(Gran Tierra Energy Inc., 6.May.2015) – Gran Tierra Energy Inc. announced its financial and operating results for the quarter ended 31.Mar.2015. All dollar amounts are in U.S.A. dollars unless otherwise indicated.
Earlier this year, Gran Tierra announced significant changes to the company’s leadership, strategic direction and cost structure. Gran Tierra’s operations and resources are now focused on Colombia, where, as its first quarter production demonstrates, the company has a record of success and strong performance. Gran Tierra continues to maintain a solid financial position with cash balances reflecting expenditures that were pre-committed prior to this strategic shift. With these legacy commitments largely behind Gran Tierra and the cost reductions announced earlier this year, the company has significantly improved its capital efficiency and continues to review opportunities for additional cost savings. Gran Tierra is confident that the actions it has taken better position the company for growth and value creation despite what continues to be a challenging lower oil price environment.
Financial and Operating Highlights:
— Due to strong Colombian performance, oil and natural gas production for the quarter was above company projections. Production averaged 24,015 boe/d gross working interest (WI), or 20,140 boe/d net after royalties (“NAR”) before adjustment for inventory changes and losses, or 19,399 boe/d NAR adjusted for inventory changes and losses, compared with 25,245 boe/d gross WI and 19,029 boe/d NAR before adjustment for inventory changes and losses and 18,753 boe/d NAR adjusted for inventory changes and losses in the corresponding period in 2014. Approximately 99% of this production was oil with the balance consisting of natural gas.
— The company is making progress on the Chaza Block in Colombia. The Moqueta-17 development well was successfully completed, stimulated and tiedin as an oil producer. The Moqueta-18i injection well was drilled and encountered mechanical difficulties. This well was being drilled to provide pressure support to the Moqueta field south block. It is currently suspended pending the results of injectivity testing at Zapotero-1, which is located in the same fault compartment as Moqueta 18i. Initial injectivity is proving to be successful with 2,500 b/d of water being injected, and the company expects to increase this to 5,000 b/d of water.
— Gran Tierra expects to achieve reductions of approximately 30% in general and administrative (“G&A”) expenses in 2015 compared with 2014. These expected savings are due to the previously announced 20% reduction in headcount, other cost cutting initiatives in all locations, and strengthening of the U.S. dollar against local currencies in South America, and exclude one-time severance expenses of $4.4 million. On a barrel of oil equivalent (BOE) basis, G&A expenses decreased by 41%, or $2.85/BOE in the 1Q:15 from the 4Q:14. Further optimization of G&A expenses is expected.
— Cost optimization initiatives resulted in $1.1 million of operating expense reductions in Colombia during the quarter and an 11% negotiated reduction in Colombian trucking tariffs. Operating expenses decreased by 13% to $18/boe in the 1Q:15 from $20.75/boe in the 4Q:14. The company expects to achieve up to $5 million of additional operating cost savings in Colombia in 2015, primarily as a result of its use of produced gas for power generation and renegotiated supply and service contracts.
— Due to lower oil prices, revenue and other income for the quarter was $76.7 million in the 1Q:15, a 23% decrease from $99.6 million in the 4Q:14, and a 50% decrease from $151.9 million in the comparable period in 2014.
— Net loss for the 1Q:15 was $44.9 million, or $0.16 per share basic and diluted, compared with a net loss of $269.8 million, or $0.94/share basic and diluted, in the 4Q:14, and net income of $45.1 million, or $0.16/share basic and diluted, in the 4Q:14.
Results in both this quarter and the 4Q:14 were significantly impacted by the company’s decision to cease development of the Bretaña field on Block 95 in Peru other than making those expenditures necessary to maintain tangible asset integrity and security, which resulted in impairment losses of $32.7 million and $265.1 million, respectively, in Gran Tierra’s Peru cost center. Included in the Peru cost center impairment loss of $32.7 million, was $14.0 million of drilling costs for the Bretaña Sur 953-4-1X appraisal well, $6.2 million for the construction of the long-term test facilities, $5.0 million relating to contract termination fees associated with the decision not to proceed with the long-term test, and $7.5 million of other costs including restocking fees and the front end engineering design (“FEED”) study. Total contract termination and restocking fees were $8.7 million.
