Gran Tierra Energy Announces Q1 2020 Results
Gran Tierra Energy Inc. (NYSE:GTE)(TSX:GTE)(LSE:GTE) has announced the company’s financial and operating results for the quarter ended March 31, 2020. All dollar amounts are in US dollars and production amounts are on an average working interest before royalties basis unless otherwise indicated. Per barrel (“bbl”) of oil equivalent (“BOE”) amounts are based on WI sales before royalties. For per BOE amounts based on net after royalty (“NAR“) production, see Gran Tierra’s Quarterly Report on Form 10-Q filed May 11, 2020.
Key Highlights
- Average Production During the Quarter: Was 29,527 BOE per day, down 10% from fourth quarter 2019; during the Quarter, volumes were impacted by suspended production at the Suroriente and PUT-7 Blocks in the southern Putumayo region due to a local farmers’ blockade, deferred development drilling, shut-in of higher cost production and wells that were off-line awaiting routine mechanical workovers; these wells are expected to remain off-line during the low-price environment
- Decisive Action To Swiftly Shut-In Uneconomic Production: Gran Tierra has temporarily suspended fields with zero or negative netbacks at current oil prices and taken precautions to minimize restart costs across all assets; Gran Tierra remains focused on the ongoing production and waterflooding of the Company’s core assets at Acordionero, Costayaco and Moqueta, which represent 81% of Gran Tierra’s WI Total Proved Reserves as of December 31, 2019*
- Deferral of Capital Expenditures: The Quarter’s capital expenditures totaled $44.3 million; following the advent of the COVID-19 outbreak and the resulting large decrease in oil demand and prices, the Company has elected to defer the majority of capital expenditures for the remainder of 2020, by stacking all drilling and workover rigs and suspending development activities
- Proactive Measures Taken During Downturn: Gran Tierra has rapidly implemented cost saving initiatives throughout the Company; furthermore, internal initiatives during this downturn are focused on portfolio optimization, deferring short-cycle investments, and pacing projects to allow the Company to properly resume operations when oil prices recover
- Colombian Government Initiatives to Assist the Oil Industry: Gran Tierra plans to make use of new regulations that the Colombian government has issued to support the oil industry in response to the recent drop in oil prices:
- On April 10, 2020, the Ministry of Finance issued Decree 535 which is designed to expedite the recovery of value-added and income tax receivables from the tax authorities, to ensure that such funds are received by companies in the short-term
- On March 27, 2020, the National Hydrocarbons Agency (ANH) issued Agreement 01, which grants companies the option to transfer certain commitments among exploration, evaluation or development acreage, providing that certain criteria are met
- On April 7, 2020, the ANH also issued Agreement 02, which allows oil companies to reduce substantially the amounts covered by letters of credit for block commitments; this new agreement also grants oil companies the option to request 12 months of additional time for the execution of exploration, evaluation and certain exploitation commitments
- Focus on Balance Sheet Protection and Long-Term Value Preservation: During the Quarter, Gran Tierra quickly shifted its focus from production growth and free cash flow generation to protecting the Company’s balance sheet and long-term value; this shift in focus was accomplished through adjusting oil production volumes, deferring capital investments and further optimizing and lowering operating and general and administrative (“G&A“) costs:
- Significant progress has been made on lowering operating costs through the renegotiation of vendor contracts, with significant discounts achieved to date; additional operating cost initiatives include personnel and rental equipment optimization; in addition to reducing operating costs, the Company is also benefiting from the recent depreciation of the Canadian dollar and Colombian peso; the Colombian peso has declined 18% versus the U.S. dollar from the Company’s original budget estimate; the majority of Gran Tierra’s operating costs (approximately 80%) and G&A costs within Colombia are denominated in Colombian pesos; all G&A costs in Canada are denominated in Canadian dollars
