147,888

Interest income
184

 
—

 
434

 
20

 
638

Depletion, depreciation, accretion and impairment
39,348

 
103

 
2,241

 
245

 
41,937

Income (loss) from continuing operations before income taxes
62,481

 
(2,408
)
 
3,750

 
(3,952
)
 
59,871

Segment capital expenditures
45,688

 
41,912

 
3,433

 
306

 
91,339

 
Six Months Ended June 30, 2015
(Thousands of U.S. Dollars)
Colombia
 
Peru
 
Brazil
 
All Other
 
Total
Oil and natural gas sales
$
141,694

 
$
—

 
$
3,887

 
$
—

 
$
145,581

Interest income
160

 
2

 
218

 
423

 
803

Depletion, depreciation, accretion and impairment
83,316

 
38,380

 
33,169

 
762

 
155,627

Income (loss) from continuing operations before income taxes
6,125

 
(43,703
)
 
(35,092
)
 
(9,890
)
 
(82,560
)
Segment capital expenditures
29,454

 
44,890

 
16,406

 
1,035

 
91,785

 
Six Months Ended June 30, 2014
(Thousands of U.S. Dollars)
Colombia
 
Peru
 
Brazil
 
All Other
 
Total
Oil and natural gas sales
$
284,285

 
$
—

 
$
14,708

 
$
—

 
$
298,993

Interest income
321

 
—

 
859

 
208

 
1,388

Depletion, depreciation, accretion and impairment
80,598

 
311

 
4,820

 
472

 
86,201

Income (loss) from continuing operations before income taxes
148,492

 
(4,466
)
 
5,700

 
(10,374
)
 
139,352

Segment capital expenditures
96,231

 
62,805

 
13,799

 
605

 
173,440


 
As at June 30, 2015
(Thousands of U.S. Dollars)
Colombia
 
Peru
 
Brazil
 
All Other
 
Total
Property, plant and equipment
$
826,824

 
$
93,700

 
$
131,834

 
$
4,911

 
$
1,057,269

Goodwill
102,581

 
—

 
—

 
—

 
102,581

All other assets
176,055

 
23,602

 
3,421

 
116,296

 
319,374

Total Assets
$
1,105,460

 
$
117,302

 
$
135,255

 
$
121,207

 
$
1,479,224

 
 
 
 
 
 
 
 
 
 
 
As at December 31, 2014
(Thousands of U.S. Dollars)
Colombia
 
Peru
 
Brazil
 
All Other
 
Total
Property, plant and equipment
$
888,822

 
$
87,028

 
$
148,457

 
$
4,637

 
$
1,128,944

Goodwill
102,581

 
—

 
—

 
—

 
102,581

All other assets
157,549

 
40,613

 
14,724

 
269,639

 
482,525

Total Assets
$
1,148,952

 
$
127,641

 
$
163,181

 
$
274,276

 
$
1,714,050


The Company’s revenues are derived principally from uncollateralized sales to customers in the oil and natural gas industry. The concentration of credit risk in a single industry affects the Company’s overall exposure to credit risk because customers may be similarly affected by changes in economic and other conditions.

10



In the three and six months ended June 30, 2015, the Company had two significant customers in Colombia: Ecopetrol S.A. ("Ecopetrol") and one other customer. In the three and six months ended June 30, 2015, sales to Ecopetrol accounted for 75% and 77%, respectively, of the Company's consolidated oil and natural gas sales from continuing operations and sales to the other customer accounted for 16% and 11%, respectively. In the three and six months ended June 30, 2014, sales to Ecopetrol accounted for 54% and 52%, respectively, of the Company's consolidated oil and natural gas sales from continuing operations and sales to the other significant customer accounted for 33% and 38%, respectively, of the Company's consolidated oil and natural gas sales from continuing operations. 

5. Property, Plant and Equipment and Inventory
 
Property, Plant and Equipment

(Thousands of U.S. Dollars)
As at June 30, 2015
 
As at December 31, 2014
Oil and natural gas properties
 
 
 

  Proved
$
1,920,806

 
$
1,876,371

  Unproved
324,979

 
316,856

 
2,245,785

 
2,193,227

Other
28,499

 
27,287

 
2,274,284

 
2,220,514

Accumulated depletion, depreciation and impairment
(1,217,015
)
 
(1,091,570
)
 
$
1,057,269

 
$
1,128,944


In the three and six months ended June 30, 2015, the Company recorded ceiling test impairment losses in its Brazil cost center of $25.0 million and $29.3 million, respectively, related to lower oil prices. The Company follows the full cost method of accounting for its oil and gas properties. Under this method, the net book value of properties on a country-by-country basis, less related deferred income taxes, may not exceed a calculated “ceiling”. The ceiling is the estimated after tax future net revenues from proved oil and gas properties, discounted at 10% per year. In calculating discounted future net revenues, oil and natural gas prices are determined using the average price during the 12 months period prior to the ending date of the period covered by the balance sheet, calculated as an unweighted arithmetic average of the first-day-of-the month price for each month within such period for that oil and natural gas. That average price is then held constant, except for changes which are fixed and determinable by existing contracts. Therefore, ceiling test estimates are based on historical prices discounted at 10% per year and it should not be assumed that estimates of future net revenues represent the fair market value of the Company's reserves.