— Funds flow from continuing operations for the 1Q:15 were consistent with company projections at $25.6 million, a decrease of 49% from $50.3 million in the 4Q:14, and a decrease of 71% from $86.7 million in the 1Q:14.
— The company maintains strong balance sheet with cash and cash equivalents of $203.5 million at March 31, 2015.The company’s cash balance reflects $74 million of capital expenditures in the first quarter of 2015 that were incurred largely as a result of precommitted costs associated with legacy projects and decisions made before the senior management and strategy changes. Reflecting Gran Tierra’s new strategic direction and focus on Colombia, in February 2015, Gran Tierra announced a $170 million reduction to its capital budget, and continues to expect 2015 capital expenditures of $140 million.
— In Brazil, Tiê field operations were suspended on March 11, 2015, following a regional facilities audit by the Agência Nacional de Petróleo Gás Natural e Biocombustíveis (ANP). Gran Tierra expects resumption of operations by May 20, 2015.
First Quarter 2015 Financial Highlights
For the three months ended 31.Mar.2015, revenue and other income decreased by 50% to $76.7 million compared with $151.9 million in the corresponding period in 2014 primarily due to decreased realized prices. Average realized oil prices decreased by 51% to $43.79/bbl for the 1Q:15, from $89.89/bbl in the 1Q:14 primarily as a result of lower benchmark prices. In the 1Q:15, an oil inventory and losses increase primarily in Colombia accounted for reduced production of 0.1 MMbbl or 741 bo/d.
Additionally, beginning July 1, 2014, the port operations fee component of the Ecopetrol S.A. operated Trans-Andean oil pipeline (the “OTA pipeline”) structure increased by $2.94/bbl, resulting in a reduction of realized oil prices by this amount on sales delivered through the OTA pipeline.
Revenue and other income for the 1Q:15, decreased by 23% to $76.7 million from $99.6 million compared with the 4Q:14 primarily due to decreased realized prices. Average realized oil prices decreased by 30% to $43.79/bbl for the 1Q:15, compared with $62.91/bbl in the 4Q:14, due to lower benchmark prices.
The average Brent oil price for the 1Q:15, was $53.91/bbl compared with $108.17/bbl in the 1Q:14, and $76.40/bbl for the 4Q:14. The average West Texas Intermediate oil price for the 1Q:15, was $48.63/bbl compared with $98.68/bbl in the 1Q:14, and $73.15/bbl for the 4Q:14.
During periods of OTA pipeline disruptions Gran Tierra uses transportation alternatives. These sales have varying effects on realized prices and transportation costs. During the three months ended March 31, 2015, 80% of Gran Tierra’s oil volumes sold in Colombia were through the OTA pipeline and only 20% were through these transportation alternatives. During the corresponding period in 2014, sales through the OTA pipeline were 41% of Gran Tierra’s oil volumes sold in Colombia and 59% were through transportation alternatives. The effect on the Colombian realized price for the 1Q:15, was an increase of approximately $0.01/boe, as compared with delivering all of Gran Tierra’s Colombian oil through the OTA pipeline, compared with a reduction of approximately $8.63/boe in the 1Q:14. Production during the 1Q:15, reflected approximately 10 days of oil delivery restrictions in Colombia compared with 51 days of oil delivery restrictions in the 1Q:14.
Operating expenses increased by 44% to $31.4 million for the 1Q:15, compared with $21.9 million in the 1Q:14. For the 1Q:15, the increase in operating expenses was primarily due to an increase in the operating cost per BOE. Operating expenses increased by 39% to $18/boe in the 1Q:15, from $12.96/boe in the 1Q:14, primarily as a result of higher transportation costs associated with higher sales using the OTA pipeline, which carried higher transportation costs instead of the realized price reductions that are incurred with some alternative customers, and increased workover expenses.