- Gran Tierra’s Executive Team and Board of Directors have taken 20 percent reductions in salaries and retainer fees, respectively; in addition, a number of cost optimization and efficiency measures are being implemented that will further reduce the Company’s G&A costs to levels consistent with lower anticipated activity levels; Gran Tierra expects these changes to result in a reduction of 30 to 35 percent in G&A costs compared to the Company’s original budget
- Due to the uncertainty of the financial and operational impact of COVID-19 and the significant decline in world oil prices, the Company is not providing any fiscal or operational outlook at this time
- 2019 Sustainability Report Published: Gran Tierra’s Environmental, Social and Governance (ESG) report for 2019 is now available on the Company’s website; the Company recognizes the importance that many stakeholders attach to its approach to managing the ESG factors that relate to its business; Gran Tierra’s 2019 Sustainability Report uses data, stories, and images to show how responsible management of these factors is fundamental to the Company’s corporate values
- Key Financial Metrics for the Quarter:
- Net loss was $252 million compared with net income of $27 million in the Prior Quarter, due to lower revenues primarily from the collapse in oil price and significant non-cash items including unrealized loss on valuation of investments ($65 million) and goodwill impairment ($103 million)
- Adjusted EBITDA(1) was $35 million, compared with $66 million in the Prior Quarter
- Funds flow from operations(1) of $22 million ($0.06 per share, basic) decreased by 55% compared with the Prior Quarter, as a result of lower production and a 19% decrease in the Brent oil price
- At March 31, 2020, net debt(1) to Adjusted EBITDA(1) was 2.75 times on a trailing 12 month basis (on a trailing 12 month basis, net loss was $215 million and Adjusted EBITDA(1) was $272 million)
- Entered into additional 2020 oil price hedges during the Quarter to provide further downside protection against a near-term, low price environment; currently, approximately 50 percent of production is hedged for the remainder of the second quarter of 2020, with 7,000 bbl of oil per day (“bopd“) hedged for the second half of 2020
- Oil and gas sales were $86 million, down 33% from $128 million in the Prior Quarter due to the decreases in production and the Brent oil price
- Operating netback(1) decreased to $14.13 per BOE, which was caused mostly by the drop in the Brent oil price, while other cost components such as operating and transportation expenses and the quality and transportation discount remained relatively unchanged; the drop in the Quarter’s royalties to $5.61 per BOE, down from the Prior Quarter’s $8.11 per BOE, partially offset the negative impact of the crash in oil prices
- Operating expenses of $12.17 per BOE were down slightly from $12.44 per BOE in the Prior Quarter due to lower power generation costs, reduction in rental equipment and cost savings attributed to the lower operating activities during the Quarter
- Workover expenses were $4.64 per BOE, up from $3.63 per BOE in the Prior Quarter as a result of fishing and recompletion work at the Chuira field and three workovers at the Costayaco field
- Transportation expenses were $1.52 per BOE, down from $2.35 per BOE in the Prior Quarter, due to higher wellhead sales
- Capital expenditures totaled $44.3 million, a decrease of 36% compared to the Prior Quarter; the remainder of the Company’s 2020 capital program is deferred, with only minimal maintenance expenditures planned for the rest of 2020
Operations Update
Acordionero (100% WI, Operator)
- During the Quarter, five development wells oil (AC-55, AC-56, AC-57, AC-58 and AC-59) were drilled, focusing on an optimized waterflood program to maximize ultimate oil recovery and long-term value
