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 8 and 7, respectively, of our 2019 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 2019 Annual Report on Form 10-K.
Financial and Operational Highlights
Key Highlights for the second quarter of 2020
•SinceMarch 2020 , in response to the global economic downturn and lower commodity priced, we rapidly implemented cost saving initiatives throughout the Company; significant progress has been made on lowering costs through the renegotiation of vendor contracts and personnel and rental equipment optimization. The majority of reductions are structural and permanent in nature •At current oil prices and differentials, we plan to bring the majority of currently shut-in oil fields back online, during the course of the second half of 2020, restart the workover program to bring a number of wells back on production, and resume development drilling by the end of the year •During the second quarter of 2020, we successfully completed the semi-annual re-determination of our bank-syndicated credit facility where the borrowing base limit was redetermined to$225 million from the prior limit of$300 million and were granted relief from compliance with certain financial covenants untilOctober 1, 2021 (the "covenant relief period"), including relief from compliance with the ratio of total debt to Covenant EBITDAX ("EBITDAX") during the covenant relief period •At the end of the prior quarter, we had a total of value added tax ("VAT") and income tax receivables of$138.5 million . As expected during the second quarter, we collected a total of$24.9 million in VAT and income tax refunds from the Colombian government during the second quarter of 2020. Subsequent to the quarter, we received another$21.4 million in tax refunds and expect to collect another$30 to$40 million before the end of 2020. We therefore forecast a total collection of approximately$76 to$86 million in VAT and income tax refunds during 2020 •During the second quarter of 2020, we successfully reduced letters of credit ("LOCs") from$135.4 million to$107.7 million ; these unsecured LOCs are provided as security relating to work commitment guarantees inColombia andEcuador •Realized oil price hedging gains totaled$16.7 million during the first half of 2020 and we have entered into additional oil price hedges and now have a total 11,000 BOEPD hedged for the second half of 2020 •With 2020's oil price volatility and logistical challenges due to COVID-19, we elected to significantly reduce the second quarter of 2020 activity levels to preserve liquidity and balance sheet strength. Capital expenditures were only$4.7 million during the second quarter, a decrease of 95.2% and 89.3% compared to the second quarter of 2019 and first quarter of 2020, respectively. While net loss was$370.6 million during the second quarter, funds flow from operations were a positive$6.0 million , which more than covered our capital expenditures. We plan to restart development drilling operations in the fourth quarter of 2020 to drill one-to-two new oil wells by 2020 year-end •Net loss was$370.6 million compared with net income of$38.5 million in the second quarter of 2019 primarily due to a non-cash impairment on our oil and gas properties as a result of significantly lower oil prices ($398.3 million ) •Adjusted EBITDA(2) was$17.9 million compared with$97.4 million in the second quarter of 2019 •Funds flow from operations(2) decreased by 93% to$6.0 million compared with the second quarter of 2019, as a result of lower production, 51% decrease in the price of Brent and a 283% increase in the Vasconia and 124% increase in the Castilla differentials. Currently the Vasconia differential is approximately$2.00 per BOE with the Castilla differential being$4.00 per BOE for the month of July. •NAR production was 18,408 BOEPD, 37% lower than the second quarter of 2019. Production decreased as a result of shut-in production at the Suroriente and PUT-7 Blocks due to force majeure related to a local farmers' blockade, and the shut-in of minor fields due to low price environment partially offset by a decrease in royalties driven by lower oil prices •Oil and natural gas sales volumes(1) were 19,266 BOEPD, 34% lower than the second quarter of 2019. The quarter's decrease in oil and gas sales volumes was commensurate with lower production