In the three and six months ended June 30, 2015, the Company recorded impairment losses in its Peru cost center of $5.3 million and $38.0 million, respectively, related to costs incurred on Block 95.

Inventory

At June 30, 2015, oil and supplies inventories were $32.1 million and $1.4 million, respectively (December 31, 2014 - $15.2 million and $2.1 million, respectively). At June 30, 2015, the Company had 679 Mbbl of oil inventory (December 31, 2014 - 330 Mbbl).

6. Share Capital
 
The Company’s authorized share capital consists of 595,000,002 shares of capital stock, of which 570 million are designated as Common Stock, par value $0.001 per share, 25 million are designated as Preferred Stock, par value $0.001 per share, and two shares are designated as special voting stock, par value $0.001 per share.


11


 
Shares of Common Stock
Exchangeable Shares of Gran Tierra Exchangeco Inc.
Exchangeable Shares of Gran Tierra Goldstrike Inc.
Balance, December 31, 2014
276,072,351

5,595,118

4,524,627

Options exercised
240,000

—

—

Exchange of exchangeable shares
1,415,995

(530,257
)
(885,738
)
Shares canceled
(11
)
(84
)
—

Balance, June 30, 2015
277,728,335

5,064,777

3,638,889


Income (loss) per share

Basic income (loss) per share is calculated by dividing income (loss) attributable to common shareholders by the weighted average number of shares of Common Stock and exchangeable shares issued and outstanding during each period. Diluted income (loss) per share is calculated by adjusting the weighted average number of shares of Common Stock and exchangeable shares outstanding for the dilutive effect, if any, of share equivalents. The Company uses the treasury stock method to determine the dilutive effect. This method assumes that all Common Stock equivalents have been exercised at the beginning of the period (or at the time of issuance, if later), and that the funds obtained thereby were used to purchase shares of Common Stock of the Company at the volume weighted average trading price of shares of Common Stock during the period.
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Weighted average number of common and exchangeable shares outstanding
 
286,393,772

 
283,773,204

 
286,294,595

 
283,505,690

Weighted average shares issuable pursuant to stock options
 
—

 
13,373,568

 
—

 
13,462,797

Weighted average shares assumed to be purchased from proceeds of stock options
 
—

 
(9,289,813
)
 
—

 
(8,629,789
)
Weighted average number of diluted common and exchangeable shares outstanding
 
286,393,772

 
287,856,959

 
286,294,595

 
288,338,698


For the three months ended June 30, 2015, 14,104,370 options, on a weighted average basis, (three months ended June 30, 2014 - 3,137,840 options) were excluded from the diluted income per share calculation as the options were anti-dilutive. For the six months ended June 30, 2015, 14,550,722 options, on a weighted average basis, (six months ended June 30, 2014 - 3,137,840 options) were excluded from the diluted income per share calculation as the options were anti-dilutive.

Restricted Stock Units and Stock Options
  
The Company grants time-vested restricted stock units ("RSUs") to certain officers, employees and consultants. Additionally, the Company grants options to purchase shares of Common Stock to certain directors, officers, employees and consultants. The following table provides information about RSU and stock option activity for the six months ended June 30, 2015:
 
RSUs
Options
 
Number of Outstanding Share Units
 
Number of Outstanding Options
 
Weighted Average Exercise Price $/Option
Balance, December 31, 2014
1,236,963

 
13,790,220

 
5.93

Granted
1,041,450

 
4,726,260

 
3.17

Exercised
(497,409
)
 
(240,000
)
 
(2.51
)
Forfeited
(683,261
)
 
(1,314,380
)
 
(5.68
)
Expired
—

 
(3,727,376
)
 
(6.83
)
Balance, June 30, 2015
1,097,743

 
13,234,724

 
4.77



12


For the six months ended June 30, 2015, 240,000 shares of Common Stock were issued for cash proceeds of $0.6 million upon the exercise of stock options (six months ended June 30, 2014 - $7.1 million).

The weighted average grant date fair value for options granted in the three months ended June 30, 2015, was $1.43 (three months ended June 30, 2014 - $2.38) and for the six months ended June 30, 2015, was $1.28 (six months ended June 30, 2014 - $2.51).

The amounts recognized for stock-based compensation were as follows:

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Thousands of U.S. Dollars)
 
2015
 
2014
 
2015
 
2014
Compensation costs for stock options
 
$
1,109

 
$
1,847

 
$
687

 
$
3,863

Compensation costs for RSUs
 
597

 
2,397

 
537

 
3,641

 
 
1,706

 
4,244

 
1,224

 
7,504

Less: Stock-based compensation costs capitalized
 
(80
)
 
(1,039
)
 
(111
)
 
(1,822
)
Stock-based compensation expense
 
$
1,626

 
$
3,205

 
$
1,113

 
$
5,682


Stock-based compensation expense for the three and six months ended June 30, 2015, was primarily recorded in general and administrative ("G&A") expenses. Of the total stock-based compensation expense for the three months ended June 30, 2014, $2.0 million was recorded in G&A expenses, $0.1 million was recorded in operating expenses and $1.1 million was recorded in loss from discontinued operations. Of the total stock-based compensation expense for the six months ended June 30, 2014, $4.1 million was recorded in G&A expenses, $0.3 million was recorded in operating expenses and $1.3 million was recorded in loss from discontinued operations.

