Edgar Filing: GRAN TIERRA ENERGY INC.

Document

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, 2016



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 August 2, 2016, the following number of shares of the registrant’s capital stock were outstanding: 289,322,888 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 4,875,177 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 June 30, 2016

Table of contents



		Page
PART I	Financial Information
Item 1.	Financial Statements	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40

PART II	Other Information
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	41
Item 6.	Exhibits	41
SIGNATURES		41
EXHIBIT INDEX		43

CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 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 2015 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 oil and gas reserves are reported NAR. Our production is also reported NAR, except as otherwise specifically noted as "working interest production before royalties." Natural gas liquids ("NGLs") 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 (Unaudited)

(Thousands of U.S. Dollars, Except Share and Per Share Amounts)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
OIL AND NATURAL GAS SALES (NOTE 4)	$	71,713		$	69,350		$	129,116		$	145,581

EXPENSES
Operating	17,748			17,758			36,815			40,419
Transportation	6,217			6,375			18,545			15,148
Depletion, depreciation and accretion (Note 4)	31,884			39,188			68,796			88,328
Asset impairment (Notes 4 and 5)	92,843			30,285			149,741			67,299
General and administrative (Note 4)	7,975			10,298			16,261			17,592
Severance	281			1,988			1,299			6,366
Equity tax (Note 9)	—			—			3,051			3,769
Foreign exchange loss (gain)	781			2,969			1,566			(8,569		)
Financial instruments gain (Note 12)	(1,072		)	(1,366		)	(227		)	(1,408		)
	156,657			107,495			295,847			228,944

GAIN ON ACQUISITION (NOTE 3)	—			—			11,712			—
INTEREST EXPENSE (NOTE 6)	(2,201		)	—			(2,720		)	—
INTEREST INCOME	749			382			1,198			803
LOSS BEFORE INCOME TAXES (NOTE 4)	(86,396		)	(37,763		)	(156,541		)	(82,560		)

INCOME TAX (EXPENSE) RECOVERY
Current	(5,778		)	(5,684		)	(7,801		)	(8,109		)
Deferred	28,615			4,883			55,751			7,239
	22,837			(801		)	47,950			(870		)
NET LOSS AND COMPREHENSIVE LOSS	$	(63,559	)	$	(38,564	)	$	(108,591	)	$	(83,430	)

NET LOSS PER SHARE - BASIC AND DILUTED	$	(0.21	)	$	(0.13	)	$	(0.37	)	$	(0.29	)
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED (Note 7)	296,565,530			286,393,772			295,188,878			286,294,595

(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)



	June 30,			December 31,
	2016			2015
ASSETS
Current Assets
Cash and cash equivalents	$	171,470		$	145,342
Restricted cash (Notes 3 and 5)	9,716			92
Accounts receivable	43,733			29,217
Marketable securities (Note 12)	3,979			6,250
Derivatives (Note 12)	7,014			—
Inventory (Note 5)	9,339			19,056
Taxes receivable	30,387			28,635
Other current assets	5,112			5,848
Total Current Assets	280,750			234,440

Oil and Gas Properties
Proved	372,752			469,589
Unproved	366,079			310,771
Total Oil and Gas Properties	738,831			780,360
Other capital assets	8,432			8,633
Total Property, Plant and Equipment (Notes 4 and 5)	747,263			788,993

Other Long-Term Assets
Restricted cash	6,750			3,317
Taxes receivable	9,497			8,276
Other long-term assets	15,578			8,511
Goodwill (Note 4)	102,581			102,581
Total Other Long-Term Assets	134,406			122,685
Total Assets (Note 4)	$	1,162,419		$	1,146,118
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued liabilities	$	65,850		$	70,778
Taxes payable	1,115			1,067
Asset retirement obligation (Note 8)	2,970			2,146
Total Current Liabilities	69,935			73,991

Long-Term Liabilities
Convertible senior notes (Notes 6 and 12)	109,145			—
Deferred tax liabilities	5,552			34,592
Asset retirement obligation (Note 8)	40,870			31,078
Other long-term liabilities	10,921			4,815
Total Long-Term Liabilities	166,488			70,485

Contingencies (Note 11)
Subsequent Events (Note 14)
Shareholders’ Equity
Common Stock (Note 7) (289,322,888 and 273,442,799 shares of Common Stock and 8,514,066 and 8,572,066 exchangeable shares, par value $0.001 per share, issued and outstanding as at June 30, 2016, and December 31, 2015, respectively)	10,202			10,186
Additional paid in capital	1,052,792			1,019,863
Deficit	(136,998		)	(28,407		)
Total Shareholders’ Equity	925,996			1,001,642
Total Liabilities and Shareholders’ Equity	$	1,162,419		$	1,146,118

(See notes to the condensed consolidated financial statements)

Gran Tierra Energy Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Thousands of U.S. Dollars)



	Six Months Ended June 30,
	2016			2015
Operating Activities
Net loss	$	(108,591	)	$	(83,430	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depletion, depreciation and accretion (Note 4)	68,796			88,328
Asset impairment (Notes 4 and 5)	149,741			67,299
Deferred tax recovery	(55,751		)	(7,239		)
Stock-based compensation expense (Note 7)	3,522			1,113
Amortization of debt issuance costs (Note 6)	629			—
Cash settlement of restricted share units	(1,186		)	(1,314		)
Unrealized foreign exchange loss (gain)	50			(5,564		)
Financial instruments gain (Note 12)	(227		)	(1,408		)
Cash settlement of financial instruments	47			(3,749		)
Cash settlement of asset retirement obligation (Note 8)	(464		)	(1,964		)
Gain on acquisition (Note 3)	(11,712		)	—
Net change in assets and liabilities from operating activities (Note 13)	(6,630		)	(46,504		)
Net cash provided by operating activities	38,224			5,568

Investing Activities
Increase in restricted cash	(2,349		)	(320		)
Additions to property, plant and equipment, excluding Corporate acquisition (Note 4)	(44,587		)	(91,318		)
Additions to property, plant and equipment - acquisition of PetroGranada Colombia Limited (Note 5)	(19,388		)	—
Changes in non-cash investing working capital	(11,059		)	(77,109		)
Cash paid for business combination, net of cash acquired (Note 3)	(50,909		)	—
Net cash used in investing activities	(128,292		)	(168,747		)

Financing Activities
Proceeds from issuance of the Notes, net of issuance costs (Note 6)	108,900			—
Proceeds from issuance of shares of Common Stock (Note 7)	5,350			602
Net cash provided by financing activities	114,250			602

Foreign exchange gain (loss) on cash and cash equivalents	1,946			(2,872		)

Net increase (decrease) in cash and cash equivalents	26,128			(165,449		)
Cash and cash equivalents, beginning of period	145,342			331,848
Cash and cash equivalents, end of period	$	171,470		$	166,399

