GRAN TIERRA ENERGY INC. 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 7 and 8, respectively, of our 2021 Annual Report on Form 10-K. Please see the cautionary language at the beginning of this Quarterly Report on Form 10-Q regarding the identification of and risks relating to forward-looking statements and the risk factors described in Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q, as well as Part I, Item 1A "Risk Factors" in our 2021 Annual Report on Form 10-K.
Financial and Operational Highlights
Key Highlights for the first quarter of 2022
•Net income in the first quarter of 2022 was$14.1 million or$0.04 per share basic and diluted, compared to a net loss of$37.4 million or$(0.10) per share basic and diluted in the first quarter of 2021 •Income before income taxes in the first quarter of 2022 was$53.7 million compared to loss before income taxes of$28.8 million in the first quarter of 2021
•During the first quarter of 2022, we repaid
•Funds flow from operations(2) increased by 201% to
•During the first quarter, the Company generated
•NAR production for the first quarter of 2022 was 22,833 BOPD representing an 11% increase compared to the first quarter of 2021, due to a successful drilling and workover campaign in all major fields. Compared to the fourth quarter of 2021, NAR production decreased by a 3% due to higher royalties •Sales volumes for the first quarter of 2022 were 22,730 BOPD representing a 12% increase from 20,271 BOPD in the first quarter of 2021, and a 4% decrease from the fourth quarter of 2021 •Oil sales were$174.6 million , 83% higher compared to$95.5 million in the first quarter of 2021, as a result of an increase in Brent price, offset by higher quality and transportation discounts. Oil sales increased by 19% compared to$146.3 million in the fourth quarter of 2021 as a result of a 23% increase in Brent price, slightly offset by a decrease in sales volumes •Operating expenses increased by$0.58 per bbl compared to the first quarter of 2021 due to an increase in operating activities and higher expenses for chemicals used in our waterflood projects and decreased by$1.33 per bbl when compared to the fourth quarter of 2021 due to lower workovers •Transportation expenses increased by 13% compared to the first quarter of 2021 due to higher truck tariffs. Compared to the fourth quarter of 2021, transportation expenses decreased by 1% as a result of higher volumes sold at wellhead during the current quarter
•Operating netback(2) increased by 117% to
•Adjusted EBITDA(2) increased by 185% to
•Quality and transportation discounts for the first quarter of 2022 increased to
•General and administrative expenses ("G&A") before stock-based compensation
increased by 14% compared to the first quarter of 2021 due to higher costs for
special projects and an increase in travel costs in the current quarter. When
compared to the fourth quarter of 2021, G&A before stock-based compensation
decreased by 8% due to the lower accrued performance bonus for the current
quarter
•Capital additions for the first quarter of 2022 were $41.5 million , an increase
of 11% compared to the first quarter of 2021 and increased 3% from the $40.2
million incurred in the fourth quarter of 2021
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(Thousands of U.S. Dollars, Three Months Ended Three Months Ended
unless otherwise indicated) March 31, December 31,
2022 2021 % Change 2021
Average Daily Volumes (BOPD)
Consolidated
Working Interest ("WI")
Production Before Royalties 29,362 24,463 20 29,493
Royalties (6,529) (3,930) 66 (6,070)
Production NAR 22,833 20,533 11 23,423
(Increase) Decrease in
Inventory (103) (262) (61) 354
Sales(1) 22,730 20,271 12 23,777
Net Income (Loss) $ 14,119 $ (37,422) 138 $ 62,524
Operating Netback
Oil Sales $ 174,569 $ 95,493 83 $ 146,287
Operating Expenses (34,400) (29,625) 16 (39,708)
Transportation Expenses (2,834) (2,506) 13 (2,867)
Operating Netback(2) $ 137,335 $ 63,362 117 $ 103,712
G&A Expenses Before Stock-Based
Compensation $ 7,779 $ 6,817 14 $ 8,473
G&A Stock-Based Compensation
Expense 4,557 3,671 24 1,799
G&A Expenses, Including
Stock-Based Compensation $ 12,336 $ 10,488 18 $ 10,272
Adjusted EBITDA(2) $ 119,378 $ 41,904 185 $ 81,529
Funds Flow From Operations(2) $ 87,310 $ 28,973 201 $ 65,137
Capital Expenditures $ 41,483 $ 37,427 11 $ 40,229 (1) Sales volumes represent production NAR adjusted for inventory changes.
