Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars, unless otherwise indicated)
1. Description of Business
Gran Tierra Energy Inc., a Delaware corporation (the “Company” or “Gran Tierra”), is a publicly traded company focused on international oil and natural gas exploration and production with assets currently in Colombia and Ecuador.
2. Significant Accounting Policies
These interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The information furnished herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for the fair presentation of results for the interim periods.
The note disclosure requirements of annual consolidated financial statements provide additional disclosures required for interim unaudited condensed consolidated financial statements. Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements as at and for the year ended December 31, 2021, included in the Company’s 2021 Annual Report on Form 10-K.
The Company’s significant accounting policies are described in Note 2 of the consolidated financial statements, which are included in the Company’s 2021 Annual Report on Form 10-K and are the same policies followed in these interim unaudited condensed consolidated financial statements. The Company has evaluated all subsequent events to the date these interim unaudited condensed consolidated financial statements were issued.
3. Taxes Receivable and Payable
The table below shows the break-down of taxes receivable and payable, which are comprised of value added tax (“VAT”) and income tax:
| | | | | | | | | | | |
(Thousands of U.S. Dollars) | As at March 31, 2022 | | As at December 31, 2021 |
Taxes Receivable | | | |
Current | | | |
VAT Receivable | $ | 12,345 | | | $ | 21,918 | |
Income Tax Receivable | 22,429 | | | 23,588 | |
| $ | 34,774 | | | $ | 45,506 | |
Long-Term | | | |
Income Tax Receivable | $ | 22,026 | | | $ | 17,522 | |
| | | |
Taxes Payable | | | |
Current | | | |
VAT Payable | $ | 7,546 | | | $ | 6,620 | |
| | | |
Long-Term | | | |
VAT Payable | $ | 68 | | | $ | — | |
Income Tax Payable | 12,668 | | | — | |
| $ | 12,736 | | | $ | — | |
| | | |
Total Taxes Receivable net of Taxes Payable | $ | 36,518 | | | $ | 56,408 | |
| | | |
The following table shows the movement of VAT and income tax receivables for the period identified below:
| | | | | | | | | | | | | | | | | |
(Thousands of U.S. Dollars) | Net VAT Receivable | | Income Tax Receivable | | Total Net Taxes Receivable |
Balance, as at December 31, 2021 | $ | 15,298 | | | $ | 41,110 | | | $ | 56,408 | |
Collected through direct government refunds | (149) | | | — | | | (149) | |
Collected through sales contracts | (40,913) | | | — | | | (40,913) | |
Taxes paid (1) | 29,674 | | | 9,703 | | | 39,377 | |
Current tax expense | — | | | (20,827) | | | (20,827) | |
Foreign exchange loss | 821 | | | 1,801 | | | 2,622 | |
Balance, as at March 31, 2022 | $ | 4,731 | | | $ | 31,787 | | | $ | 36,518 | |
(1)VAT is paid on certain goods and services and collected on sales in Colombia at a rate of 19%
4. Property, Plant and Equipment
| | | | | | | | | | | |
(Thousands of U.S. Dollars) | As at March 31, 2022 | | As at December 31, 2021 |
Oil and natural gas properties | | | |
Proved | $ | 4,390,016 | | | $ | 4,302,473 | |
Unproved | 97,031 | | | 131,865 | |
| 4,487,047 | | | 4,434,338 | |
Other(1) | 34,998 | | | 34,943 | |
| 4,522,045 | | | 4,469,281 | |
Accumulated depletion and depreciation and impairment | (3,514,125) | | | (3,473,484) | |
| $ | 1,007,920 | | | $ | 995,797 | |
(1) The “other” category includes right-of-use assets for operating and finance leases of $13.9 million, which had a net book value of $3.3 million as at March 31, 2022 (December 31, 2021 - $13.9 million, which had a net book value of $3.9 million).