- Drilling efficiencies continue to be achieved, with AC-59 drilled in record low cycle time (drilled, completed and on production) of 15 days and AC-57 drilled and completed for a total capital cost of $1.8 million; wells drilled at Acordionero have been consistently delivered with per well capital costs below $2 million; further price negotiations with vendors are forecast to further lower infill drilling costs by approximately 20% to 30%, with revised contract terms once drilling recommences after future oil price recovery
- At the end of the Quarter, a total of 9 oil wells require workovers to restore production; Gran Tierra has elected to defer the workovers of these wells due to the current low oil price environment; if the Brent oil price were to recover to a level above $30 per bbl, the Company would consider initiating these workovers
- From January 1, 2020 until mid-March 2020, the instantaneous voidage replace ratio in the waterflood at Acordionero was steady at a level of 1.0 for the Lisama A and 1.8 for the Lisama C reservoirs, indicating continued prudent waterflood management
Suroriente (52% WI and Operator)
- The Cohembi oil field in the Suroriente Block was producing at approximately 4,000 bopd (WI) prior to the blockades as the field was continuing to positively respond to increased water injection and pump optimizations
- Since assuming operatorship, Gran Tierra had been able to increase production by over 1,000 bopd without drilling any development wells
- Prior to the blockades in late February 2020, activities were underway to expand the Cohembi water treatment, injection and processing facilities under a two-phased expansion program; the combined phased expansion would be expected to boost gross water injection capacity from 19,000 to 60,000 bbl of water per day
Ayombero-Chuira (100% WI)
- Gran Tierra remains encouraged by early results from the Ayombero-1 well, which continues to show stable production which averaged 177 bopd for the Quarter on natural flow and has total cumulative oil production to date of 108,000 bbl
- Ayombero-2 and -3 remain suspended and ready for the next phase of operations to recover the wellbores; Gran Tierra continues detailed planning for the next phase of operations but plans to await a recovery in oil prices before restarting development activities
Message to Shareholders
Gary Guidry, President and Chief Executive Officer of Gran Tierra, commented: “Gran Tierra has taken decisive action to protect our balance sheet and cash flows by swiftly reducing our 2020 capital program. We believe we have a competitive advantage to withstand the current challenging environment in light of our low base decline, conventional oil asset base, ability to control capital allocation and low cost structure. We forecast that the Company currently has the productive capacity to produce over 30,000 bopd with the future completion of workovers in Acordionero, resumption of production in the Suroriente Block and restart of production from our minor fields, although we have prudently suspended these workovers and restarts at the present time. We continue to prioritize financial strength and liquidity and currently believe we will exit strongly from this period of economic turmoil.”
Financial and Operational Highlights (all amounts in $000s, except per share and BOE amounts)
| Three Months Ended March 31, | Three Months Ended December 31, | |||||||||
| 2020 | 2019 | 2019 | ||||||||
| Net (Loss) Income | $ | (251,626 | ) | $ | 1,979 | $ | 27,004 | |||
| Per Share – Basic and Diluted | $ | (0.69 | ) | $ | 0.01 | $ | 0.07 | |||
| Oil and Gas Sales | $ | 86,079 | $ | 152,565 | $ | 127,934 | ||||
| Operating Expenses | (32,285 | ) | (34,783 | ) | (37,967 | ) | ||||
| Workover Expenses | (12,303 | ) | (6,289 | ) | (11,093 | ) | ||||
| Transportation Expenses | (4,037 | ) | (8,103 | ) | (4,233 | ) | ||||
| Operating Netback(1)(2) | $ | 37,454 | $ | 103,390 | $ | 74,641 | ||||
| G&A Expenses Before Stock-Based Compensation | $ | 7,440 | $ | 7,869 | $ | 8,518 | ||||
| G&A Stock-Based Compensation (Recovery) Expense | (2,055 | ) | 1,727 | 338 | ||||||
| G&A Expenses, Including Stock Based Compensation | $ | 5,385 | $ | 9,596 | $ | 8,856 | ||||
| Adjusted EBITDA(1) | $ | 34,516 | $ | 93,913 | $ | 65,926 | ||||
