Gran Tierra Energy(GTE) - 2023 Q3 - Quarterly Report

PART I - Financial Information This section presents the company's unaudited condensed consolidated financial statements, management's analysis of operations, market risks, and internal controls Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including statements of operations, balance sheets, cash flows, and shareholders' equity, along with detailed notes providing context on business operations, accounting policies, debt, share capital, revenue, taxes, contingencies, and financial instruments Condensed Consolidated Statements of Operations (Unaudited) This statement provides a summary of the company's revenues, expenses, and net income or loss for the specified periods Net Income (Loss) | Period | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Three Months Ended Sep 30 | 6,527 | 38,663 | (83)% | | Nine Months Ended Sep 30 | (13,998) | 105,754 | (113)% | Oil Sales | Period | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Three Months Ended Sep 30 | 179,921 | 168,397 | 7% | | Nine Months Ended Sep 30 | 482,013 | 548,751 | (12)% | Net Income (Loss) Per Share - Basic | Period | 2023 (USD) | 2022 (USD) | Change (%) | | :--------------------- | :--------- | :--------- | :--------- | | Three Months Ended Sep 30 | 0.20 | 1.05 | (81)% | | Nine Months Ended Sep 30 | (0.42) | 2.88 | (115)% | Condensed Consolidated Balance Sheets (Unaudited) This statement provides a snapshot of the company's financial position, detailing its assets, liabilities, and shareholders' equity at specific points in time Total Assets | As at | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Sep 30, 2023 | 1,386,035 | 1,335,610 | 3.77% | Total Liabilities | As at | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Sep 30, 2023 | 991,495 | 918,044 | 7.99% | Total Shareholders' Equity | As at | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Sep 30, 2023 | 394,540 | 417,566 | (5.51)% | - The company drew $49,067 thousand from its credit facility as of September 30, 2023, compared to nil at December 31, 2022[14] Condensed Consolidated Statements of Cash Flows (Unaudited) This statement outlines the cash inflows and outflows from operating, investing, and financing activities over the reporting periods Net Cash Provided by Operating Activities | Period | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Nine Months Ended Sep 30 | 157,511 | 355,846 | (55.73)% | Net Cash Used in Investing Activities | Period | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Nine Months Ended Sep 30 | (190,758) | (160,462) | 18.88% | Net Cash Provided by (Used in) Financing Activities | Period | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Nine Months Ended Sep 30 | 25,402 | (99,959) | 125.41% | - Proceeds from debt, net of issuance costs: $48,125 thousand for the nine months ended September 30, 2023, compared to nil in 2022[15] Condensed Consolidated Statements of Shareholders' Equity (Unaudited) This statement presents the changes in the company's shareholders' equity over the reporting periods, including net income, share repurchases, and other comprehensive income Total Shareholders' Equity | As at | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Sep 30, 2023 | 394,540 | 417,566 | (5.51)% | - Net loss of $(13,998) thousand for the nine months ended September 30, 2023, compared to a net income of $105,754 thousand in the prior year[16] - The company repurchased 1,328,650 shares for the nine months ended September 30, 2023, and cancelled all 3,603,396 shares held as treasury stock[16][31] Notes to the Condensed Consolidated Financial Statements (Unaudited) These notes provide detailed explanations and additional information regarding the figures presented in the condensed consolidated financial statements Note 1. Description of Business This note outlines the company's primary business activities, focusing on international oil and natural gas exploration and production - Gran Tierra Energy Inc. is a publicly traded company focused on international oil and natural gas exploration and production[17] - Assets are currently located in Colombia and Ecuador[17] Note 2. Significant Accounting Policies This note describes the key accounting principles and methods applied in the preparation of the interim financial statements - Interim unaudited condensed consolidated financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America ("GAAP")[18] - The company's significant accounting policies are consistent with those in its 2022 Annual Report on Form 10-K[20] Note 3. Property, Plant and Equipment This note provides information on the company's property, plant, and equipment, including contract extensions and related capital commitments Total Property, Plant and Equipment | As at | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Sep 30, 2023 | 1,140,955 | 1,100,902 | 3.64% | - The contract for the Suroriente Block was extended for 20 years from September 1, 2023[21] - In connection with the contract extension, the company paid $6.2 million cash and provided $123.0 million in letters of credit for committed capital investments[21] - No ceiling test impairment losses