For the three months ended March 31, 2022, and 2021, the Company had no ceiling test impairment losses. The Company used an average Brent price of $77.41 and $43.31 per bbl for March 31, 2022, and 2021 ceiling test calculations, respectively.
5. Debt and Debt Issuance Costs
The Company’s debt at March 31, 2022, and December 31, 2021, was as follows:
| | | | | | | | | | | |
(Thousands of U.S. Dollars) | As at March 31, 2022 | | As at December 31, 2021 |
Current | | | |
Revolving credit facility | $ | 40,000 | | | $ | 67,500 | |
Unamortized debt issuance costs | (383) | | | (513) | |
| $ | 39,617 | | | $ | 66,987 | |
| | | |
Long-Term | | | |
6.25% Senior Notes, due February 2025 | $ | 300,000 | | | $ | 300,000 | |
7.75% Senior Notes, due May 2027 | 300,000 | | | 300,000 | |
Unamortized debt issuance costs | (13,297) | | | (14,030) | |
| 586,703 | | | 585,970 | |
Long-term lease obligation(1) | 1,066 | | | 1,434 | |
| $ | 587,769 | | | $ | 587,404 | |
| $ | 627,386 | | | $ | 654,391 | |
(1) The current portion of the lease obligation has been included in accounts payable and accrued liabilities on the Company’s balance sheet and totaled $2.9 million as at March 31, 2022 (December 31, 2021 - $3.3 million).
As at March 31, 2022, the borrowing base of the Company’s Senior Secured Credit Facility (the “revolving credit facility”) was $150 million, with $125 million readily available and $25 million subject to approval by major lenders. The maturity date of the revolving credit facility is November 10, 2022, and the next re-determination is to occur no later than May 2022.
Under the terms of the credit facility, the Company is required to maintain compliance with the following financial covenants: limitations on the Company’s ratio of debt to earnings before interest, taxes, depletion, depreciation and accretion and exploration expenses (“EBITDAX”) to a maximum of 4.0 to 1.0; limitations on Company’s ratio of Senior Secured Debt to EBITDAX to a maximum of 3.0 to 1.0; and the maintenance of a ratio of EBITDAX to interest expense of at least 2.5 to 1.0. If the Company fails to comply with these financial covenants, it will result in a default under the terms of the credit agreement, which could result in an acceleration of repayment of all indebtedness under the Company’s revolving credit facility. As of March 31, 2022, the Company was in compliance with all applicable covenants in the revolving credit facility.
Amounts drawn down under the revolving credit facility bear interest, at the Company’s option, at the USD LIBOR rate plus a
margin ranging from 2.90% to 4.90%, or an alternate base rate plus a margin ranging from 1.90% to 3.90%, in each case based on the borrowing base utilization percentage. The alternate base rate is currently the U.S. prime rate. We pay a commitment fee on undrawn amounts under the revolving credit facility, which ranges from 0.73% to 1.23% per annum, based on the average daily amount of unused commitments.
The Company’s revolving credit facility is guaranteed by and secured against the assets of certain of the Company’s subsidiaries (the “Credit Facility Group”). Under the terms of the revolving credit facility, the Company is subject to certain restrictions on its ability to distribute funds to entities outside of the Credit Facility Group, including restrictions on the ability to pay dividends to shareholders of the Company.