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•Oil and gas sales per BOE were$19.29 , 67% lower than the second quarter of 2019 •Operating expenses decreased 45% compared to the second quarter of 2019 •Operating expenses per BOE were$10.51 , 17% lower than the second quarter of 2019 due to lower power generation and equipment rental costs resulting from successful completion of power generation and expansion facilities in the Acordionero field and cost savings attributed to the shut-in of higher cost wells compared to the corresponding period of 2019 •Workover expenses per BOE were$0.78 for the second quarter of 2020, 84% lower compared to the second quarter of 2019 as a result of minimal workover activity incurred in the current period. With the recent significant recovery in oil prices, we are expecting to restart workover program during the third quarter of 2020 to bring back on production several oil wells which are currently offline •Quality and transportation discount per BOE was$14.10 compared to$9.02 in the second quarter of 2019. The increase was due to higher Castilla and Vasconia differentials during the second quarter of 2020 •Transportation expenses per BOE were$1.84 , compared to$1.83 per BOE in the second quarter of 2019 •General and administrative ("G&A") before stock-based compensation decreased 43% in the second quarter of 2020, compared to the corresponding period of 2019, due to head-count optimization and temporary cost saving measures implemented in response to the low oil price environment and COVID-19 experienced during the current quarter, such as lowering consulting, travel and general office expenses
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(Thousands of U.S. Dollars, unless Three Months Six Months Ended June
otherwise indicated) Three Months Ended June 30, Ended March 31, 30,
2020 2019 % Change 2020 2020 2019 % Change
Average Daily Volumes (BOEPD)
Consolidated
Working Interest Production Before
Royalties 20,165 35,340 (43) 29,527 24,846 36,744 (32)
Royalties (1,757) (6,147) (71) (4,156) (2,957) (6,322) (53)
Production NAR 18,408 29,193 (37) 25,371 21,889 30,422 (28)
Decrease (Increase) in Inventory 858 84 921 (521) 169 127 33
Sales(1) 19,266 29,277 (34) 24,850 22,058 30,549 (28)
Net (Loss) Income $ (370,649) $ 38,540 (1,062) $ (251,626) $ (622,275) $ 40,519 (1,636)
Operating Netback
Oil and Natural Gas Sales $ 33,824 $ 157,993 (79) $ 86,079 $ 119,903 $ 310,558 (61)
Operating Expenses (18,424) (33,733) (45) (32,285) (50,709) (68,516) (26)
Workover Expenses (1,361) (12,757) (89) (12,303) (13,664) (19,046) (28)
Transportation Expenses (3,226) (4,885) (34) (4,037) (7,263) (12,988) (44)
Operating Netback(2) $ 10,813 $ 106,618 (90) $ 37,454 $ 48,267 $ 210,008 (77)
G&A Expenses Before Stock-Based
Compensation $ 5,237 $ 9,268 (43) $ 7,440 $ 12,677 $ 17,137 (26)
G&A Stock-Based Compensation
Expense (Recovery) 1,292 (627) 306 (2,055) (763) 1,100 (169)
G&A Expenses, Including Stock-Based
Compensation $ 6,529 $ 8,641 (24) $ 5,385 $ 11,914 $ 18,237 (35)
Adjusted EBITDA(2) $ 17,851 $ 97,351 (82) $ 34,516 $ 52,367 $ 191,264 (73)
Funds Flow From Operations(2) $ 5,974 $ 88,269 (93) $ 22,227 $ 28,201 $ 163,719 (83)
Capital Expenditures $ 4,747 $ 99,595 (95) $ 44,277 $ 49,024 $ 194,084 (75)
(1) Sales volumes represent production NAR adjusted for inventory changes.
(2) Non-GAAP measures
Operating netback, EBITDA, Adjusted EBITDA and funds flow from operations are
non-GAAP measures which 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 net (loss) income 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. Each non-GAAP financial measure is presented
along with 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 and natural gas sales less
operating, workover 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 and natural gas sales to
operating netback is provided in the table above.