At June 30, 2015, there was $6.8 million (December 31, 2014 - $4.8 million) of unrecognized compensation cost related to unvested stock options and RSUs which is expected to be recognized over a weighted average period of 1.6 years.
 
7. Asset Retirement Obligation
 
Changes in the carrying amounts of the asset retirement obligation associated with the Company’s oil and natural gas properties were as follows:
 
Six Months Ended
 
Year Ended
(Thousands of U.S. Dollars)
June 30, 2015
 
December 31, 2014
Balance, beginning of period
$
35,812

 
$
21,973

Settlements
(5,565
)
 
(1,137
)
Liability incurred
432

 
11,956

Liabilities associated with the Argentina business unit sold (Note 3)
—

 
(10,170
)
Foreign exchange
—

 
(53
)
Accretion
631

 
1,406

Revisions in estimated liability
(71
)
 
11,837

Balance, end of period
$
31,239

 
$
35,812

 
 
 
 
Asset retirement obligation - current
$
5,582

 
$
8,026

Asset retirement obligation - long-term
25,657

 
27,786

Balance, end of period
$
31,239

 
$
35,812


For the six months ended June 30, 2015, settlements included cash payments of $2.0 million with the balance in accounts payable and accrued liabilities at June 30, 2015. Revisions to estimated liabilities relate primarily to changes in estimates of asset retirement costs and include, but are not limited to, revisions of estimated inflation rates, changes in property lives and the expected timing of settling the asset retirement obligation. At June 30, 2015, the fair value of assets that are legally restricted for purposes of settling the asset retirement obligation was $3.4 million (December 31, 2014 - $2.0 million). These assets are included in restricted cash on the Company's interim unaudited condensed consolidated balance sheets.

13


8. Taxes
 
The Company's effective tax rate was (1.1)% in the six months ended June 30, 2015, compared with 41.7% in the comparable period in 2014. In the six months ended June 30, 2015, the Company had income tax expense despite having a loss from continuing operations. The Company's effective tax rate differed from the U.S. statutory rate of 35% primarily due to an increase to the valuation allowance, which was largely attributable to the 2015 impairment losses and increases in tax rates, as well as other local taxes and the non-deductible third party royalty in Colombia. These were partially offset by the impact of foreign taxes and other permanent differences.

On December 23, 2014, the Colombian Congress passed a law which imposes an equity tax levied on Colombian operations for 2015, 2016 and 2017. The equity tax is calculated based on a legislated measure, which is based on the Company’s Colombian legal entities' balance sheet equity for tax purposes at January 1, 2015. This measure is subject to adjustment for inflation in future years. The equity tax rates for January 1, 2015, 2016 and 2017, are 1.15%, 1% and 0.4%, respectively. The legal obligation for each year's equity tax liability arises on January 1 of each year; therefore, the Company recognized the annual amount of $3.8 million for the equity tax expense in the consolidated statement of operations during the three months ended March 31, 2015, and a corresponding payable on the consolidated balance sheet at March 31, 2015. At June 30, 2015, accounts payable included the unpaid balance of equity tax liability of $1.7 million (December 31, 2014 - $nil) which will be paid in September 2015.
 
9. Contingencies
 
Gran Tierra’s production from the Costayaco Exploitation Area is subject to an additional royalty (the "HPR royalty"), which applies when cumulative gross production from an Exploitation Area is greater than five MMbbl. The HPR royalty is calculated on the difference between a trigger price defined in the Chaza Block exploration and production contract (the "Chaza Contract") and the sales price. The Agencia Nacional de Hidrocarburos (National Hydrocarbons Agency) (“ANH”) has interpreted the Chaza Contract as requiring that the HPR royalty must be paid with respect to all production from the Moqueta Exploitation Area and initiated a noncompliance procedure under the Chaza Contract, which was contested by Gran Tierra because the Moqueta Exploitation Area and the Costayaco Exploitation Area are separate Exploitation Areas. ANH did not proceed with that noncompliance procedure. Gran Tierra also believes that the evidence shows that the Costayaco and Moqueta fields are two clearly separate and independent hydrocarbon accumulations. Therefore, it is Gran Tierra’s view that, pursuant to the terms of the Chaza Contract, the HPR royalty is only to be paid with respect to production from the Moqueta Exploitation Area when the accumulated oil production from that Exploitation Area exceeds five MMbbl. Discussions with the ANH have not resolved this issue and Gran Tierra has initiated the dispute resolution process under the Chaza Contract by filing on January 14, 2013, an arbitration claim before the Center for Arbitration and Conciliation of the Chamber of Commerce of Bogotá, Colombia, seeking a decision that the HPR royalty is not payable until production from the Moqueta Exploitation Area exceeds five MMbbl. Gran Tierra supplemented its claim on May 30, 2013. The ANH filed a response to the claim seeking a declaration that its interpretation is correct and a counterclaim seeking, amongst other remedies, declarations that Gran Tierra breached the Chaza Contract by not paying the disputed HPR royalty, that the amount of the alleged HPR royalty is payable, and that the Chaza Contract be terminated. Gran Tierra filed a response to the ANH's counterclaim and filed its comments on the ANH's responses to Gran Tierra's claim. The ANH filed an amended counterclaim and Gran Tierra filed a response to the ANH's amended counterclaim. On April 30, 2015, total cumulative production from the Moqueta Exploitation Area reached 5.0 MMbbl and Gran Tierra commenced paying the HPR royalty payable on production over that threshold. The estimated compensation which would be payable on cumulative production if the ANH's claims are accepted in the arbitration is $66.3 million plus related interest of $24.8 million. Gran Tierra also disagrees with the interest rate that the ANH has used in calculating the interest cost. Gran Tierra asserts that since the HPR royalty is denominated in the U.S. dollar, the contract requires the interest rate to be three-month LIBOR plus 4%, whereas the ANH has applied the highest legally authorized interest rate on Colombian peso liabilities, which during the period of production to date has averaged approximately 29% per annum. At March 31, 2015, based on an interest rate of three-month LIBOR plus 4% related interest would be $4.9 million. At this time no amount has been accrued in the interim unaudited condensed consolidated financial statements nor deducted from the Company's reserves for the disputed HPR royalty as Gran Tierra does not consider it probable that a loss will be incurred.

