10-Q
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 September 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 October 30, 2015, the following number of shares of the registrant’s capital stock were outstanding: 274,499,439 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 4,957,777 shares of Gran Tierra Exchangeco Inc., which are exchangeable on a 1-for-1 basis into the registrant’s Common Stock.
Gran Tierra Energy Inc.
Quarterly Report on Form 10-Q
Quarterly Period Ended September 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 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 6. | Exhibits | |
SIGNATURES | |
EXHIBIT INDEX | |
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 and in Part I, Item 1A “Risk Factors” in our 2014 Annual Report on Form 10-K. The information included herein is given as of the filing date of this Quarterly Report on 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 | BOEPD | barrels of oil equivalent per day |
MMbbl | million barrels | bopd | barrels of oil per day |
NAR | net after royalty | Mcf | thousand cubic feet |
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. Natural gas liquids ("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.
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 September 30, | | Nine Months Ended September 30, |
| | 2015 | | 2014 | | 2015 | | 2014 |
REVENUE AND OTHER INCOME | | | | | | | | |
Oil and natural gas sales (Note 4) | | $ | 75,653 |
| | $ | 161,517 |
| | $ | 221,234 |
| | $ | 460,510 |
|
Interest income | | 266 |
| | 772 |
| | 1,069 |
| | 2,160 |
|
| | 75,919 |
| | 162,289 |
| | 222,303 |
| | 462,670 |
|
EXPENSES | | | | | | | | |
Operating | | 33,751 |
| | 33,949 |
| | 89,318 |
| | 81,161 |
|
Depletion, depreciation, accretion and impairment (Note 5) | | 204,993 |
| | 53,936 |
| | 360,620 |
| | 140,137 |
|
General and administrative (Note 6) | | 7,863 |
| | 13,350 |
| | 25,455 |
| | 40,145 |
|
Severance (Note 11) | | 461 |
| | — |
| | 6,827 |
| | — |
|
Equity tax (Note 8) | | — |
| | — |
| | 3,769 |
| | — |
|
Foreign exchange gain | | (12,923 | ) | | (12,438 | ) | | (21,492 | ) | | (6,604 | ) |
Financial instruments loss (gain) (Note 10) | | 2,670 |
| | 2,790 |
| | 1,262 |
| | (2,223 | ) |
| | 236,815 |
| | 91,587 |
| | 465,759 |
| | 252,616 |
|
| | | | | | | | |
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | | (160,896 | ) | | 70,702 |
| | (243,456 | ) | | 210,054 |
|
INCOME TAX (EXPENSE) RECOVERY | | | | | | | | |
Current | | (3,523 | ) | | (24,246 | ) | | (11,632 | ) | | (83,183 | ) |
Deferred | | 62,542 |
| | (2,272 | ) | | 69,781 |
| | (1,431 | ) |
| | 59,019 |
| | (26,518 | ) | | 58,149 |
| | (84,614 | ) |
(LOSS) INCOME FROM CONTINUING OPERATIONS | | (101,877 | ) | | 44,184 |
| | (185,307 | ) | | 125,440 |
|
Loss from discontinued operations, net of income taxes (Note 3) | | — |
| | — |
| | — |
| | (26,990 | ) |
NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) | | (101,877 | ) | | 44,184 |
| | (185,307 | ) | | 98,450 |
|
RETAINED EARNINGS, BEGINNING OF PERIOD | | 156,192 |
| | 465,227 |
| | 239,622 |
| | 410,961 |
|
RETAINED EARNINGS, END OF PERIOD | | $ | 54,315 |
| | $ | 509,411 |
| | $ | 54,315 |
| | $ | 509,411 |
|
| | | | | | | | |
(LOSS) INCOME PER SHARE | | | | | | | | |
BASIC | | | | | | | | |
(LOSS) INCOME FROM CONTINUING OPERATIONS |
| $ | (0.36 | ) | | $ | 0.15 |
| | $ | (0.65 | ) | | $ | 0.44 |
|
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | | — |
| | — |
| | — |
| | (0.09 | ) |
NET INCOME (LOSS) | | $ | (0.36 | ) | | $ | 0.15 |
| | $ | (0.65 | ) | | $ | 0.35 |
|
DILUTED | | | | | | | | |
(LOSS) INCOME FROM CONTINUING OPERATIONS |
| $ | (0.36 | ) | | $ | 0.15 |
| | $ | (0.65 | ) | | $ | 0.44 |
|
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES | | — |
| | — |
|
| — |
|
| (0.09 | ) |
NET INCOME (LOSS) | | $ | (0.36 | ) | | $ | 0.15 |
| | $ | (0.65 | ) | | $ | 0.35 |
|
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC (Note 6) | | 285,592,382 |
| | 285,576,898 |
| | 286,057,952 |
| | 284,203,679 |
|
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED (Note 6) | | 285,592,382 |
| | 288,059,601 |
| | 286,057,952 |
| | 287,569,347 |
|
(See notes to the condensed consolidated financial statements)
Gran Tierra Energy Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(Thousands of U.S. Dollars, Except Share and Per Share Amounts) |
| | | | | | | |
| September 30, | | December 31, |
| 2015 | | 2014 |
ASSETS | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 186,978 |
| | $ | 331,848 |
|
Restricted cash | 303 |
| | 1,836 |
|
Accounts receivable | 21,426 |
| | 83,227 |
|
Marketable securities (Note 10) | 7,016 |
| | 7,586 |
|
Inventory (Note 5) | 19,073 |
| | 17,298 |
|
Taxes receivable | 27,507 |
| | 15,843 |
|
Prepaids | 3,462 |
| | 6,000 |
|
Deferred tax assets | 583 |
| | 1,552 |
|