were recorded for the three and nine months ended September 30, 2023 and 2022[22] Note 4. Debt and Debt Issuance Costs This note provides details on the company's debt obligations, including credit facility terms and recent exchange offers for senior notes Total Debt | As at | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Sep 30, 2023 | 636,511 | 589,593 | 7.96% | - The credit facility's initial commitment was adjusted from $100 million to $50 million, and $50 million was drawn during Q3 2023, bearing interest at SOFR + 6.00% + 0.26% spread, with a final maturity date of August 15, 2024[23] - Subsequent to the quarter, the company completed exchange offers for $247.1 million of 6.25% Senior Notes and $275.8 million of 7.75% Senior Notes for $487.6 million newly issued 9.50% Senior Secured Notes due 2029[27] - The company was in compliance with all financial covenants under the credit facility as of September 30, 2023[24] Note 5. Share Capital This note details changes in the company's share capital, including a reverse stock split, share repurchases, and stock-based compensation expenses - A 1-for-10 reverse stock split of the company's common stock became effective on May 5, 2023[29] - The company repurchased 1,328,650 shares at a weighted average price of $8.15 per share during the nine months ended September 30, 2023, under its 2022 Program, which expired in May 2023[31] Stock-Based Compensation Expense | Period | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Three Months Ended Sep 30 | 1,931 | (170) | 1,236% | | Nine Months Ended Sep 30 | 3,748 | 6,376 | (41)% | Note 6. Revenue This note provides an analysis of the company's revenue, which is entirely derived from oil sales, and the factors influencing its changes - 100% of the company's revenue is generated from oil sales[38] - Oil sales for the three months ended September 30, 2023, increased by 7% due to lower quality and transportation discounts and utilization of 'M pricing' arrangements[38][74] - Oil sales for the nine months ended September 30, 2023, decreased by 12% due to a 20% decrease in Brent price and higher differentials, partially offset by 14% higher sales volumes[38][75] - In Q3 2023, 96% of total sales volumes were sold to one major customer in Colombia (9M 2023: 97%)[39][40] Note 7. Taxes This note explains the company's tax expenses, including the effective tax rate and the factors contributing to its changes - The effective tax rate for the nine months ended September 30, 2023, was 115%, compared to 49% in the comparative period of 2022[41] - The increase in the effective tax rate was primarily due to higher non-deductible foreign exchange adjustments, foreign taxes, non-deductible royalties in Colombia, and non-deductible stock-based compensation, partially offset by a decrease in valuation allowance[45] - Current income tax expense was $63.7 million for the nine months ended September 30, 2023, compared to $63.1 million in 2022[42] - Deferred income tax expense for the nine months ended September 30, 2023, was $43.2 million, mainly due to higher tax depreciation and utilization of tax losses in Colombia[43] Note 8. Contingencies This note addresses potential liabilities from lawsuits and disputes, along with details on letters of credit and other credit support - Management believes the resolution of pending lawsuits and disputes would not have a material adverse effect on the company's consolidated financial position, results of operations, or cash flows[47] Letters of Credit and Other Credit Support | As at | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Sep 30, 2023 | 220,100 | 111,100 | 98.11% | - Credit support is primarily for work commitment guarantees in Colombia and Ecuador, including the Suroriente Block extension[48] Note 9. Financial Instruments and Fair Value Measurement This note describes the company's financial instruments, their fair value measurement, and the impact of derivative instruments - The company uses a fair value hierarchy (Level 1, 2, 3) for financial instruments, with PEF and Senior Notes primarily valued using Level 1 inputs[49][50][51] - The Prepaid Equity Forward (PEF) notional amount decreased from 1.6 million shares to 1.0 million shares, with its fair value decreasing from $16.0 million to $7.0 million as of September 30, 2023[52] - A $3.6 million loss on the PEF was recorded for the nine months ended September 30, 2023[52] - The company did not have any derivative instruments in 2023, compared to a $26.6 million loss from commodity price derivatives in the nine months ended September 30, 2022[54] Note 10. Supplemental Cash Flow Information This note provides additional details on cash flows, including net changes in assets and liabilities from operating activities, and cash paid for income taxes and interest Net Changes in Assets and Liabilities from Operating Activities | Period | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Nine Months Ended Sep 30 | (34,235) | 72,838 | (146.99)% | Cash Paid for Income Taxes | Period | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Nine Months Ended Sep 30 | 85,203 | 29,881 | 185.14% | Cash Paid for Interest | Period | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Nine Months Ended Sep 30 | 29,446 | 31,455 | (6.39)% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and operational results for the three and nine months ended September 30, 2023, highlighting key changes in income, expenses, production, and liquidity, and discussing the factors influencing these trends Financial and Operational Highlights This section provides a concise overview of the company's key financial and operational performance metrics for the reporting period - Net income in Q3 2023 was $6.5 million, an 83% decrease from $38.7 million in Q3 2022[60] - Adjusted EBITDA increased 3% to $119.2 million in Q3 2023, compared to $116.1 million in Q3 2022[60] - NAR production for Q3 2023 increased 14% to 26,776 BOPD, compared to 23,472 BOPD in Q3 2022[60] - Oil sales for Q3 2023 were $179.9 million, 7% higher than Q3 2022, primarily due to lower quality and transportation discounts and 'M pricing' arrangements[60] - Capital additions for Q3 2023 were $43.1 million, a 24% decrease compared to Q3 2022, due to the completion of the 2023 drilling program in the first half[60] Additional Operational Results This section offers a more detailed breakdown of the company's operational performance, including production, sales volumes, and various expenses Oil Production and Sales Volumes, BOPD This note analyzes the company's oil production and sales volumes, highlighting changes and the impact of royalties - Oil production NAR for the three and nine months ended September 30, 2023, increased by 14% in each period compared to 2022, driven by successful drilling and workover campaigns in Colombia and exploration success in Ecuador[68] - Oil production NAR decreased by 2% compared to the prior quarter due to higher royalties from an increase in benchmark oil prices[69] - Royalties as a percentage of WI production decreased to 21% for Q3 2023 and 20% for 9M 2023, compared to 2022, commensurate with the decrease in benchmark oil prices and the price-sensitive royalty regime in Colombia[70] Realized Price and Oil Sales This note examines the realized price per barrel and total oil sales, explaining the factors influencing these figures - Realized price per bbl for Q3 2023 decreased by 5% compared to Q3 2022, primarily due to a 12% decrease in Brent price, offset by lower differentials[71] - Realized price per bbl for 9M 2023 decreased by 23% compared to 9M 2022, primarily due to a 20% decrease in Brent price and higher differentials[72] - Oil sales for Q3 2023 increased by 7% to $179.9 million compared to Q3 2022, due to lower Castilla and Vasconia differentials and the use of 'M pricing' marketing arrangements[74] - Oil sales for 9M 2023 decreased by 12% to $482.0 million compared to 9M 2022, due to a 20% decrease in Brent price and higher differentials, partially offset by 14% higher sales volumes[75] Operating Netback This note presents the company's operating netback, both in total and on a per-barrel basis, for the reporting periods Operating Netback | Period | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Three Months Ended Sep 30 | 126,712 | 124,143 | 2% | | Nine Months Ended Sep 30 | 332,187 | 424,721 | (22)% | Operating Netback per bbl Sales Volumes NAR | Period | 2023 (USD) | 2022 (USD) | Change (%) | | :--------------------- | :--------- | :--------- | :--------- | | Three Months Ended Sep 30 | 52.18 | 57.38 | (9)% | | Nine Months Ended Sep 30 | 46.30 | 67.55 | (31)% | Operating Expenses This note analyzes the company's operating expenses, explaining the factors contributing to their changes - Operating expenses for Q3 2023 increased by 18% to $49.4 million ($20.33 per bbl) compared to Q3 2022[79] - Operating expenses for 9M 2023 increased by 20% to $139.2 million ($19.40 per bbl) compared to 9M 2022[80] - Increases were primarily due to higher lifting costs (road/pipeline maintenance, power generation due to El Niño drought and increased compressed natural gas purchases, equipment rental) and the depreciation of the U.S. dollar against the Colombian peso[79][80] Transportation Expenses This note details the company's transportation expenses, explaining the reasons for their fluctuations - Transportation expenses for Q3 2023 increased by 59% to $3.8 million ($1.58 per bbl) compared to Q3 2022[83][84] - Transportation expenses for 9M 2023 increased by 37% to $10.6 million ($1.48 per bbl) compared to 9M 2022[83][84] - The increase was due to higher transportation tariffs affecting Acordionero sales and the utilization of new transportation routes for new exploration wells in Colombia and Ecuador[83] - Compared to the prior quarter, transportation expenses increased by 4% due to higher trucking costs from longer distance delivery points and depreciation of the U.S. dollar against the Colombian peso[85] DD&A Expenses This note analyzes the company's depreciation, depletion, and amortization (DD&A) expenses, explaining the factors driving their changes - DD&A expenses for Q3 2023 increased by 21% to $55.0 million ($22.66 per bbl) compared to Q3 2022[86] - DD&A expenses for 9M 2023 increased by 27% to $162.9 million ($22.71 per bbl) compared to 9M 