(2) Non-GAAP measures
Operating netback, EBITDA, adjusted EBITDA, funds flow from operations, and free
cash flow are non-GAAP measures that do not have any standardized meaning
prescribed under GAAP. Management views these measures as financial performance
measures. Investors are cautioned that these measures should not be construed as
alternatives to oil sales, net income (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. Disclosure of each
non-GAAP financial measure is preceded by the corresponding GAAP measure so as
not to imply that more emphasis should be placed on the non-GAAP measure.
Operating netback, as presented, is defined as oil sales less operating and
transportation expenses. Management believes that operating 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. A
reconciliation from oil sales to operating netback is provided in the table
above.
EBITDA, as presented, is defined as net income or loss adjusted for depletion,
depreciation and accretion ("DD&A") expenses, interest expense and income tax
expense or recovery. Adjusted EBITDA, as presented, is defined as EBITDA
adjusted for non-cash lease expense, lease payments, unrealized foreign exchange
gain or loss, stock-based compensation expense or recovery, other-non cash gain
or loss, unrealized derivative instruments gain or loss, and other financial
instruments gain or loss. Management uses this supplemental measure to analyze
performance and income generated by our principal business activities prior to
the consideration of how non-cash items affect that income and believes that
this financial measure is useful supplemental information for investors to
analyze our performance and our financial results. A reconciliation from net
income (loss) to EBITDA and adjusted EBITDA is as follows:
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Three
Months
Ended
Three Months Ended December
March 31, 31,
(Thousands of U.S. Dollars) 2022 2021 2021
Net income (loss) $ 14,119 $ (37,422) $ 62,524
Adjustments to reconcile net income (loss) to
EBITDA and Adjusted EBITDA
DD&A expenses 40,963 31,318 41,574
Interest expense 12,128 13,812 13,026
Income tax expense (recovery) 39,540 8,651 (46,141)
EBITDA (non-GAAP) $ 106,750 $ 16,359 $ 70,983
Non-cash lease expense 411 444 445
Lease payments (344) (462) (382)
Unrealized foreign exchange (gain) loss (4,839) 13,003 4,934
Stock-based compensation expense 4,557 3,671 1,799
Other non-cash loss - - 44
Unrealized derivative instruments loss (gain) 12,843 10,294 (12,088)
Other financial instruments (gain) loss - (1,405) 15,794
Adjusted EBITDA (non-GAAP) $ 119,378 $ 41,904 $ 81,529
Funds flow from operations, as presented, is defined as net income or loss
adjusted for DD&A expenses, deferred tax expense or recovery, stock-based
compensation expense or recovery, amortization of debt issuance costs, non-cash
lease expense, lease payments, unrealized foreign exchange gain or loss,
derivative instruments gain or loss, cash settlement on derivative instruments,
other non-cash gain or loss and other financial instruments gain or loss.
Management uses this financial measure to analyze performance and income
generated by our principal business activities prior to the consideration of how
non-cash items affect that income and believes that this financial measure is
also useful supplemental information for investors to analyze performance and
our financial results. Free cash flow, as presented, is defined as funds flow
less capital expenditures. Management uses this financial measure to analyze
cash flow generated by our principal business activities after capital
requirements and believes that this financial measure is also useful
supplemental information for investors to analyze performance and our financial
results. A reconciliation from net income (loss) to funds flow from operations,
and free cash flow is as follows:
Three
Months
Ended
Three Months Ended December
March 31, 31,
(Thousands of U.S. Dollars) 2022 2021 2021
Net income (loss) $ 14,119 $ (37,422) $ 62,524
Adjustments to reconcile net income (loss) to
funds flow from operations
DD&A expenses 40,963 31,318 41,574
Deferred tax expense (recovery) 18,713 8,651 (50,634)
Stock-based compensation expense 4,557 3,671 1,799
Amortization of debt issuance costs 887 881 1,127
Non-cash lease expense 411 444 445
Lease payments (344) (462) (382)
Unrealized foreign exchange (gain) loss (4,839) 13,003 4,934
Derivative instruments loss 21,439 23,698 1,298
Cash settlements on derivative instruments (8,596) (13,404) (13,386)
Other non-cash loss - - 44
Other financial instruments (gain) loss - (1,405) 15,794