Supplemental cash flow disclosures (Note 13)

(See notes to the condensed consolidated financial statements)

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,
	2016			2015
Share Capital
Balance, beginning of period	$	10,186		$	10,190
Issuance of Common Stock (Note 7)	16			—
Repurchase of Common Stock	—			(4		)
Balance, end of period	10,202			10,186

Additional Paid in Capital
Balance, beginning of period	1,019,863			1,026,873
Issuance of Common Stock (Note 7)	25,798			—
Exercise of stock options (Note 7)	5,347			722
Stock-based compensation (Note 7)	1,784			2,263
Repurchase of Common Stock	—			(9,995		)
Balance, end of period	1,052,792			1,019,863

Retained Earnings (Deficit)
Balance, beginning of period	(28,407		)	239,622
Net loss	(108,591		)	(268,029		)
Balance, end of period	(136,998		)	(28,407		)

Total Shareholders’ Equity	$	925,996		$	1,001,642

(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 company focused on oil and natural gas exploration and production in Colombia. The Company also has business activities in 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, 2015, included in the Company’s 2015 Annual Report on Form 10-K, filed with the SEC on February 29, 2016.

The Company’s significant accounting policies are described in Note 2 of the consolidated financial statements which are included in the Company’s 2015 Annual Report on Form 10-K and are the same policies followed in these interim unaudited condensed consolidated financial statements, except as noted below. The Company has evaluated all subsequent events through to the date these interim unaudited condensed consolidated financial statements were issued.

Convertible Senior Notes

The Company accounts for its 5.00% Convertible Senior Notes due 2021 (the "Notes") as a liability in their entirety. The embedded features of the Notes were assessed for bifurcation from the Notes under the applicable provisions, including the basic conversion feature, the fundamental change make-whole provision and the put and call options. Based on an assessment, the Company concluded that these embedded features did not meet the criteria to be accounted for separately.

The Company incurred debt issuance costs in connection with the issuance of the Notes which have been presented as a direct deduction against the carrying amount of the Notes and are being amortized to interest expense using the effective interest method over the contractual term of the Notes.

Derivatives

The Company's commodity price and foreign currency derivatives are recorded on its interim unaudited condensed consolidated balance sheet at fair value as either an asset or a liability with changes in fair value recognized in the interim unaudited condensed consolidated statements of operations. While the Company utilizes derivative instruments to manage the price risk attributable to its expected oil production and foreign exchange risk, it has elected not to designate its derivative instruments as accounting hedges under the accounting guidance.

Recently Issued Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (the "FASB") issued guidance regarding the accounting for revenue from contracts with customers. In August 2015, the FASB issued Accounting Standards Update (“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. In March 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" which clarifies implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing" which clarifies implementation guidance. In May 2016, the FASB issued ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients" which reduces the potential for diversity in practice at initial application and the cost and complexity of applying

Topic 606 both at transition and on an ongoing basis. 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.

Simplifying the Accounting for Measurement - Period Adjustments

In September 2015, the FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement - Period Adjustments". The amendments require that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined and eliminates the requirement to retrospectively revise prior periods. Additionally, an acquirer should record in the same period the effects on earnings of any changes in the provisional accounts, calculated as if the accounting had been completed at the acquisition date. The ASU was effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. 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.

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases". This ASU will require most lease assets and lease liabilities to be recognized on the balance sheet and the disclosure of key information about lease arrangements. The ASU will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the impact the new lease standard will have on its consolidated financial position, results of operations, cash flows, and disclosure.

Employee Share-Based Payment Accounting

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting". This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for forfeitures, income taxes, and statutory tax withholding requirements. The ASU will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company is currently assessing the impact this update will have on its consolidated financial position, results of operations, cash flows, and disclosure.

3. Business Combination

On January 13, 2016 (the “Petroamerica Acquisition Date”), the Company acquired all of the issued and outstanding common shares of Petroamerica Oil Corp. ("Petroamerica"), a Canadian corporation, pursuant to the terms and conditions of an arrangement agreement dated November 12, 2015 (the “Arrangement”). The transaction contemplated by the Arrangement was effected through a court approved plan of arrangement in Canada. The Arrangement was approved at a special meeting of Petroamerica shareholders and by the Court of Queen's Bench of Alberta on January 11, 2016. Under the Arrangement, each Petroamerica shareholder was entitled to receive, for each Petroamerica share held, either 0.40 of a Gran Tierra common share or $1.33 Canadian dollars in cash, or a combination of shares and cash, subject to a maximum of 70% of the consideration payable in cash.

As consideration for the acquisition of all the issued and outstanding Petroamerica shares, the Company issued approximately 13.7 million shares of Gran Tierra Common Stock, par value $0.001, and paid cash consideration of approximately $70.6 million. The fair value of Gran Tierra’s Common Stock issued was determined to be $25.8 million based on the closing price of shares of Common Stock of Gran Tierra as at the Petroamerica Acquisition Date. Total net purchase price of Petroamerica was $72.2 million, after giving consideration to net working capital of $24.2 million. Upon completion of the transaction on the Petroamerica Acquisition Date, Petroamerica became an indirect wholly-owned subsidiary of Gran Tierra.

The acquisition was accounted for as a business combination using the acquisition method, with Gran Tierra being the acquirer, whereby the assets acquired and liabilities assumed were recognized at their fair values as at the Petroamerica Acquisition Date, and the results of Petroamerica were included with those of Gran Tierra from that date. Fair value estimates were made based on significant unobservable (Level 3) inputs and based on the best information available at the time.

The following table shows the allocation of the consideration transferred based on the fair values of the assets and liabilities acquired:



(Thousands of U.S. Dollars)
Consideration Transferred:
Cash	$	70,625
Shares of Common Stock issued net of share issue costs	25,811
	$	96,436

Allocation of Consideration Transferred⁽¹⁾:
Oil and gas properties
Proved	$	48,595
Unproved	50,054
Net working capital (including cash acquired of $19.7 million, restricted cash of $2.5 million and accounts receivable of $5.0 million)	24,202
Long-term restricted cash	8,167
Other long-term assets	1,570
Long-term deferred tax liability	(10,105		)
Long-term portion of asset retirement obligation	(11,556		)
Other long-term liabilities	(2,779		)
Gain on acquisition	(11,712		)
	$	96,436

⁽¹⁾The allocation of the consideration transferred is incomplete and is subject to change. Management is continuing to review and assess information to accurately determine the acquisition date fair value of the assets and liabilities acquired. During the measurement period, Gran Tierra will continue to obtain information to assist in finalizing the fair value of net assets acquired, which may differ materially from the above preliminary estimates.

