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 third quarter of 2022
•Net income in the third quarter of 2022 was$38.7 million or$0.11 per share basic and$0.10 per share diluted, compared to a net income of$35.0 million or$0.10 per share basic and diluted in the third quarter of 2021 •Income before income taxes in the third quarter of 2022 was$60.4 million compared to an income before income taxes of$44.0 million in the third quarter of 2021 •During the third quarter of 2022, we re-purchased$20.1 million of 6.25% Senior Notes for a cash consideration of$17.3 million and re-purchased 10,733,702 of our common shares at a weighted average price of$1.34 per share
•Funds flow from operations(2) increased by 36% to
•During the third quarter, the Company generated$36.7 million of free cash flow(2). For the nine months endedSeptember 30, 2022 , the Company generated$121.0 million of free cash flow(2). Free cash flow was partially used for the re-purchase of Senior Notes and shares of Common Stock
•NAR production for the third quarter of 2022 was 23,472 BOPD, which was comparable to 23,372 BOPD in the third quarter of 2021 and 23,215 in the second quarter of 2022
•Sales volumes for the third quarter of 2022 were 23,516 BOPD which were comparable to 23,833 BOPD in the third quarter of 2021 and 3% higher than 22,847 in the second quarter of 2022
•Oil sales were$168.4 million , 24% higher compared to$135.3 million in the third quarter of 2021, as a result of a 33% increase in Brent price, offset by a 16% increase in quality and transportation discounts. Oil sales decreased by 18% compared to$205.8 million in the second quarter of 2022 as a result of a 13% decrease in Brent price and 3% higher quality and transportation discounts. •Operating expenses were$41.8 million , 9% higher than$38.4 million in the third quarter of 2021, due to increased workovers and higher lifting costs as a result of higher environmental, community aids, and lower recoveries from partners in the Suroriente Block as a result of social blockades. Operating expenses increased by 6% from$39.5 million in the second quarter of 2022, primarily due to higher workover activities during the current quarter
•Transportation expenses decreased by 23% compared to the third quarter of 2021. During the third quarter of 2021, alternative transportation routes were utilized due to the maintenance of the Impala terminal, which had higher transportation costs per bbl. Compared to the second quarter of 2022, transportation expenses decreased by 4% due to the use of alternative transportation routes, which resulted in lower transportation costs in the current quarter
•Operating netback(2) increased by 32% to$124.1 million compared to$93.7 million in the third quarter of 2021 and decreased 24% from$163.8 million in the second quarter of 2022 •Adjusted EBITDA(2) increased by 48% to$121.2 million compared to$81.8 million in the third quarter of 2021 and decreased by 13% from$140.1 million in the second quarter of 2022. The trailing twelve-month Adjusted EBITDA was$462.3 million resulting in Net Debt(2) to Adjusted EBITDA(2) of 1.0 times.
•Quality and transportation discounts for the third quarter of 2022 increased to
•General and administrative expenses ("G&A") before stock-based compensation increased by 52% compared to the third quarter of 2021 due to higher costs for special projects and lease obligations in the current quarter. G&A expenses before stock-based compensation increased by 6% or$0.06 per bbl from the second quarter of 2022, primarily due to costs for optimization projects •Capital additions for the third quarter of 2022 were$57.0 million , an increase of 64% compared to the third quarter of 2021, as a result of the drilling program in the Acordionero field and exploration wells inColombia andEcuador and decreased 13% from the second quarter of 2022
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(Thousands of U.S. Dollars, Three Months unless otherwise Ended June indicated) Three Months Ended September 30, 30,
Nine Months Ended
2022 2021 % Change 2022 2022 2021 % Change Average Daily Volumes (BOPD) Consolidated Working Interest ("WI") Production Before Royalties 30,391 28,957 5 30,607 30,123 25,501 18 Royalties (6,919) (5,585) 24 (7,392) (6,948) (4,531) 53 Production NAR 23,472 23,372 - 23,215 23,175 20,970 11 Decrease (Increase) in Inventory 44 461 (90) (368) (141) (105) (34) Sales(1) 23,516 23,833 (1) 22,847
23,034 20,865 10
Net Income (Loss)$ 38,663 $ 35,007 10$ 52,972 $
105,754
Operating
Netback
Oil Sales
548,751$ 327,435 68 Operating Expenses (41,837) (38,448) 9 (39,494)
(116,266) (95,366) 22
Transportation
Expenses (2,417) (3,130) (23) (2,513) (7,764) (8,731) (11) Operating Netback(2)$ 124,143 $ 93,741 32$ 163,778 $ 424,721 $ 223,338 90 G&A Expenses Before Stock-Based Compensation$ 8,284 $ 5,444 52$ 7,847 $ 23,910 $ 19,394 23 G&A Stock-Based Compensation (Recovery) Expense (170) 1,053 (116) 1,989 6,376 6,597 (3) G&A Expenses, Including Stock-Based Compensation$ 8,114 $ 6,497 25$ 9,836 $ 30,286 $ 25,991 17 Adjusted$ 121,236 $ 81,804 48$ 380,727 $ 160,007 138 EBITDA(2)$ 140,113 Funds Flow From Operations(2)$ 93,746 $ 69,103 36$ 103,625 $
284,681
Capital
Expenditures
163,717
(1) Sales volumes represent production NAR adjusted for inventory changes.
