Gran Tierra Energy(GTE) - 2018 Q4 - Annual Report

Part I Business and Properties Gran Tierra Energy Inc. is an oil and gas exploration and production company exclusively focused on Colombia, where 100% of its proved reserves and 2018 revenue were generated, with a strategy to grow its portfolio through exploration, development, and enhanced oil recovery (EOR) - The company is exclusively focused on oil and gas exploration and production in Colombia, which accounted for 100% of its proved reserves and revenue in 2018[35] - The business strategy is to profitably grow its Colombian portfolio by developing existing reserves, applying EOR techniques, and executing a multi-year exploration program funded by cash flows[46] 2018 Operational and Financial Summary | Metric | Value | | :--- | :--- | | 2018 Capital Expenditures | $347.1 million | | Exploration Wells Drilled (Spud) | 5 | | Development Wells Drilled (Spud) | 23 | | Proved Reserves (NAR) at Dec 31, 2018 | 54.3 MMBOE | 2019 Capital Budget Outlook | Category | Budget ($ million) | | :--- | :--- | | Development | 130-135 | | Exploration | 80-85 | | Facilities | 85-90 | | Seismic and Studies | 25-30 | | Total | 320-340 | Estimated Reserves As of December 31, 2018, total proved reserves (NAR) decreased to 54.3 MMBOE, with 12.9 MMBOE of proved undeveloped reserves converted to developed status Estimated Reserves NAR as of December 31, 2018 (MBOE) | Reserves Category | Oil (Mbbl) | Natural Gas (MMcf) | Total (MBOE) | | :--- | :--- | :--- | :--- | | Proved Developed | 36,805 | 1,253 | 37,014 | | Proved Undeveloped | 17,117 | 929 | 17,272 | | Total Proved | 53,922 | 2,182 | 54,286 | | Total Probable | 61,391 | 1,272 | 61,603 | | Total Possible | 48,696 | 1,407 | 48,930 | Change in Proved Undeveloped Reserves (MMBOE) | Category | Colombia - Oil Equivalent (MMBOE) | | :--- | :--- | | Balance, December 31, 2017 | 19.6 | | Acquisitions | 0.7 | | Converted to proved producing | (12.9) | | Discoveries and extensions | 6.4 | | Technical revisions | 3.5 | | Balance, December 31, 2018 | 17.3 | - In 2018, the company converted 12.9 MMBOE, or 66%, of its 2017 proved undeveloped reserves to developed status by investing $92.7 million[72] Drilling and Production Activities In 2018, the company drilled 28 gross wells in Colombia, with 20 productive, and achieved approximately 8.7 million barrels of oil and NGLs production from key fields 2018 Drilling Activity Summary (Gross/Net Wells) | Well Type | Productive | Dry | In Progress | Total | | :--- | :--- | :--- | :--- | :--- | | Exploration | 1.00 / 1.00 | 1.00 / 0.51 | 3.00 / 3.00 | 5.00 / 4.51 | | Development | 19.00 / 18.16 | 0 / 0 | 4.00 / 4.00 | 23.00 / 22.16 | | Total Colombia | 20.00 / 19.16 | 1.00 / 0.51 | 7.00 / 7.00 | 28.00 / 26.67 | Production and Operating Data for Key Fields (2018) | Field | Oil & NGL's (bbl) | Avg. Sales Price ($/bbl) | Operating Exp. ($/bbl) | | :--- | :--- | :--- | :--- | | Acordionero (ACR) | 5,469,072 | $57.64 | $11.22 | | Costayaco (CYC) | 2,244,497 | $58.19 | $22.23 | | Moqueta (MQT) | 1,020,673 | $59.87 | $20.47 | Marketing, Competition, and Regulation The company's oil production in Colombia's MMV and Putumayo basins is sold to various parties, including Ecopetrol and Trafigura, and is subject to intense competition and ANH regulation - Putumayo production is sold to multiple parties, including Ecopetrol (20% in 2018), with delivery via pipeline or truck[83][89] - The company has transportation agreements with CENIT (Ecopetrol subsidiary) for up to 10,000 bopd on a ship-and-pay basis and 6,000 bopd on a ship-or-pay/ship-and-pay basis for its Putumayo production[84][86] - The oil and gas industry in Colombia is highly competitive and heavily regulated by the Agencia Nacional de Hidrocarburos (ANH)[92][94][96] Risk Factors The company faces significant risks from volatile oil prices, geographic concentration in Colombia, substantial capital requirements, and security and social unrest - Price Volatility: Substantially all revenues are derived from oil sales, which are subject to volatile global market factors beyond the company's control[105][106] - Geographic Concentration: All reserves