Interest Expense
The following table presents the total interest expense recognized in the accompanying interim unaudited condensed consolidated statements of operations:
| | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(Thousands of U.S. Dollars) | | | | | 2022 | 2021 |
Contractual interest and other financing expenses | | | | | $ | 11,241 | | $ | 12,931 | |
Amortization of debt issuance costs | | | | | 887 | | 881 | |
| | | | | $ | 12,128 | | $ | 13,812 | |
6. Share Capital
| | | | | |
| Shares of Common Stock |
Balance, December 31, 2021 | 367,144,500 | |
Shares issued on option exercise | 1,276,533 | |
Balance, March 31, 2022 | 368,421,033 | |
Equity Compensation Awards
The following table provides information about performance stock units (“PSUs”), deferred share units (“DSUs”), and stock option activity for the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | |
| PSUs | DSUs | | Stock Options |
| Number of Outstanding Share Units | Number of Outstanding Share Units | | Number of Outstanding Stock Options | Weighted Average Exercise Price/Stock Option ($) |
Balance, December 31, 2021 | 30,365,196 | | 5,710,764 | | | 17,848,722 | | 1.20 | |
Granted | 6,720,129 | | 344,464 | | | 2,721,929 | | 1.41 | |
Exercised | (4,396,646) | | — | | | (1,276,533) | | 0.77 | |
Forfeited | (47,572) | | — | | | (62,638) | | 1.95 | |
Expired | — | | — | | | (1,173,714) | | 2.80 | |
Balance, March 31, 2022 | 32,641,107 | | 6,055,228 | | | 18,057,766 | | 1.15 | |
For the three months ended March 31, 2022 and 2021 stock-based compensation expense was $4.6 million and $3.7 million, respectively.
At March 31, 2022, there was $31.1 million (December 31, 2021 - $11.8 million) of unrecognized compensation costs related to unvested PSUs and stock options, which is expected to be recognized over a weighted-average period of 1.9 years. During the three months ended March 31, 2022, the Company paid out $2.4 million for PSUs vested on December 31, 2021 (three months ended March 31, 2021 - $0.6 million for PSUs vested on December 31, 2020).
Net Income (Loss) per Share
Basic net income (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted average number of shares of common stock issued and outstanding during each period.
Diluted net income per share is calculated using the treasury stock method for share-based compensation arrangements. The treasury stock method assumes that any proceeds obtained on the exercise of share-based compensation arrangements would be used to purchase common shares at the average market price during the period. The weighted average number of shares is then adjusted by the difference between the number of shares issued from the exercise of share-based compensation arrangements and shares repurchased from the related proceeds. Anti-dilutive shares represent potentially dilutive securities excluded from the computation of diluted income or loss per share as their impact would be anti-dilutive.
Weighted Average Shares Outstanding
| | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | 2022 | 2021 |
Weighted average number of common shares outstanding | | | | 367,386,664 | | 366,981,556 | |
Shares issuable pursuant to stock options | | | | 12,950,523 | | — | |
Shares assumed to be purchased from proceeds of stock options | | | | (7,961,942) | | — | |
Weighted average number of diluted common shares outstanding | | | | 372,375,245 | | 366,981,556 | |
For the three months ended March 31, 2022, 5,331,160 options, on a weighted average basis (three months ended March 31, 2021 - all options), were excluded from the diluted income (loss) per share calculation as the options were anti-dilutive.
7. Revenue
The Company’s revenues are generated from oil sales at prices that reflect the blended prices received upon shipment by the purchaser at defined sales points or defined by contract relative to ICE Brent and adjusted for Vasconia or Castilla crude differentials, quality, and transportation discounts each month. For the three months ended March 31, 2022, 100% (three months ended March 31, 2021 - 100%) of the Company’s revenue resulted from oil sales. During the three months ended March 31, 2022, quality and transportation discounts were 13% of the average ICE Brent price (three months ended March 31, 2021 - 15%). During the three months ended March 31, 2022, the Company’s production was sold primarily to two major customers in Colombia, representing 57% and 43% of total sales volumes (three months ended March 31, 2021 - two, representing 68% and 31% of total sales volumes).
As at March 31, 2022, accounts receivable included nil of accrued sales revenue related to March 2022 production (December 31, 2021 - nil related to December 2021 production).
8. Taxes
The Company's effective tax rate was 74% for the three months ended March 31, 2022, compared to (30)% in the comparative period of 2021. Current income tax expense was $20.8 million for the three months ended March 31, 2022, compared to no current tax expense in the corresponding period of 2021, primarily due to an increase in taxable income. The deferred income tax expense for the three months ended March 31, 2022, was mainly the result of tax depreciation being higher than accounting depreciation in Colombia. 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 in Colombia.