As indicated in the allocation of the consideration transferred, the fair value of identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration transferred. Consequently, Gran Tierra reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that all acquired assets and assumed liabilities were recognized and that the valuation procedures and resulting measures were appropriate. As a result, Gran Tierra recognized a “Gain on acquisition” of $11.7 million in the interim unaudited condensed consolidated statement of operations for the six months ended June 30, 2016. The gain reflects the impact on Petroamerica’s pre-acquisition market value resulting from the company's lack of liquidity and capital resources required to maintain current production and reserves and further develop and explore their inventory of prospects.

Pro Forma Results (unaudited)

Pro forma results for the six months ended June 30, 2016 and 2015, are shown below, as if the acquisition had occurred on January 1, 2015. Pro forma results are not indicative of actual results or future performance.



	Six Months Ended June 30,
(Unaudited, thousands of U.S. Dollars, except per share amounts)	2016			2015
Oil and gas sales	$	129,587		$	178,509
Net loss	$	(120,317	)	$	(138,535	)
Net loss per share - basic and diluted	$	(0.41	)	$	(0.48	)

The supplemental pro forma net loss of Gran Tierra for the six months ended June 30, 2016, was adjusted to exclude the $11.7 million gain on acquisition and $1.3 million of acquisition costs recorded in general and administrative ("G&A") expenses because they were not expected to have a continuing impact on Gran Tierra’s results of operations.

The Company's consolidated statement of operations for the six months ended June 30, 2016, included oil and gas sales of $8.9 million and a loss after tax of $18.2 million from Petroamerica for the period subsequent to the Petroamerica Acquisition Date.

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. The All Other category represents the Company’s corporate activities. The Company evaluates reportable segment performance based on income or loss before income taxes.

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



	Three Months Ended June 30, 2016
(Thousands of U.S. Dollars)	Colombia			Peru			Brazil			All Other			Total
Oil and natural gas sales	$	69,271		$	—		$	2,442		$	—		$	71,713
Depletion, depreciation and accretion	30,458			71			1,024			331			31,884
Asset impairment	78,208			483			14,152			—			92,843
General and administrative expenses	4,430			387			241			2,917			7,975
Loss before income taxes	(64,836		)	(744		)	(14,037		)	(6,779		)	(86,396		)
Segment capital expenditures	14,535			1,102			2,160			610			18,407
	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
Depletion, depreciation and accretion	37,061			147			1,575			405			39,188
Asset impairment	—			5,285			25,000			—			30,285
General and administrative expenses	3,035			1,273			965			5,025			10,298
Income (loss) before income taxes	3,197			(8,261		)	(28,211		)	(4,488		)	(37,763		)
Segment capital expenditures	8,173			6,878			2,505			316			17,872
	Six Months Ended June 30, 2016
(Thousands of U.S. Dollars)	Colombia			Peru			Brazil			All Other			Total
Oil and natural gas sales	$	125,571		$	—		$	3,545		$	—		$	129,116
Depletion, depreciation and accretion	66,194			212			1,742			648			68,796
Asset impairment	133,440			899			15,402			—			149,741
General and administrative expenses	7,695			796			533			7,237			16,261
Loss before income taxes	(137,557		)	(1,456		)	(15,546		)	(1,982		)	(156,541		)
Segment capital expenditures⁽¹⁾	36,522			2,369			4,880			816			44,587
	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
Depletion, depreciation and accretion	83,316			414			3,836			762			88,328
Asset impairment	—			37,966			29,333			—			67,299
General and administrative expenses	5,751			2,313			1,592			7,936			17,592
Income (loss) before income taxes	6,125			(43,703		)	(35,092		)	(9,890		)	(82,560		)
Segment capital expenditures	29,295			44,577			16,411			1,035			91,318

⁽¹⁾On January 13, 2016, the Company acquired all of the issued and outstanding common shares of Petroamerica, which acquisition was accounted for as a business combination (Note 3) and, therefore, property, plant and equipment acquired are not reflected in the table above. Additionally, on January 25, 2016, the Company acquired all of the issued and outstanding common shares of PetroGranada Colombia Limited ("PGC"), which acquisition was accounted for as an asset acquisition (Note 5) and property, plant and equipment acquired in this acquisition are not reflected in the table above.



	As at June 30, 2016
(Thousands of U.S. Dollars)	Colombia		Peru		Brazil		All Other		Total
Property, plant and equipment	$	543,273	$	96,433	$	103,368	$	4,189	$	747,263
Goodwill	102,581		—		—		—		102,581
All other assets	146,191		16,404		3,211		146,769		312,575
Total Assets	$	792,045	$	112,837	$	106,579	$	150,958	$	1,162,419

	As at December 31, 2015
(Thousands of U.S. Dollars)	Colombia		Peru		Brazil		All Other		Total
Property, plant and equipment	$	574,351	$	95,069	$	115,552	$	4,021	$	788,993
Goodwill	102,581		—		—		—		102,581
All other assets	93,479		21,111		2,236		137,718		254,544
Total Assets	$	770,411	$	116,180	$	117,788	$	141,739	$	1,146,118

5. Property, Plant and Equipment and Inventory

Property, Plant and Equipment



(Thousands of U.S. Dollars)	As at June 30, 2016			As at December 31, 2015
Oil and natural gas properties
Proved	$	2,111,268		$	1,998,330
Unproved	366,079			310,771
	2,477,347			2,309,101
Other	28,597			28,342
	2,505,944			2,337,443
Accumulated depletion, depreciation and impairment	(1,758,681		)	(1,548,450		)
	$	747,263		$	788,993

In the three and six months ended June 30, 2016, the Company recorded ceiling test impairment losses in its Colombia cost center of $78.2 million and $132.8 million, respectively, and in its Brazil cost center of $14.2 million and $15.4 million, respectively, related to lower oil prices. 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, 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, 2016, and 2015, the Company recorded impairment losses in its Peru cost center of $0.5 million and $0.9 million and $5.3 million and $38.0 million, respectively, related to costs incurred on Block 95.

Asset impairment for the three and six months ended June 30, 2016, and 2015 was as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(Thousands of U.S. Dollars)	2016		2015		2016		2015
Impairment of oil and gas properties	$	92,843	$	30,285	$	149,077	$	67,299
Impairment of inventory	—		—		664		—
	$	92,843	$	30,285	$	149,741	$	67,299

Acquisition of PGC

On January 25, 2016, the Company acquired all of the issued and outstanding common shares of PGC, pursuant to the terms and conditions of an acquisition agreement dated January 14, 2016. Upon completion of the transaction, PGC became an indirect wholly-owned subsidiary of Gran Tierra. The net purchase price of PGC was $19.4 million, after giving consideration to net working capital of $18.3 million. The acquisition was accounted for as an asset acquisition with the excess consideration transferred over the fair value of the net assets acquired allocated on a relative fair value basis to the net assets acquired.