and production are in Colombia, with 82% of 2018 production from just three fields (Acordionero, Costayaco, Moqueta)[121][123] - Capital Requirements: The 2019 capital program of $320-$340 million is expected to be funded by cash flow from operations, which relies on Brent oil prices of $65/barrel or higher[116] - Security and Social Risks: Operations in Colombia are subject to risks from guerrilla activity (specifically the ELN), social unrest, and community disputes, which can delay production and increase costs[126][129] Legal Proceedings The company is in a dispute with the ANH over High Price Royalty deductions, with a potential liability of up to $56.3 million, though no loss is considered probable - The company is in a dispute with the ANH regarding the eligibility of certain transportation costs for deduction in the HPR royalty calculation, with a potential liability estimated at up to $56.3 million[147] - No amount has been accrued for the HPR royalty dispute, as management does not believe a loss is probable at this time[147] Part II Market for Common Equity, Stockholder Matters and Issuer Purchases Gran Tierra's common stock trades on NYSE American, TSX, and LSE; the company has never paid dividends and repurchased over 4.2 million shares in 2018 - The company's common stock is listed on the NYSE American, TSX, and LSE under the symbol 'GTE'[156] - No dividends have ever been paid, and the company intends to retain future earnings for business development[157] Q4 2018 Share Repurchases | Period | Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Nov 1-30, 2018 | 2,921,776 | $2.79 | | Dec 1-31, 2018 | 1,346,481 | $2.56 | | Total Q4 2018 | 4,268,257 | $2.68 | Selected Financial Data The company's financial performance in 2018 showed a return to profitability with $613.4 million in sales and $102.6 million net income, following volatile years with significant impairments Selected Financial Data (2014-2018, in thousands of U.S. Dollars) | Year | Oil and Gas Sales | Net Income (Loss) | Total Assets | Long-term Debt | | :--- | :--- | :--- | :--- | :--- | | 2018 | $613,431 | $102,616 | $1,676,584 | $399,415 | | 2017 | $421,734 | $(31,708) | $1,429,619 | $256,542 | | 2016 | $289,269 | $(465,565) | $1,367,896 | $197,083 | | 2015 | $276,011 | $(268,029) | $1,146,118 | $0 | | 2014 | $559,398 | $(171,339) | $1,714,050 | $0 | - The company recorded significant asset impairments of $616.6 million in 2016 and $323.9 million in 2015, contributing to large net losses in those years[165] Management's Discussion and Analysis (MD&A) In 2018, Gran Tierra achieved record production and a significant financial turnaround, with oil and gas sales rising 45% to $613.4 million and net income reaching $102.6 million, supported by strong operating netback and a fully funded 2019 capital program 2018 vs. 2017 Key Performance Indicators | Metric | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Net Income (Loss) | $102.6M | $(31.7)M | 424% | | EBITDA (Non-GAAP) | $376.7M | $182.5M | 106% | | Funds Flow from Operations (Non-GAAP) | $306.4M | $220.2M | 39% | | Oil and Gas Sales | $613.4M | $421.7M | 45% | | Avg. Production (before royalties) | 36,209 BOEPD | 31,426 BOEPD | 15% | | Operating Netback (Non-GAAP) | $41.85/BOE | $29.43/BOE | 42% | - The company's 2019 capital program of $320-$340 million is 100% allocated to Colombia and is expected to be fully funded by cash flows from operations[224][225] Results of Operations In 2018, oil and gas sales increased 45% to $613.4 million, driving a net income of $102.6 million, despite rising operating and workover expenses per BOE Consolidated Results of Operations per BOE | Metric ($/BOE) | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Oil and gas sales | $58.53 | $43.29 | 35% | | Operating expenses | $10.62 | $9.02 | 18% | | Workover expenses | $3.29 | $2.26 | 46% | | Operating netback | $41.85 | $29.43 | 42% | | DD&A expenses | $18.88 | $13.48 | 40% | | Net Income (loss) | $9.79 | $(3.29) | 398% | - The increase in operating expenses per BOE was primarily due to higher power generation and equipment rental costs needed to manage capacity limitations at the fast-growing