(2) Non-GAAP measures
Operating netback, net debt, 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. Net debt as ofSeptember 30, 2022 , was$461.7 million , calculated using the sum of 6.25% Senior Notes and 7.75% Senior Notes, excluding deferred financing fees of$579.9 million , less cash and cash equivalents of$118.2 million .
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EBITDA, as presented, is defined as net income or loss adjusted for depletion, depreciation and accretion ("DD&A") expenses, interest expense and income tax expense. Adjusted EBITDA, as presented, is defined as EBITDA adjusted for non-cash lease expense, lease payments, unrealized foreign exchange gain or loss, stock-based compensation expense or recovery, unrealized derivative instruments gain or loss, gain on re-purchase of Senior Notes, other financial instruments gain or loss and other loss. Management uses this supplemental measure to analyze performance and income generated by our principal business activities prior to the consideration of how non-cash items affect that income and believes that this financial measure is useful supplemental information for investors to analyze our performance and our financial results. A reconciliation from net income (loss) to EBITDA and adjusted EBITDA is as follows: Twelve Months Three Months Ended Three Months Nine Months Ended Rolling Ending September 30, Ended June 30, September 30, September 30, (Thousands of U.S. Dollars) 2022 2021 2022 2022 2021 2022 Net income (loss)$ 38,663 $ 35,007 $ 52,972 $ 105,754 $ (20,042) $ 168,278 Adjustments to reconcile net income (loss) to EBITDA and Adjusted EBITDA DD&A expenses 45,320 38,055 42,216 128,499 98,300 170,073 Interest expense 11,421 13,608 12,194 35,743 41,355 48,769 Income tax expense 21,734 8,955 38,666 99,940 26,795 53,799 EBITDA (non-GAAP)$ 117,138 $ 95,625 $
146,048
851 408 747 2,009 1,222 2,454 Lease payments (402) (384) (388) (1,134) (1,239) (1,516) Unrealized foreign exchange loss 6,636 3,465 4,341 6,138 16,945 11,072 Stock-based compensation (recovery) expense (170) 1,053 1,989 6,376 6,597 8,175 Unrealized derivative instruments (gain) loss (219) (4,729) (12,624) - 2,499 (12,088) Gain on re-purchase of Senior Notes (2,598) - - (2,598) - (2,598) Other financial instruments (gain) loss - (13,634) - - (12,425) 15,794 Other loss - - - - - 44 Adjusted EBITDA (non-GAAP)$ 121,236 $ 81,804 $ 140,113 $ 380,727 $ 160,007 $ 462,256 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, gain on re-purchase of Senior Notes, 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:
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Three Months Ended Three Months Nine Months Ended September 30, Ended June 30, September 30, (Thousands of U.S. Dollars) 2022 2021 2022 2022 2021 Net income (loss)$ 38,663 $ 35,007 $ 52,972 $ 105,754 $ (20,042) Adjustments to reconcile net income (loss) to funds flow from operations DD&A expenses 45,320 38,055 42,216 128,499 98,300 Deferred tax expense 4,914 8,955 13,241 36,868 26,809 Stock-based compensation (recovery) expense (170) 1,053 1,989 6,376 6,597 Amortization of debt issuance costs 751 907 1,131 2,769 2,682 Non-cash lease expense 851 408 747 2,009 1,222 Lease payments (402) (384) (388) (1,134) (1,239) Unrealized foreign exchange loss 6,636 3,465 4,341 6,138 16,945 Derivative instruments loss - 2,603 5,172 26,611 47,540 Cash settlements on derivative instruments (219) (7,332) (17,796) (26,611) (45,041) Gain on re-purchase of Senior Notes (2,598) - - (2,598) - Other financial instruments gain - (13,634) - - (12,425) Funds flow from operations (non-GAAP)$ 93,746 $ 69,103 $ 103,625 $ 284,681 $ 121,348 Capital expenditures$ 57,035 $ 34,839 $ 65,199 $ 163,717 $ 109,650 Free cash flow (non-GAAP)$ 36,711 $ 34,264 $ 38,426 $ 120,964 $ 11,698
Additional Operational Results
Three Months
