Consolidated Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Three Months Ended March 31,
|
|
|
|
2015
|
|
2016
|
|
2015
|
|
% Change
|
|
(Thousands of U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
Oil and natural gas sales
|
|
$
|
54,777
|
|
|
$
|
57,403
|
|
|
$
|
76,231
|
|
|
(25
|
)
|
|
Operating expenses
|
|
14,252
|
|
|
19,067
|
|
|
22,661
|
|
|
(16
|
)
|
|
Transportation expenses
|
|
12,199
|
|
|
12,328
|
|
|
8,773
|
|
|
41
|
|
|
Operating netback
(1)
|
|
28,326
|
|
|
26,008
|
|
|
44,797
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
DD&A expenses
|
|
33,044
|
|
|
36,912
|
|
|
49,140
|
|
|
(25
|
)
|
|
Asset impairment
|
|
106,640
|
|
|
56,898
|
|
|
37,014
|
|
|
54
|
|
|
G&A expenses
|
|
6,898
|
|
|
8,805
|
|
|
7,294
|
|
|
21
|
|
|
Severance expenses
|
|
2,163
|
|
|
1,018
|
|
|
4,378
|
|
|
(77
|
)
|
|
Equity tax
|
|
—
|
|
|
3,051
|
|
|
3,769
|
|
|
(19
|
)
|
|
Foreign exchange loss (gain)
|
|
4,250
|
|
|
785
|
|
|
(11,538
|
)
|
|
107
|
|
|
Financial instruments loss (gain)
|
|
765
|
|
|
845
|
|
|
(42
|
)
|
|
—
|
|
|
Other gain
|
|
(502
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
153,258
|
|
|
108,314
|
|
|
90,015
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on acquisition
|
|
—
|
|
|
11,712
|
|
|
—
|
|
|
—
|
|
|
Interest income
|
|
300
|
|
|
449
|
|
|
421
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(124,632
|
)
|
|
(70,145
|
)
|
|
(44,797
|
)
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense
|
|
(3,751
|
)
|
|
(2,023
|
)
|
|
(2,425
|
)
|
|
(17
|
)
|
|
Deferred income tax recovery
|
|
45,661
|
|
|
27,136
|
|
|
2,356
|
|
|
1,052
|
|
|
|
|
41,910
|
|
|
25,113
|
|
|
(69
|
)
|
|
—
|
|
|
Net loss
|
|
$
|
(82,722
|
)
|
|
$
|
(45,032
|
)
|
|
$
|
(44,866
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Volumes
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and NGL's, bbl
|
|
1,552,708
|
|
|
2,292,116
|
|
|
1,734,898
|
|
|
32
|
|
|
Natural gas, Mcf
|
|
86,186
|
|
|
132,265
|
|
|
66,026
|
|
|
100
|
|
|
Total sales volumes, BOE
|
|
1,567,072
|
|
2,314,160
|
|
1,745,902
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales volumes, BOEPD
|
|
17,034
|
|
|
25,430
|
|
|
19,399
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and NGL's per bbl
|
|
$
|
35.07
|
|
|
$
|
24.88
|
|
|
$
|
43.79
|
|
|
(43
|
)
|
|
Natural gas per Mcf
|
|
$
|
3.81
|
|
|
$
|
2.83
|
|
|
$
|
3.87
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Brent Price per bbl
|
|
$
|
43.57
|
|
|
$
|
33.70
|
|
|
53.91
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Results of Operations per BOE sales volumes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas sales
|
|
$
|
34.95
|
|
|
$
|
24.81
|
|
|
$
|
43.66
|
|
|
(43
|
)
|
|
Operating expenses
|
|
9.09
|
|
|
8.24
|
|
|
12.98
|
|
|
(37
|
)
|
|
Transportation expenses
|
|
7.78
|
|
|
5.33
|
|
|
5.02
|
|
|
6
|
|
|
Operating netback
(1)
|
|
18.08
|
|
|
11.24
|
|
|
25.66
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