Funds flow from operations (non-GAAP) $ 87,310 $ 28,973 $ 65,137
Capital expenditures $ 41,483 $ 37,427 $ 40,229
Free cash flow (non-GAAP) $ 45,827 $ (8,454) $ 24,908
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Additional Operational Results
Three Months Ended Three Months Ended
March 31, December 31,
(Thousands of U.S. Dollars) 2022 2021 % Change 2021
Oil sales $ 174,569 $ 95,493 83 $ 146,287
Operating expenses 34,400 29,625 16 39,708
Transportation expenses 2,834 2,506 13 2,867
Operating netback(1) 137,335 63,362 117 103,712
COVID-19 related costs 535 1,139 (53) 668
DD&A expenses 40,963 31,318 31 41,574
G&A expenses before stock-based
compensation 7,779 6,817 14 8,473
G&A stock-based compensation expense 4,557 3,671 24 1,799
Foreign exchange (gain) loss (3,725) 13,083 (128) 4,653
Derivative instruments loss 21,439 23,698 (10) 1,298
Other financial instruments (gain) loss - (1,405) (100) 15,794
Other loss - - - 44
Interest expense 12,128 13,812 (12) 13,026
83,676 92,133 (9) 87,329
Income (loss) before income taxes 53,659 (28,771) 287 16,383
Current income tax expense 20,827 - 100 4,493
Deferred income tax expense (recovery) 18,713 8,651 116 (50,634)
39,540 8,651 357 (46,141)
Net income (loss) $ 14,119 $ (37,422) 138 $ 62,524
Sales Volumes (NAR)
Total sales volumes, BOPD 22,730 20,271 12 23,777
Brent Price per bbl $ 97.90 $ 61.32 60 $ 79.66
Consolidated Results of Operations per bbl
Sales Volumes NAR
Oil sales $ 85.33 $ 52.34 63 $ 66.88
Operating expenses 16.82 16.24 4 18.15
Transportation expenses 1.39 1.37 1 1.31
Operating netback(1) 67.12 34.73 93 47.42
COVID-19 related costs 0.26 0.62 (58) 0.31
DD&A expenses 20.02 17.17 17 19.01
G&A expenses before stock-based
compensation 3.80 3.73 2 3.87
G&A stock-based compensation expense 2.23 2.01 11 0.82
Foreign exchange (gain) loss (1.82) 7.17 (125) 2.13
Derivative instruments loss 10.48 12.99 (19) 0.59
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Other financial instruments (gain) loss -
(0.77) (100) 7.22
Other loss - - - 0.02
Interest expense 5.93 7.57 (22) 5.95
40.90 50.49 (19) 39.92
Income (loss) before income taxes 26.22 (15.76) 266 7.50
Current income tax expense 10.18 - 100 2.05
Deferred income tax expense (recovery) 9.15 4.74 93 (23.15)
19.33 4.74 308 (21.10)
Net income (loss) $ 6.89 $ (20.50) 134 $ 28.60 (1) Operating netback is a non-GAAP measure that does not have any standardized meaning prescribed under GAAP. Refer to "Financial and Operational Highlights-non-GAAP measures" for a definition of this measure.
Oil Production and Sales Volumes, BOPD
Three
Months
Ended
December
Three Months Ended March 31, 31,
2022 2021 2021
Average Daily Volumes (BOPD)
WI Production Before Royalties 29,362 24,463 29,493
Royalties (6,529) (3,930) (6,070)
Production NAR 22,833 20,533 23,423
Increase in Inventory (103) (262) 354
Sales 22,730 20,271 23,777
Royalties, % of WI Production Before
Royalties 22 % 16 % 21 %
Oil production NAR for the three months ended March 31, 2022 , increased by 11%
compared to the corresponding period of 2021 due to the successful drilling and
workover campaign in all major fields. Compared to the prior quarter, oil
production NAR decreased 3% due to higher royalties.
Royalties as a percentage of production for the three months ended March 31,
2022 , increased compared with the corresponding period of 2021 and the prior
quarter commensurate with the increase in benchmark oil prices and the price
sensitive royalty regime in Colombia .
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The Midas block includes the Acordionero, Chuira, and Ayombero oil fields, and
the Chaza block includes the Costayaco and Moqueta oil fields.
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Operating Netback
Three
Months
Ended
Three Months Ended December
March 31, 31,
(Thousands of U.S. Dollars) 2022 2021 2021
Oil Sales $ 174,569 $ 95,493 $ 146,287
Transportation Expenses (2,834) (2,506) (2,867)
171,735 92,987 143,420
Operating Expenses (34,400) (29,625) (39,708)
Operating Netback(1) $ 137,335 $ 63,362 $ 103,712
(U.S. Dollars Per bbl Sales Volumes NAR)
Brent $ 97.90 $ 61.32 $ 79.66
Quality and Transportation Discounts (12.57) (8.98) (12.78)
Average Realized Price 85.33 52.34 66.88
Transportation Expenses (1.39) (1.37) (1.31)
Average Realized Price Net of Transportation
Expenses 83.94 50.97 65.57
Operating Expenses (16.82) (16.24) (18.15)
Operating Netback(1) $ 67.12 $ 34.73 $ 47.42 (1) Operating netback is a non-GAAP measure that does not have any standardized meaning prescribed under GAAP. Refer to "Financial and Operational Highlights-non-GAAP measures" for a definition of this measure.