EBITDA, as presented, is defined as net (loss) income 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
goodwill and asset impairment, unrealized foreign exchange gain or loss, stock-
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based compensation expense or recovery and unrealized financial instruments gain
or loss. Management uses these supplemental measures to analyze performance and
(loss) 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 (loss)
income to EBITDA and Adjusted EBITDA is as follows:
Three
Months
Ended
March Six Months Ended
Three Months Ended June 30, 31, June 30,
(Thousands of U.S. Dollars) 2020 2019 2020 2020 2019
Net (loss) income $ (370,649) $ 38,540 $ (251,626) $ (622,275) $ 40,519
Adjustments to reconcile net (loss)
income to EBITDA and Adjusted EBITDA
DD&A expenses 42,484 51,697 57,294 99,778 114,618
Interest expense 13,365 10,564 12,810 26,175 18,502
Income tax expense (76,575) 14,468 34,904 (41,671) 34,154
EBITDA (non-GAAP) $ (391,375) $ 115,269 $ (146,618) $ (537,993) $ 207,793
Goodwill impairment - - 102,581 102,581 -
Asset impairment 398,458 - 3,904 402,362 -
Unrealized foreign exchange (gain) loss (1,544) 2,174 20,799 19,255 (1,109)
Stock-based compensation expense
(recovery) 1,292 (627) (2,055) (763) 1,100
Unrealized financial instruments loss
(gain) 11,020 (19,465) 55,905 66,925 (16,520)
Adjusted EBITDA (non-GAAP) $ 17,851 $ 97,351 $ 34,516 $ 52,367 $ 191,264
Funds flow from operations, as presented, is defined as net (loss) income
adjusted for DD&A expenses, goodwill and asset impairment, 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, financial instruments gain or loss and cash settlement of
financial instruments. 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. A reconciliation from net (loss)
income to funds flow from operations is as follows:
Three
Months
Ended
March Six Months Ended
Three Months Ended June 30, 31, June 30,
(Thousands of U.S. Dollars) 2020 2019 2020 2020 2019
Net (loss) income $ (370,649) $ 38,540 $ (251,626) $ (622,275) $ 40,519
Adjustments to reconcile net (loss)
income to funds flow from operations
DD&A expenses 42,484 51,697 57,294 99,778 114,618
Goodwill impairment - - 102,581 102,581 -
Asset impairment 398,458 - 3,904 402,362 -
Deferred tax (recovery) expense (76,200) 14,957 34,606 (41,594) 23,280
Stock-based compensation expense
(recovery) 1,292 (627) (2,055) (763) 1,100
Amortization of debt issuance costs 1,092 947 844 1,936 1,785
Non-cash lease expense 481 894 490 971 894
Lease payments (460) (848) (515) (975) (848)
Unrealized foreign exchange (gain) loss (1,544) 2,174 20,799 19,255 (1,109)
Financial instruments loss (gain) 164 (18,340) 52,418 52,582 (15,175)
Cash settlement of financial instruments 10,856 (1,125) 3,487 14,343 (1,345)
Funds flow from operations (non-GAAP) $ 5,974
$ 22,227 $ 28,201 $ 163,719 19
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Additional Operational Results
Three Months Six Months Ended June
Three Months Ended June 30, Ended March 31, 30,
2020 2019 % Change 2020 2020 2019 % Change
(Thousands of U.S. Dollars)
Oil and natural gas sales $ 33,824 $ 157,993 (79)$ 86,079 $ 119,903 $ 310,558 (61) Operating expenses 18,424 33,733 (45) 32,285 50,709 68,516 (26) Workover expenses 1,361 12,757 (89) 12,303 13,664 19,046 (28) Transportation expenses 3,226 4,885 (34) 4,037 7,263 12,988 (44) Operating netback(1) 10,813 106,618 (90) 37,454 48,267 210,008 (77) DD&A expenses 42,484 51,697 (18) 57,294 99,778 114,618 (13) Goodwill impairment - - - 102,581 102,581 - 100 Asset impairment 398,458 - 100 3,904 402,362 - 100 G&A expenses before stock-based compensation 5,237 9,268 (43) 7,440 12,677 17,137
(26)
G&A stock-based compensation expense (recovery) 1,292 (627) 306 (2,055) (763) 1,100 (169) Severance expenses 25 270 (91) 1,322 1,347 942 43 Foreign exchange (gain) loss (2,988) 1,175 (354) 18,807 15,819 (1,259)
1,356
Financial instruments loss (gain) 164 (18,340) 101 52,418 52,582 (15,175) 447
Interest expense 13,365 10,564 27 12,810 26,175 18,502 41
458,037 54,007 748 254,521 712,558 135,865 424
Interest income - 397 (100) 345 345 530 (35)
(Loss) income before income taxes (447,224) 53,008 (944) (216,722) (663,946) 74,673 (989)
Current income tax (recovery) expense (375) (489) 23 298 (77) 10,874
(101)
Deferred income tax (recovery) expense (76,200) 14,957
(609) 34,606 (41,594) 23,280 (279)