Three Months Ended September 30, Ended June 30, Nine Months Ended September 30, (Thousands of U.S. Dollars) 2022 2021 % Change 2022 2022 2021 % Change Oil sales$ 168,397 $ 135,319 24$ 205,785 $ 548,751 $ 327,435 68 Operating expenses 41,837 38,448 9 39,494 116,266 95,366 22 Transportation expenses 2,417 3,130 (23) 2,513 7,764 8,731 (11) Operating netback(1) 124,143 93,741 32 163,778 424,721 223,338 90 DD&A expenses 45,320 38,055 19 42,216 128,499 98,300 31 G&A expenses before stock-based compensation 8,284 5,444 52 7,847 23,910 19,394 23 G&A stock-based compensation (recovery) expense (170) 1,053 (116) 1,989 6,376 6,597 (3) Foreign exchange loss 1,489 2,650 (44) 2,722 486 15,824 (97) Derivative instruments loss - 2,603 (100) 5,172 26,611 47,540 (44) Other financial instruments gain - (13,634) (100) - - (12,425) (100) Gain on re-purchase of Senior Notes (2,598) - 100 - (2,598) - 100 Interest expense 11,421 13,608 (16) 12,194 35,743 41,355 (14) 63,746 49,779 28 72,140 219,027 216,585 1 Income before income taxes 60,397 43,962 37 91,638 205,694 6,753 2946 19
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Current income tax expense (recovery) 16,820 - 100 25,425 63,072 (14) 450,614 Deferred income tax expense 4,914 8,955 (45) 13,241 36,868 26,809 38 21,734 8,955 143 38,666 99,940 26,795 273 Net income (loss)$ 38,663 $ 35,007 10$ 52,972 $ 105,754 $ (20,042) 628 Sales Volumes (NAR) Total sales volumes, BOPD 23,516 23,833 (1) 22,847 23,034 20,865 10 Brent Price per bbl$ 97.70 $ 73.23 33$ 111.98 $ 102.48 $ 67.97 51 Consolidated Results of Operations per bbl Sales Volumes NAR Oil sales$ 77.84 $ 61.72 26$ 98.98 $ 87.27 $ 57.48 52 Operating expenses 19.34 17.53 10 19.00 18.49 16.74 10 Transportation expenses 1.12 1.43 (22) 1.21 1.23 1.53 (20) Operating netback(1) 57.38 42.76 34 78.77 67.55 39.21 72 DD&A expenses 20.95 17.36 21 20.31 20.43 17.26 18 G&A expenses before stock-based compensation 3.83 2.48 54 3.77 3.80 3.40 12 G&A stock-based compensation (recovery) expense (0.08) 0.48 (117) 0.96 1.01 1.16 (13) Foreign exchange loss 0.69 1.21 (43) 1.31 0.08 2.78 (97) Derivative instruments loss - 1.19 (100) 2.49 4.23 8.35 (49) Other financial instruments gain - (6.22) (100) - - (2.18) (100) Gain on re-purchase of Senior Notes (1.20) - 100 - (0.41) - 100 Interest expense 5.28 6.21 (15) 5.87 5.68 7.26 (22) 29.47 22.71 30 34.71 34.82 38.03 (8) Income before income taxes 27.91 20.05 39 44.06 32.73 1.18 2,674 Current income tax expense (recovery) 7.77 - 100 12.23 10.03 - 100 Deferred income tax expense 2.27 4.08 (44) 6.37 5.86 4.71 24 10.04 4.08 146 18.60 15.89 4.71 237 Net income (loss)$ 17.87 $ 15.97 12$ 25.46 $ 16.84 $ (3.53) (577)
(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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Oil Production and Sales Volumes, BOPD
Three Months Ended Three Months Ended September 30, June 30, Nine Months Ended September 30, 2022 2021 2022 2022 2021 Average Daily Volumes (BOPD) WI Production Before Royalties 30,391 28,957 30,607 30,123 25,501 Royalties (6,919) (5,585) (7,392) (6,948) (4,531) Production NAR 23,472 23,372 23,215 23,175 20,970 Decrease (Increase) in Inventory 44 461 (368) (141) (105) Sales 23,516 23,833 22,847 23,034 20,865 Royalties, % of WI Production Before Royalties 23 % 19 % 24 % 23 % 18 % Oil production NAR for the three months endedSeptember 30, 2022 was consistent with the corresponding period of 2021. Oil production NAR for the nine months endedSeptember 30, 2022 , increased by 11% compared to the corresponding period of 2021 due to the successful drilling and workover campaign in the Acordionero and Costayaco fields. Oil production NAR was comparable to the prior quarter. Royalties as a percentage of production for the three and nine months endedSeptember 30, 2022 , increased to 23% compared to the corresponding periods of 2021 commensurate with the increase in benchmark oil prices and the price sensitive royalty regime inColombia . Compared to the prior quarter, royalties as a percentage of production remained comparable.