The following table shows the allocation of the cost of the acquisition based on the relative fair values of the assets and liabilities acquired:



(Thousands of U.S. Dollars)
Cost of asset acquisition:
Cash	$	37,727

Allocation of Consideration Transferred:
Oil and gas properties
Proved	$	12,228
Unproved	15,563
	27,791
Net working capital (including cash acquired of $0.2 million and restricted cash of $18.6 million)	18,339
Long-term deferred tax liability	(8,403		)
	$	37,727

Contingent consideration of $4.0 million will be payable if cumulative production from the Putumayo-7 Block plus gross proved plus probable reserves under the Putumayo Block meet or exceed 8 MMbbl. PGC is an oil and gas exploration,

development and production company active in Colombia. Contingent consideration will be recognized when the contingency is resolved.

Inventory

At June 30, 2016, oil and supplies inventories were $8.0 million and $1.3 million, respectively (December 31, 2015 - $17.8 million and $1.3 million, respectively). At June 30, 2016, the Company had 244 Mbbl of oil inventory (December 31, 2015 - 616 Mbbl) NAR. In the six months ended June 30, 2016, the Company recorded oil inventory impairment of $0.7 million (six months ended June 30, 2015 - $nil) related to lower oil prices.

6. Convertible Senior Notes and Debt Issuance Costs

On April 6, 2016, the Company issued $100 million aggregate principal amount of Notes in a private placement to qualified institutional buyers. On April 22, 2016, the Company issued an additional $15 million aggregate principal amount of the Notes pursuant to the underwriters’ exercise of their option to acquire additional Notes. The Notes bear interest at a rate of 5.00% per year, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2016. The Notes will mature on April 1, 2021, unless earlier redeemed, repurchased or converted.

The Notes are convertible at the option of the holder at any time prior to the close of business on the business day immediately preceding the maturity date. The conversion rate is initially 311.4295 shares of Common Stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $3.21 per share of Common Stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event in certain circumstances.

The Company may not redeem the Notes prior to April 5, 2019, except in certain circumstances following a fundamental change (as defined in the indenture governing the Notes). The Company may redeem for cash all or any portion of the Notes, at its option, on or after April 5, 2019, if (terms below are as defined in the indenture governing the Notes):

(i) the last reported sale price of the Company's Common Stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption; and

(ii) the Company has filed all reports that it is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act, as applicable (other than current reports on Form 8-K), during the twelve months preceding the date on which the Company provides such notice.

The redemption price will be equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. No sinking fund is provided for the Notes.

If the Company undergoes a fundamental change, holders may require the Company to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

Net proceeds from the sale of the Notes were $108.9 million, after deducting the initial purchasers' discount and the offering expenses payable by the Company. The Company intends to use the net proceeds from the sale of Notes for general corporate purposes, which may include acquisitions and/or capital expenditures.

In connection with the issuance of the Notes, the Company incurred $6.1 million of debt issuance costs, which have been presented as a direct deduction against the carrying amount of the Notes. As of June 30, 2016, the balance of unamortized debt issuance costs was $5.9 million. The Company also incurred debt issuance costs in connection with its credit facility which have been presented as other long-term assets and are being amortized to interest expense using the effective interest method over the term of the credit facility.

The following table presents total interest expense 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)	2016		2015		2016		2015
Contractual interest and other financing expenses	$	1,712	$	—	$	2,091	$	—
Amortization of debt issuance costs	489		—		629		—
	$	2,201	$	—	$	2,720	$	—

7. 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, one share is designated as Special A Voting Stock, par value $0.001 per share, and one share is designated as Special B 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, 2015	273,442,799	4,933,177		3,638,889
Shares issued for acquisition (Note 3)	13,656,719	—		—
Options exercised	2,165,370	—		—
Exchange of exchangeable shares	58,000	(58,000	)	—
Balance, June 30, 2016	289,322,888	4,875,177		3,638,889

Loss per Share

Basic loss per share is calculated by dividing 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,
	2016	2015	2016	2015
Weighted average number of common and exchangeable shares outstanding	296,565,530	286,393,772	295,188,878	286,294,595
Weighted average shares issuable pursuant to stock options	—	—	—	—
Weighted average shares assumed to be purchased from proceeds of stock options	—	—	—	—
Weighted average number of diluted common and exchangeable shares outstanding	296,565,530	286,393,772	295,188,878	286,294,595

Stock options and shares issuable upon conversion of the Notes were excluded from the diluted loss per share calculation as the stock options and shares issuable upon conversion of the Notes were anti-dilutive.

Equity Compensation Awards

In December 2015, the Company's Board of Directors approved a new equity compensation program for 2016 to realign the Company's compensation programs with its renewed short and long-term strategy. The 2016 equity compensation program reflects the Company's emphasis on pay-for-performance.

In prior years, all equity awards were subject to vesting conditions based solely on the recipient’s continued employment over a specified period of time. In contrast, 80% of the equity awards granted in early 2016 consisted of Performance Stock Units (“PSUs”) and 20% consisted of stock options. Gran Tierra's Compensation Committee and Board of Directors believed it was important to revise the Company's long-term incentive program to incorporate a new form of equity award that vests based on the achievement of certain key measures of performance. The purpose of this change was to align the Company's executives and employees to achieve the operational goals established by the Board of Directors, total shareholder return and increase the net asset value per share for stockholders. The Company’s equity compensation awards outstanding as of June 30, 2016, include PSUs, deferred share units (“DSUs”), restricted stock units (“RSUs”) and stock options.

The Company records stock-based compensation expense, measured at the fair value of the awards that are ultimately expected to vest, in the consolidated financial statements. Fair values are determined using pricing models such as the Black-Scholes-Merton or Monte Carlo simulation stock option-pricing models and/or observable share prices. For equity-settled stock-based compensation awards, fair values are determined at the grant date and are recognized over the requisite service period. For cash-settled stock-based compensation awards, fair values are determined at each reporting date and periodic changes are recognized as compensation costs, with a corresponding change to liabilities. Stock-based compensation expense is capitalized as part of oil and natural gas properties or expensed as part of operating expenses or G&A expenses, as appropriate.