DD&A expenses
|
|
21.09
|
|
|
15.95
|
|
|
28.15
|
|
|
(43
|
)
|
|
Asset impairment
|
|
68.05
|
|
|
24.59
|
|
|
21.20
|
|
|
16
|
|
|
G&A expenses
|
|
4.40
|
|
|
3.80
|
|
|
4.18
|
|
|
(9
|
)
|
|
Severance expenses
|
|
1.38
|
|
|
0.44
|
|
|
2.51
|
|
|
(82
|
)
|
|
Equity tax
|
|
—
|
|
|
1.32
|
|
|
2.16
|
|
|
(39
|
)
|
|
Foreign exchange loss (gain)
|
|
2.71
|
|
|
0.34
|
|
|
(6.61
|
)
|
|
105
|
|
|
Financial instruments loss (gain)
|
|
0.49
|
|
|
0.37
|
|
|
(0.02
|
)
|
|
—
|
|
|
Other gain
|
|
(0.32
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
97.80
|
|
46.81
|
|
51.57
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gain on acquisition
|
|
—
|
|
|
5.06
|
|
|
—
|
|
|
—
|
|
|
Interest income
|
|
0.19
|
|
|
0.19
|
|
|
0.24
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(79.53
|
)
|
|
(30.32
|
)
|
|
(25.67
|
)
|
|
18
|
|
|
Current income tax expense
|
|
(2.39
|
)
|
|
(0.87
|
)
|
|
(1.39
|
)
|
|
(37
|
)
|
|
Deferred income tax recovery
|
|
29.14
|
|
|
11.73
|
|
|
1.35
|
|
|
769
|
|
|
|
|
26.75
|
|
|
10.86
|
|
|
(0.04
|
)
|
|
—
|
|
|
Net loss
|
|
$
|
(52.78
|
)
|
|
$
|
(19.46
|
)
|
|
$
|
(25.71
|
)
|
|
(24
|
)
|
(1)
Operating netback is a non-GAAP measure which does not have any standardized meaning prescribed under GAAP. Refer to non-GAAP measures disclosure above regarding this measure.
(2)
Sales volumes represent production NAR adjusted for inventory changes and losses.
Oil and gas production and sales volumes, BOEPD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Three Months Ended March 31, 2015
|
|
Average Daily Volumes (BOEPD)
|
Colombia
|
Brazil
|
Total
|
|
Colombia
|
Brazil
|
Total
|
|
Working Interest Production Before Royalties
|
24,886
|
|
724
|
|
25,610
|
|
|
23,297
|
|
718
|
|
24,015
|
|
|
Royalties
|
(2,676
|
)
|
(146
|
)
|
(2,822
|
)
|
|
(3,778
|
)
|
(97
|
)
|
(3,875
|
)
|
|
Production NAR
|
22,210
|
|
578
|
|
22,788
|
|
|
19,519
|
|
621
|
|
20,140
|
|
|
Decrease (Increase) in Inventory
|
2,647
|
|
(5
|
)
|
2,642
|
|
|
(771
|
)
|
30
|
|
(741
|
)
|
|
Sales
|
24,857
|
|
573
|
|
25,430
|
|
|
18,748
|
|
651
|
|
19,399
|
|
|
|
|
|
|
|
|
|
|
|
Royalties, % of Working Interest Production Before Royalties
|
11
|
%
|
20
|
%
|
11
|
%
|
|
16
|
%
|
14
|
%
|
16
|
%
|
Oil and gas production NAR
for the
three months ended March 31, 2016
,
increased
by
13%
to
22,788
BOEPD compared with
20,140
BOEPD in the corresponding period in
2015
. In the
three months ended March 31, 2016
, production from the newly acquired Petroamerica properties contributed
1,848
BOEPD NAR. Additionally, in the
three months ended March 31, 2016
, new wells in the Moqueta Field increased production in Colombia. The Company commenced its drilling program in the Chaza Block in late 2015 and continued into 2016. Production is expected to increase in the Chaza Block as additional wells are tied in. Royalties as a percentage of production decreased from the prior year commensurate with the decrease in oil prices.