Operating expenses decreased by 4%, or $1.4 million, in the 1Q:15, from $32.8 million in the 4Q:14 primarily due to reduced operating costs per BOE. On a per BOE basis, operating expenses decreased by 13% to $18/boe for the 1Q:15, from $20.75/boe in the 4Q:14 as a result of cost reduction initiatives, deferral of road and equipment maintenance and higher production adjusted for inventory changes and losses.
DD&A expenses for the 1Q:15, increased to $86.2 million from $44.3 million in the 1Q:14. DD&A expenses in the 1Q:15, included $32.7 million of impairment charges in Gran Tierra’s Peru cost center relating to costs incurred in the 1Q:15 on Block 95 and a $4.3 million ceiling test impairment loss in Gran Tierra’s Brazil cost center relating to lower oil prices. Included in the Peru cost center impairment loss of $32.7 million, was $14.0 million of drilling costs for the Bretaña Sur 95-3-4-1X appraisal well, $6.2 million for the construction of the long-term test facilities, $5.0 million relating to contract termination fees associated with the decision not to proceed with the long-term test, and $7.5 million of other costs including restocking fees and the FEED study. Total contract termination and restocking fees were $8.7 million. The depletion rate increased by 88% to $49.35/boe from $26.23/boe primarily due to the 2015 impairment charges. If Brent oil prices continue at current levels, Gran Tierra believes it is reasonably likely that it would record further ceiling test impairment losses in its Brazil cost center in 2015 and, possibly, in its Colombia cost center. Additionally, Gran Tierra expects to record further impairment losses in its Peru cost center for costs incurred on Block 95 in 2015.
G&A expenses for the 1Q:15, decreased by 43% to $7.3 million ($4.18/boe) from $12.9 million ($7.62/boe) in the 1Q:14. The decrease was mainly due to the effect of the strengthening of the U.S. dollar against the Colombian peso which resulted in significant savings for costs denominated in local currency and a 20% reduction in the number of Gran Tierra’s full-time employees in March 2015 as part of the company’s cost saving measures and focus on reductions to other G&A expenses. Further optimization of G&A expenses is expected. G&A expenses in the three months ended 31.Mar.2015, are also net of a credit of $1.7 million ($0.97/boe) relating to the reversal of stock-based compensation expense for unvested options and restricted stock units on employee terminations.
Severance expenses for the 1Q:15, were $4.4 million compared with $nil in the 1Q:14. In March 2015, Gran Tierra reduced the number of its full-time employees by 20%.
Equity tax expense for the 1Q:15, of $3.8 million, represented a Colombian tax which was calculated based on Gran Tierra’s Colombian legal entities’ balance sheet equity for tax purposes at 1.Jan.2015. The legal obligation for each year’s equity tax liability arises on 1.Jan. of each year, therefore, Gran Tierra recognized the 2015 annual amount of the equity tax payable on its consolidated balance sheet at 31.Mar.2015, and a corresponding expense in its consolidated statement of operations during the 1Q:15.
Foreign exchange gain for the 1Q:15, was $11.5 million comprising an unrealized non-cash foreign exchange gain of $9.0 million and realized foreign exchange gains of $2.5 million. For the 1Q:14, there was a foreign exchange gain of $4.2 million, which was primarily a $4.2 million unrealized non-cash foreign exchange gain. Unrealized foreign exchange gains were primarily the result of the impact of the weakening of the Colombian peso versus the U.S. dollar on a net monetary liability position in Colombia.
For the 1Q:15, financial instruments gains included $2.4 million of unrealized financial instruments gains which were offset by $2.4 million of realized financial instrument losses. Financial instrument gains and losses related to unrealized gains on the Madalena Energy Inc. shares Gran Tierra received in connection with the sale of its Argentina business unit and gains and losses on Gran Tierra’s Colombia peso nondeliverable forward contracts.