For the three months ended March 31, 2022, the difference between the effective tax rate of 74% and the 35% Colombian tax rate was primarily due to an increase in the impact of foreign taxes, foreign translation adjustments, increase in the valuation allowance, other permanent differences, and non-deductible stock-based compensation.
For the three months ended March 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.
9. Contingencies
Legal Proceedings
Gran Tierra has a number of lawsuits and claims pending, including a dispute with the Agencia Nacional de Hidrocarburos (National Hydrocarbons Agency) (“ANH”) relating to the calculation of high price share royalties. Although the outcome of these lawsuits and disputes cannot be predicted with certainty, Gran Tierra believes the resolution of these matters would not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. Gran Tierra records costs as they are incurred or become probable and determinable.
Letters of credit and other credit support
At March 31, 2022, the Company had provided letters of credit and other credit support totaling $105.7 million (December 31, 2021 - $103.0 million) as security relating to work commitment guarantees in Colombia and Ecuador contained in exploration contracts and other capital or operating requirements.
10. Financial Instruments and Fair Value Measurement
Financial Instruments
Financial instruments are initially recorded at fair value, defined as the price that would be received to sell an asset or paid to market participants to settle liability at the measurement date. For financial instruments carried at fair value, GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels:
•Level 1 - Inputs representing quoted market prices in active markets for identical assets and liabilities
•Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the assets and liabilities, either directly or indirectly
•Level 3 - Unobservable inputs for assets and liabilities
At March 31, 2022, the Company’s financial instruments recognized on the balance sheet consist of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, other long-term assets, accounts payable and accrued liabilities, current portion of long-term debt, derivatives, other short-term payables, long-term debt, long-term equity compensation reward liability and other long-term liabilities. The Company uses appropriate valuation techniques based on the available information to measure the fair values of assets and liabilities.
Fair Value Measurement
The following table presents the Company’s fair value measurements of its financial instruments as of March 31, 2022, and December 31, 2021:
| | | | | | | | | | | |
| As at March 31, 2022 | | As at December 31, 2021 |
(Thousands of U.S. Dollars) | | | |
Level 1 | | | |
Assets | | | |
Prepaid equity forward - current (2) | $ | 3,137 | | | $ | — | |
Prepaid equity forward - long-term(1) | 15,698 | | | 7,578 | |
| $ | 18,835 | | | $ | 7,578 | |
| | | |
Liabilities | | | |
DSUs liability - long-term(3) | $ | 9,506 | | | $ | 4,346 | |
6.25% Senior Notes | 277,875 | | | 273,672 | |
7.75% Senior Notes | 278,187 | | 271,500 | |
| $ | 565,568 | | | $ | 549,518 | |
Level 2 | | | |
Assets | | | |
Derivative asset(2) | $ | — | | | $ | 219 | |
Restricted cash and cash equivalents - long-term(1) | 5,253 | | | 4,903 | |
| $ | 5,253 | | | $ | 5,122 | |
Liabilities | | | |
Derivative liability | $ | 18,875 | | | $ | 2,976 | |
Revolving credit facility | 39,617 | | | 66,987 | |
PSUs liability - current (4) | 15,292 | | 2,710 |
PSUs liability - long-term(3) | 7,930 | | | 9,372 | |
| $ | 81,714 | | | $ | 82,045 | |
| | | |
Level 3 | | | |
Liabilities | | | |
Asset retirement obligation - current(4) | $ | 1,100 | | | $ | — | |
Asset retirement obligation - long-term | 55,478 | | | 54,525 | |
| $ | 56,578 | | | $ | 54,525 | |
(1)The long-term portion of restricted cash and Prepaid equity forward are included in the other long-term assets on the Company’s balance sheet
(2) Included in the other current assets on the Company’s balance sheet
(3) Long-term DSUs and PSUs liabilities are included in the long-term equity compensation award liability on the Company’s balance sheet
(4) Current portion of PSU liability and asset retirement obligation are recorded in other short-term liabilities on the Company’s balance sheet
The fair values of cash and cash equivalents, current restricted cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the short-term maturity of these instruments.