The following table provides information about PSU, DSU, RSU and stock option activity for the six months ended June 30, 2016:



	PSUs	DSUs	RSUs		Stock Options
	Number of Outstanding Share Units	Number of Outstanding Share Units	Number of Outstanding Share Units		Number of Outstanding Stock Options		Weighted Average Exercise Price/Stock Option ($)
Balance, December 31, 2015	—	—	1,015,457		12,851,557		4.60
Granted	2,297,700	117,621	—		1,302,350		2.65
Exercised	—	—	(460,614	)	(2,165,370	)	2.47
Forfeited	—	—	(173,830	)	(1,563,903	)	(6.07	)
Expired	—	—	—		(1,517,500	)	(6.41	)
Balance, June 30, 2016	2,297,700	117,621	381,013		8,907,134		4.27

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)	2016			2015			2016			2015
Compensation costs for PSUs	$	707		$	—		$	871		$	—
Compensation costs for stock options	813			1,109			1,784			687
Compensation costs for DSUs	404			—			550			—
Compensation costs for RSUs	341			597			705			537
	2,265			1,706			3,910			1,224
Less: Stock-based compensation costs capitalized	(203		)	(80		)	(388		)	(111		)
Stock-based compensation expense	$	2,062		$	1,626		$	3,522		$	1,113

Stock-based compensation expense for the three and six months ended June 30, 2016 and 2015, was primarily recorded in G&A expenses.

At June 30, 2016, there was $9.9 million (December 31, 2015 - $3.9 million) of unrecognized compensation cost related to unvested PSUs, stock options, DSUs and RSUs which is expected to be recognized over a weighted average period of 2.2 years.

PSUs

PSUs entitle the holder to receive, at the option of the Company, either the underlying number of shares of the Company's Common Stock upon vesting of such units or a cash payment equal to the value of the underlying shares. PSUs will cliff vest after three years, subject to the continued employment of the grantee. The number of PSUs that vest may range from zero to 200% of the target number granted based on the Company’s performance with respect to the applicable performance targets. The performance targets for the PSUs outstanding as of June 30, 2016, are as follows:

(i) 50% of the award is subject to targets relating to the total shareholder return (“TSR”) of the Company against a group of peer companies;

(ii) 25% of the award is subject to targets relating to net asset value ("NAV") of the Company per share and NAV is based on before tax net present value discounted at 10% of proved plus probable reserves; and

(iii) 25% of the award is subject to targets relating to the execution of corporate strategy.

The compensation cost of PSUs is subject to adjustment based upon the attainability of these performance targets. No settlement will occur with respect to the portion of the PSU award subject to each performance target for results below the applicable minimum threshold for that target. PSUs in excess of the target number granted will vest and be settled if performance exceeds the targeted performance goals. The Company currently intends to settle PSUs in cash.

DSUs and RSUs

DSUs and RSUs entitle the holder to receive, either the underlying number of shares of the Company's Common Stock upon vesting of such units or, at the option of the Company, a cash payment equal to the value of the underlying shares. The Company's historic practice has been to settle RSUs in cash and the Company currently intends to settle the RSUs and DSUs outstanding as of June 30, 2016 in cash. Once a DSU or RSU is vested, it is immediately settled. During the six months ended June 30, 2016, DSUs were granted to directors and will vest 100% at such time the grantee ceases to be a member of the Board of Directors.

Stock Options

Each stock option permits the holder to purchase one share of Common Stock at the stated exercise price. The exercise price equals the market price of a share of Common Stock at the time of grant. Stock options generally vest over three years. The term of stock options granted starting in May of 2013 is five years or three months after the grantee’s end of service to the Company, whichever occurs first. Stock options granted prior to May of 2013 continue to have a term of ten years or three months after the end of the grantee’s service to the Company, whichever occurs first.

For the six months ended June 30, 2016, 2,165,370 shares of Common Stock were issued for cash proceeds of $5.4 million (six months ended June 30, 2015 - $0.6 million) upon the exercise of stock options.

The weighted average grant date fair value for stock options granted in three months ended June 30, 2016, was $1.06 (three months ended June 30, 2015 - $1.43) and for the six months ended June 30, 2016, was $1.12 (six months ended June 30, 2015 - $1.28).

8. 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, 2016			December 31, 2015
Balance, beginning of period	$	33,224		$	35,812
Settlements	(681		)	(6,317		)
Liability incurred	1,208			1,556
Liabilities assumed in acquisition (Note 3)	11,852			—
Accretion	1,273			1,313
Revisions in estimated liability	(3,036		)	860
Balance, end of period	$	43,840		$	33,224

Asset retirement obligation - current	$	2,970		$	2,146
Asset retirement obligation - long-term	40,870			31,078
	$	43,840		$	33,224

For the six months ended June 30, 2016, settlements included cash payments of $0.5 million with the balance in accounts payable and accrued liabilities at June 30, 2016. 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, 2016, the fair value of assets that are legally restricted for purposes of settling the asset retirement obligation was $8.9 million (December 31, 2015 - $2.9 million). These assets are accounted for as restricted cash on the Company's interim unaudited condensed consolidated balance sheets.

9. Taxes

The Company's effective tax rate was 31% in the six months ended June 30, 2016, compared with (1)% in the corresponding period in 2015. 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 impairment losses in Brazil, as well as non-deductible local taxes, stock based compensation and a third party royalty in Colombia. These items were partially offset by the impact of foreign taxes, foreign currency translation adjustments and other permanent differences, which mainly relates to non-taxable gain arising on the acquisition of Petroamerica and uncertain tax position adjustments, partially offset by prior periods true-up adjustments and other non-deductible expenses. The deferred tax recovery for six months ended June 30, 2016, included $53.1 million associated with the ceiling test impairment loss in Colombia.

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 amounts of $3.1 million and $3.8 million, respectively, for the equity tax expense in the consolidated statement of operations during the six months ended June 30, 2016 and 2015. At June 30, 2016, accounts payable included $1.6 million (December 31, 2015 - $nil) which will be paid in September 2016.

10. Credit Facility

On June 2, 2016, the Company entered into a Second Amendment (the "Second Amendment") to its credit agreement dated September 18, 2015 (the "credit facility"). Pursuant to the Second Amendment, among other things, the committed borrowing base under the Company's credit facility was reduced from $200 million to $185 million, with $160 million readily available and $25 million subject to the consent of all lenders. Further, the amount of permitted senior debt under the Company's credit facility was decreased from $600 million to $500 million.

11. Contingencies

On June 6, 2016, the Company received a positive decision from the Chamber of Commerce of Bogotá Center for Arbitration and Conciliation tribunal (the "Tribunal") relating to its dispute with the Agencia Nacional de Hidrocarburos (National Hydrocarbons Agency) of Colombia ("ANH") with respect to whether all production from the Moqueta Exploitation Area of the Chaza Block exploration and production contract ("Chaza Contract") was subject to an additional royalty (the "HPR Royalty"). In its decision, the Tribunal found that the HPR Royalty under the Chaza Contract was only payable when the

accumulated oil production from the Moqueta Exploitation Area exceeded 5.0 MMbbl. That production threshold was reached on April 30, 2015, and since that time the Company has been paying the HPR Royalty on production from the Moqueta Exploitation Area.