In the
three months ended March 31, 2016
, our production in Brazil continued to be limited by a temporary capacity reduction at a third party's shipping facility due to an integrity issue with one of their oil receiving tanks. The third party operator completed repairs on the facility and the tank was fully operational as of March 21, 2016. Receiving capacity for the field's crude oil is now restored to 1,100 bopd.
In the corresponding period in Brazil in 2015, our operations in the Tiê Field were suspended by the Agência Nacional de Petróleo Gás Natural e Biocombustíveis ("ANP") from March 11, 2015, to May 15, 2015, due to alleged non-compliance with certain requirements regarding the health and safety management system identified during a safety and operational audit conducted by the ANP in early 2015. Clearance to resume production was received on May 15, 2015.
Oil and gas sales volumes
for the
three months ended March 31, 2016
,
increased
by
31%
to
25,430
BOEPD, compared with
19,399
BOEPD, in the corresponding period in
2015
. Sales volumes increased due to higher working interest production (
1,595
BOEPD), lower royalty volumes (
1,053
BOEPD) and decreased inventory (
3,383
bopd). During the
three months ended March 31, 2016
, oil inventory
decrease
s accounted for
0.2
MMbbl or
2,642
bopd of
increased
sales volumes compared with oil inventory
increase
s which accounted for
0.1
MMbbl or
741
bopd of
reduced
sales volumes in the corresponding period in
2015
.
Operating netbacks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Three Months Ended March 31, 2015
|
|
(Thousands of U.S. Dollars)
|
Colombia
|
Brazil
|
Total
|
|
Colombia
|
Brazil
|
Total
|
|
Oil and Natural Gas Sales
|
$
|
56,300
|
|
$
|
1,103
|
|
$
|
57,403
|
|
|
$
|
74,067
|
|
$
|
2,164
|
|
$
|
76,231
|
|
|
Transportation Expenses
|
(12,256
|
)
|
(72
|
)
|
(12,328
|
)
|
|
(8,682
|
)
|
(91
|
)
|
(8,773
|
)
|
|
|
44,044
|
|
1,031
|
|
45,075
|
|
|
65,385
|
|
2,073
|
|
67,458
|
|
|
Operating Expenses
|
(19,164
|
)
|
97
|
|
(19,067
|
)
|
|
(21,292
|
)
|
(1,369
|
)
|
(22,661
|
)
|
|
Operating Netback
(1)
|
$
|
24,880
|
|
$
|
1,128
|
|
$
|
26,008
|
|
|
$
|
44,093
|
|
$
|
704
|
|
$
|
44,797
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollars Per bbl
|
|
|
|
|
|
|
|
|
Brent
|
|
|
$
|
33.70
|
|
|
|
|
53.91
|
|
|
WTI
|
|
|
$
|
33.45
|
|
|
|
|
48.63
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollars Per BOE
|
|
|
|
|
|
|
|
|
Oil and Natural Gas Sales
|
$
|
24.89
|
|
$
|
21.13
|
|
$
|
24.81
|
|
|
$
|
43.90
|
|
$
|
36.92
|
|
$
|
43.66
|
|
|
Transportation Expenses
|
(5.42
|
)
|
(1.38
|
)
|
(5.33
|
)
|
|
(5.15
|
)
|
(1.55
|
)
|
(5.02
|
)
|
|
|
19.47
|
|
19.75
|
|
19.48
|
|
|
38.75
|
|
35.37
|
|
38.64
|
|
|
Operating Expenses
|
(8.47
|
)
|
1.86
|
|
(8.24
|
)
|
|
(12.62
|
)
|
(23.36
|
)
|
(12.98
|
)
|
|
Operating Netback
(1)
|
$
|
11.00
|
|
$
|
21.61
|
|
$
|
11.24
|
|
|
$
|
26.13
|
|
$
|
12.01
|
|
$
|
25.66
|
|
(1)
Operating netback is a non-GAAP measure which does not have any standardized meaning prescribed under GAAP. Refer to non-GAAP measures disclosure above regarding this measure.