Total Current Assets | 266,348 |
| | 465,190 |
|
| | | |
Oil and Gas Properties | |
| | |
|
Proved | 546,069 |
| | 801,075 |
|
Unproved | 326,717 |
| | 316,856 |
|
Total Oil and Gas Properties | 872,786 |
| | 1,117,931 |
|
Other capital assets | 9,478 |
| | 11,013 |
|
Total Property, Plant and Equipment (Note 5) | 882,264 |
| | 1,128,944 |
|
| | | |
Other Long-Term Assets | |
| | |
|
Restricted cash | 3,272 |
| | 2,037 |
|
Deferred tax assets | 483 |
| | 601 |
|
Taxes receivable | 9,250 |
| | 9,684 |
|
Other long-term assets | 6,670 |
| | 5,013 |
|
Goodwill | 102,581 |
| | 102,581 |
|
Total Other Long-Term Assets | 122,256 |
| | 119,916 |
|
Total Assets | $ | 1,270,868 |
| | $ | 1,714,050 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | |
|
Current Liabilities | |
| | |
|
Accounts payable | $ | 25,984 |
| | $ | 112,401 |
|
Accrued liabilities | 44,123 |
| | 75,430 |
|
Foreign currency derivative (Note 10) | — |
| | 3,057 |
|
Taxes payable | 750 |
| | 25,412 |
|
Deferred tax liabilities | 21 |
| | 1,040 |
|
Asset retirement obligation (Note 7) | 4,686 |
| | 8,026 |
|
Total Current Liabilities | 75,564 |
| | 225,366 |
|
| | | |
Long-Term Liabilities | |
| | |
|
Deferred tax liabilities | 74,596 |
| | 175,324 |
|
Asset retirement obligation (Note 7) | 27,167 |
| | 27,786 |
|
Other long-term liabilities | 6,523 |
| | 8,889 |
|
Total Long-Term Liabilities | 108,286 |
| | 211,999 |
|
| | | |
Contingencies (Note 9) |
|
| |
|
|
Shareholders’ Equity | |
| | |
|
Common Stock (Note 6) (274,814,539 and 276,072,351 shares of Common Stock and 8,616,666 and 10,119,745 exchangeable shares, par value $0.001 per share, issued and outstanding as at September 30, 2015, and December 31, 2014, respectively) | 10,187 |
| | 10,190 |
|
Additional paid in capital | 1,022,516 |
| | 1,026,873 |
|
Retained earnings | 54,315 |
| | 239,622 |
|
Total Shareholders’ Equity | 1,087,018 |
| | 1,276,685 |
|
Total Liabilities and Shareholders’ Equity | $ | 1,270,868 |
| | $ | 1,714,050 |
|
(See notes to the condensed consolidated financial statements)
Gran Tierra Energy Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Thousands of U.S. Dollars)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2015 | | 2014 |
Operating Activities | | | |
Net income (loss) | $ | (185,307 | ) | | $ | 98,450 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
|
Loss from discontinued operations, net of income taxes (Note 3) | — |
| | 26,990 |
|
Depletion, depreciation, accretion and impairment | 360,620 |
| | 140,137 |
|
Deferred tax (recovery) expense | (69,781 | ) | | 1,431 |
|
Non-cash stock-based compensation | 1,511 |
| | 4,341 |
|
Unrealized foreign exchange gain | (13,093 | ) | | (6,924 | ) |
Financial instruments loss (gain) | 1,262 |
| | (2,223 | ) |
Equity tax | — |
| | (3,283 | ) |
Cash settlement of foreign currency derivatives | (3,749 | ) | | 4,662 |
|
Cash settlement of asset retirement obligation (Note 7) | (4,768 | ) | | (211 | ) |
Net change in assets and liabilities from operating activities of continuing operations | |
| | |
|
Accounts receivable and other long-term assets | 52,133 |
| | (61,224 | ) |
Inventory | 1,599 |
| | (1,688 | ) |
Prepaids | 2,538 |
| | 2,565 |
|
Accounts payable and accrued and other long-term liabilities | (36,935 | ) | | (981 | ) |
Taxes receivable and payable | (47,483 | ) | | (55,084 | ) |
Net cash provided by operating activities of continuing operations | 58,547 |
| | 146,958 |
|
Net cash used in operating activities of discontinued operations | — |
| | (4,792 | ) |
Net cash provided by operating activities | 58,547 |
| | 142,166 |
|
| | | |
Investing Activities | |
| | |
|
Decrease in restricted cash | 298 |
| | 877 |
|
Additions to property, plant and equipment | (116,353 | ) | | (268,859 | ) |
Changes in non-cash investing working capital | (75,152 | ) | | 18,225 |
|
Net cash used in investing activities of continuing operations | (191,207 | ) | | (249,757 | ) |
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 | (191,207 | ) | | (219,386 | ) |
| | | |
Financing Activities | |
| | |
|
Repurchase of shares of Common Stock (Note 6) | (6,616 | ) | | — |
|
Proceeds from issuance of shares of Common Stock (Note 6) | 602 |
| | 11,177 |
|
Net cash (used in) provided by financing activities | (6,014 | ) | | 11,177 |
|
| | | |
Foreign exchange loss on cash and cash equivalents | (6,196 | ) | | (2,327 | ) |
| | | |
Net decrease in cash and cash equivalents | (144,870 | ) | | (68,370 | ) |
Cash and cash equivalents, beginning of period | 331,848 |
| | 428,800 |
|
Cash and cash equivalents, end of period | $ | 186,978 |
| | $ | 360,430 |
|
| | | |
Non-cash investing activities: | |
| | |
|
Net liabilities related to property, plant and equipment, end of period | $ | 34,023 |
| | $ | 72,410 |
|
(See notes to the condensed consolidated financial statements)
Gran Tierra Energy Inc.