(76,575) 14,468 (629) 34,904 (41,671) 34,154 (222)
Net (loss) income $ (370,649) $ 38,540 (1,062) $ (251,626) $ (622,275) $ 40,519 (1,636)
Sales Volumes (NAR)
Total sales volumes, BOEPD 19,266 29,277 (34) 24,850 22,058 30,549 (28)
Brent Price per bbl $ 33.39 $ 68.32 (51) $ 50.82 $ 42.10 $ 66.11 (36)
Consolidated Results of Operations per
BOE Sales Volumes NAR
Oil and natural gas sales $ 19.29 $ 59.30 (67) $ 38.07 $ 29.87 $ 56.17 (47)
Operating expenses 10.51 12.66 (17) 14.28 12.63 12.39 2
Workover expenses 0.78 4.79 (84) 5.44 3.40 3.44 (1)
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Transportation expenses 1.84 1.83 1 1.79 1.81 2.35 (23)
Operating netback(1) 6.16 40.02 (85) 16.56 12.03 37.99 (68)
DD&A expenses 24.23 19.40 25 25.34 24.85 20.73 20
Goodwill impairment - - - 45.36 25.55 - 100
Asset impairment 227.28 - 100 1.73 100.23 - 100
G&A expenses before stock-based
compensation 2.99 3.48 (14) 3.29 3.16 3.10 2
G&A stock-based compensation
expense (recovery) 0.74 (0.24) 408 (0.91) (0.19) 0.20 (195)
Severance expenses 0.01 0.10 (90) 0.58 0.34 0.17 100
Foreign exchange (gain) loss (1.70) 0.44 (486) 8.32 3.94 (0.23) 1,813
Financial instruments loss
(gain) 0.09 (6.88) 101 23.18 13.10 (2.74) 578
Interest expense 7.62 3.97 92 5.66 6.52 3.35 95
261.26 20.27 1,189 112.55 177.50 24.58 622
Interest income - 0.15 (100) 0.15 0.09 0.10 (10)
(Loss) income before income
taxes (255.10) 19.90 (1,382) (95.84) (165.38) 13.51 (1,324)
Current income tax (recovery)
expense (0.21) (0.18) (17) 0.13 (0.02) 1.97 (101)
Deferred income tax (recovery)
expense (43.46) 5.61 (875) 15.30 (10.36) 4.21 346
(43.67) 5.43 (904) 15.43 (10.38) 6.18 (268)
Net (loss) income $ (211.43) $ 14.47 (1,561) $ (111.27) $ (155.00) $ 7.33 (2,215)
(1) Operating netback is a non-GAAP measure which 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 and Gas Production and Sales Volumes, BOEPD
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Average Daily Volumes (BOEPD)
Working Interest Production Before
Royalties 20,165 35,340 24,846 36,744
Royalties (1,757) (6,147) (2,957) (6,322)
Production NAR 18,408 29,193 21,889 30,422
(Increase) Decrease in Inventory 858 84 169 127
Sales 19,266 29,277 22,058 30,549
Royalties, % of Working Interest
Production Before Royalties 9 % 17 % 12 % 17 %
Oil and gas production NAR for the three and six months ended June 30, 2020
decreased by 37% and 28%, respectively, compared to the corresponding periods of
2019 due the temporary shut-in of higher cost producing wells in response to low
price environment as a result of COVID-19 during current periods.
Royalties as a percentage of production for the three and six months ended June
30, 2020 , decreased compared with the corresponding periods of 2019 commensurate
with the decrease in benchmark oil prices and the price sensitive royalty regime
in Colombia .
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Operating Netback
Six Months Ended
Three Months Ended June 30, June 30,
(Thousands of U.S. Dollars) 2020 2019 2020 2019
Oil and Natural Gas Sales $ 33,824 $ 157,993 $ 119,903 $ 310,558
Transportation Expenses (3,226) (4,885) (7,263) (12,988)
30,598 153,108 112,640 297,570
Operating Expenses (18,424) (33,733) (50,709) (68,516)
Workover Expenses (1,361) (12,757) (13,664) (19,046)
Operating Netback(1) $ 10,813 $ 106,618 $ 48,267 $ 210,008
U.S. Dollars Per BOE Sales Volumes NAR
Brent $ 33.39 $ 68.32 $ 42.10 $ 66.11
Quality and Transportation Discounts (14.10) (9.02) (12.23) (9.94)
Average Realized Price 19.29 59.30 29.87 56.17
Transportation Expenses (1.84) (1.83) (1.81) (2.35)
Average Realized Price Net of Transportation
Expenses 17.45 57.47 28.06 53.82
Operating Expenses (10.51) (12.66) (12.63) (12.39)
Workover Expenses (0.78) (4.79) (3.40) (3.44)
Operating Netback(1) $ 6.16 $
40.02
(1) Operating netback is a non-GAAP measure which 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 and gas sales for the three and six months endedJune 30, 2020 decreased 79% and 61% to$33.8 and$119.9 million , respectively, as a result of 51% and 36%, respectively, decrease in Brent, higher quality and transportation discounts, and 34% and 28%, respectively, lower sales volumes, compared with the corresponding periods of 2019. Compared with the prior quarter, oil and gas sales decreased 61% as a result of 34% decrease in Brent, higher quality and transportation discounts and 22% lower sales volumes.