2022[86] - The increases were due to increased production and higher costs in the depletable base[86] G&A Expenses This note examines general and administrative (G&A) expenses, both before and including stock-based compensation, and the reasons for their changes - G&A expenses before stock-based compensation for Q3 2023 were comparable to Q3 2022, but on a per bbl basis, decreased by $0.41 to $3.42 due to higher sales volumes[88] - G&A expenses before stock-based compensation for 9M 2023 increased by 22% to $29.1 million ($4.05 per bbl) due to higher consulting costs and legal fees[89] - G&A expenses including stock-based compensation for Q3 2023 increased 26% compared to Q3 2022, and by $0.47 per bbl, due to share price appreciation[90] Foreign Exchange Gains and Losses This note discusses the company's foreign exchange gains and losses, primarily driven by the U.S. dollar's fluctuation against the Colombian peso - The company recorded a $1.7 million foreign exchange loss for Q3 2023 and an $8.1 million loss for 9M 2023[93] - The primary source of foreign exchange losses was the weakening of the U.S. dollar against the Colombian peso (3% in Q3 2023, 16% in 9M 2023), impacting the translation of monetary items[93][94] Income Tax Expense This note analyzes the company's income tax expense, including the effective tax rate and the factors influencing it - The effective tax rate for the nine months ended September 30, 2023, was 115%, significantly higher than 49% in the prior year[94] - The higher effective tax rate was primarily due to increased non-deductible foreign exchange adjustments, foreign taxes, non-deductible royalties in Colombia, and non-deductible stock-based compensation[96] - Current income tax expense for 9M 2023 was $63.7 million, and deferred income tax expense was $43.2 million[95] Net Income (Loss) and Funds Flow from Operations (a Non-GAAP Measure) This note discusses the company's net income or loss and funds flow from operations, explaining the drivers behind their changes - Net income for Q3 2023 decreased by 83% year-over-year, and the company reported a net loss for 9M 2023[99] - Funds flow from operations decreased by 16% to $79.0 million for Q3 2023 and by 33% to $192.1 million for 9M 2023 compared to the corresponding periods in 2022[61][99] - The decrease in funds flow from operations was primarily due to lower Brent prices, higher operating costs, and realized foreign exchange losses[110] Capital expenditures This note provides a breakdown of capital expenditures by category and region, along with details on drilling programs and contract extensions Capital Expenditures (Q3 2023) | Category | Colombia (Millions USD) | Ecuador (Millions USD) | Total (Millions USD) | | :--------------------- | :---------------------- | :--------------------- | :------------------- | | Exploration | 4.0 | 2.9 | 6.9 | | Development: Drilling and Completions | 9.3 | — | 9.3 | | Development: Facilities | 5.2 | 0.6 | 5.8 | | Development: Workovers | 4.8 | — | 4.8 | | Other | 14.0 | 2.3 | 16.3 | | Total | 37.3 | 5.8 | 43.1 | - No wells were spudded in Colombia or Ecuador during Q3 2023, as the 2023 drilling program was completed in the first half[100] - The Suroriente Block contract extension involved committed capital investments over a three-year period[101] Liquidity and Capital Resources This section assesses the company's ability to meet its financial obligations, detailing its capital resources, credit facilities, and debt restructuring - The company believes its capital resources, including cash on hand and cash generated from operations, will provide sufficient liquidity for the next 12 months[102] - The credit facility was amended, adjusting the initial commitment to $50 million, which was drawn during Q3 2023, and is secured by Colombian assets with a maturity date of August 15, 2024[103] - Subsequent to the quarter, the company completed exchange offers for its 6.25% and 7.75% Senior Notes, replacing them with $487.6 million newly issued 9.50% Senior Secured Notes due 2029[106] - The 2022 share repurchase program expired in May 2023 after reaching its 10% share maximum[108] - As of September 30, 2023, the company was in compliance with all financial covenants under its credit facility[104] Cash Flows This section analyzes the company's cash flow changes, including the decrease in funds flow from operations and additions to property, plant, and equipment Net (Decrease) Increase in Cash and Cash Equivalents and Restricted Cash and Cash Equivalents | Period | 2023 (Thousands USD) | 2022 (Thousands USD) | Change (%) | | :--------------------- | :------------------- | :------------------- | :--------- | | Nine Months Ended Sep 30 | (1,948) | 93,429 | (102.08)% | - Funds flow from operations decreased by 33% for the nine months ended September 30, 2023, compared to the prior year, primarily due to lower Brent prices, higher operating costs, and realized foreign exchange losses[109][110] - Additions to property, plant and equipment for 9M 2023 were $(179,707) thousand, an increase from $(163,717) thousand in 9M 2022[109] Critical Accounting Policies and Estimates This section confirms that there have