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[[Image Removed: gte-20220331_g4.jpg]] [[Image Removed: gte-20220331_g5.jpg]] Oil sales for the three months endedMarch 31, 2022 , increased by 83% to$174.6 million due to a 60% increase in Brent price and 12% higher sales volumes, partially offset by a 40% increase in the quality and transportation discounts as a result of the widening of the Castilla and Vasconia differentials compared to the corresponding period of 2021. Castilla and Vasconia differentials have widened from$3.99 and$2.40 in the first quarter of 2021 to$6.38 and$3.60 in the first quarter of 2022, respectively. Compared with the prior quarter, oil sales increased 19%, primarily as a result of a 23% increase in Brent price and lower quality and transportation discounts, partially offset by a 4% decrease in sales volumes.
The following table shows the effect of changes in realized price and sales
volumes on our oil sales for the three months ended
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First Quarter 2022 First Quarter 2022
Compared with Fourth Compared with First
(Thousands of U.S. Dollars) Quarter 2021 Quarter 2021
Oil sales for the comparative period $ 146,287 $ 95,493
Realized sales price increase effect 37,757 67,487
Sales volumes (decrease) increase effect (9,475) 11,589
Oil sales for the three month ended
The average realized price for the three months endedMarch 31, 2022 , increased 63%, compared to the corresponding period of 2021. The increase was commensurate with the rise in benchmark oil prices, offset by higher Castilla and Vasconia differentials. Compared to the prior quarter, the average realized price increased 28% due to higher benchmark oil prices and lower Castilla and Vasconia differentials. Operating expenses for the three months endedMarch 31, 2022 , increased by$0.58 per bbl to$34.4 million or$16.82 per bbl, primarily due to increased operating activities and$0.44 per bbl higher expenses for chemicals used in our waterflood projects when compared to the corresponding period of 2021. Compared to the prior quarter, operating expenses decreased by$1.33 per bbl from$39.7 million or$18.15 per bbl primarily due to lower workover activity. We have options to sell our oil through multiple pipelines and trucking routes. Each option has varying effects on realized sales price and transportation expenses. The following table shows the percentage of oil volumes we sold inColombia using each option for the three months endedMarch 31, 2022 , 2021, and the prior quarter: Three Months Ended Three Months Ended March December 31, 31, 2022 2021 2021 Volume transported through pipeline - % - % 26 % Volume sold at wellhead 47 % 48 % 24 % Volume transported via truck to sales point 53 % 52 % 50 % 100 % 100 % 100 %
Volumes transported through pipeline or via truck receive a higher realized price but incur higher transportation expenses. Conversely, volumes sold at the wellhead have the opposite effect of lower realized price, offset by lower transportation expenses.
Transportation expenses for the three months endedMarch 31, 2022 , increased by 13% to$2.8 million and on a per bbl basis increased by 1% to$1.39 compared to the corresponding period of 2021. The increase in transportation expenses per bbl compared to the corresponding period of 2021 was a result of higher truck tariffs and higher volumes transported via truck in 2022. For the three months endedMarch 31, 2022 , transportation expenses decreased by 1% compared to$2.9 million in the prior quarter due to higher volumes sold at wellhead. On a per bbl basis, transportation expenses increased by 6% from$1.31 in the previous quarter due to higher truck tariffs and higher volumes transported via truck.
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[[Image Removed: gte-20220331_g6.jpg]] COVID-19 Costs The COVID-19 pandemic has resulted in extra ongoing operating and transportation costs related to COVID-19 health and safety preventative measures, including incremental sanitation requirements and enhanced procedures for trucking barrels and crew changes in the field. For the three months endedMarch 31, 2022 , COVID-19 costs were$0.5 million entirely related to operating activities. For three months endedMarch 31, 2021 , COVID-19 costs were$1.1 million comprised of$1.0 million related to operating activities and 0.1 million related to transportation activities. For the prior quarter, COVID-19 costs were$0.7 million , entirely related to operating activities. DD&A Expenses Three Months Ended Three Months Ended December March 31, 31, 2022 2021 2021 DD&A Expenses, thousands of U.S. Dollars$ 40,963 $ 31,318 $ 41,574 DD&A Expenses, U.S. Dollars per bbl 20.02 17.17 19.01
DD&A expenses for the three months ended
For the three months endedMarch 31, 2022 , DD&A expenses decreased 1% when compared to the prior quarter due to lower production in the current quarter. On a per bbl basis, DD&A expenses increased by$1.01 when compared to the prior quarter due to higher costs in the depletable base.