Additionally, the ANH and Gran Tierra are engaged in discussions regarding the interpretation of whether certain transportation and related costs are eligible to be deducted in the calculation of the HPR royalty. Discussions with the ANH are ongoing. Based on the Company's understanding of the ANH's position, the estimated compensation which would be payable if the ANH’s interpretation is correct could be up to $42.1 million as at June 30, 2015. At this time no amount has been accrued in the interim unaudited condensed consolidated financial statements as Gran Tierra does not consider it probable that a loss will be incurred.


14


Gran Tierra Energy Colombia, Ltd. and Petrolifera Petroleum (Colombia) Ltd (collectively “GTEC”) and Ecopetrol, the contracting parties of the Guayuyaco Association Contract, are engaged in a dispute regarding the interpretation of the procedure for allocation of oil produced and sold during the long-term test of the Guayuyaco-1 and Guayuyaco-2 wells, prior to GTEC's purchase of the companies originally involved in the dispute. There was no agreement between the parties, and Ecopetrol filed a lawsuit in the Contravention Administrative Tribunal in the District of Cauca (the "Tribunal") regarding this matter. During 2013, the Tribunal ruled in favor of Ecopetrol and awarded Ecopetrol 44,025 bbl of oil. GTEC has filed an appeal of the ruling to the Supreme Administrative Court (Consejo de Estado) in a second instance procedure. At June 30, 2015, and December 31, 2014, Gran Tierra had accrued $2.4 million in the interim unaudited condensed consolidated financial statements in relation to this dispute.

The Company provided the purchaser of its Argentina business unit with certain indemnifications. The Company remains responsible for certain contingent liabilities related to such indemnifications, subject to defined limitations. The Company does not believe that these obligations are probable of having a material impact on its consolidated financial position, results of operations or cash flows.

In addition to the above, Gran Tierra has a number of other lawsuits and claims pending. Although the outcome of these other lawsuits and disputes cannot be predicted with certainty, Gran Tierra believes the resolution of these matters would not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. Gran Tierra records costs as they are incurred or become probable and determinable.

Letters of credit

At June 30, 2015, the Company had provided promissory notes totaling $76.2 million (December 31, 2014 - $86.3 million) as security for letters of credit relating to work commitment guarantees contained in exploration contracts and other capital or operating requirements.

10. Financial Instruments, Fair Value Measurement, Credit Risk and Foreign Exchange Risk

Financial Instruments

At June 30, 2015, the Company’s financial instruments recognized in the balance sheet consist of cash and cash equivalents, restricted cash, accounts receivable, trading securities, accounts payable, accrued liabilities and contingent consideration included in other long-term liabilities.

Fair Value Measurement

The fair value of trading securities, foreign currency derivatives and contingent consideration are being remeasured at the estimated fair value at the end of each reporting period.

The fair value of the trading securities which were received as consideration on the sale of the Company's Argentina business unit was estimated based on quoted market prices in an active market.

The fair value of foreign currency derivatives was based on the estimated maturity value of foreign exchange non-deliverable forward contracts using applicable forward exchange rates. The most significant variable to the cash flow calculations is the estimation of forward foreign exchange rates. The resulting future cash inflows or outflows at maturity of the contracts are the net value of the contract.

The fair value of the contingent consideration, which relates to the acquisition of the remaining 30% working interest in certain properties in Brazil, was estimated based on the consideration expected to be transferred and discounted back to present value by applying an appropriate discount rate that reflected the risk factors associated with the payment streams. The discount rate used was determined in accordance with accepted valuation methods.