Oil and gas sales
for the
three months ended March 31, 2016
,
decrease
d by
25%
to
$57.4 million
, from
$76.2 million
in the corresponding period in
2015
primarily due to the effect of
decrease
d realized oil prices, partially offset by
higher
sales volumes. Average realized prices
decrease
d by
43%
to
$24.81
per BOE for the
three months ended March 31, 2016
, from
$43.66
per BOE in the corresponding period in
2015
.
These price
decrease
s were primarily due to lower benchmark oil prices. Average Brent and WTI oil prices for the
three months ended March 31, 2016
, decreased
37%
and
31%
, respectively, compared with the corresponding period in
2015
.
During periods of OTA pipeline disruptions, we have multiple transportation alternatives. Each transportation route has varying effects on realized prices and transportation costs. During the
three months ended March 31, 2016
,
54%
of our oil volumes sold in Colombia were sold through the OTA pipeline compared with
80%
in the corresponding period in
2015
. Sales during the
three months ended March 31, 2016
, reflected an inventory decrease in Ecuador of
235
Mbbl.
Oil and gas sales for the
three months ended March 31, 2016
,
increase
d by
5%
to
$57.4 million
from
$54.8 million
compared with the prior quarter primarily due to
higher
sales volumes, partially offset by
lower
realized prices. Average realized prices
decreased
by
29%
to
$24.81
per BOE for the
three months ended March 31, 2016
, compared with
$34.95
per BOE in the prior quarter, primarily due to
lower
benchmark oil prices. Average Brent oil prices for the
three months ended March 31, 2016
, were
$33.70
per bbl, compared with
$43.57
per bbl, in the prior quarter, a
23%
decrease
. During the prior quarter,
6%
of our oil volumes sold in Colombia were sold through the OTA pipeline compared with
54%
in the current quarter.
Transportation expenses
increase
d by
41%
to
$12.3 million
for the
three months ended March 31, 2016
, compared with the corresponding period in 2015. The
increase
was due to
higher
sales volumes combined with
increase
d transportation expenses per BOE. On a per BOE basis, transportation expenses
increase
d by
6%
to
$5.33
per BOE from
$5.02
per BOE in the corresponding period in
2015
. The
increase
was primarily due to the alternative transportation routes used during periods of OTA pipeline disruptions.
Transportation expenses for the
three months ended March 31, 2016
, were consistent with the prior quarter. The effect of
higher
sales volumes was offset by
decrease
d transportation costs per BOE. On a per BOE basis, transportation expenses
decrease
d by
31%
to
$5.33
per BOE from
$7.78
per BOE in the prior quarter. The
decrease
was primarily due to the alternative transportation routes used during periods of OTA pipeline disruptions.
Operating expenses
decrease
d by
16%
to
$19.1 million
for the
three months ended March 31, 2016
, compared with the corresponding period in
2015
. The
decrease
was due to
decrease
d operating costs per BOE, partially offset by
higher
sales volumes. On a per BOE basis, operating expenses
decrease
d by
37%
to
$8.24
per BOE for the
three months ended March 31, 2016
, from
$12.98
per BOE in the corresponding period in
2015
.
In Colombia, operating costs
decrease
d by
$4.15
per BOE primarily as a result of cost saving measures and the effect of the strengthening of the U.S. dollar against the local currency in Colombia, which resulted in savings for costs denominated in local currency.
In Brazil in the
three months ended March 31, 2016
, we reduced the value of a contingent loss by
$0.4 million
, or
$7.97
per bbl based on volumes sold in Brazil, after we settled a one-time penalty for less than we had estimated. The one-time penalty related to alleged non-compliance with certain requirements regarding the health and safety management system, identified during a safety and operational audit conducted by the ANP in early 2015. Additionally, in Brazil operating costs per BOE decreased as a result of a reduction in headcount and the effect of the strengthening of the U.S. dollar against the local currency in Brazil.
On a per BOE basis, operating expenses
decrease
d by
9%
to
$8.24
per BOE for the
three months ended March 31, 2016
, from
$9.09
per BOE in the prior quarter. Operating expenses
increased
by
34%
to
$19.1 million
in the
three months ended March 31, 2016
, compared with
$14.3 million
in the prior quarter primarily due to
higher
sales volumes, partially offset by the effect of
decrease
d operating costs per BOE.