The following table shows the effect of changes in realized price and sales
volumes on our oil and gas sales for the three and six months ended
Six Months
Ended June
Second Quarter 2020 Second Quarter 2020 30, 2020
Compared with First Compared with Second Compared with
Quarter 2020 Quarter 2019 Six Months
Ended June
(Thousands of U.S. Dollars) 30, 2019
Oil and natural gas sales for the comparative
period $ 86,079 $ 157,993 $ 310,558
Realized sales price decrease effect (32,912) (70,141) (105,575)
Sales volumes decrease effect (19,343) (54,028) (85,080)
Oil and natural gas sales for the three and six
months ended June 30, 2020 $ 33,824 $ 33,824 $ 119,903
Average realized price for the three and six months ended June 30, 2020
decreased 67% and 47%, respectively, compared with the corresponding periods of
2019. The decreases were commensurate with the decreases in benchmark oil prices
in addition to higher Vasconia and Castilla differentials. Compared with the
prior quarter, the average realized price decreased 49% due to the same reasons
mentioned above.
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 and our primarily focus is on maximizing operating netback. The following table shows the
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percentage of oil volumes we sold in
Three
Months
Ended
March Six Months Ended
Three Months Ended June 30, 31, June 30,
2020 2019 2020 2020 2019
Volume transported through pipeline 15 % 1 % 1 % 7 % 2 %
Volume sold at wellhead 49 % 51 % 48 % 50 % 47 %
Volume transported via truck to sales point 36 % 48 % 51 % 43 % 51 %
100 % 100 % 100 % 100 % 100 %
Volumes transported through pipeline or via truck receive higher realized price,
but incur higher transportation expenses. Volumes sold at the wellhead have the
opposite effect of lower realized price, offset by lower transportation
expenses.
Transportation expenses for the three and six months ended June 30, 2020
decreased 34% and 44% to $3.2 and $7.3 million , respectively, compared to the
corresponding periods of 2019 as a result of lower sales volumes during current
periods. On a per BOE basis, transportation expenses increased by 1% to $1.84
for the three months ended June 30, 2020 , as a result of lower volumes sold at
wellhead, partially offset by a temporary reduction of OTA pipeline tariff
negotiated at the end of second quarter of 2020 in response to the low oil price
environment, compared to the corresponding period of 2019. On a per BOE basis,
transportation expenses decreased by 23% for the six months ended June 30, 2020 ,
to $1.81 , compared to the corresponding period of 2019, as a result of higher
volumes sold at the wellhead where transportation is netted against sales price
and a temporary reduction of OTA pipeline tariff negotiated in response to low
oil price environment at the end of the second quarter of 2020.
For the three months ended June 30, 2020 , transportation expenses decreased 20%
compared with $4.0 million in the prior quarter as a result of lower sales
volumes. On a per BOE basis, transportation expenses increased 3% from $1.79 in
the prior quarter due to utilization of the OTA pipeline during the current
quarter which had higher transportation cost per BOE, partially offset by a
temporary reduction of pipeline tariff negotiated at the end of the second
quarter of 2020.
Operating expenses for the three and six months ended June 30, 2020 decreased
45% and 26% to $18.4 and $50.7 million , respectively, compared to the
corresponding periods of 2019. On a per BOE basis, operating expenses decreased
by $2.15 for the three months ended June 30, 2020 , due to lower power generation
and equipment rental costs resulting from successful completion of power
generation and expansion facilities in the Acordionero field and cost savings
attributed to the shut-in of higher cost wells compared to the corresponding
period of 2019. On a per BOE basis, operating expenses increased by $0.24 for
the six months ended June 30, 2020 , primarily as a result of lower sales volumes
and a fixed nature of a significant portion of our operating expenses.
Operating expenses for the three months ended June 30, 2020 , decreased 43%
compared with the prior quarter. On a per BOE basis, operating expenses for the
three months ended June 30, 2020 , decreased by $3.77 , primarily as a result of
lower power generation and cost savings attributed to the lower operating
activities partially offset by lower sales volumes during the current quarter.