The fair value of the trading securities, foreign currency derivative liability and contingent consideration at June 30, 2015, and December 31, 2014, were as follows:


15


 
 
As at
(Thousands of U.S. Dollars)
 
June 30, 2015
 
December 31, 2014
Trading securities
 
$
9,686

 
$
7,586

 
 
 
 
 
Foreign currency derivative liability
 
$
—

 
$
3,057

Contingent consideration liability
 
1,061

 
1,061

 
 
$
1,061

 
$
4,118


The following table presents gains or losses on financial instruments recognized in the accompanying interim unaudited condensed consolidated statements of operations:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Thousands of U.S. Dollars)
2015
 
2014
 
2015
 
2014
Trading securities gain
$
(1,688
)
 
$
(339
)
 
$
(2,100
)
 
$
(339
)
Foreign currency derivatives loss (gain)
322

 
(2,265
)
 
692

 
(4,674
)
 
$
(1,366
)
 
$
(2,604
)
 
$
(1,408
)
 
$
(5,013
)

These gains are presented as financial instruments gain in the interim unaudited condensed consolidated statements of operations and cash flows. There were no sales of trading securities in the six months ended June 30, 2015, and the trading securities gain represents an unrealized gain.

The fair value of long-term restricted cash approximates its carrying value because interest rates are variable and reflective of market rates. The fair values of other financial instruments approximate their carrying amounts due to the short-term maturity of these instruments.

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs consist of quoted prices (unadjusted) in active markets for identical assets and liabilities and have the highest priority. Level 2 and 3 inputs are based on significant other observable inputs and significant unobservable inputs, respectively, and have lower priorities. The Company uses appropriate valuation techniques based on the available inputs to measure the fair values of assets and liabilities.

At June 30, 2015, and December 31, 2014, the fair value of the trading securities acquired in connection with the disposal of the Argentina business unit was determined using Level 1 inputs. At December 31, 2014, the fair value of the foreign currency derivative was determined using Level 2 inputs. At June 30, 2015, and December 31, 2014, the fair value of the contingent consideration payable in connection with the Brazil acquisition was determined using Level 3 inputs. The disclosure in the paragraph above regarding the fair value of cash and restricted cash was based on Level 1 inputs.

The Company’s non-recurring fair value measurements include asset retirement obligations. The fair value of an asset retirement obligation is measured by reference to the expected future cash outflows required to satisfy the retirement obligation discounted at the Company’s credit-adjusted risk-free interest rate. The significant level 3 inputs used to calculate such liabilities include estimates of costs to be incurred, the Company’s credit-adjusted risk-free interest rate, inflation rates and estimated dates of abandonment. Accretion expense is recognized over time as the discounted liabilities are accreted to their expected settlement value, while the asset retirement cost is amortized over the estimated productive life of the related assets.

Foreign Exchange Rate Risk

Unrealized foreign exchange gains and losses primarily result from fluctuation of the U.S. dollar to the Colombian peso due to Gran Tierra’s current and deferred tax liabilities, which are monetary liabilities mainly denominated in the local currency of the Colombian operations. As a result, foreign exchange gains and losses must be calculated on conversion to the U.S. dollar functional currency. A strengthening in the Colombian peso against the U.S. dollar results in foreign exchange losses, estimated at $60,000 for each one peso decrease in the exchange rate of the Colombian peso to one U.S. dollar.


16


From time to time, the Company purchases non-deliverable forward contracts for purposes of fixing exchange rates at which it will purchase or sell Colombian pesos to settle its income tax installment payments. At June 30, 2015, the Company did not have any open foreign currency derivative positions. With the exception of these foreign currency derivatives, any foreign currency transactions are conducted on a spot basis with major financial institutions in the Company’s operating areas.

For the six months ended June 30, 2015, 97% (six months ended June 30, 2014 - 95%) of the Company's revenue and other income was generated in Colombia. In Colombia, the company receives 100% of its revenues in U.S. dollars and the majority of its capital expenditures are in U.S. dollars or are based on U.S. dollar prices. In Brazil, prices for oil are in U.S. dollars, but revenues are received in local currency translated according to current exchange rates. The majority of the Company's capital expenditures within Brazil are based on U.S. dollar prices, but are paid in local currency translated according to current exchange rates. In Peru, capital expenditures are based on U.S. dollar prices and may be paid in local currency or U.S. dollars.

Credit Risk

Credit risk arises from the potential that the Company may incur a loss if a counterparty to a financial instrument fails to meet its obligation in accordance with agreed terms. The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash, accounts receivables and foreign currency derivatives. The carrying value of cash, accounts receivable and foreign currency derivatives reflects management’s assessment of credit risk.

At June 30, 2015, cash and cash equivalents and restricted cash included balances in savings and checking accounts, as well as term deposits and certificates of deposit, placed with financial institutions with strong investment grade ratings or governments, or the equivalent in the Company’s operating areas.

11. Severance Costs

In March 2015, largely as a result of the current low commodity price environment, the Company significantly reduced the number of its full-time employees. Staff reductions as part of this cost cutting measure were substantially completed at March 31, 2015. Additional employee terminations occurred during the three months ended June 30, 2015. These terminations were not part of the planned March 2015 staff reductions.

Employee termination benefits were recorded as incurred based on existing employee contracts, statutory requirements, completed negotiations and company policy.