been no material changes to the company's critical accounting policies and estimates since the last annual report - The company's critical accounting policies and estimates have not changed materially since the filing of its 2022 Annual Report on Form 10-K[111] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to various market risks, including commodity price risk, foreign currency risk, and interest rate risk, and how these factors can impact its financial performance Commodity price risk This note identifies the company's primary market risk as the volatility of oil prices, which directly affects its revenues - The company's principal market risk relates to volatile and unpredictable oil prices, which directly influence its revenues from oil sales[112] - Revenues are from oil sales at ICE Brent adjusted for quality differentials[112] Foreign currency risk This note explains the company's exposure to foreign currency fluctuations, particularly between the U.S. dollar and the Colombian peso - Foreign currency risk primarily stems from the fluctuation of the U.S. dollar against the Colombian peso[114] - This impacts local currency-denominated operating and G&A expenses, and current/deferred tax assets and liabilities in Colombia[113][114] - The risk is somewhat ameliorated as 100% of revenues and the majority of capital expenditures are U.S. dollar-related[113] Interest Rate Risk This note describes the company's exposure to interest rate fluctuations on its credit facility - The company is exposed to interest rate fluctuations on its credit facility, which bears floating rates of interest[115] - As of September 30, 2023, the outstanding balance under the credit facility was $50 million[115] Item 4. Controls and Procedures This section details the company's assessment of its disclosure controls and procedures and reports on any changes in internal control over financial reporting Disclosure Controls and Procedures This note confirms management's assessment of the effectiveness of the company's disclosure controls and procedures - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[116] - These controls are designed to provide reasonable assurance that required information is recorded, processed, summarized, and reported within specified time periods[116] Changes in Internal Control over Financial Reporting This note reports that there were no material changes in internal control over financial reporting during the quarter - There were no changes in internal control over financial reporting during the quarter ended September 30, 2023, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[117] PART II - Other Information This section provides additional information, including legal proceedings, risk factors, equity sales, other disclosures, and a list of exhibits Item 1. Legal Proceedings This section refers to the detailed disclosures on legal proceedings provided in Note 8 of the financial statements, indicating no new material developments - The company refers to Note 8 in Part I, Item 1 of this Quarterly Report on Form 10-Q for material developments regarding legal proceedings[119] Item 1A. Risk Factors This section highlights the various factors that could affect the company's business and results of operations, directing readers to the 2022 Annual Report on Form 10-K for a comprehensive list and noting the increased uncertainty from current global events - Readers should carefully review the risk factors outlined in Part I, Item 1A of the 2022 Annual Report on Form 10-K[120] - The unprecedented nature of ongoing global conflicts and volatility in the worldwide economy and oil and gas industry makes it more difficult to identify all risks and their ultimate impact[120] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period covered by this report - No unregistered sales of equity securities or use of proceeds were reported[121] Item 5. Other information This section confirms that no directors or Section 16 officers adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the third quarter of 2023 - No director or Section 16 officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the three months ended September 30, 2023[122] Item 6. Exhibits This section lists all documents filed as exhibits to the Form 10-Q, including corporate governance documents, amendments to the credit agreement, and various certifications required by regulatory bodies, along with XBRL data files - Key exhibits include the Certificate of Incorporation, Bylaws, Deed of Amendment and Restatement to Credit Agreement, and certifications pursuant to the Sarbanes-Oxley Act of 2002[123] - XBRL (eXtensible Business Reporting Language) documents are also included, such as the Instance Document and Taxonomy Extension Schema, Calculation, Definition, Label, and Presentation Linkbase Documents[123] SIGNATURES This section contains the official signatures of the company's President, Chief Executive Officer, and Chief Financial Officer, certifying the report - The report was signed on October 31, 2023, by Gary S. Guidry, President and Chief Executive Officer, and Ryan Ellson, Executive Vice President and Chief Financial Officer[126]