Workover expenses on a per BOE basis, decreased to $0.78 and $3.40 for the three
and six months ended June 30, 2020 , compared to $4.79 and $3.44 , respectively,
in the corresponding periods of 2019 due to less workover activities performed
during current periods. Workover expenses decreased by $4.66 per BOE compared to
the prior quarter as a result of less workover activities performed during the
second quarter of 2020.
DD&A Expenses
Six Months Ended
Three Months Ended June 30, June 30,
2020 2019 2020 2019
DD&A Expenses, thousands of
$ 99,778 $ 114,618 DD&A Expenses, U.S. Dollars per BOE 24.23 19.40 24.85 20.73 23
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DD&A expenses for the three and six months endedJune 30, 2020 , decreased 18% and 13% and increased by$4.83 and$4.12 per BOE, respectively, compared to the corresponding periods of 2019 due to lower production volumes and higher costs in the depletable base.
For the three months ended
Impairment
Three Months Ended June 30, Six Months Ended June 30,
(Thousands of U.S. Dollars) 2020 2019 2020 2019
Oil and gas property impairment $ 398,282 $ - $ 398,282 $ -
Inventory impairment 176 - 4,080 -
Asset Impairment 398,458 - 402,362 -
Goodwill impairment - - 102,581 -
$ 398,458 $ - $ 504,943 $ -
Asset Impairment
(i) Oil and gas property impairment
For the three and six months endedJune 30, 2020 , we recorded ceiling test impairment losses of$398.3 million as a result of lower oil prices. We follow the full cost method of accounting for its oil and gas properties. Under this method, the net book value of properties on a country-by-country basis, less related deferred income taxes, may not exceed a calculated "ceiling". The ceiling is the estimated after tax future net revenues from proved oil and gas properties, discounted at 10% per year. In calculating discounted future net revenues, oil and natural gas prices are determined using the average price for the 12 month period prior to the ending date of the period covered by the balance sheet, calculated as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period. That average price is then held constant, except for changes which are fixed and determinable by existing contracts. Therefore, ceiling test estimates are based on historical prices discounted at 10% per year and it should not be assumed that estimates of future net revenues represent the fair market value of our reserves. In accordance with GAAP, we used an average Brent price of$52.32 per bbl for the purposes of theJune 30, 2020 ceiling test calculations (June 30, 2019 -$69.38 ). There was no ceiling test impairment for the three and six months endedJune 30, 2019 . (ii) Inventory Impairment
For the three and six months ended
Goodwill Impairment
For the three and six months endedJune 30, 2020 , we recorded nil and$102.6 million , respectively, of impairment of goodwill relating to ourColombia business unit. The impairment was due to the carrying value of the unit exceeding its fair value as a result of the cumulative impact of the shut-in of higher cost production and lower forecasted commodity prices. The estimated fair value of theColombia unit for the goodwill impairment test was based on the discounted after-tax cash flows associated with the proved and probable reserves of the reporting unit. AtJune 30, 2020 , goodwill consisted entirely of$102.6 million relating to theSolana Resources Limited andArgosy Energy International L.P. acquisitions in 2008 and 2006, respectively. There was no goodwill impairment for the three and six months endedJune 30, 2019 .