DD&A expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Three Months Ended March 31, 2015
|
|
|
DD&A expenses, thousands of U.S. Dollars
|
DD&A expenses, U.S. Dollars Per BOE
|
|
DD&A expenses, thousands of U.S. Dollars
|
DD&A expenses, U.S. Dollars Per BOE
|
|
Colombia
|
$
|
35,736
|
|
$
|
15.80
|
|
|
$
|
46,255
|
|
$
|
27.41
|
|
|
Brazil
|
718
|
|
13.75
|
|
|
2,261
|
|
38.58
|
|
|
Peru
|
141
|
|
—
|
|
|
267
|
|
—
|
|
|
Corporate
|
317
|
|
—
|
|
|
357
|
|
—
|
|
|
|
$
|
36,912
|
|
$
|
15.95
|
|
|
$
|
49,140
|
|
$
|
28.15
|
|
DD&A expenses for the
three months ended March 31, 2016
,
decrease
d to
$36.9 million
(
$15.95
per BOE) from
$49.1 million
(
$28.15
per BOE) in the corresponding period in
2015
. On a per BOE basis, the decrease was due to lower costs in the depletable base and increased proved reserves.
On a per BOE basis, DD&A expenses
decrease
d by
24%
to
$15.95
per BOE for the
three months ended March 31, 2016
, from
$21.09
per BOE in the prior quarter.
Asset impairment
We follow the full cost method of accounting for our 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 during the 12 months 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 for that oil and natural gas. 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. We used an average Brent price of
$48.79
per bbl for the purposes of the
March 31, 2016
, ceiling test calculations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
(Thousands of U.S. Dollars)
|
|
2016
|
2015
|
|
Impairment of oil and gas properties
|
|
|
|
|
Colombia
|
|
$
|
54,568
|
|
$
|
—
|
|
|
Brazil
|
|
1,250
|
|
4,333
|
|
|
Peru
|
|
416
|
|
32,681
|
|
|
|
|
56,234
|
|
37,014
|
|
|
Impairment of inventory
|
|
664
|
|
—
|
|
|
|
|
$
|
56,898
|
|
$
|
37,014
|
|
In the
three months ended March 31, 2016
, and 2015, ceiling test impairment losses in our Colombia and Brazil cost centers and inventory impairment were primarily due to lower oil prices and impairment losses in our Peru cost center related to costs incurred on Block 95.
G&A expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Three Months Ended March 31,
|
|
(Thousands of U.S. Dollars)
|
|
2015
|
|
2016
|
2015
|
% Change
|
|
G&A Expenses Before Stock-Based Compensation, Gross
|
|
$
|
14,155
|
|
|
$
|
14,085
|
|
$
|
20,265
|
|
(30
|
)
|
|
Stock-Based Compensation
|
|
566
|
|
|
1,397
|
|
(530
|
)
|
(364
|
)
|
|
Capitalized G&A and Overhead Recoveries
|
|
(7,823
|
)
|
|
(6,677
|
)
|
(12,441
|
)
|
(46
|
)
|
|
|
|
$
|
6,898
|
|
|
$
|
8,805
|
|
$
|
7,294
|
|
21
|
|
|
U.S. Dollars Per BOE
|
|
$
|
4.40
|
|
|
$
|
3.80
|
|
$
|
4.18
|
|
(9
|
)
|
G&A expenses before stock-based compensation and capitalized G&A and overhead recoveries
decreased
by
30%
to
$14.1 million
(
$6.09
per BOE), from
$20.3 million
(
$11.61
per BOE), in the corresponding period in
2015
as a result of reductions in the number of our employees, commitment to cost control including focusing on all of our other G&A expenses, and the effect of the strengthening of the U.S. dollar against local currencies in South America and Canada which resulted in savings for costs denominated in local currency. G&A expenses in the
three months ended March 31, 2016
, included
$1.3 million
of costs relating to the acquisition of Petroamerica.