The ANH and Gran Tierra are engaged in ongoing discussions regarding the interpretation of whether certain transportation and related costs are eligible to be deducted in the calculation of the HPR royalty. 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 $45.2 million as at June 30, 2016. 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.

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, 2016, the Company had provided promissory notes totaling $72.4 million (December 31, 2015 - $76.5 million) as security for letters of credit relating to work commitment guarantees contained in exploration contracts and other capital or operating requirements.

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

Financial Instruments

At June 30, 2016, the Company’s financial instruments recognized in the balance sheet consist of cash and cash equivalents, restricted cash, accounts receivable, trading securities, derivatives assets, accounts payable and accrued liabilities, Notes, PSU liability included in other long-term liabilities, and RSU liability included in accounts payable and accrued liabilities and other long-term liabilities.

Fair Value Measurement

The fair value of trading securities, derivative assets and RSU and PSU liabilities are being remeasured at the estimated fair value at the end of each reporting period.

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

The fair value of commodity price and foreign currency derivatives is estimated based on various factors, including quoted market prices in active markets and quotes from third parties. The Company also performs an internal valuation to ensure the reasonableness of third party quotes. In consideration of counterparty credit risk, the Company assessed the possibility of whether the counterparty to the derivative would default by failing to make any contractually required payments. Additionally, the Company considers that it is of substantial credit quality and has the financial resources and willingness to meet its potential repayment obligations associated with the derivative transactions.

The fair value of the RSU liability was estimated based on quoted market prices in an active market. The fair value of the PSU liability was estimated based on quoted market prices in an active market and an option pricing model such as the Monte Carlo simulation option-pricing models.

The fair value of trading securities, derivative assets, and RSU and PSU liabilities at June 30, 2016, and December 31, 2015, were as follows:



(Thousands of U.S. Dollars)	As at June 30, 2016		As at December 31, 2015
Trading securities	$	3,979	$	6,250
Commodity price derivative asset	5,896		—
Foreign currency derivative asset	1,118		—
	$	10,993	$	6,250

RSU and PSU liability	$	2,129	$	1,189

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)	2016			2015			2016			2015
Trading securities loss (gain)	$	1,380		$	(1,688	)	$	2,225		$	(2,100	)
Commodity price derivative gain	(1,334		)	—			(1,334		)	—
Foreign currency derivatives (gain) loss	(1,118		)	322			(1,118		)	692
Financial instruments gain	$	(1,072	)	$	(1,366	)	$	(227	)	$	(1,408	)

These gains and losses are presented as financial instruments gains or losses in the interim unaudited condensed consolidated statements of operations and cash flows.

The fair value of long-term restricted cash approximates its carrying value because interest rates are variable and reflective of market rates. Financial instruments not recorded at fair value include the Notes (Note 6). At June 30, 2016, the carrying amount of the Notes was $109.1 million, which represents the aggregate principal amount less unamortized debt issuance costs, and the fair value was $144.6 million. 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, 2016, and December 31, 2015, the fair value of the trading securities acquired in connection with the disposal of the Argentina business unit and the RSU liability was determined using Level 1 inputs. At June 30, 2016, the fair value of the derivative assets was determined using Level 2 inputs. The fair value of the PSU liability was determined using Level 3 inputs. The disclosure in the paragraph above regarding the fair value of the Notes was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of the Notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system. 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.

Commodity Price Derivatives

The Company utilizes commodity price derivatives to manage the variability in cash flows associated with the forecasted sale of its oil production, reduce commodity price risk and provide a base level of cash flow in order to assure it can execute at least a portion of its capital spending.

At June 30, 2016, the Company had outstanding commodity price derivative positions as follows:



Period and type of instrument	Volume, bopd	Reference	Sold Put		Purchased Put		Sold Call
Collar: June 1, 2016 to May 31, 2017	10,000	ICE Brent	$	35	$	45	$	65

The Company paid a premium of $4.6 million, or $1.25 per bbl, upon entering into the commodity price derivative. Collars are a combination of put options (floor) and sold call options (ceiling). For a collar position, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is below the floor strike price while the Company is required to make payment to the counterparty if the settlement price for any settlement period is above the ceiling strike price. Neither party is required to make a payment to the other party if the settlement price for any settlement period is equal to or greater than the floor strike price and equal to or less than the ceiling strike price.

Foreign Currency Derivatives

The Company utilizes foreign currency derivatives to manage the variability in cash flows associated with the Company's forecasted Colombian peso ("COP") denominated costs.

At June 30, 2016, the Company had outstanding foreign currency derivative positions as follows:



Period and type of instrument	Amount hedged (COP)	Reference	Purchased Call (COP)	Sold Put (COP)	Sold Put (COP)
Collar: June 1, 2016 to June 30, 2016	9,794.6	COP	3,000	3,265	3,310
Collar: July 1, 2016 to September 30, 2016	25,064.6	COP	3,000	3,275	3,320
Collar: October 1, 2016 to December 31, 2016	20,930.0	COP	3,000	3,285	3,330
Collar: January 1, 2017 to March 31, 2017	31,597.6	COP	3,100	3,300	3,345
Collar: April 1, 2017 to May 31, 2017	22,697.2	COP	3,100	3,310	3,370
	110,084.0

The Company's cash flow is only impacted when the actual settlements under the derivative contracts result in making or receiving a payment to or from the counterparty. These cash settlements represent the cumulative gains and losses on the Company's derivative instruments for the periods presented and do not include a recovery of costs that were paid to acquire or modify the derivative instruments that were settled.

While the use of these derivative instruments may limit or partially reduce the downside risk of adverse commodity price and foreign exchange movements, their use also may limit future income and gains from favorable commodity price and foreign exchange movements.

13. Supplemental Cash Flow Information

Net changes in assets and liabilities from operating activities were as follows:



	Six Months Ended June 30,
(Thousands of U.S. Dollars)	2016			2015
Accounts receivable and other long-term assets	$	(9,156	)	$	23,652
Derivatives	(4,562		)	—
Inventory	4,365			(7,697		)
Prepaids	1,102			2,133
Accounts payable and accrued and other long-term liabilities	(5,628		)	(20,319		)
Taxes receivable and payable	7,249			(44,273		)
Net changes in assets and liabilities from operating activities	$	(6,630	)	$	(46,504	)

The following table provides additional supplemental cash flow disclosures:



	Six Months Ended June 30,
(Thousands of U.S. Dollars)	2016		2015
Non-cash investing activities:
Net liabilities related to property, plant and equipment, end of period	$	24,497	$	33,658

14. Subsequent Events

On June 30, 2016, Gran Tierra Energy International Holdings Ltd., a wholly-owned subsidiary of the Company, entered into a share purchase agreement (the "Acquisition Agreement") to acquire all of the issued and outstanding common shares of PetroLatina Energy Ltd. ("PetroLatina") for cash consideration of $525.0 million (the "Acquisition"), subject to customary working capital and other adjustments. Funding for the Acquisition will consist of an initial payment of $500.0 million at closing and a deferred payment of $25.0 million to be paid prior to December 31, 2016. Subsequent to the signing of the Acquisition Agreement, the Company paid $5.0 million, which funds are to be held in escrow and applied to the initial payment at closing. The Acquisition is also subject to customary closing conditions, including, among other things, any required regulatory approval. Approval from the ANH was received on July 29, 2016 and the Acquisition is expected to close prior to August 31, 2016.