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G&A Expenses
Three Months Six Months Ended
Three Months Ended June 30, Ended March 31, June 30,
(Thousands of U.S. Dollars) 2020 2019 % Change 2020 2020 2019 % Change
G&A Expenses Before Stock-Based
Compensation $ 5,237 $ 9,268 (43) $ 7,440 $ 12,677 $ 17,137 (26)
G&A Stock-Based Compensation
Expense (Recovery) 1,292 (627) 306 (2,055) (763) 1,100 (169)
G&A Expenses, Including
Stock-Based Compensation $ 6,529 $ 8,641 (24) $ 5,385 $ 11,914 $ 18,237 (35)
U.S. Dollars Per BOE Sales Volumes
NAR
G&A Expenses Before Stock-Based
Compensation $ 2.99 $ 3.48 (14) $ 3.29 $ 3.16 $ 3.10 2
G&A Stock-Based Compensation
Expense (Recovery) 0.74 (0.24) 408 (0.91) (0.19) 0.20 (195)
G&A Expenses, Including
Stock-Based Compensation $ 3.73 $ 3.24 15 $ 2.38 $ 2.97 $ 3.30 (10)
For the three and six months ended June 30, 2020 , G&A expenses before
stock-based compensation decreased 43% and 26%, respectively, from the
corresponding periods of 2019, due to temporary cost saving measures implemented
in response to the low oil price environment and COVID-19. On a per BOE basis,
for the three months ended June 30, 2020 , G&A expenses before stock-based
compensation decreased 14% to $2.99 compared to the corresponding period of
2019, due to headcount optimization and temporary cost saving measures
implemented in response to the low oil price environment and COVID-19
experienced during the current quarter, such as lowering consulting, travel and
general office expenses. On a per BOE basis, for the six months ended June 30,
2020 , G&A expenses increased 2% to $3.16 compared to the corresponding period of
2019 due to the lower sales volumes in the current period. For the three months
ended June 30, 2020 , G&A expenses before stock-based compensation decreased 30%
or $0.30 per BOE due to a number of temporary cost saving measures implemented
in response to COVID-19 during the second quarter of 2020, such as 20% salary
reduction taken by the Executive Team and Board of Directors, lowering
consulting, travel and general office costs.
G&A expenses after stock-based compensation for the three and six months ended
June 30, 2020 decreased 24% and 35% (15% and 10% per BOE), respectively,
compared to the corresponding periods of 2019, mainly due to lower stock-based
compensation resulting from a lower share price. G&A expenses after stock-based
compensation for the three months ended June 30, 2020 increased by 21% (56% per
BOE), compared with the prior quarter, primarily due to higher stock-based
compensation resulting from higher share price in the current period.
Foreign Exchange Gains and Losses
For the three and six months endedJune 30, 2020 , we had a gain of$3.0 million and a loss of$15.8 million , respectively, on foreign exchange compared with a$1.2 million loss and a$1.3 million gain, respectively, in the corresponding periods of 2019. Taxes receivable, deferred income taxes, accounts payable and investment are considered monetary items, and require translation from local currency toU.S. dollar functional currency at each balance sheet date. This translation was the main source of the foreign exchange losses and gains in the periods. The following table presents the change in theU.S. dollar against the Colombian peso and Canadian dollar for the three and six months endedJune 30, 2020 and 2019: 25
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Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Change in the
strengthened by weakened by
Colombian peso 8% 1% 15% 1%
Change in the U.S. dollar against the weakened by weakened by strengthened by weakened by
Canadian dollar 4% 2% 5% 4%
Financial Instrument Gains and Losses
The following table presents the nature of our financial instruments gains and
losses for the three and six months ended
Six Months Ended
Three Months Ended June 30, June 30,
(Thousands of U.S. Dollars) 2020 2019 2020 2019
Commodity price derivative loss (gain)
$ (10,777) $ 488 Foreign currency derivatives (gain) loss (1,919) 55 3,533 55 Investment (gain) loss (6,216) (17,689) 59,069 (15,718) Financial instruments loss 757 - 757 -$ 164 $ (18,340) $ 52,582 $ (15,175) Income Tax Expense Six Months Ended Three Months Ended June 30, June 30, (Thousands of U.S. Dollars) 2020 2019 2020 2019 Income (loss) before income tax$ (447,224) $
53,008
Current income tax (recovery) expense $ (375)$ (489) $ (77) $ 10,874 Deferred income tax (recovery) expense (76,200) 14,957 (41,594) 23,280 Total income tax (recovery) expense$ (76,575) $ 14,468 $ (41,671) $ 34,154 Effective tax rate 17 % 27 % 6 % 46 % Current income tax expense was lower for the six months endedJune 30, 2020 , compared to the corresponding period of 2019, primarily as a result of lower income inColombia . The deferred income tax recovery for the six months endedJune 30, 2020 , was the result of a ceiling test impairment loss inColombia ; which was partially offset by losses incurred inColombia that are now fully offset by a valuation allowance. The deferred income tax expense in the comparative period of 2019, was mainly the result of tax depreciation being higher than accounting deprecation inColombia . For the six months endedJune 30, 2020 , the difference between the effective tax rate of 6% and the 32% Colombian tax rate was primarily due to an increase in the valuation allowance, the non-deductibility of goodwill impairment for tax purposes, foreign translation adjustments and the non-deductible portion (50%) of the unrealized loss on the PetroTal shares.
For the six months ended
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