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[[Image Removed: gte-20220930_g2.jpg]] The Midas block includes the Acordionero, Chuira, and Ayombero oil fields, and the Chaza block includes the Costayaco and Moqueta oil fields.
Operating Netback
Three Months Ended Three Months Nine Months Ended September 30, Ended June 30, September 30, (Thousands of U.S. Dollars) 2022 2021 2022 2022 2021 Oil Sales$ 168,397 $ 135,319 $ 205,785 $ 548,751 $ 327,435 Transportation Expenses (2,417) (3,130) (2,513) (7,764) (8,731) 165,980 132,189 203,272 540,987 318,704 Operating Expenses (41,837) (38,448) (39,494) (116,266) (95,366) Operating Netback(1)$ 124,143 $ 93,741 $ 163,778 $ 424,721 $ 223,338 (U.S. Dollars Per bbl Sales Volumes NAR) Brent$ 97.70 $ 73.23 $ 111.98 $ 102.48 $ 67.97 One Month Forward Brent ("M+1") Adjustment (6.49) - - (2.23) - Quality and Transportation Discounts (13.37) (11.51) (13.00) (12.98) (10.49) Average Realized Price 77.84 61.72 98.98 87.27 57.48 Transportation Expenses (1.12) (1.43) (1.21) (1.23) (1.53) Average Realized Price Net of Transportation Expenses 76.72 60.29 97.77 86.04 55.95 Operating Expenses (19.34) (17.53) (19.00) (18.49) (16.74) Operating Netback(1)$ 57.38 $ 42.76 $ 78.77 $ 67.55 $ 39.21
(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-20220930_g5.jpg]] Oil sales for the three months endedSeptember 30, 2022 , increased by 24% to$168.4 million compared to the corresponding period of 2021 due to a 33% increase in Brent price, partially offset by a 16% increase in the quality and transportation discounts and M+1 Brent adjustment, (as defined below). Castilla differentials increased to$9.15 from$6.51 per bbl in the corresponding period of 2021, and Vasconia differentials decreased to$3.77 from$4.02 in the corresponding period of 2021. During the three months endedSeptember 30, 2022 , we entered into new marketing arrangements moving from the Brent monthly average of the month of delivery ("M pricing") to the Brent monthly average following the month of deliveries ("M+1 Brent"). The Company's revenue was negatively impacted as the Brent monthly average decreased throughout the quarter. For the nine months endedSeptember 30, 2022 , oil sales increased by 68% to$548.8 million compared to the corresponding period of 2021 due to a 51% increase in Brent price and 10% higher sales volumes, partially offset by 24% increase in the quality and transportation discounts and M+1 Brent adjustment. Castilla and Vasconia differentials increased to$7.89 and$4.17 from$4.50 and$2.65 per bbl in the corresponding period of 2021, respectively. Compared to the prior quarter, oil sales decreased by 18%, primarily as a result of a 13% decrease in Brent price, 3% higher quality and transportation discounts and M+1 Brent adjustment.