Severance costs for the Company’s reportable segments and other activities for the three and six months ended June 30, 2015, were as follows:
 
Three Months Ended June 30, 2015
(Thousands of U.S. Dollars)
Colombia
 
Peru
 
Brazil
 
All Other
 
Total
Severance expenses
$
71

 
$
901

 
$
—

 
$
1,016

 
$
1,988

 
Six Months Ended June 30, 2015
 
Colombia
 
Peru
 
Brazil
 
All Other
 
Total
Severance expenses
$
1,237

 
$
1,424

 
$
109

 
$
3,596

 
$
6,366


The amounts in the table for the six months ended June 30, 2015, represent cumulative costs incurred to date and exclude the impact of the reversal of stock-based compensation expense for unvested options of terminated employees which was recorded in G&A expenses.

At June 30, 2015, accounts payable and accrued liabilities included $2.3 million in relation to these actions which are expected to be settled within the three months ending September 30, 2015. Changes in the severance cost related liability were as follows:
(Thousands of U.S. Dollars)
Six Months Ended June 30, 2015
Balance, beginning of period
$
—

Liability incurred
6,366

Settlements
(4,090
)
Balance, end of period
$
2,276



17


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This report, and in particular this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Please see the cautionary language at the very beginning of this Quarterly Report on Form 10-Q regarding the identification of and risks relating to forward-looking statements, as well as Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q.
 
The following discussion of our financial condition and results of operations should be read in conjunction with the "Financial Statements" as set out in Part I, Item 1 of this Quarterly Report on Form 10-Q as well as the "Financial Statements and Supplementary Data" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in Part II, Items 8 and 7, respectively, of our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 2, 2015.

Overview

We are an independent international energy company incorporated in the United States and engaged in oil and natural gas acquisition, exploration, development and production. Our operations are carried out in South America in Colombia, Peru and Brazil, and we are headquartered in Calgary, Alberta, Canada.

During the three months ending June 30, 2015, a new management team and board of directors of the Company was appointed. On May 7, 2015, we entered into an agreement (the “Agreement”) with West Face SPV (Cayman) I L.P. (“West Face”) pursuant to which we settled a proxy contest. Pursuant to the terms of the Agreement, Gary Guidry was appointed as our President and Chief Executive Officer. Mr. Guidry replaced Duncan Nightingale in that role, who was serving as interim Chief Executive Officer since February 2015 and, with the appointment of Mr. Guidry as Chief Executive Officer, was designated as Executive Vice President. Additionally, effective May 11, 2015, Ryan Ellson was appointed as Chief Financial Officer. Under the terms of the Agreement, our Board of Directors was expanded from six to eight directors. At our Annual General Meeting on June 24, 2015, the majority of our shareholders elected the proposed board members.

For the six months ended June 30, 2015, 97% (six months ended June 30, 2014 - 95%) of our revenue and other income from continuing operations was generated in Colombia. During the three months ending June 30, 2015, our board approved a new capital program, focused on accelerating development activities in Colombia.

The price of oil is a critical factor to our business, has historically been volatile and decreased dramatically in December 2014 through March 2015, remaining at relatively low levels through June 30, 2015. Sustained periods of low oil prices have decreased our financial performance; however we remain in a strong financial position with working capital of $199.6 million including cash and cash equivalents of $166.4 million and zero debt. During the six months ended June 30, 2015, the average price realized for our oil was $47.03 per barrel (six months ended June 30, 2014 - $91.74). Average Brent oil prices for the six months ended June 30, 2015, were $57.81 per bbl compared with $108.93 per bbl in the corresponding period in 2014. West Texas Intermediate ("WTI") oil prices for the six months ended June 30, 2015, were $53.25 per bbl compared with $100.84 per bbl in the corresponding period in 2014. Despite the fall in the oil prices, at June 30, 2015, we had working capital of $199.6 million, no debt, and an undrawn $150 million credit facility.



18


Highlights
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
2014(2)
% Change
 
2015
2014(2)
% Change
Volumes (MBOE)
 
 
 
 
 
 
 
 
Working Interest Production Before Royalties
 
2,101

2,390

(12
)
 
4,263

4,662

(9
)
Royalties
 
(418
)
(583
)
(28
)
 
(768
)
(1,142
)
(33
)
Production NAR
 
1,683

1,807

(7
)
 
3,495

3,520

(1
)
Inventory Adjustments and Losses
 
(321
)
(212
)
51

 
(387
)
(237
)
63

Sales(1)

1,362

1,595

(15
)
 
3,108

3,283

(5
)
 
 
 
 
 
 
 
 
 
Average Daily Volumes (BOEPD)
 
 
 
 
 
 
 
 
Working Interest Production Before Royalties
 
23,094

26,261

(12
)
 
23,552

25,756

(9
)
Royalties
 
(4,600
)
(6,404
)
(28
)
 
(4,240
)
(6,311
)
(33
)
Production NAR
 
18,494

19,857

(7
)
 
19,312

19,445

(1
)
Inventory Adjustments and Losses
 
(3,524
)
(2,333
)
51

 
(2,140
)
(1,310
)
63

Sales(1)

14,970

17,524

(15
)
 
17,172

18,135

(5
)
 
 
 
 
 
 
 
 


Oil and Gas Sales ($000s)
 
$
69,350

$
147,888

(53
)
 