Acordionero field[196] - The effective tax rate for 2018 was 32%, a significant decrease from 185% in 2017, primarily due to a reduction in the valuation allowance in Colombia[216][218] Liquidity and Capital Resources The company's liquidity is supported by $51.0 million cash, an undrawn $300 million revolving credit facility, and $399.4 million in long-term debt, deemed sufficient for 2019 objectives Capital Structure as of Dec 31, 2018 (in thousands) | Item | Amount | | :--- | :--- | | Cash and Cash Equivalents | $51,040 | | Revolving Credit Facility (Drawn) | $0 | | Revolving Credit Facility (Capacity) | $300,000 | | Senior Notes (6.25% due 2025) | $300,000 | | Convertible Notes (5.00% due 2021) | $115,000 | - In February 2018, the company issued $300 million of 6.25% Senior Notes due 2025, using the proceeds to repay the outstanding balance on its revolving credit facility[231] - The company must maintain compliance with financial covenants, including a Debt-to-EBITDAX ratio not exceeding 4.0 to 1.0 and an EBITDAX-to-interest expense ratio of at least 2.5 to 1.0[233] Critical Accounting Policies and Estimates The company's financial statements rely on critical accounting policies and estimates, including the full cost method with quarterly ceiling tests, proved reserves, and asset retirement obligations - Full Cost Method & Ceiling Test: The company uses the full cost method, capitalizing all exploration and development costs, and performs a quarterly ceiling test that can lead to non-cash impairment charges[246][247] - Proved Reserves Estimation: Estimates of proved reserves are a major component of DD&A and ceiling test calculations and require substantial subjective judgment based on engineering and geological data[249] - Asset Retirement Obligations (ARO): Estimating future ARO involves significant judgments about costs, timing, inflation, and discount rates for activities that will occur many years in the future[259] - The company adopted ASC 606 (Revenue from Contracts with Customers) on January 1, 2018, which did not have a material impact on its financial position or results, but enhanced disclosures[269][350] Quantitative and Qualitative Disclosures About Market Risk The company faces primary market risks from volatile oil prices, foreign currency fluctuations (Colombian peso), interest rate changes, and equity price risk from its PetroTal Corp. investment - Commodity Price Risk: The principal market risk relates to volatile oil prices, and the company may use derivatives to manage this risk but had none in place at December 31, 2018[287][288] - Foreign Currency Risk: The company is exposed to fluctuations in the Colombian peso, as a strengthening peso against the U.S. dollar increases operating costs and tax liabilities, with a one-peso decrease in the COP/USD exchange rate resulting in an estimated $7,209 foreign exchange loss[289][290] - Equity Price Risk: The company holds approximately 46% of PetroTal's common shares, where a 10% decrease in PetroTal's share price would result in a $4.1 million investment loss[294][262] Financial Statements and Supplementary Data The audited consolidated financial statements for 2018 show a net income of $102.6 million, increased assets, and $284.5 million cash flow from operations, with supplementary data indicating a rise in discounted future net cash flows despite a decrease in proved reserves Consolidated Financial Statements The consolidated financial statements for 2018 report $613.4 million in oil and gas sales, $102.6 million net income, $1.68 billion total assets, and $284.5 million net cash from operations Consolidated Statement of Operations Highlights (Year Ended Dec 31, 2018, in thousands) | Line Item | Amount | | :--- | :--- | | Oil and Natural Gas Sales | $613,431 | | Total Expenses | $464,030 | | Income Before Income Taxes | $151,487 | | Income Tax Expense | $48,871 | | Net Income | $102,616 | Consolidated Balance Sheet Highlights (As of Dec 31, 2018, in thousands) | Line Item | Amount | | :--- | :--- | | Total Current Assets | $202,525 | | Total Property, Plant & Equipment | $1,312,777 | | Total Assets | $1,676,584 | | Total