The following table shows the effect of changes in realized price and sales
volumes on our oil sales for the three and nine months ended
Nine Months Ended Third Quarter 2022 Third Quarter 2022 September 30, Compared with Compared with Third 2022 Compared Second Quarter 2022 Quarter 2021 with Nine Months Ended September 30, (Thousands of U.S. Dollars) 2021 Oil sales for the comparative period$ 205,785 $ 135,319 $ 327,435 Realized sales price increase effect (45,744) 34,873 187,280 Sales volumes increase effect 8,356 (1,795) 34,036 Oil sales for the three and nine months ended September 30, 2022$ 168,397 $ 168,397 $ 548,751 24
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The average realized price for the three and nine months endedSeptember 30, 2022 , increased by 26% and 52%, compared to the corresponding periods of 2021, commensurate with the increase in benchmark oil prices, offset by higher differentials and utilization of M+1 Brent pricing for our sales. Compared to the prior quarter, the average realized price decreased by 21% due to lower benchmark oil prices, higher Castilla differentials and utilization of M+1 Brent pricing, which were partially offset by lower Vasconia differentials. Operating expenses for the three months endedSeptember 30, 2022 , increased by 9% to$41.8 million or by$1.81 per bbl to$19.34 per bbl, compared to the corresponding period of 2021, primarily as a result of$0.68 per bbl increased workovers and$1.12 higher lifting costs mainly attributed to higher environmental, community aids, and lower recoveries from partners as a result of social blockades in the Suroriente block. Operating expenses for the nine months endedSeptember 30, 2022 , increased by 22% to$116.3 million or by$1.75 per bbl to$18.49 per bbl, compared to the corresponding period of 2021, primarily as a result of$0.58 per bbl increased workovers and$1.16 per bbl higher lifting costs attributed to higher power generation and chemical costs due to increased production and waterflood in all major fields.
Compared to the prior quarter, operating expenses increased by 6% or
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 and nine months endedSeptember 30, 2022 , and 2021, and the prior quarter: Three Months Three Months Ended September 30, Ended June 30, Nine Months Ended September 30, 2022 2021 2022 2022 2021
Volume transported through pipeline - % 9 % - % - % 6 % Volume sold at wellhead 47 % 42 % 48 % 47 % 55 % Volume transported via truck to sales point 53 % 49 % 52 % 53 % 39 % 100 % 100 % 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 a lower realized price, offset by lower transportation expenses. Transportation expenses for the three and nine months endedSeptember 30, 2022 , decreased by 23% and 11% to$2.4 million and$7.8 million , respectively, compared to the corresponding periods of 2021. On a per bbl basis, transportation expenses decreased by 22% and 20% to$1.12 and$1.23 for the three and nine months endedSeptember 30, 2022 , compared to the corresponding periods of 2021. The decrease in transportation expenses per bbl compared to the corresponding periods of 2021 was a result of a change in transportation routes that had lower transportation costs per bbl. During the third quarter of 2021, alternative transportation routes were utilized due to maintenance of the Impala terminal, which had higher transportation costs per bbl. For the three months endedSeptember 30, 2022 , transportation expenses decreased by 4% compared to$2.5 million in the prior quarter. On a per bbl basis, transportation expenses decreased by 7% from$1.21 in the prior quarter due use of alternative transportation routes, which resulted in lower transportation costs per bbl in the current quarter.
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[[Image Removed: gte-20220930_g6.jpg]] DD&A Expenses Three Months Three Months Ended September 30, Ended June 30, Nine Months Ended September 30, 2022 2021 2022 2022 2021 DD&A Expenses, thousands of U.S. Dollars $ 45,320$ 38,055 $ 42,216 $ 128,499$ 98,300 DD&A Expenses, U.S. 20.95 17.36 20.31 20.4317.26 Dollars per bbl DD&A expenses for the three and nine months endedSeptember 30, 2022 , increased by 19% and 31% or by$3.59 and$3.17 per bbl due to increased production and higher costs in the depletable base compared to the corresponding periods of 2021.
For the three months ended
G&A Expenses
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Three Months Ended June Nine Months Ended September Three Months Ended September 30, 30, 30, (Thousands ofU.S. Dollars) 2022 2021 % Change 2022 2022 2021 % Change G&A Expenses Before Stock-Based Compensation$ 8,284 $ 5,444 52$ 7,847 $ 23,910 $ 19,394 23 G&A Stock-Based Compensation (Recovery) Expense (170) 1,053 (116) 1,989 6,376 6,597 (3) G&A Expenses, Including Stock-Based Compensation$ 8,114 $ 6,497 25$ 9,836 $ 30,286 $ 25,991 17 (U.S. Dollars Per bbl Sales Volumes NAR) G&A Expenses Before Stock-Based Compensation$ 3.83 $ 2.48 54$ 3.77 $ 3.80 $ 3.40 12 G&A Stock-Based Compensation (Recovery) Expense (0.08) 0.48 (117) 0.96 1.01 1.16 (13) G&A Expenses, Including Stock-Based Compensation$ 3.75 $ 2.96 27$ 4.73 $ 4.81 $ 4.56 5 For the three and nine months endedSeptember 30, 2022 , G&A expenses before stock-based compensation increased by 52% to$8.3 million and 23% to$23.9 million , respectively, primarily due to higher costs for optimization projects and lease obligations compared to corresponding periods of 2021. On a per bbl basis, G&A expenses before stock-based compensation increased by$1.35 and$0.40 per bbl to$3.83 and$3.80 per bbl, respectively, for the same reason mentioned above. When compared to the prior quarter, G&A expenses before stock-based compensation increased by 7% or$0.06 on a per bbl basis, primarily due to higher costs for optimization projects. G&A expenses after stock-based compensation for the three and nine months endedSeptember 30, 2022 , increased by 25% and 17% or$0.79 and$0.25 per bbl, respectively, due to a higher share price compared to the corresponding periods of 2021.