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(Thousands of U.S. Dollars)
|
| | | | | | | |
| Nine Months Ended September 30, | | Year Ended December 31, |
| 2015 | | 2014 |
Share Capital | | | |
Balance, December 31, 2014 | $ | 10,190 |
| | $ | 10,187 |
|
Issue of shares of Common Stock (Note 6) | — |
| | 3 |
|
Repurchase of shares of Common Stock (Note 6) | (3 | ) | | — |
|
Balance, September 30, 2015 | 10,187 |
| | 10,190 |
|
| | | |
Additional Paid in Capital | |
| | |
|
Balance, December 31, 2014 | 1,026,873 |
| | 1,008,760 |
|
Exercise of stock options (Note 6) | 602 |
| | 11,137 |
|
Stock-based compensation (Note 6) | 1,654 |
| | 6,976 |
|
Repurchase of shares of Common Stock (Note 6) | (6,613 | ) | | — |
|
Balance, September 30, 2015 | 1,022,516 |
| | 1,026,873 |
|
| | | |
Retained Earnings | |
| | |
|
Balance, December 31, 2014 | 239,622 |
| | 410,961 |
|
Net loss | (185,307 | ) | | (171,339 | ) |
Balance, September 30, 2015 | 54,315 |
| | 239,622 |
|
| | | |
Total Shareholders’ Equity | $ | 1,087,018 |
| | $ | 1,276,685 |
|
(See notes to the condensed consolidated financial statements)
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 of 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.
Revenue from Contracts with Customers
In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers - Deferral of the Effective Date". The ASU defers the effective date of the new revenue recognition model by one year. As a result, the guidance will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently assessing the impact the new revenue recognition model will have on its consolidated financial position, results of operations, cash flows, and 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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 2014, were as follows:
|
| | | | |
(Thousands of U.S. Dollars) | | Nine Months Ended September 30, 2014 |
Revenue and other income | | $ | 31,985 |
|
| | |
Loss from operations of discontinued operations before income taxes | | $ | (6,252 | ) |
Income tax expense | | (1,458 | ) |
Loss from operations of discontinued operations | | (7,710 | ) |
| | |
Loss on sale before income taxes | | (18,235 | ) |
Income tax expense | | (1,045 | ) |
Loss on sale | | (19,280 | ) |
Loss from discontinued operations, net of income taxes | | $ | (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:
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2015 |
(Thousands of U.S. Dollars) | Colombia | | Peru | | Brazil | | All Other | | Total |
Oil and natural gas sales | $ | 73,557 |
| | $ | — |
| | $ | 2,096 |
| | $ | — |
| | $ | 75,653 |
|
Interest income | 61 |
| | — |
| | — |
| | 205 |
| | 266 |
|
Depletion, depreciation, accretion and impairment | 181,981 |
| | 3,208 |
| | 19,396 |
| | 408 |
| | 204,993 |
|
Loss from continuing operations before income taxes | (130,154 | ) | | (5,020 | ) | | (18,540 | ) | | (7,182 | ) | | (160,896 | ) |
Segment capital expenditures | 18,903 |
| | 3,885 |
| | 1,769 |
| | 12 |
| | 24,569 |
|
| Three Months Ended September 30, 2014 |
(Thousands of U.S. Dollars) | Colombia | | Peru | | Brazil | | All Other | | Total |
Oil and natural gas sales | $ | 153,815 |
| | $ | — |
| | $ | 7,702 |
| | $ | — |
| | $ | 161,517 |
|
Interest income | 98 |
| | 1 |
| | 433 |
| | 240 |
| | 772 |
|
Depletion, depreciation, accretion and impairment | 51,144 |
| | 109 |
| | 2,429 |
| | 254 |
| | 53,936 |
|
Income (loss) from continuing operations before income taxes | 81,258 |
| | (3,345 | ) | | 1,746 |
| | (8,957 | ) | | 70,702 |
|
Segment capital expenditures | 50,785 |
| | 40,730 |
| | 3,377 |
| | 527 |
| | 95,419 |
|
| Nine Months Ended September 30, 2015 |
(Thousands of U.S. Dollars) | Colombia | | Peru | | Brazil | | All Other | | Total |
Oil and natural gas sales | $ | 215,251 |
| | $ | — |
| | $ | 5,983 |
| | $ | — |
| | $ | 221,234 |
|
Interest income | 221 |
| | 2 |
| | 218 |
| | 628 |
| | 1,069 |
|
Depletion, depreciation, accretion and impairment | 265,297 |
| | 41,588 |
| | 52,565 |
| | 1,170 |
| | 360,620 |
|
Loss from continuing operations before income taxes | (124,029 | ) | | (48,723 | ) | | (53,632 | ) | | (17,072 | ) | | (243,456 | ) |
Segment capital expenditures | 48,357 |
| | 48,775 |
| | 18,174 |
| | 1,047 |
| | 116,353 |
|
| Nine Months Ended September 30, 2014 |
(Thousands of U.S. Dollars) | Colombia | | Peru | | Brazil | | All Other | | Total |
Oil and natural gas sales | $ | 438,100 |
| | $ | — |
| | $ | 22,410 |
| | $ | — |
| | $ | 460,510 |
|
Interest income | 419 |
| | 1 |
| | 1,292 |
| | 448 |
| | 2,160 |
|
Depletion, depreciation, accretion and impairment | 131,742 |
| | 420 |
| | 7,249 |
| | 726 |
| | 140,137 |
|
Income (loss) from continuing operations before income taxes | 229,750 |
| | (7,811 | ) | | 7,446 |
| | (19,331 | ) | | 210,054 |
|