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G&A Expenses
Three Months Ended
Three Months Ended March 31, December 31,
(Thousands of U.S. Dollars) 2022 2021 2021
G&A Expenses Before Stock-Based
Compensation $ 7,779 $ 6,817 $ 8,473
G&A Stock-Based Compensation Expense 4,557 3,671 1,799
G&A Expenses, Including Stock-Based
Compensation $ 12,336 $ 10,488 $ 10,272
(U.S. Dollars Per bbl Sales Volumes NAR)
G&A Expenses Before Stock-Based
Compensation $ 3.80 $ 3.73 $ 3.87
G&A Stock-Based Compensation Expense 2.23 2.01 0.82
G&A Expenses, Including Stock-Based
Compensation $ 6.03 $ 5.74 $ 4.69
For the three months ended March 31, 2022 , G&A expenses before stock-based
compensation increased by 14% to $7.8 million or $0.07 per bbl to $3.80 per bbl
due to higher costs for special projects and increase in travel costs in 2022
when compared to the corresponding period of 2021. When compared to prior
quarter, G&A expenses before stock-based compensation decreased by 8% and were
comparable on per bbl basis due to lower accrued performance bonus for the first
quarter of 2022 due to timing of the fourth quarter 2021 bonus accrual.
G&A expenses after stock-based compensation for the three months ended March 31,
2022 , increased by 18% or $0.29 per bbl, compared to the corresponding period of
2021, mainly due to higher stock-based compensation resulting from a higher
share price. Compared to prior quarter, G&A expenses after stock-based
compensation increased by 20% or $1.34 on a per bbl basis, due to higher
stock-based compensation resulting from a higher share price in the current
quarter.
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Foreign Exchange Gains and Losses
For the three months ended March 31, 2022 , we had a $3.7 million gain on foreign
exchange compared to a $13.1 million loss for the corresponding period of 2021.
Accounts receivable, taxes receivable, deferred income taxes, accounts payable,
and prepaid equity forward ("PEF") are considered monetary items and require
translation from local currency to U.S. dollar
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functional currency at each balance sheet date. This translation was the primary source of the foreign exchange gains and losses in the periods.
The following table presents the change in theU.S. dollar against the Colombian peso and Canadian dollar for the three months endedMarch 31, 2022 , and 2021: Three Months Ended March 31, 2022 2021 Change in the U.S. dollar against the Colombian peso weakened by strengthened by 6% 9% Change in the U.S. dollar against the Canadian dollar weakened by weakened by 2% 1%
Financial Instrument Gains and Losses
The following table presents the nature of our derivative and other financial
instruments gains and losses for the three months ended
Three Months Ended March 31,
(Thousands of U.S. Dollars) 2022 2021
Commodity price derivatives loss $
21,439
Foreign currency derivatives loss - 66
Derivative instruments loss $
21,439
Unrealized PetroTal investment gain $ - $ (6,475)
Loss on sale of PetroTal shares - 5,070
Other financial instruments gain $ - $ (1,405)
Income Tax Expense
Three Months Ended March 31,
(Thousands of U.S. Dollars) 2022 2021
Income (loss) before income tax $ 53,659
Current income tax expense $ 20,827 $ -
Deferred income tax expense 18,7138,651
Total income tax expense $ 39,540 $ 8,651 Effective tax rate 74 % (30) % Current income tax expense was$20.8 million for the three months endedMarch 31, 2022 , compared to no current tax expense in the corresponding period in 2021, primarily due to an increase in taxable income. The deferred income tax expense for the three months endedMarch 31, 2022 , was mainly the result of tax depreciation being higher than accounting depreciation inColombia . The deferred income tax expense in the comparative period of 2021 was the result of excess tax depreciation compared with accounting depreciation and the use of tax losses to offset taxable income inColombia . For the three months endedMarch 31, 2022 , the difference between the effective tax rate of 74% and the 35% Colombian tax rate was primarily due to increase in the impact of foreign taxes, foreign translation adjustments, increase in the valuation allowance, other permanent differences, and non-deductible stock-based compensation. 28
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For the three months endedMarch 31, 2021 , the difference between the effective tax rate of (30)% and the 31% Colombian tax rate was primarily due to an increase in the impact of foreign taxes, foreign translation adjustments and other permanent differences, which was partially offset by a decrease in valuation allowance.
Net Income and Funds Flow from Operations (a Non-GAAP Measure)
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