Compared to the prior quarter, G&A expenses after stock-based compensation
decreased by 18% or
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[[Image Removed: gte-20220930_g7.jpg]] Foreign Exchange Gains and Losses For the three and nine months endedSeptember 30, 2022 , we had a loss on foreign exchange of$1.5 million and$0.5 million , respectively, compared to a$2.7 million and$15.8 million loss in the corresponding periods of 2021. Accounts receivable, taxes receivable, deferred income taxes, accounts payable, and prepaid equity forward ("PEF") are considered monetary items and require translation from local currencies toU.S. dollar functional currency at each balance sheet date. This translation was the primary source of the foreign exchange gains and losses in the periods. The following table presents the change in theU.S. dollar against the Colombian peso and Canadian dollar for the three and nine months endedSeptember 30, 2022 , and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021
Change in the
strengthened by strengthened by the Colombian peso 10% 2% 14% 12% Change in the U.S. dollar against strengthened by strengthened by strengthened by strengthened by the Canadian dollar 6% 3% 8% -% 28
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Income Tax Expense
Three Months Ended September 30, Nine Months Ended September 30, (Thousands of U.S. Dollars) 2022 2021 2022 2021 Income before income tax$ 60,397 $ 43,962 $ 205,694 $ 6,753 Current income tax expense (recovery)$ 16,820 $ - $ 63,072 $ (14) Deferred income tax expense 4,914 8,955 36,868 26,809 Total income tax expense$ 21,734 $ 8,955 $ 99,940$ 26,795 Effective tax rate 36 % 20 % 49 % 397 % Current income tax expense was$63.1 million for the nine months endedSeptember 30, 2022 , compared to a small recovery in the corresponding period in 2021, primarily due to an increase in taxable income. The deferred income tax expense for the nine months endedSeptember 30, 2022 , was also the result of tax depreciation being higher than accounting depreciation and the use of tax losses to offset taxable income inColombia . The deferred income tax expense in the comparative period of 2021 resulted from excess tax depreciation compared with accounting depreciation and the use of tax losses to offset taxable income inColombia . For the nine months endedSeptember 30, 2022 , the difference between the effective tax rate of 49% and the 35% Colombian tax rate was primarily due to$26.6 million of hedging loss and$35.7 million of financing cost related to Senior Notes, and$11.1 million of corporate costs, which were incurred in jurisdictions where no tax benefit is recognized which was partially offset by$12.5 million of non-taxable foreign exchange gain. For the nine months endedSeptember 30, 2021 , the difference between the effective tax rate of 397% and the 31% Colombian tax rate was primarily due to the non-deductibility of derivative instrument losses and financing costs; foreign currency translation adjustments, and stock based compensation. These were partially offset by a decrease in valuation allowance and the non-taxable portion (50%) of the unrealized gain on PetroTal Corp. shares. 29
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Net Income and Funds Flow from Operations (a Non-GAAP Measure)
Third Quarter % change Third Quarter % change Nine Months % change 2022 Compared 2022 Compared Ended with Second with Third September 30, Quarter 2022 Quarter 2021 2022 Compared with Nine Months Ended September 30, (Thousands of U.S. Dollars) 2021 Net income (loss) for the comparative period$ 52,972 $ 35,007 $ (20,042) Increase (decrease) due to: Sales price (45,744) 34,873 187,280 Sales volumes 8,356 (1,795) 34,036 Expenses: Operating (2,343) (3,389) (20,900) Transportation 96 713 967 Cash G&A (437) (2,840) (4,516) Net lease payments 90 425 892 Interest, net of amortization of debt issuance costs 393 2,031 5,699 Realized foreign exchange 3,528 4,332 4,531 Cash settlements on derivative instruments 17,577 7,113 18,430 Current taxes 8,605 (16,820) (63,086) Net change in funds flow from operations(1) from comparative period (9,879) 24,643 163,333 Expenses: Depletion, depreciation and accretion (3,104) (7,265) (30,199) Deferred tax 8,327 4,041 (10,059) Amortization of debt issuance costs 380 156 (87) Stock-based compensation 2,159 1,223 221 Derivative instruments gain or loss, net of settlements on derivative instruments (12,405) (4,510) 2,499 Gain on re-purchase of Senior Notes 2,598 2,598 2,598 Other financial instruments gain - (13,634) (12,425) Unrealized foreign exchange (2,295) (3,171) 10,807 Net lease payments (90) (425) (892) Net change in net income (loss) (14,309) 3,656 125,796 Net income for the current period$ 38,663 (27)%$ 38,663 (10)%$ 105,754 628%
(1)Funds flow from operations 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 and reconciliation of this measure.