PetroLatina is a private, independent exploration and production company, incorporated in England and Wales, with assets primarily in the Middle Magdalena Basin of Colombia. Upon completion of the transaction, PetroLatina will become an indirect wholly-owned subsidiary of Gran Tierra.

On July 8, 2016, the Company issued approximately 57.8 million subscription receipts (“Subscription Receipts”) in a private placement to eligible purchasers at a price of $3.00 per Subscription Receipt for gross proceeds of approximately $173.5 million. Each Subscription Receipt will entitle the holder to automatically receive one common share of the Company upon closing of the Acquisition upon the satisfaction of certain conditions. The gross proceeds from the sale of the Subscription Receipts will be held in escrow until the Acquisition close date and will be recorded as restricted cash by the Company.

The Company expects to fund the Acquisition through a combination of the Company's current cash balance, gross proceeds of $173.5 million from the Subscription Receipts, available borrowings under the Company's existing revolving loan and $130.0 million of borrowings under a new term loan that is contingent upon the closing of the Acquisition.

The Acquisition Agreement may be terminated by either Gran Tierra or the vendors under certain circumstances set forth in the Acquisition Agreement, including, among other circumstances, the failure of the Acquisition to be consummated on or before October 31, 2016. For further information regarding the Acquisition, please see “Risk Factors - The acquisition of PetroLatina may not be completed, and even if the acquisition is completed, we may fail to realize the benefits anticipated as a result of the acquisition.”

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q 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 2015 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 SEC on February 29, 2016.

Highlights

Acquisitions of Petroamerica and PGC

On January 13, 2016, we acquired all of the issued and outstanding common shares of Petroamerica, a Calgary based oil and gas exploration, development and production company active in Colombia. As consideration we issued approximately 13.7 million shares of Common Stock, and paid cash consideration of approximately $70.6 million. The fair value of Common Stock issued was determined to be $25.8 million based on the closing price of shares of our Common Stock on the acquisition date. Total net purchase price of Petroamerica was $72.2 million, after giving consideration to net working capital of $24.2 million.

The acquisition was accounted for as a business combination using the acquisition method, with Gran Tierra being the acquirer, whereby the assets acquired and liabilities assumed were recognized at their fair values as at the acquisition date, and the results of Petroamerica were included with our results from that date. The fair value of identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration transferred. As a result, we recognized a “Gain on acquisition” of $11.7 million in the interim unaudited condensed consolidated statement of operations for the six months ended June 30, 2016.

Additionally, on January 25, 2016, we acquired all of the issued and outstanding common shares of PGC for cash consideration. The net purchase price of PGC was $19.4 million, after giving consideration to net working capital of $18.3 million. PGC's working capital on the acquisition date included restricted cash of $18.6 million and cash of $0.2 million. Of the opening balance of restricted cash, $15.6 million was released prior to June 30, 2016, and we expect that the remaining balance will be released this year. The acquisition was accounted for as an asset acquisition.

Convertible Senior Notes

During April 2016, we issued $115 million aggregate principal amount of 5.00% Convertible Senior Notes due 2021 (the "Notes") in a private placement to qualified institutional buyers. Net proceeds from the sale of the Notes were $108.9 million, after deducting the initial purchasers' discount and the offering expenses.

The Notes bear interest at a rate of 5.00% per year. Interest expense on the Notes for the three and six months ended June 30, 2016, was $1.3 million.

The Notes are convertible at the option of the holder at any time prior to the close of business on the business day immediately preceding the maturity date. We may not redeem the Notes prior to April 5, 2019, except in certain circumstances following a fundamental change (as defined in the indenture governing the Notes). We may redeem for cash all or any portion of the Notes, on or after April 5, 2019, if certain conditions are met. The redemption price will be equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

If we undergo a fundamental change, holders may require us to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

PetroLatina Acquisition Agreement

million, which funds are to be held in escrow and applied to the initial payment at closing. The Acquisition is also subject to customary closing conditions, including, among other things, any required regulatory approval. Approval from the ANH was received on July 29, 2016 and the Acquisition is expected to close prior to August 31, 2016.

PetroLatina is a private, independent exploration and production company with assets primarily in the Middle Magdalena basin of Colombia. We expect the acquisition to close in the second half of 2016 subject to various factors, including the timing of shareholder and regulatory approvals. Upon completion of the transaction, PetroLatina will become an indirect wholly-owned subsidiary of Gran Tierra.

On July 8, 2016, we issued approximately 57.8 million subscription receipts (the “Subscription Receipts”) in a private placement to eligible purchasers at a price of $3.00 per Subscription Receipt for gross proceeds of approximately $173.5 million. Each Subscription Receipt will entitle the holder to automatically receive one common share of Gran Tierra upon closing of the Acquisition upon the satisfaction of certain conditions.

We expect to fund the Acquisition through a combination of our current cash balance, gross proceeds of $173.5 million from the Subscription Receipts, available borrowings under our existing revolving loan and $130.0 million of borrowings under a new term loan that is contingent upon the closing of the Acquisition. For further information regarding the Acquisition, please see “Risk Factors - The acquisition of PetroLatina may not be completed, and even if the acquisition is completed, we may fail to realize the benefits anticipated as a result of the acquisition.”



	Three Months Ended March 31,			Three Months Ended June 30,								Six Months Ended June 30,
	2016			2016			2015			% Change		2016			2015			% Change
Volumes (BOE)
Working Interest Production Before Royalties	2,330,539			2,342,681			2,101,499			11		4,673,221			4,262,831			10
Royalties	(256,803		)	(368,384		)	(418,508		)	(12	)	(625,188		)	(767,283		)	(19	)
Production NAR	2,073,736			1,974,297			1,682,991			17		4,048,033			3,495,548			16
Decrease (Increase) in Inventory	240,424			65,753			(320,768		)	(120	)	306,175			(387,422		)	(179	)
Sales⁽¹⁾	2,314,160			2,040,050			1,362,223			50		4,354,208			3,108,126			40