Segment capital expenditures | 147,016 |
| | 103,535 |
| | 17,176 |
| | 1,132 |
| | 268,859 |
|
|
| | | | | | | | | | | | | | | | | | | |
| As at September 30, 2015 |
(Thousands of U.S. Dollars) | Colombia | | Peru | | Brazil | | All Other | | Total |
Property, plant and equipment | $ | 669,083 |
| | $ | 94,460 |
| | $ | 114,207 |
| | $ | 4,514 |
| | $ | 882,264 |
|
Goodwill | 102,581 |
| | — |
| | — |
| | — |
| | 102,581 |
|
All other assets | 133,776 |
| | 21,822 |
| | 11,255 |
| | 119,170 |
| | 286,023 |
|
Total Assets | $ | 905,440 |
| | $ | 116,282 |
| | $ | 125,462 |
| | $ | 123,684 |
| | $ | 1,270,868 |
|
| | | | | | | | | |
| 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 |
|
5. Property, Plant and Equipment and Inventory
Property, Plant and Equipment
|
| | | | | | | |
(Thousands of U.S. Dollars) | As at September 30, 2015 | | As at December 31, 2014 |
Oil and natural gas properties | | | |
|
Proved | $ | 1,940,596 |
| | $ | 1,876,371 |
|
Unproved | 326,717 |
| | 316,856 |
|
| 2,267,313 |
| | 2,193,227 |
|
Other | 28,317 |
| | 27,287 |
|
| 2,295,630 |
| | 2,220,514 |
|
Accumulated depletion, depreciation and impairment | (1,413,366 | ) | | (1,091,570 | ) |
| $ | 882,264 |
| | $ | 1,128,944 |
|
In the three and nine months ended September 30, 2015, the Company recorded ceiling test impairment losses of $129.4 million in its Colombia cost center, and $17.6 million and $46.9 million, respectively, in its Brazil cost center, 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 nine months ended September 30, 2015, the Company recorded impairment losses in its Peru cost center of $3.0 million and $41.0 million, respectively, related to costs incurred on Block 95.
Inventory
At September 30, 2015, oil and supplies inventories were $17.4 million and $1.7 million, respectively (December 31, 2014 - $15.2 million and $2.1 million, respectively). At September 30, 2015, the Company had 429 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.
|
| | | | | | |
| 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 |
| — |
| — |
|
Shares repurchased and canceled | (3,000,796 | ) | — |
| — |
|
Exchange of exchangeable shares | 1,502,995 |
| (617,257 | ) | (885,738 | ) |
Shares canceled | (11 | ) | (84 | ) | — |
|
Balance, September 30, 2015 | 274,814,539 |
| 4,977,777 |
| 3,638,889 |
|
On July 22, 2015, the Company announced that it intended to implement a new share repurchase program (the “2015 Program”) through the facilities of the Toronto Stock Exchange ("TSX"), the NYSE MKT and eligible alternative trading
platforms in Canada and the United States. The Company received regulatory approval from the TSX to commence the 2015 Program on July 27, 2015. The Company is able to purchase at prevailing market prices up to 13,831,866 shares of Common Stock, representing 4.98% of the issued and outstanding shares of Common Stock as of July 21, 2015. Shares purchased pursuant to the 2015 Program will be canceled. The 2015 Program will expire on July 29, 2016, or earlier if the 4.98% share maximum is reached. The 2015 Program may be terminated by the Company at any time, subject to compliance with regulatory requirements. As such, there can be no assurance regarding the total number of shares that may be repurchased under the 2015 Program.
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 September 30, | | Nine Months Ended September 30, |
| | 2015 | | 2014 | | 2015 | | 2014 |
Weighted average number of common and exchangeable shares outstanding | | 285,592,382 |
| | 285,576,898 |
| | 286,057,952 |
| | 284,203,679 |
|
Weighted average shares issuable pursuant to stock options | | — |
| | 8,117,355 |
| | — |
| | 9,399,930 |
|
Weighted average shares assumed to be purchased from proceeds of stock options | | — |
| | (5,634,652 | ) | | — |
| | (6,034,262 | ) |
Weighted average number of diluted common and exchangeable shares outstanding | | 285,592,382 |
| | 288,059,601 |
| | 286,057,952 |
| | 287,569,347 |
|
For the three and nine months ended September 30, 2015, 13,051,834 and 13,659,367 options, respectively, on a weighted average basis, (three and nine months ended September 30, 2014 - 6,884,227 and 6,925,117 options, respectively) 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 nine months ended September 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 |
| | 5,076,260 |
| | 3.11 |
|
Exercised | (519,111 | ) | | (240,000 | ) | | 2.51 |
|
Forfeited | (708,242 | ) | | (1,344,961 | ) | | (5.66 | ) |
Expired | — |
| | (4,323,143 | ) | | (6.85 | ) |
Balance, September 30, 2015 | 1,051,060 |
| | 12,958,376 |
| | 4.61 |
|
For the nine months ended September 30, 2015, 240,000 shares of Common Stock were issued for cash proceeds of $0.6 million upon the exercise of stock options (nine months ended September 30, 2014 - $11.2 million).