$
145,581

$
298,993

(51
)
Operating Expenses ($000s)
 
(24,133
)
(25,346
)
(5
)
 
(55,567
)
(47,212
)
18

Operating Netback ($000s)(3)
 
$
45,217

$
122,542

(63
)
 
$
90,014

$
251,781

(64
)
 
 
 
 
 
 
 
 
 
General and Administrative Expenses ("G&A")
 
 
 


 
 
 


G&A Expenses Before Stock-Based Compensation, Gross
 
$
17,288

$
24,504

(29
)
 
$
37,551

$
48,001

(22
)
Stock-Based Compensation
 
1,540

1,957

(21
)
 
1,010

4,100

(75
)
Capitalized G&A and Overhead Recoveries
 
(8,530
)
(12,529
)
(32
)
 
(20,969
)
(25,306
)
(17
)
 
 
$
10,298

$
13,932

(26
)
 
$
17,592

$
26,795

(34
)
 
 
 
 
 
 
 
 
 
EBITDA(4)
 
$
31,710

$
101,808

(69
)
 
$
73,067

$
225,553

(68
)
 
 
 
 
 
 
 
 
 
Net Income (Loss)
 
$
(38,564
)
$
9,137

(522
)
 
$
(83,430
)
$
54,266

(254
)
 
 
 
 
 
 
 
 
 
Funds Flow from Continuing Operations ($000s)(5)
 
$
24,425

$
85,145

(71
)
 
$
49,983

$
171,814

(71
)
 
 
 
 
 
 
 
 


Capital Expenditures for Continuing Operations ($000s)
 
$
17,764

$
91,339

(81
)
 
$
91,785

$
173,440

(47
)

 
As at
 
June 30, 2015
December 31, 2014
% Change
Cash & Cash Equivalents ($000s)
$
166,399

$
331,848

(50
)
 
 
 
 
Working Capital (including Cash & Cash Equivalents) ($000s)
$
199,587

$
239,824

(17
)

(1) Sales volumes represent production NAR adjusted for inventory changes and losses.


19


(2) Excludes amounts relating to discontinued operations. Sales volumes associated with discontinued operations were nil BOEPD for the three and six months ended June 30, 2015, and 2,426 BOEPD and 2,744 BOEPD for the corresponding periods in 2014. Discontinued operations sales volumes for the three and six months ended June 30, 2014, were calculated to the date of sale of June 25, 2014.

(3) Operating netback is a non-GAAP measure which does not have any standardized meaning prescribed under GAAP. Management believes that netback is a useful supplemental measure for management and investors to analyze operating performance and provide an indication of the results generated by our principal business activities prior to the consideration of other income and expenses. Investors are cautioned that this measure should not be construed as an alternative to net income or loss or other measures of financial performance as determined in accordance with GAAP. Our method of calculating this measure may differ from other companies and, accordingly, it may not be comparable to similar measures used by other companies. Operating netback as presented is oil and gas sales net of royalties and operating expenses.

(4) EBITDA is a non-GAAP measure which does not have any standardized meaning prescribed under GAAP. Management believes that this financial measure is also useful supplemental information for management and investors as an indicator of the company’s ability to generate liquidity through operating cash flow to fund future working capital needs and fund future capital expenditures. Investors are cautioned that this measure should not be construed as an alternative to net income or loss or other measures of financial performance as determined in accordance with GAAP. Our method of calculating this measure may differ from other companies and, accordingly, it may not be comparable to similar measures used by other companies. EBITDA, as presented, is net income or loss adjusted for loss from discontinued operations, net of income taxes, depletion, depreciation, accretion and impairment (“DD&A”) expenses and income tax recovery or expense. A reconciliation from net income or loss to EBITDA is as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
EBITDA - Non-GAAP Measure ($000s)
 
2015
 
2014
 
2015
 
2014
Net income (loss)
 
$
(38,564
)
 
$
9,137

 
$
(83,430
)
 
$
54,266

Adjustments to reconcile net income (loss) to EBITDA
 
 
 
 
 
 
 
 
Loss from discontinued operations, net of income taxes
 
—

 
22,347

 
—

 
26,990

DD&A expenses
 
69,473

 
41,937

 
155,627

 
86,201

Income tax (recovery) expense
 
801

 
28,387

 
870

 
58,096

EBITDA
 
$
31,710

 
$
101,808

 
$
73,067

 
$
225,553

 
(5) Funds flow from continuing operations is a non-GAAP measure which does not have any standardized meaning prescribed under GAAP. Management uses this financial measure to analyze performance and income or loss generated by our principal business activities prior to the consideration of how non-cash items affect that income or loss, and believes that this financial measure is also useful supplemental information for investors to analyze performance and our financial results. Investors are cautioned that this measure should not be construed as an alternative to net income or loss or other measures of financial performance as determined in accordance with GAAP. Our method of calculating this measure may differ from other companies and, accordingly, it may not be comparable to similar measures used by other companies. Funds flow from continuing operations, as presented, is net income or loss adjusted for loss from discontinued operations, net of income taxes, DD&A expenses, deferred tax recovery or expense, non-cash stock-based compensation, unrealized foreign exchange and financial instruments gains and losses, equity tax and cash settlement of asset retirement obligation. A reconciliation from net income or loss to funds flow from continuing operations is as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Funds Flow From Continuing Operations - Non-GAAP Measure ($000s)
 