Average Daily Volumes (BOEPD)
Working Interest Production Before Royalties	25,610			25,744			23,094			11		25,677			23,552			9
Royalties	(2,822		)	(4,049		)	(4,600		)	(12	)	(3,435		)	(4,240		)	(19	)
Production NAR	22,788			21,695			18,494			17		22,242			19,312			15
Decrease (Increase) in Inventory	2,642			723			(3,524		)	(121	)	1,682			(2,140		)	(179	)
Sales⁽¹⁾	25,430			22,418			14,970			50		23,924			17,172			39

Operating Netback ($000s)
Oil and Natural Gas Sales	$	57,403		$	71,713		$	69,350		3		$	129,116		$	145,581		(11	)
Operating Expenses	(19,067		)	(17,748		)	(17,758		)	—		(36,815		)	(40,419		)	(9	)
Transportation Expenses	(12,328		)	(6,217		)	(6,375		)	(2	)	(18,545		)	(15,148		)	22
Operating Netback⁽²⁾	$	26,008		$	47,748		$	45,217		6		$	73,756		$	90,014		(18	)

General and Administrative Expenses ("G&A") ($000s)	$	8,286		$	7,975		$	10,298		(23	)	$	16,261		$	17,592		(8	)

Net Loss ($000s)	$	(45,032	)	$	(63,559	)	(38,564		)	65		$	(108,591	)	$	(83,430	)	30
EBITDA ($000s)⁽³⁾	$	24,184		$	40,532		$	31,710		28		$	64,716		$	73,067		(11	)
Adjusted EBITDA ($000s)⁽³⁾	$	13,257		$	41,313		$	34,679		19		$	54,570		$	64,498		(15	)

Net cash provided by operating activities ($000s)	$	10,812		$	27,412		$	3,223		751		$	38,224		$	5,568		586
Funds Flow From Operations ($000s)⁽⁴⁾	$	11,563		$	33,755		$	25,040		35		$	45,318		$	54,036		(16	)

Capital Expenditures ($000s)	$	26,180		$	18,407		$	17,872		3		$	44,587		$	91,318		(51	)



	As at
	June 30, 2016		December 31, 2015		% Change
Cash, Cash Equivalents and Current Restricted Cash ($000s)	$	181,186	$	145,434	25

Working Capital ($000s)	$	210,815	$	160,449	31

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

Non-GAAP measures

Operating netback, EBITDA, adjusted EBITDA and funds flow from operations are non-GAAP measures which do not have any standardized meaning prescribed under GAAP. Management views operating netback, EBITDA and adjusted EBITDA as financial performance measures and funds flow from operations as a liquidity measure. Investors are cautioned that these measures should not be construed as alternatives to net 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. Each non-GAAP financial measure is presented along with the corresponding GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure.

⁽²⁾ Operating netback as presented is oil and gas sales net of royalties and operating and transportation expenses. Management believes that netback is a useful supplemental measure for management and investors to analyze financial performance and provides an indication of the results generated by our principal business activities prior to the consideration of other income and expenses.

⁽³⁾ EBITDA, as presented, is net loss adjusted for depletion, depreciation and accretion (“DD&A”) expenses, asset impairment, interest expense and income tax recovery or expense. Adjusted EBITDA is EBITDA adjusted for gain on acquisition and foreign exchange losses or gains. Management uses these financial measures 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 these financial measures are also useful supplemental information for investors to analyze performance and our financial results. A reconciliation from net loss to EBITDA and adjusted EBITDA is as follows:



	Three Months Ended March 31,			Three Months Ended June 30,						Six Months Ended June 30,
EBITDA - Non-GAAP Measure ($000s)	2016			2016			2015			2016			2015
Net loss	$	(45,032	)	$	(63,559	)	$	(38,564	)	$	(108,591	)	$	(83,430	)
Adjustments to reconcile net loss to EBITDA
DD&A expenses	36,912			31,884			39,188			68,796			88,328
Asset impairment	56,898			92,843			30,285			149,741			67,299
Income tax (recovery) expense	(25,113		)	(22,837		)	801			(47,950		)	870
Interest expense	519			2,201			—			2,720			—
EBITDA	24,184			$	40,532		$	31,710		64,716			73,067
Gain on acquisition	(11,712		)	—			—			(11,712		)	—
Foreign exchange loss (gain)	785			781			2,969			1,566			(8,569		)
Adjusted EBITDA	$	13,257		$	41,313		$	34,679		$	54,570		$	64,498

⁽⁴⁾ Funds flow from operations, as presented, is net cash provided by operating activities adjusted for net change in assets and liabilities from operating activities and cash settlement of asset retirement obligation. During the three months ended September 30, 2015, we changed our method of calculating funds flow from operations to be more consistent with our peers. Funds flow from operations is no longer net of cash settlement of asset retirement obligation. Additionally, foreign exchange gains and 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 liquidity and cash flows generated by our principal business activities prior to the consideration of how changes in assets and liabilities from operating activities and cash settlement of asset retirement obligation affect those cash flows , and believes that this financial measure is also useful supplemental information for investors to analyze our liquidity and financial results. A reconciliation from net cash provided by operating activities to funds flow from operations is as follows:



	Three Months Ended March 31,		Three Months Ended June 30,				Six Months Ended June 30,
Funds Flow From Operations - Non-GAAP Measure ($000s)	2016		2016		2015		2016		2015
Net cash provided by operating activities	$	10,812	$	27,412	$	3,223	38,224		$	5,568
Adjustments to reconcile net cash provided by operating activities to funds flow from operations
Net change in assets and liabilities from operating activities	647		5,983		21,278		6,630		46,504
Cash settlement of asset retirement obligation	104		360		539		464		1,964
Funds flow from operations	$	11,563	$	33,755	$	25,040	$	45,318	$	54,036

Consolidated Results of Operations



	Three Months Ended March 31,		Three Months Ended June 30,								Six Months Ended June 30,
	2016		2016			2015			% Change		2016			2015			% Change
(Thousands of U.S. Dollars)
Oil and natural gas sales	$	57,403	$	71,713		$	69,350		3		$	129,116		$	145,581		(11	)
Operating expenses	19,067		17,748			17,758			—		36,815			40,419			(9	)
Transportation expenses	12,328		6,217			6,375			(2	)	18,545			15,148			22
Operating netback⁽¹⁾	26,008		47,748			45,217			6		73,756			90,014			(18	)

DD&A expenses	36,912		31,884			39,188			(19	)	68,796			88,328			(22	)
Asset impairment	56,898		92,843			30,285			207		149,741			67,299			123
G&A expenses	8,286		7,975			10,298			(23	)	16,261			17,592			(8	)
Severance expenses	1,018		281			1,988			(86	)	1,299			6,366			(80	)
Equity tax	3,051		—			—			—		3,051			3,769			(19	)
Foreign exchange loss (gain)	785		781			2,969			(74	)	1,566			(8,569		)	118
Financial instruments loss (gain)	845		(1,072		)	(1,366		)	(22	)	(227		)	(1,408		)