Income tax expense related to continuing operations was $0.1 million for the 1Q:15, compared with $29.7 million in the 1Q:14. The decrease was primarily due to lower taxable income.
Loss from continuing operations was $44.9 million, or $0.16/share basic and diluted, for the 1Q:15, compared with income from continuing operations of $49.8 million, or $0.18/share basic and diluted, in the 1Q:14. As noted above, in the 1Q:15, Gran Tierra recorded impairment losses of $32.7 million in its Peru cost center relating to costs incurred on Block 95 and $4.3 million in its Brazil cost center due to lower oil prices.
Additionally, loss from continuing operations was impacted by decreased oil and natural gas sales as a result of lower realized oil prices, higher operating, DD&A, severance and equity tax expenses and lower financial instrument gains which were partially offset by lower G&A expenses, increased foreign exchange gains and lower income tax expenses.
Loss from discontinued operations, net of income taxes, was $nil for the 1Q:15, compared with $4.6 million, or $0.02/share basic and diluted, in the 1Q:14. Gran Tierra sold its Argentina business unit on 25.Jun.2014.
Net loss for the 1Q:15, was $44.9 million, or $0.16/share basic and diluted, compared with net income of $45.1 million, or $0.16/share basic and diluted, in the 1Q:14 and net loss of $269.8 million, or $0.94/share basic and diluted, in the 4Q:14.
Balance Sheet Highlights
The company’s repositioning strategy will help ensure that Gran Tierra maintains a strong balance sheet. Cash and cash equivalents were $203.5 million at 31.Mar.2015, compared with $331.8 million at 31.Dec.2014. The decrease was primarily due to capital expenditures incurred during the quarter of $74.0 million ($21.4 million in Colombia, $38.0 million in Peru, $13.9 million in Brazil and $0.7 million in Corporate) associated with the decisions by the prior management team and the costs associated with those legacy projects, $53.8 million of net cash outflows related to property, plant and equipment ($45.1 million outflow in Colombia, $9.4 million outflow in Peru, and a $0.7 million inflow in Brazil and Corporate), $26.1 million of net cash outflows related to assets and liabilities from operating activities and a $0.5 million increase in restricted cash, partially offset by funds flow from continuing operations of $25.6 million and proceeds from the issuance of shares of common stock of $0.5 million. Changes in assets and liabilities associated with operating and investing activities from 31.Dec.2014 to 31.Mar.2015, resulted in cash outflows of $83.1 million due to the payment of accounts payable and accrued liabilities partially offset by cash inflows of $3.2 million related to other assets and liabilities in the quarter.
Working capital (including cash and cash equivalents) was $181.3 million at 31.Mar.2015, a $58.6 million decrease from 31.Dec.2014. Gran Tierra remains debt free.
Production for the 1Q:15 averaged 24,015 boe/d WI, or 20,140 boe/d NAR before adjustment for inventory changes and losses, or 19,399 boe/d NAR adjusted for inventory changes and losses, compared with 25,245 boe/d gross WI and 19,029 boe/d NAR before adjustment for inventory changes and losses and 18,753 boe/d NAR adjusted for inventory changes and losses in the corresponding period in 2014. Production for the 1Q:15 consisted of 18,748 boe/d NAR in Colombia and 651 bo/d NAR in Brazil, all adjusted for inventory changes and losses. Production in April 2015 averaged approximately 18,700 boe/d NAR before adjustment for inventory changes and losses, due to temporary operational shut-ins and approximately one day of oil delivery restrictions in Colombia. Gran Tierra expects production to be back to normal daily production levels after resumption of operations on the Tiê field in Brazil. Approximately 99% of this production is expected to be oil, with the balance consisting of natural gas.
During the 1Q:15, an oil inventory and losses increase accounted for 0.1 MMbbls, or 741 bo/d, of reduced production, compared with an oil inventory and losses increase which accounted for 24,784 barrels, or 276 bo/d, of reduced production in the 1Q:14.