Current Liabilities | $169,380 | | Total Long-Term Liabilities | $477,454 | | Total Shareholders' Equity | $1,029,750 | Consolidated Statement of Cash Flows Highlights (Year Ended Dec 31, 2018, in thousands) | Line Item | Amount | | :--- | :--- | | Net cash provided by operating activities | $284,509 | | Net cash used in investing activities | $(382,589) | | Net cash provided by financing activities | $128,378 | | Net increase in cash | $27,630 | Supplementary Data (Unaudited) Supplementary data indicates a decrease in proved NAR reserves to 54.3 MMBOE in 2018, while the standardized measure of discounted future net cash flows significantly increased to $1.19 billion due to higher oil prices Changes in Proved NAR Reserves - Colombia (Liquids - Mbbl) | Category | 2018 | | :--- | :--- | | Proved NAR Reserves, Dec 31, 2017 | 58,954 | | Purchases of reserves in place | 1,871 | | Extensions & Discoveries | 7,168 | | Technical revisions | (3,502) | | Production | (10,569) | | Proved NAR Reserves, Dec 31, 2018 | 53,922 | Standardized Measure of Discounted Future Net Cash Flows (in thousands) | Year | Future Net Cash Flows | 10% Discount | Standardized Measure | | :--- | :--- | :--- | :--- | | 2018 | $1,493,045 | $(298,585) | $1,194,460 | | 2017 | $1,094,740 | $(246,692) | $848,048 | | 2016 | $613,203 | $(160,498) | $452,705 | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with KPMG LLP issuing an unqualified opinion, following ERP system implementation - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2018[470] - Management concluded that internal control over financial reporting was effective as of December 31, 2018, which was confirmed by an unqualified opinion from the independent auditor, KPMG LLP[471][474] - In 2018, a new company-wide ERP system was implemented, which required modifications to existing internal controls[472] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement, including the Code of Business Conduct and Ethics - Required information regarding directors, executive officers, and corporate governance is incorporated by reference from the definitive Proxy Statement for the 2019 Annual Meeting of Stockholders[484][485] - The company has adopted a Code of Business Conduct and Ethics applicable to all board members, employees, and executive officers, which is available on its website[486] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2019 Proxy Statement - All information regarding executive compensation is incorporated by reference from the company's 2019 Proxy Statement[488] Security Ownership and Related Stockholder Matters Security ownership information is incorporated by reference from the 2019 Proxy Statement, detailing outstanding options and available securities under equity compensation plans - Information regarding security ownership of beneficial owners and management is incorporated by reference from the 2019 Proxy Statement[489] Equity Compensation Plan Information (as of Dec 31, 2018) | Plan Category | Securities to be issued upon exercise of outstanding options | Weighted-average exercise price of outstanding options | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 9,034,412 | $3.18 | 16,657,324 | Certain Relationships, Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the company's 2019 Proxy Statement - All information regarding related transactions and director independence is incorporated by reference from the company's 2019 Proxy Statement[496] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2019 Proxy Statement - All information regarding principal accounting fees and services is incorporated by reference from the company's 2019 Proxy Statement[497] Part IV Exhibits, Financial Statement Schedules This section lists all documents filed as part of the Annual Report on Form 10-K, including financial statements, supplementary data, and a comprehensive list of exhibits - The report includes audited financial statements and unaudited supplementary data[500] - No financial statement schedules are filed with this report[501] - A detailed list of exhibits filed with the report is included, covering agreements, indentures, and certifications[501][503][504]