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Capital expenditures during the three months endedSeptember 30, 2022 were$57.0 million: (Millions ofU.S. Dollars)Colombia : Exploration$ 16.9 Development: Drilling and Completions 12.7 Facilities 6.2 Other 8.3 44.1 Corporate &Ecuador 12.9$ 57.0
During the three months ended
Number of wells (Gross and Net)Colombia Exploration 2.0 Development 3.0 Service 2.0 7.0Ecuador Exploration 1.0 8.0 We spud three exploration, three development, and two water injection wells, of which five were in Midas Block, one inChaza Block , one in Alea-1848A Block, and one in the Chanangue Block inEcuador . Of the wells spud during the quarter five were completed, and three were in-progress as ofSeptember 30, 2022 .
Liquidity and Capital Resources
As at (Thousands of U.S. Dollars) September 30, 2022 % Change December 31, 2021 Cash and Cash Equivalents $ 118,173 353 $ 26,109 Credit Facility $ - (100) $ 67,500 6.25% Senior Notes $ 279,909 (7) $ 300,000 7.75% Senior Notes $ 300,000 - $ 300,000 We believe that our capital resources, including cash on hand, cash generated from operations and available borrowings under the credit facility, will provide us with sufficient liquidity to meet our strategic objectives and planned capital program for the next 12 months, given the current oil price trends and production levels. We may also access capital markets to pursue financing or refinance our Senior Notes. In accordance with our investment policy, available cash balances are held in our primary cash management banks or may be invested inU.S. or Canadian government-backed federal, provincial or state securities or other money market instruments with high credit ratings and short-term liquidity. We believe that our current financial position provides us with the flexibility to respond to both internal growth opportunities and those available through acquisitions. We intend to pursue growth opportunities and acquisitions from time to time, which may require significant
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capital, be located in basins or countries beyond our current operations, involve joint ventures, or be sizable compared to our current assets and operations.
During the three months endedSeptember 30, 2022 , we terminated our prior revolving credit facility agreement and entered into a new credit facility agreement with a market lender in the global commodities industry. The credit facility has a borrowing base of up to$150 million , with$100 million readily available atSeptember 30, 2022 , and a potential option for an additional$50 million of borrowings upon mutual agreement by the lender and us. The credit facility bears interest based on a risk-free rate posted by theFederal Reserve Bank of New York plus a margin of 6.0% and a credit-adjusted spread of 0.26%. Undrawn amounts under the credit facility bear interest at 2.1% per annum, based on the amount available. The credit facility is secured by our Colombian assets and economic rights. It has a final maturity date ofAugust 15, 2024 , which may be extended toFebruary 18, 2025 , upon the satisfaction of certain conditions. The availability period for the draws is six months commencing the date of the credit facility. As ofSeptember 30, 2022 , the credit facility remained undrawn.
Under the terms of the credit facility, we are required to maintain compliance with the following financial covenants:
i.Coverage ratio of at least 150% is calculated using the net present value of the consolidated future cash flows of the Company up to the final maturity date discounted at 10% over the outstanding amount on the credit facility at each reporting period. The net present value of the consolidated future cash flows of the Company is required to be based on 80% of the prevailing ICE Brent forward strip. ii.Prepayment Life Coverage Ratio of at least 150% calculated using the estimated aggregate value of commodities to be delivered under the commercial contract from the commencement date to the final maturity date based on 80% of the prevailing ICE Brent forward strip, adjusted for quality and transportation discounts over the outstanding amount on the credit facility including interest and all other costs payable to the lender. iii.Liquidity ratio where the Company's projected sources of cash exceed projected uses of cash by at least 1.15 times in each quarter period included in one year consolidated future cash flows. The future cash flows represent forecasted expected cash flows from operations, less anticipated capital expenditures and certain other adjustments. The commodity pricing assumption used in this covenant is required to be 90% of the prevailing Brent strip forward for the projected future cash flows.