| Funds Flow from Operations(1) | $ | 22,227 | $ | 75,450 | $ | 49,669 | ||||
| Capital Expenditures | $ | 44,277 | $ | 94,489 | $ | 68,735 | ||||
| Average Daily Volumes (BOEPD) | ||||||||||
| WI Production Before Royalties | 29,527 | 38,163 | 32,924 | |||||||
| Royalties | (4,156 | ) | (6,499 | ) | (5,428 | ) | ||||
| Production NAR | 25,371 | 31,664 | 27,496 | |||||||
| (Increase) Decrease in Inventory | (521 | ) | 169 | 306 | ||||||
| Sales | 24,850 | 31,833 | 27,802 | |||||||
| Royalties, % of WI Production Before Royalties | 14 | % | 17 | % | 16 | % | ||||
| Per BOE | ||||||||||
| Brent | $ | 50.82 | $ | 63.90 | $ | 62.42 | ||||
| Quality and Transportation Discount | (12.75 | ) | (10.65 | ) | (12.40 | ) | ||||
| Royalties | (5.61 | ) | (8.99 | ) | (8.11 | ) | ||||
| Average Realized Price | 32.46 | 44.26 | 41.91 | |||||||
| Transportation Expenses | (1.52 | ) | (2.35 | ) | (1.39 | ) | ||||
| Average Realized Price Net of Transportation Expenses | 30.94 | 41.91 | 40.52 | |||||||
| Operating Expenses | (12.17 | ) | (10.09 | ) | (12.44 | ) | ||||
| Workover Expenses | (4.64 | ) | (1.82 | ) | (3.63 | ) | ||||
| Operating Netback(1)(2) | 14.13 | 30.00 | 24.45 | |||||||
| G&A Expenses Before Stock-Based Compensation | (2.81 | ) | (2.28 | ) | (2.79 | ) | ||||
| Severance Expenses | (0.50 | ) | (0.19 | ) | (0.23 | ) | ||||
| Realized Foreign Exchange Gain (Loss) | 0.75 | (0.25 | ) | 0.48 | ||||||
| Realized Financial Instruments Gain (Loss) | 1.31 | (0.06 | ) | (0.33 | ) | |||||
| Interest Expense, Excluding Amortization of Debt Issuance Costs | (4.51 | ) | (2.06 | ) | (3.87 | ) | ||||
| Interest Income | 0.13 | 0.04 | 0.01 | |||||||
| Other Loss | — | — | (0.45 | ) | ||||||
| Net Lease Payments | (0.01 | ) | — | 0.02 | ||||||
| Current Income Tax Expense | (0.11 | ) | (3.30 | ) | (1.03 | ) | ||||
| Cash Netback(1) | $ | 8.38 | $ | 21.90 | $ | 16.26 | ||||
| Share Information (000s) | ||||||||||
| Common Stock Outstanding, End of Period | 366,982 | 384,493 | 366,982 | |||||||
| Weighted Average Number of Common and Exchangeable Shares Outstanding – Basic | 366,982 | 386,930 | 366,982 | |||||||
| Weighted Average Number of Common and Exchangeable Shares Outstanding – Diluted | 366,982 | 386,946 | 366,982 | |||||||
* Gran Tierra’s 2019 year-end reserves were evaluated, in compliance with Canadian National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities and the Canadian Oil and Gas Evaluation Handbook, by the Company’s independent qualified reserves evaluator McDaniel & Associates Consultants Ltd. in a report with an effective date of December 31, 2019 (the “GTE McDaniel Reserves Report“).
(1) Net debt is defined as face value of debt ($787 million), less cash and cash equivalents ($39 million). Net debt, funds flow from operations, operating netback, return on average capital employed, cash netback, earnings before interest, taxes and depletion, depreciation and accretion (“DD&A”) and adjusted earnings before interest, taxes and depletion, depreciation and accretion (“EBITDA”) and EBITDA adjusted for loss on redemption of Convertible Notes and loss or gain on investment (“Adjusted EBITDA”) are non-GAAP measures and do not have standardized meanings under generally accepted accounting principles in the United States of America (“GAAP”). Refer to “Non-GAAP Measures” in this press release for descriptions of these non-GAAP measures and reconciliations to the most directly comparable measures calculated and presented in accordance with GAAP.
(2) Operating netback is a non-GAAP measure and does not have a standardized meaning under GAAP. Refer to “Non-GAAP Measures” in this press release for a description. The closest related GAAP measure is oil and gas sales price. Operating netback as presented is defined as oil and gas sales less operating, workover and transportation expenses. See the table entitled Financial and Operational Highlights above for the components of consolidated operating netback and corresponding reconciliation.
Gran Tierra’s Corporate Presentation has been updated and is available on the company website at www.grantierra.com.
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