The weighted average grant date fair value for options granted in the three months ended September 30, 2015, was $0.95 (three months ended September 30, 2014 - $2.21) and for the nine months ended September 30, 2015, was $1.26 (nine months ended September 30, 2014 - $2.50).
The amounts recognized for stock-based compensation were as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Thousands of U.S. Dollars) | | 2015 | | 2014 | | 2015 | | 2014 |
Compensation costs for stock options | | $ | 967 |
| | $ | 1,961 |
| | $ | 1,654 |
| | $ | 5,824 |
|
Compensation costs for RSUs | | 46 |
| | 326 |
| | 583 |
| | 3,967 |
|
| | 1,013 |
| | 2,287 |
| | 2,237 |
| | 9,791 |
|
Less: Stock-based compensation costs capitalized | | — |
| | (278 | ) | | (111 | ) | | (2,100 | ) |
Stock-based compensation expense | | $ | 1,013 |
| | $ | 2,009 |
| | $ | 2,126 |
| | $ | 7,691 |
|
Stock-based compensation expense for the three and nine months ended September 30, 2015, and the three months ended September 30, 2014, was primarily recorded in general and administrative ("G&A") expenses. Of the total stock-based compensation expense for the nine months ended September 30, 2014, $6.1 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 September 30, 2015, there was $5.3 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 1.5 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:
|
| | | | | | | |
| Nine Months Ended | | Year Ended |
(Thousands of U.S. Dollars) | September 30, 2015 | | December 31, 2014 |
Balance, December 31, 2014 | $ | 35,812 |
| | $ | 21,973 |
|
Settlements | (6,368 | ) | | (1,137 | ) |
Liability incurred | 1,030 |
| | 11,956 |
|
Liabilities associated with the Argentina business unit sold (Note 3) | — |
| | (10,170 | ) |
Foreign exchange | — |
| | (53 | ) |
Accretion | 960 |
| | 1,406 |
|
Revisions in estimated liability | 419 |
| | 11,837 |
|
Balance, September 30, 2015 | $ | 31,853 |
| | $ | 35,812 |
|
| | | |
Asset retirement obligation - current | $ | 4,686 |
| | $ | 8,026 |
|
Asset retirement obligation - long-term | 27,167 |
| | 27,786 |
|
| $ | 31,853 |
| | $ | 35,812 |
|
For the nine months ended September 30, 2015, settlements included cash payments of $4.8 million with the balance in accounts payable and accrued liabilities at September 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 September 30, 2015, the fair value of assets that are legally restricted for purposes of settling the asset retirement obligation was $2.8 million (December 31, 2014 - $2.0 million). These assets are included in restricted cash on the Company's interim unaudited condensed consolidated balance sheets.
8. Taxes
The Company's effective tax rate was 24% in the nine months ended September 30, 2015, compared with 40% in the comparable period in 2014. The Company's effective tax rate differed from the U.S. statutory rate of 35% primarily due to an increase in the valuation allowance, which was largely attributable to 2015 impairment losses in Brazil and Peru and an increase in the tax rate in Canada, as well as non-deductible third party royalty in Colombia and other local taxes. 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. This amount was paid in May and September 2015 and at September 30, 2015, accounts payable included $nil (December 31, 2014 - $nil).
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 $23.6 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 September 30, 2015, based on an interest rate of three-month LIBOR plus 4% related interest would be $5.7 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 $43.6 million as at September 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.
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 September 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 September 30, 2015, the Company had provided promissory notes totaling $75.7 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 September 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 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 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 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 trading securities, foreign currency derivative liability and contingent consideration at September 30, 2015, and December 31, 2014, were as follows:
|
| | | | | | | | |
| | As at |
(Thousands of U.S. Dollars) | | September 30, 2015 | | December 31, 2014 |
Trading securities | | $ | 7,016 |
| | $ | 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 September 30, | | Nine Months Ended September 30, |
(Thousands of U.S. Dollars) | 2015 | | 2014 | | 2015 | | 2014 |
Trading securities loss | $ | 2,670 |
| | $ | 2,540 |
| | $ | 570 |
| | $ | 2,201 |
|
Foreign currency derivatives loss (gain) | — |
| | 250 |
| | 692 |
| | (4,424 | ) |
| $ | 2,670 |
| | $ | 2,790 |
| | $ | 1,262 |
| | $ | (2,223 | ) |
These gains and losses are presented as financial instruments gains or losses in the interim unaudited condensed consolidated statements of operations and cash flows. There were no sales of trading securities in the nine months ended September 30, 2015, and the trading securities loss represents an unrealized loss.