After stock-based compensation and capitalized G&A and overhead recoveries, G&A expenses for the
three months ended March 31, 2016
,
increase
d by
21%
to
$8.8 million
(
$3.80
per BOE), from
$7.3 million
(
$4.18
per BOE), in the corresponding period in
2015
. The
increase
was mainly due to lower allocations to capital projects due to lower capital activity. Additionally, G&A expenses in the corresponding period in 2015 were net of a credit of
$1.7 million
relating to the reversal of stock-based compensation expense for unvested stock options and RSUs associated with terminated employees.
G&A expenses before stock-based compensation and capitalized G&A and overhead recoveries were consistent with the prior quarter,
$14.1 million
(
$6.09
per BOE) compared with
$14.2 million
(
$9.03
per BOE). G&A expenses for the
three months ended March 31, 2016
,
increase
d by
28%
to
$8.8 million
(
$3.80
per BOE) compared with
$6.9 million
(
$4.40
per BOE) in the prior quarter. The
increase
was primarily due to lower allocations to capital projects due to lower capital activity and higher stock-based compensation expense.
Severance expenses
For the
three months ended March 31, 2016
, severance expenses were
$1.0 million
, compared with
$4.4 million
in the corresponding period in
2015
. Severance expenses were consistent with the decrease in headcount from both the corresponding period in the prior year and the prior quarter.
Equity tax expense
For the
three months ended March 31, 2016
, and
2015
equity tax expense of
$3.1 million
and
$3.8 million
, respectively, represented a Colombian tax which was calculated based on our Colombian legal entities' balance sheet equity for tax purposes at January 1, 2015. The legal obligation for each year's equity tax liability arises on January 1 of each year, therefore, we recognized the annual amounts of the equity tax expense in our interim unaudited condensed consolidated statement of operations during the three months ended
March 31, 2016
and
2015
.
Foreign exchange gains and losses
For the
three months ended March 31, 2016
, we had foreign exchange
loss
es of
$0.8 million
, compared with foreign exchange
gain
s of
$11.5 million
, in the corresponding period in
2015
. Under U.S. GAAP, deferred taxes are considered a monetary liability and require translation from local currency to U.S. dollar functional currency at each balance sheet date. This translation was the main source of the foreign exchange gains and losses. The following table presents the change in the Colombian peso against the U.S. dollar for the
three months ended March 31, 2016
, and 2015:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
Change in the Colombian peso against the U.S. dollar
|
strengthened by
|
|
weakened by
|
|
4%
|
|
8%
|
Financial instrument gains and losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
(Thousands of U.S. Dollars)
|
|
2016
|
|
2015
|
|
Trading securities loss (gain)
|
|
$
|
845
|
|
|
$
|
(412
|
)
|
|
Foreign currency derivatives loss
|
|
—
|
|
|
370
|
|
|
|
|
$
|
845
|
|
|
$
|
(42
|
)
|
Trading securities gains and losses related to unrealized losses on the Madalena Energy Inc. shares we received in connection with the sale of our Argentina business unit in June 2014. Foreign currency derivative gains and losses related to our Colombian peso non-deliverable forward contracts. We purchased these contracts for purposes of fixing the exchange rate at which we would purchase or sell Colombian pesos to settle our income tax installments and payments. At
March 31, 2016
, we did not have any open foreign currency derivative positions.
Income tax expense and recovery
For the
three months ended March 31, 2016
, income tax
recovery
was
$25.1 million
, compared with income tax expense of
$0.1 million
in the corresponding period in
2015
. The income tax
recovery
for the
three months ended March 31, 2016
, was primarily due to the ceiling test impairment loss in Colombia. The income tax recovery for the
three months ended March 31, 2016
, included
$22.4 million
associated with the ceiling test impairment loss in Colombia. In the
three months ended March 31, 2015
, income tax recovery associated with impairment losses in Peru and Brazil was offset by a full valuation allowance.