At
AtSeptember 30, 2022 , we had a$279.9 million aggregate principal amount of 6.25% Senior Notes due 2025 and a$300.0 million aggregate principal amount of 7.75% Senior Notes due 2027 outstanding. During the three months endedSeptember 30, 2022 , we repurchased in the open market$20.1 million of 6.25% Senior Notes for cash consideration of$17.3 million , including interest payable of$0.1 million , which resulted in a$2.6 million gain on re-purchase which included the write-off of deferred financing fees of$0.3 million . The re-purchased 6.25% Senior Notes were not cancelled and are held by us as treasury bonds as ofSeptember 30, 2022 . During the three months endedSeptember 30, 2022 , we implemented a share re-purchase program (the "2022 Program") through the facilities of theToronto Stock Exchange ("TSX") and eligible alternative trading platforms inCanada . Under the 2022 Program, we are able to purchase at prevailing market prices up to 36,033,969 shares of Common Stock, representing approximately 10% of the issued and outstanding shares of Common Stock as ofAugust 22, 2022 . The 2022 Program expires onAugust 31, 2023 , or earlier if the 10% share maximum is reached. Re-purchases are subject to prevailing market conditions, the trading price of our Common Stock, our financial performance and other conditions.
During the three and nine months ended
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Cash Flows
The following table presents our primary sources and uses of cash and cash equivalents for the periods presented:
Nine Months Ended September 30, (Thousands of U.S. Dollars) 2022 2021 Sources of cash and cash equivalents: Net income (loss)$ 105,754 $ (20,042) Adjustments to reconcile net loss to Adjusted EBITDA(1) and funds flow from operations(1) DD&A expenses 128,499 98,300 Interest expense 35,743 41,355 Income tax expense 99,940 26,795 Non-cash lease expenses 2,009 1,222 Lease payments (1,134) (1,239) Unrealized foreign exchange loss 6,138 16,945 Stock-based compensation expense 6,376 6,597 Unrealized derivative instruments loss - 2,499 Gain on re-purchase of Senior Notes (2,598) - Other financial instruments gain - (12,425) Adjusted EBITDA(1) 380,727 160,007 Current income tax (expense) recovery (63,072) 14 Contractual interest and other financing expenses (32,974) (38,673) Funds flow from operations(1) 284,681 121,348 Proceeds from exercise of stock options 1,292 19
Proceeds from issuance of Common Stock, net of issuance costs
2 -
Proceeds from disposition of investment, net of transaction costs
- 14,632
Net changes in assets and liabilities from operating activities
72,838 17,956 Changes in non-cash investing working capital 3,255 709 362,068 154,664 Uses of cash and cash equivalents: Additions to property, plant and equipment (163,717) (109,650) Repayment of debt (67,623) (40,125) Re-purchase of Common Stock (14,365) - Re-purchase of Senior Notes (17,274) - Settlement of asset retirement obligations (1,673) (483) Lease payments (1,991) (1,269)
Foreign exchange loss on cash, cash equivalents and restricted cash and cash equivalents
(1,996) (528)
(268,639) (152,055) Net increase in cash and cash equivalents and restricted cash and cash equivalents
$ 93,429$ 2,609 (1) Adjusted EBITDA and funds flow from operations are a non-GAAP measures which do not have any standardized meaning prescribed under GAAP. Refer to "Financial and Operational Highlights - non-GAAP measures" for a definition and reconciliation of this measure. One of the primary sources of variability in our cash flows from operating activities is the fluctuation in oil prices. Sales volume changes and costs related to operations and debt service also impact cash flows. Our cash flows from operating activities are also impacted by foreign currency exchange rate changes. During the nine months endedSeptember 30, 2022 , funds flow from
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operations increased by 135% compared to the corresponding period of 2021 primarily due to a significant increase in Brent price and increase in production, which were partially offset by higher Castilla and Vasconia differentials, M+1 Brent adjustment, an increase in operating expenses and cash settlements on derivative instruments.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are disclosed in Item 7 of our 2021 Annual Report on Form 10-K and have not changed materially since the filing of that document.
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