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 September 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 September 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 $24,000 for each one peso decrease in the exchange rate of the Colombian peso to one U.S. dollar.
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 September 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 nine months ended September 30, 2015, 97% (nine months ended September 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 and accounts receivables. The carrying value of cash and accounts receivable reflects management’s assessment of credit risk.
At September 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, 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, and the three months ended September 30, 2015. 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 nine months ended September 30, 2015, were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2015 |
(Thousands of U.S. Dollars) | Colombia | | Peru | | Brazil | | All Other | | Total |
Severance expenses | $ | — |
| | $ | 439 |
| | $ | — |
| | $ | 22 |
| | $ | 461 |
|
| Nine Months Ended September 30, 2015 |
| Colombia | | Peru | | Brazil | | All Other | | Total |
Severance expenses | $ | 1,237 |
| | $ | 1,863 |
| | $ | 109 |
| | $ | 3,618 |
| | $ | 6,827 |
|
The amounts in the table for the nine months ended September 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. Changes in the severance cost related liability were as follows:
|
| | | |
(Thousands of U.S. Dollars) | Nine Months Ended September 30, 2015 |
Balance, December 31, 2014 | $ | — |
|
Liability incurred | 6,827 |
|
Settlements | (6,827 | ) |
Balance, September 30, 2015 | $ | — |
|
12. Credit Facility
At September 30, 2015, the Company had a credit facility with a syndicate of lenders. Availability under the credit facility is determined by a proven reserves-based borrowing base, and remains subject to the satisfaction of conditions precedent set forth in the credit agreement. Loans under the credit agreement will mature on September 18, 2018. The initial borrowing base is $200 million, and the borrowing base will be re-determined semi-annually based on reserve evaluation reports, subject to a
maximum of $500 million. The borrowing base for the credit facility is supported by the present value of the petroleum reserves of two of the Company's subsidiaries with operating branches in Colombia. The credit agreement includes a letter of credit sub-limit of up to $100 million. Amounts drawn down under the facility bear interest, at the Company's option, at the USD LIBOR rate plus a margin ranging from 2.00% per annum to 3.00% per annum, or an alternate base rate plus a margin ranging from 1.00% per annum to 2.00% per annum, in each case based on the borrowing base utilization percentage. Undrawn amounts under the credit facility bear interest at 0.75% per annum, based on the average daily amount of unused commitments. A letter of credit participation fee of 0.25% per annum will accrue on the average daily amount of letter of credit exposure. Under the terms of the credit facility, the Company is required to maintain and was in compliance with certain financial and operating covenants. No amounts have been drawn on this facility. This credit facility was entered into and became effective on September 18, 2015, and replaced the Company's previous credit facility which was canceled on this date.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q, 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 and Part I, Item 1A “Risk Factors” in our 2014 Annual Report on Form 10-K.
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.
Highlights
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2015 | 2014(2) | % Change | | 2015 | 2014(2) | % Change |
Volumes (BOE) | | | | | | | | |
Working Interest Production Before Royalties | | 2,149,907 |
| 2,331,276 |
| (8 | ) | | 6,412,737 |
| 6,993,072 |
| (8 | ) |
Royalties | | (348,270 | ) | (555,967 | ) | (37 | ) | | (1,115,555 | ) | (1,698,253 | ) | (34 | ) |
Production NAR | | 1,801,637 |
| 1,775,309 |
| 1 |
| | 5,297,182 |
| 5,294,819 |
| — |
|
Change in Inventory | | 187,908 |
| 123,663 |
| 52 |
| | (199,514 | ) | (113,383 | ) | 76 |
|
Sales(1) |
| 1,989,545 |
| 1,898,972 |
| 5 |
| | 5,097,668 |
| 5,181,436 |
| (2 | ) |
| | | | | | | | |
Average Daily Volumes (BOEPD) | | | | | | | | |
Working Interest Production Before Royalties | | 23,368 |
| 25,340 |
| (8 | ) | | 23,490 |
| 25,615 |
| (8 | ) |
Royalties | | (3,785 | ) | (6,043 | ) | (37 | ) | | (4,086 | ) | (6,220 | ) | (34 | ) |