The effective tax rate was
36%
in the
three months ended March 31, 2016
, compared with
0.2%
in the corresponding period in
2015
. The change in the effective tax rate for the
three months ended March 31, 2016
, was due to a decrease in other permanent differences caused by the gain on acquisition, a decrease in the valuation allowance, as well as a decrease in the foreign currency translation and the impact of foreign taxes.
For the
three months ended March 31, 2016
, the difference between the effective tax rate of
36%
and the 35% U.S. statutory rate was primarily due to an increase in the valuation allowance, other local taxes and a non-deductible third party royalty in Colombia, partially offset by other permanent differences, the impact of foreign taxes and foreign currency translation. For the
three months ended March 31, 2015
, the difference between the effective tax rate of
0.2%
and the 35% U.S. statutory rate was primarily a result of a loss before income taxes caused by the 2015 impairment losses in Peru and Brazil which were fully offset by an increase in the valuation allowance. Other factors that affected the effective tax rate in the
three months ended March 31, 2015
, were other local taxes, a non-deductible third party royalty in Colombia and other permanent differences, partially offset by foreign currency translation adjustments.
Funds flow from operations
For the
three months ended March 31, 2016
, funds flow from operations
decrease
d by
61%
to
$11.4 million
compared with the corresponding period in
2015
. For the
three months ended March 31, 2016
,
our funds flow was negatively impacted by equity tax of
$3.1 million
, realized foreign exchange losses of
$1.0 million
, transaction costs of
$1.3 million
and severance expenses of
$1.0 million
. Lower
oil and natural gas sales,
higher
transportation and G&A expenses and realized foreign exchange
loss
es were partially offset by
lower
operating, severance, equity tax and income tax expenses and the absence of cash settlement of financial instruments.
2016
Capital Program
In January 2016, we announced our 2016 capital budget. Our base 2016 capital program of
$107.0 million
consists of:
$76.0 million
for Colombia;
$8.0 million
for Brazil;
$6.0 million
for Peru; and
$17.0 million
for other. Included in other expenditures are asset retirement obligations, geological and geophysical studies, environmental impact assessments, Health, Safety, and Environmental services, other technical services and capitalized G&A.
In Colombia, our base
2016
capital program includes two water injector wells in the Costayaco Field and three development wells in the Moqueta Field, both on the Chaza Block (100% WI, operated), two exploration wells in the Putumayo-7 Block (subject to regulatory approval, 100% WI, operated) and an exploration well on the Llanos-10 Block (50% WI, non-operated) with the costs being carried by a third party. Minor facilities work is also planned for the Chaza
In Peru, the
2016
capital program includes only those activities required for retention of lands and security of assets. In Brazil, the capital program includes minimal activity to implement water injection for reservoir pressure maintenance, and to preserve current production levels. In both Peru and Brazil, operations have been scaled back significantly, with the aim of allowing time to explore and execute on options to maximize shareholder value.
In addition to our 2016 base capital budget, we have a discretionary capital budget of $61 million that we may utilize during 2016 in the event of an increase in commodity prices. If deployed, we expect that our discretionary capital budget would target six exploration wells, five development wells and seismic activities in Colombia.
We expect to finance our
2016
capital program through cash flows from operations and cash on hand, while retaining financial flexibility to undertake further development opportunities and opportunistically pursue acquisitions.
Capital expenditures for the
three months ended March 31, 2016
, were
$26.2 million
compared with
$73.4 million
for the
three months ended March 31, 2015
. In
2016
, capital expenditures included drilling of
$20.5 million
, seismic of
$0.2 million
, facilities of
$1.8 million
and other expenditures of
$3.7 million
. Included in other expenditures are geological and geophysical studies, environmental impact assessments, Health, Safety, and Environmental services, other technical services and capitalized G&A.
Capital Expenditures - Colombia
Capital expenditures in our Colombian segment during the
three months ended March 31, 2016
, were
$22.0 million
. Capital expenditures in the
three months ended March 31, 2016
, consisted of drilling of
$18.7 million
, seismic of
$0.1 million
, facilities of
$0.9 million
and other expenditures of
$2.3 million
.