Gran Tierra anticipates 2015 production to average between 21,800 boe/d and 22,300 boe/d gross WI, or 18,200 boe/d and 18,700 boe/d both NAR before adjustments for inventory changes and losses. This includes between 17,300 boe/d and 17,800 boe/d both NAR from Colombia and 900 bo/d NAR from Brazil. Approximately 99% of this production is oil, with the balance consisting of natural gas.
2015 Capital Program
In concert with Gran Tierra’s repositioning strategy, the planned 2015 capital program was reduced to $140 million from $310 million in early February 2015. This includes $60 million for Colombia, as well as funds that were pre-committed for non-core legacy projects, including $55 million for Peru, $24 million for Brazil and $1 million associated with corporate activities. The capital spending program allocates: $45 million for drilling; $49 million for facilities, pipelines and other; and $46 million for G&G expenditures. Approximately $35 million of the capital program is dedicated to the maintenance of existing production while $21 million is dedicated to drilling in Colombia.
During the 1Q:15, the company incurred $74.0 million of capital expenditures, which included $21.4 million in Colombia, $38.0 million in Peru, $13.9 million in Brazil and $0.7 million at Corporate. Capital expenditures in Peru included $32.7 million on Block 95 and $5.3 million on Gran Tierra’s other blocks.
On Block 95, all capital expenditures recorded had been completed or committed to prior to the advent of the repositioning strategy in Feb.2015 and included: $14 million of drilling costs for the Bretaña Sur 95-3-4-1X appraisal well; $6.2 million for the construction of the long-term test facilities; $8.7 million recorded unavoidable costs for contract termination fees associated with the decision not to proceed with the long-term test, and other contract termination and restocking fees; and $3.8 million related to the FEED study and other.
Gran Tierra is evaluating all contractual commitments on the company’s blocks with the objective of rationalizing this portfolio through farm outs, transfers and relinquishment. Gran Tierra expects the 2015 capital program to be funded through cash flows from operations and cash on hand at current production and oil price levels.
First Quarter 2015 Operational Highlights
Chaza Block, Putumayo Basin (Gran Tierra 100% WI and Operator)
In the 1Q:15, Gran Tierra successfully completed, stimulated and tied-in the Moqueta-17 development well in the Moqueta field as an oil producer. Moqueta-17 is now producing approximately 400 bo/d gross from the Villeta T and Caballos reservoirs. The Moqueta-18i injection well was drilled and encountered mechanical difficulties. It is currently suspended pending the results of injectivity testing at Zapotero-1, which is interpreted to be in the same fault compartment as Moqueta 18i (the Moqueta South Block). Initial injectivity tests on Zapotero-1 have been very positive and Gran Tierra is currently injecting approximately 2,500 b/d of water into the target Moqueta reservoir compartments, and expects to increase this to 5,000 b/d of water. The company expects that the water injection will create a positive pressure response in the Moqueta South Block updip oil bearing reservoirs and support oil production.
Gran Tierra continued facilities work at the Costayaco and Moqueta fields. In the first week of Mar.2015, the Company implemented a cogeneration project which utilizes produced gas and converts it to electricity to power the facilities at the Moqueta field.
Two 500 kilowatt power generators are generating 1 megawatt (MW) of power with the gas produced from the Moqueta field. This nearly meets the 1.2MW electrical needs of Moqueta. As a third party owns the generators and sells the electricity back to Gran Tierra at a lower rate than the national electrical utility, the project required no capital investment. This project is expected to provide both environmental and cost benefits by reducing the flaring of gas and cutting the cost of electricity to the field. Additionally, when excess electricity is generated, there is an opportunity to sell that excess to the national grid. This project is estimated to generate operating cost savings of approximately $350,000 in 2015. A similar co-generation project is currently being planned for the Costayaco field before year-end.