Production NAR | | 19,583 |
| 19,297 |
| 1 |
| | 19,404 |
| 19,395 |
| — |
|
Change in Inventory | | 2,043 |
| 1,344 |
| 52 |
| | (731 | ) | (415 | ) | 76 |
|
Sales(1) |
| 21,626 |
| 20,641 |
| 5 |
| | 18,673 |
| 18,980 |
| (2 | ) |
| | | | | | | |
|
|
Oil and Gas Sales ($000s) | | $ | 75,653 |
| $ | 161,517 |
| (53 | ) | | $ | 221,234 |
| $ | 460,510 |
| (52 | ) |
Operating Expenses ($000s) | | (33,751 | ) | (33,949 | ) | (1 | ) | | (89,318 | ) | (81,161 | ) | 10 |
|
Operating Netback ($000s)(3) | | $ | 41,902 |
| $ | 127,568 |
| (67 | ) | | $ | 131,916 |
| $ | 379,349 |
| (65 | ) |
| | | | | | | | |
General and Administrative Expenses ("G&A") | | | |
|
| | | |
|
|
G&A Expenses Before Stock-Based Compensation, Gross | | $ | 14,544 |
| $ | 24,500 |
| (41 | ) | | $ | 52,095 |
| $ | 72,503 |
| (28 | ) |
Stock-Based Compensation | | 997 |
| 1,962 |
| (49 | ) | | 2,007 |
| 6,061 |
| (67 | ) |
Capitalized G&A and Overhead Recoveries | | (7,678 | ) | (13,112 | ) | (41 | ) | | (28,647 | ) | (38,419 | ) | (25 | ) |
| | $ | 7,863 |
| $ | 13,350 |
| (41 | ) | | $ | 25,455 |
| $ | 40,145 |
| (37 | ) |
| | | | | | | | |
EBITDA(4) | | $ | 44,097 |
| $ | 124,638 |
| (65 | ) | | $ | 117,164 |
| $ | 350,191 |
| (67 | ) |
| | | | | | | | |
Net Income (Loss) | | $ | (101,877 | ) | $ | 44,184 |
| (331 | ) | | $ | (185,307 | ) | $ | 98,450 |
| (288 | ) |
| | | | | | | | |
Funds Flow from Continuing Operations ($000s)(5) | | $ | 36,644 |
| $ | 93,569 |
| (61 | ) | | $ | 91,463 |
| $ | 263,581 |
| (65 | ) |
| | | | | | | |
|
|
Capital Expenditures for Continuing Operations ($000s) | | $ | 24,569 |
| $ | 95,419 |
| (74 | ) | | $ | 116,353 |
| $ | 268,859 |
| (57 | ) |
|
| | | | | | | | |
| As at |
| September 30, 2015 | December 31, 2014 | % Change |
Cash & Cash Equivalents ($000s) | $ | 186,978 |
| $ | 331,848 |
| (44 | ) |
| | | |
Working Capital (Including Cash & Cash Equivalents) ($000s) | $ | 190,784 |
| $ | 239,824 |
| (20 | ) |
(1) Sales volumes represent production NAR adjusted for inventory changes and losses.
(2) Excludes amounts relating to discontinued operations. Sales volumes associated with discontinued operations were nil BOEPD for the three and nine months ended September 30, 2015, and nil and 1,819 BOEPD, respectively, for the corresponding periods in 2014. Discontinued operations sales volumes for the nine months ended September 30, 2014, were calculated to the date of sale of June 25, 2014.
Non-GAAP measures
Operating netback, EBITDA and funds flow from continuing operations are non-GAAP measures which do not have any standardized meaning prescribed under GAAP. Investors are cautioned that these measures should not be construed as alternatives to net income or loss or other measures of financial performance as determined in accordance with GAAP. Our method of calculating these measures may differ from other companies and, accordingly, may not be comparable to similar measures used by other companies.
(3) Operating netback as presented is oil and gas sales net of royalties and operating expenses. 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.
(4) 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. 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. A reconciliation from net income or loss to EBITDA is as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
EBITDA - Non-GAAP Measure ($000s) | | 2015 | | 2014 | | 2015 | | 2014 |
Net income (loss) | | $ | (101,877 | ) | | $ | 44,184 |
| | $ | (185,307 | ) | | $ | 98,450 |
|
Adjustments to reconcile net income (loss) to EBITDA | | | | | | | | |
Loss from discontinued operations, net of income taxes | | — |
| | — |
| | — |
| | 26,990 |
|
DD&A expenses | | 204,993 |
| | 53,936 |
| | 360,620 |
| | 140,137 |
|
Income tax (recovery) expense | | (59,019 | ) | | 26,518 |
| | (58,149 | ) | | 84,614 |
|
EBITDA | | $ | 44,097 |
| | $ | 124,638 |
| | $ | 117,164 |
| | $ | 350,191 |
|
(5) 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 gains and losses, financial instruments gains and losses, equity tax and cash settlement of foreign currency derivatives. During the three months ended September 30, 2015, our new management changed our method of calculating funds flow from continuing operations to be more consistent with our peers. Funds flow from continuing operations is no longer net of cash settlement of asset retirement obligation. Additionally, foreign exchange losses on cash and cash equivalents have been excluded from funds flow. Comparative information has been restated to be calculated on a consistent basis. 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. A reconciliation from net income or loss to funds flow from continuing operations is as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Funds Flow From Continuing Operations - Non-GAAP Measure ($000s) | | 2015 | | 2014 | | 2015 | | 2014 |