2015
 
2014
 
2015
 
2014
Net income (loss)
 
$
(38,564
)
 
$
9,137

 
$
(83,430
)
 
$
54,266

Adjustments to reconcile net income (loss) to funds flow from continuing operations
 
 
 
 
 
 
 
 
Loss from discontinued operations, net of income taxes
 
—

 
22,347

 
—

 
26,990

DD&A expenses
 
69,473

 
41,937

 
155,627

 
86,201

Deferred tax (recovery) expense
 
(4,883
)
 
1,419

 
(7,239
)
 
(841
)
Non-cash stock-based compensation
 
1,095

 
1,144

 
582

 
2,624

Unrealized foreign exchange loss (gain)
 
601

 
8,745

 
(8,436
)
 
4,567

Unrealized financial instruments (gain) loss
 
(2,758
)
 
2,058

 
(5,157
)
 
(351
)
   Equity tax
 
—

 
(1,642
)
 
—

 
(1,642
)
Cash settlement of asset retirement obligation
 
(539
)
 
—

 
(1,964
)
 
—

Funds flow from continuing operations
 
$
24,425

 
$
85,145

 
$
49,983

 
$
171,814




20


Results of Operations

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014(2)
 
% Change
 
2015
 
2014(2)
 
% Change
(Thousands of U.S. Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
Oil and natural gas sales
 
$
69,350

 
$
147,888

 
(53
)
 
$
145,581

 
$
298,993

 
(51
)
Interest income
 
382

 
638

 
(40
)
 
803

 
1,388

 
(42
)
 
 
69,732

 
148,526

 
(53
)
 
146,384


300,381

 
(51
)
 
 
 
 
 
 
 
 
 
 
 
 

Operating expenses
 
24,133

 
25,346

 
(5
)
 
55,567

 
47,212

 
18

DD&A expenses
 
69,473

 
41,937

 
66

 
155,627

 
86,201

 
81

G&A expenses
 
10,298

 
13,932

 
(26
)
 
17,592

 
26,795

 
(34
)
Severance expenses
 
1,988

 
—

 
—

 
6,366

 
—

 
—

Equity tax
 
—

 
—

 
—

 
3,769

 
—

 
—

Foreign exchange loss (gain)
 
2,969

 
10,044

 
(70
)
 
(8,569
)
 
5,834

 
(247
)
Financial instruments gain
 
(1,366
)
 
(2,604
)
 
48

 
(1,408
)
 
(5,013
)
 
72

 
 
107,495

 
88,655

 
21

 
228,944

 
161,029

 
42

 
 
 
 
 
 
 
 
 
 
 
 

(Loss) income from continuing operations before income taxes
 
(37,763
)
 
59,871

 
(163
)
 
(82,560
)
 
139,352

 
(159
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Current income tax expense
 
(5,684
)

(26,968
)
 
(79
)
 
(8,109
)
 
(58,937
)
 
(86
)
Deferred income tax recovery (expense)
 
4,883


(1,419
)
 
(444
)
 
7,239

 
841

 
761

 
 
(801
)
 
(28,387
)
 
(97
)
 
(870
)
 
(58,096
)
 
(99
)
(Loss) income from continuing operations
 
(38,564
)

31,484


(222
)

(83,430
)

81,256


(203
)
Loss from discontinued operations, net of income taxes
 
—

 
(22,347
)
 
100

 
—

 
(26,990
)
 
100

Net income (loss)
 
$
(38,564
)
 
$
9,137

 
(522
)
 
$
(83,430
)
 
$
54,266

 
(254
)
 
 
 
 
 
 
 
 
 
 
 
 

Sales volumes(1)
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 

Oil and NGL's, bbl
 
1,349,127

 
1,573,071

 
(14
)
 
3,084,025

 
3,250,049

 
(5
)
Natural gas, Mcf
 
78,578

 
129,711

 
(39
)
 
144,605

 
194,490

 
(26
)
Total sales volumes, BOE
 
1,362,223

1,594,690

(15
)

3,108,126
 
3,282,464
 
(5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total sales volumes, BOEPD
 
14,970

 
17,524

 
(15
)
 
17,172

 
18,135

 
(5
)
 
 
 
 
 
 
 
 
 
 
 
 

Average Prices
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 

Oil and NGL's per bbl
 
$
51.18

 
$
93.72

 
(45
)
 
$
47.03

 
$
91.74

 
(49
)
Natural gas per Mcf
 
$
3.78

 
$
4.01

 
(6
)
 
$
3.82

 
$
4.79

 
(20
)
 
 
 
 
 
 
 
 
 
 
 
 


Consolidated Results of Operations per BOE sales volumes
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 
 
 


Oil and natural gas sales
 
$
50.91

 
$
92.74

 
(45
)
 
$
46.84

 
$
91.09

 
(49
)
Interest income
 
0.28

 
0.40

 
(30
)
 
0.26

 
0.42

 
(38
)
 
 
51.19

 
93.14

 
(45
)