The fair value of long-term restricted cash and cash equivalents approximate its carrying value because interest rates are variable and reflective of market rates.
Prepaid Equity Forward (“PEF”)
To reduce the Company’s exposure to changes in the trading price of the Company’s common shares on outstanding PSUs, the Company entered into a PEF. At the end of the term, the counterparty will pay the Company an amount equivalent to the notional amount of the shares using the price of the Company’s common shares at the valuation date. The Company has the discretion to increase or decrease the notional amount of the PEF or terminate the agreement early. As at March 31, 2022, the Company’s PEF had a notional amount of 12 million shares with a fair value of $18.8 million (As at December 31, 2021 - 10 million shares with a fair value of $7.6 million). During the three months ended March 31, 2022, the Company recorded a gain of $7.8 million on the PEF in general and administrative expenses (three months ended March 31, 2021- nil). The fair value of the PEF asset was estimated using the Company’s share price quoted in active markets at the end of each reporting period.
DSU liability
The fair value of DSUs liability was estimated using Company’s share price quoted in active markets at the end of each reporting period.
PSUs liability
The fair value of the PSUs liability was estimated based on a pricing model using inputs, such as Company’s share price and PSU performance factor.
Derivative asset and derivative liability
The fair value of derivatives is estimated based on various factors, including quoted market prices in active markets and quotes from third parties. The Company also performs an internal valuation to ensure the reasonableness of third party quotes. In consideration of counterparty credit risk, the Company assessed whether the counterparty to the derivative would default by failing to make any contractually required payments. Additionally, the Company considers that it is of substantial credit quality and has the financial resources and willingness to meet its potential repayment obligations associated with the derivative transactions.
The following table presents gains or losses on derivatives and other financial instruments recognized in the accompanying interim unaudited condensed consolidated statements of operations:
| | | | | | | | | | | |
| | Three Months Ended March 31, |
(Thousands of U.S. Dollars) | | | | 2022 | 2021 |
Commodity price derivatives loss | | | | $ | 21,439 | | $ | 23,632 | |
Foreign currency derivatives loss | | | | — | | 66 | |
Derivative instruments loss | | | | $ | 21,439 | | $ | 23,698 | |
| | | | | |
Unrealized PetroTal investment gain | | | | $ | — | | $ | (6,475) | |
Loss on sale of PetroTal shares | | | | — | | 5,070 | |
Other financial instruments gain | | | | $ | — | | $ | (1,405) | |
Revolving credit facility and Senior Notes
Financial instruments not recorded at fair value at March 31, 2022, included the Senior Notes and the Revolving Credit Facility (Note 5).
The fair value of the Revolving Credit Facility approximates its carrying value. The fair value of the Revolving Credit Facility is estimated based on the amount the Company would have to pay a third party to assume the debt, including the credit spread for the difference between the issue rate and the period-end market rate. The credit spread is the Company’s default or repayment risk. The credit spread (premium or discount) is determined by comparing the debt to new issuances (secured or unsecured) and secondary trades of similar size and credit statistics for public and private debt.
At March 31, 2022, the carrying amounts of the 6.25% Senior Notes and the 7.75% Senior Notes were $294.4 million and $292.3 million, respectively, which represented the aggregate principal amount less unamortized debt issuance costs, and the fair values were $277.9 million and $278.2 million, respectively. The fair value of long-term restricted cash and cash equivalents and the revolving credit facility approximated their carrying value because interest rates are variable and reflective of market rates. The fair values of other financial instruments approximate their carrying amounts due to the short-term maturity of these instruments.