Net income (loss) | | $ | (101,877 | ) | | $ | 44,184 |
| | $ | (185,307 | ) | | $ | 98,450 |
|
Adjustments to reconcile net income (loss) to funds flow from continuing operations | | | | | | | | |
Loss from discontinued operations, net of income taxes | | — |
| | — |
| | — |
| | 26,990 |
|
DD&A expenses | | 204,993 |
| | 53,936 |
| | 360,620 |
| | 140,137 |
|
Deferred tax (recovery) expense | | (62,542 | ) | | 2,272 |
| | (69,781 | ) | | 1,431 |
|
Non-cash stock-based compensation | | 929 |
| | 1,717 |
| | 1,511 |
| | 4,341 |
|
Unrealized foreign exchange (gain) loss | | (7,529 | ) | | (9,689 | ) | | (13,093 | ) | | (6,924 | ) |
Financial instruments loss (gain) | | 2,670 |
| | 2,790 |
| | 1,262 |
| | (2,223 | ) |
Equity tax | | — |
| | (1,641 | ) | | — |
| | (3,283 | ) |
Cash settlement of foreign currency derivatives | | — |
| | — |
| | (3,749 | ) | | 4,662 |
|
Funds flow from continuing operations | | $ | 36,644 |
| | $ | 93,569 |
| | $ | 91,463 |
| | $ | 263,581 |
|
Consolidated Results of Operations
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2015 | | 2014(2) | | % Change | | 2015 | | 2014(2) | | % Change |
(Thousands of U.S. Dollars) | | | | | | | | | | | | |
Oil and natural gas sales | | $ | 75,653 |
| | $ | 161,517 |
| | (53 | ) | | $ | 221,234 |
| | $ | 460,510 |
| | (52 | ) |
Interest income | | 266 |
| | 772 |
| | (66 | ) | | 1,069 |
| | 2,160 |
| | (51 | ) |
| | 75,919 |
| | 162,289 |
| | (53 | ) | | 222,303 |
|
| 462,670 |
| | (52 | ) |
| | | | | | | | | | | |
|
Operating expenses | | 33,751 |
| | 33,949 |
| | (1 | ) | | 89,318 |
| | 81,161 |
| | 10 |
|
DD&A expenses | | 204,993 |
| | 53,936 |
| | 280 |
| | 360,620 |
| | 140,137 |
| | 157 |
|
G&A expenses | | 7,863 |
| | 13,350 |
| | (41 | ) | | 25,455 |
| | 40,145 |
| | (37 | ) |
Severance expenses | | 461 |
| | — |
| | — |
| | 6,827 |
| | — |
| | — |
|
Equity tax | | — |
| | — |
| | — |
| | 3,769 |
| | — |
| | — |
|
Foreign exchange gain | | (12,923 | ) | | (12,438 | ) | | (4 | ) | | (21,492 | ) | | (6,604 | ) | | (225 | ) |
Financial instruments loss (gain) | | 2,670 |
| | 2,790 |
| | (4 | ) | | 1,262 |
| | (2,223 | ) | | 157 |
|
| | 236,815 |
| | 91,587 |
| | 159 |
| | 465,759 |
| | 252,616 |
| | 84 |
|
| | | | | | | | | | | |
|
(Loss) income from continuing operations before income taxes | | (160,896 | ) | | 70,702 |
| | (328 | ) | | (243,456 | ) | | 210,054 |
| | (216 | ) |
| | | | | | | | | | | | |
Current income tax expense | | (3,523 | ) |
| (24,246 | ) | | (85 | ) | | (11,632 | ) | | (83,183 | ) | | (86 | ) |
Deferred income tax recovery (expense) | | 62,542 |
|
| (2,272 | ) | | — |
| | 69,781 |
| | (1,431 | ) | | — |
|
| | 59,019 |
| | (26,518 | ) | | (323 | ) | | 58,149 |
| | (84,614 | ) | | (169 | ) |
(Loss) income from continuing operations | | (101,877 | ) |
| 44,184 |
|
| (331 | ) |
| (185,307 | ) |
| 125,440 |
|
| (248 | ) |
Loss from discontinued operations, net of income taxes | | — |
| | — |
| | — |
| | — |
| | (26,990 | ) | | 100 |
|
Net income (loss) | | $ | (101,877 | ) | | $ | 44,184 |
| | (331 | ) | | $ | (185,307 | ) | | $ | 98,450 |
| | (288 | ) |
| | | | | | | | | | | |
|
Sales Volumes(1) | | | | | | | | | | | |
|
| | | | | | | | | | | |
|
Oil and NGL's, bbl | | 1,974,945 |
| | 1,888,626 |
| | 5 |
| | 5,058,970 |
| | 5,138,675 |
| | (2 | ) |
Natural gas, Mcf | | 87,600 |
| | 62,077 |
| | 41 |
| | 232,187 |
| | 256,567 |
| | (10 | ) |
Total sales volumes, BOE | | 1,989,545 |
| 1,898,972 |
| 5 |
|
| 5,097,668 | | 5,181,436 | | (2 | ) |
| | | | | | | | | | | | |
Total sales volumes, BOEPD | | 21,626 |
| | 20,641 |
| | 5 |
| | 18,673 |
| | 18,980 |
| | (2 | ) |
| | | | | | | | | | | |
|
Average Prices | | | | | | | | | | | |
|
| | | | | | | | | | | |
|
Oil and NGL's per bbl | | $ | 38.14 |
| | $ | 85.40 |
| | (55 | ) | | $ | 43.56 |
| | $ | 89.41 |
| | (51 | ) |
Natural gas per Mcf | | $ | 3.77 |
| | $ | 4.51 |
| | (16 | ) | | $ | 3.80 |
| | $ | 4.72 |
| | (19 | ) |
| | | | | | | | | | | |
|
|
Consolidated Results of Operations per BOE sales volumes | | | | | | | | | | | |
|
|
| | | | | | | | | | | |
|
|
Oil and natural gas sales | | $ | 38.03 |
| | $ | 85.05 |
| | (55 | ) | | $ | 43.40 |
| | $ | 88.88 |
| | (51 | ) |
Interest income | | 0.13 |
| | 0.41 |
| | (68 | ) | | 0.21 |
| | 0.42 |
| | (50 | ) |
| | 38.16 |
| | 85.46 |
| | (55 | ) | | 43.61 |
| | 89.30 |
| | (51 | ) |
| | | | | | | | | | | |
|
|
Operating expenses | | 16.96 |
| | 17.88 |
| | (5 | |