Gran Tierra has renegotiated contracts with its suppliers and service providers during the quarter and expects to achieve savings of up to $5 million from this initiative in 2015. Also during the quarter, Colombian trucking tariffs were renegotiated from a 5% reduction in early February to an 11% reduction by quarter-end. Gran Tierra also achieved $1.1 million of savings in the quarter mainly through staff and salary reductions, lower road maintenance due to decreased trucking transportation, and operational efficiencies related to reduced energy consumption.
Gran Tierra experienced higher than expected pipeline transportation during the quarter with approximately 85% of the Company’s Colombian crude being shipped through the OTA pipeline to the Port of Tumaco or through the Oleoducto de Crudos Pesado (“OCP”) pipeline to the Port of Esmeraldas, with the remainder transported by truck or other pipelines. Gran Tierra’s crude sold at the Ports of Tumaco and Esmeraldas received higher prices due to lower oil quality discounts than volumes trucked or shipped north to Barranquilla. Trucked volumes also have higher transportation costs which either decrease realized oil prices or increase operating costs.
Cauca-7 Block, Cauca Basin (Gran Tierra 100% WI and Operator)
The acquisition of 97km of 2-D seismic on the Cauca-7 Block, which commenced in the 4Q:14, was completed in the 1Q:15. Processing and interpretation is underway.
Sinu-3 Block, Sinu San Jacinto Basin (Gran Tierra 51% WI and Operator) The acquisition of 487km of 2-D seismic on Sinu-3, which commenced in the 4Q:14, was completed in the 1Q:15. Processing and interpretation is ongoing. The company also commenced environmental impact assessments (“EIA”s) for future drilling on this block. Putumayo-10 Block, Putumayo Basin (Gran Tierra 100% WI and Operator)
To fulfill the work commitment for the first exploration phase of this contract, Gran Tierra plans to acquire 73km of 2-D seismic on this block this year. During the 1Q:15, the company continued preparations for the seismic acquisition.
Block 95, Bretaña field, Marañon Basin (Gran Tierra 100% WI and Operator)
As announced in Feb.2015, the company ceased all further development expenditures on the Bretaña field on Block 95 other than what is necessary to maintain tangible asset integrity and security. Gran Tierra has since commenced dismantling, removal and abandonment of the Bretaña long-term test facilities.
As announced in Feb.2015, the Company has refocused its strategy and resources on its core operations in Colombia. As a result of this change in strategy, in Brazil, the company will focus capital spending to facilities at the Tiê field. These facilities are expected to allow the company to maintain existing production levels.
Blocks 129, 142, 155, Recôncavo Basin (Gran Tierra 100% WI and Operator)
The First Appraisal Plan (“PAD”) phase will end 24.May.2015, before which Gran Tierra must decide whether to move to the next exploration phase. Gran Tierra has requested a suspension of the PAD phase and is awaiting a response from the ANP.
On 11.Mar.2015, the ANP suspended Tiê field operations due to region-wide facilities audits. Pursuant to this audit, Gran Tierra completed a risk analysis, prepared additional documentation and presented this to the ANP on 17.Mar.2015, and 10.Apr.2015. Gran Tierra expects operations will resume by 20.May.2015.
Gran Tierra initiated construction of an infield gas line connecting the 3-GTE-03-BA well to the Tiê Facilities. This tie-in is expected to be completed in the second quarter.
Importantly, the ANP has authorized the extension of Tiê field gas flaring through Jul.2015. The original gas flaring authorization was to expire Mar.2015. Block 224, Recôncavo Basin (Gran Tierra 100% WI and Operator) Gran Tierra received an extension to drill the Block 224 commitment well. The company now has one year following the approval of the pending EIA to drill the commitment well. Blocks 86, 117, 118, Recôncavo Basin (Gran Tierra 100% WI and Operator)
Gran Tierra completed the acquisition of the 3-D seismic program that had been initiated in the 4Q:14. Processing of the 3-D seismic is ongoing.