Asset retirement obligation
The Company’s non-recurring fair value measurements include asset retirement obligation. The fair value of an asset retirement obligation is measured by reference to the expected future cash outflows required to satisfy the retirement obligation discounted at the Company’s credit-adjusted risk-free interest rate. The significant level 3 inputs used to calculate such liabilities include estimates of costs to be incurred, the Company’s credit-adjusted risk-free interest rate, inflation rates, and estimated dates of abandonment. Accretion expense is recognized over time as the discounted liabilities are accreted to their expected settlement value, while the asset retirement cost is amortized over the estimated productive life of the related assets.
Commodity Price Derivatives
The Company utilizes commodity price derivatives to manage the variability in cash flows associated with the forecasted sale of its oil production, reduce commodity price risk and provide a base level of cash flows to assure it can execute at least a portion of its planned capital spending.
At March 31, 2022, the Company had outstanding commodity price derivative positions as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
Period and type of instrument | Volume, bopd | Reference | Sold Swap ($/bbl, Weighted Average) | Sold Put ($/bbl, Weighted Average) | Purchased Put ($/bbl, Weighted Average) | Sold Call ($/bbl, Weighted Average) | Premium ($/bbl Weighted Average) |
Three-way Collars: April 1, to June 30, 2022 | 5,000 | | ICE Brent | — | | 64.00 | | 74.00 | | 91.72 | | — | |
Swaps: April 1, to June 30, 2022 | 3,000 | | ICE Brent | 80.77 | | — | | — | | — | | — | |
Deferred Puts: April 1, to June 30, 2022 | 1,000 | | ICE Brent | — | | — | | 70.00 | | — | | 4.00 | |
11. Supplemental Cash Flow Information
The following table provides a reconciliation of cash and cash equivalents and restricted cash and cash equivalents shown as a sum of these amounts in the interim unaudited condensed consolidated statements of cash flows:
| | | | | | | | | | | | | | | | | |
(Thousands of U.S. Dollars) | As at March 31, | | As at December 31, |
| 2022 | 2021 | | 2021 | 2020 |
Cash and cash equivalents | $ | 58,707 | | $ | 21,225 | | | $ | 26,109 | | $ | 13,687 | |
Restricted cash and cash equivalents - current | 1,142 | | 424 | | | 392 | | 427 | |
Restricted cash and cash equivalents - long-term (1) | 5,252 | | 3,219 | | | 4,903 | | 3,409 | |
| $ | 65,101 | | $ | 24,868 | | | $ | 31,404 | | $ | 17,523 | |
(1) Included in other long-term assets on the Company’s balance sheet
Net changes in assets and liabilities from operating activities were as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(Thousands of U.S. Dollars) | 2022 | | 2021 |
Accounts receivable and other long-term assets | $ | (10,150) | | | $ | 3,803 | |
Derivatives | (7,706) | | | 3,841 | |
Inventory | 110 | | | (1,146) | |
Prepaids | (269) | | | 157 | |
Accounts payable and accrued and other long-term liabilities | 12,021 | | | 752 | |
Taxes receivable and payable | 22,514 | | | 5,721 | |
Net changes in assets and liabilities from operating activities | $ | 16,520 | | | $ | 13,128 | |
Changes in non-cash investing working capital for the three months ended March 31, 2022, are comprised of an decrease in accounts payable and accrued liabilities of $1.7 million and an increase in accounts receivable of $0.1 million (three months ended March 31, 2021, a decrease in accounts payable and accrued liabilities of $0.8 million and a decrease in accounts receivable of $0.1 million).
The following table provides additional supplemental cash flow disclosures:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(Thousands of U.S. Dollars) | 2022 | | 2021 |
Cash paid for income taxes | $ | 9,703 | | | $ | 6,093 | |
Cash paid for interest | $ | 10,042 | | | $ | 11,479 | |
| | | |
Non-cash investing activities: | | | |
Net liabilities related to property, plant and equipment, end of period | $ | 28,339 | | | $ | 28,003 | |