The significant elements of our
first
quarter
2016
capital program in Colombia were:
|
|
|
|
•
|
On the Chaza Block (100% working interest ("WI"), operated), we completed the Costayaco-24 development well and drilled and completed the Costayaco-23i, Costayaco-27i and Moqueta-20 development wells in the Costayaco and Moqueta Fields. All four wells were completed as oil producers. We completed a dual completion on the Moqueta-19i water injector well. We drilled the Moqueta-23 development well and started pre-drilling activities for the Moqueta 22 development well. The Moqueta 22 development well was spud subsequent to quarter end.
|
|
|
|
|
•
|
We continued facilities work at the Moqueta Field on the Chaza Block.
|
Capital Expenditures – Brazil
Capital expenditures in our Brazilian segment during the
three months ended March 31, 2016
, were
$2.7 million
, and consisted of drilling of
$1.5 million
, seismic of
$0.1 million
, facilities of
$0.9 million
and other expenditures of
$0.2 million
. In the
first
quarter of
2016
, we commenced work on a water injection/pressure support project with an initial workover ongoing on the 1-GTE-7HPC-BA well to assess potential as a water source well.
Capital Expenditures – Peru
Capital expenditures in our Peruvian segment for the
three months ended March 31, 2016
, were
$1.3 million
, and included
$0.4 million
on Block 95 and
$0.9 million
on our other blocks in Peru. In the
first
quarter of
2016
, operations in Peru continued to focus on maintaining tangible asset integrity and security of our five blocks in Peru (95, 107 and 133, 123 and 129) and moving forward with environmental approvals on Blocks 107 and 133 (100% WI, operated).
Liquidity and Capital Resources
At
March 31, 2016
, we had working capital of
$80.6 million
compared with
$160.4 million
at
December 31, 2015
. Working capital included cash and cash equivalents of
$51.3 million
and restricted cash of
$18.5 million
, compared with
$145.3 million
of cash and cash equivalents and restricted cash of
$0.1 million
at
December 31, 2015
. Of the opening balance of PGC restricted cash of
$18.6 million
, $6.6 million was released prior to March 31, 2016 and we expect that the remaining balance will be released this year.
Subsequent to March 31, 2016, we issued
$100 million
aggregate principal amount of our
5.00%
Convertible Senior Notes due 2021 (the "Notes
"
) in a private placement to qualified institutional buyers. On
April 22, 2016
, we issued an additional
$15 million
aggregate principal amount of the Notes pursuant to the underwriters’ exercise of their option to acquire additional Notes. Net proceeds from the sale of the Notes were approximately
$109.0 million
, after deducting the initial purchasers' discount and the offering expenses.
We believe that our cash resources, including cash on hand and cash generated from operations, will provide us with sufficient liquidity to meet our strategic objectives and planned capital program for
2016
, given current oil price trends and production levels. In accordance with our investment policy, cash balances are held in our primary cash management bank in interest earning current accounts or are invested in U.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 the flexibility to respond to both internal growth opportunities and those available through acquisitions.
At
March 31, 2016
,
81%
of our cash and cash equivalents were held by subsidiaries and partnerships outside of Canada and the United States. This cash was generally not available to fund domestic or head office operations unless funds were repatriated. As noted above, subsequent to March 31, 2016, our parent company in the United States received net proceeds of
$109.0 million
from the Notes offering. At this time, we do not intend to repatriate further funds, but if we did, we might have to accrue and pay withholding taxes in certain jurisdictions on the distribution of accumulated earnings. Undistributed earnings of foreign subsidiaries are considered to be permanently reinvested and a determination of the amount of unrecognized deferred tax liability on these undistributed earnings is not practicable.
The government in Brazil requires us to register funds that enter and exit the country with its central bank. In Brazil and Colombia, all transactions must be carried out in the local currency of the country. In Colombia, we participate in a special exchange regime, and we receive revenue in U.S. dollars offshore. We may also pay invoices denominated in U.S. dollars for our Colombian business from these U.S. dollars received offshore.
I
n Peru, expenditures may be paid in local currency or U.S. dollars.
Credit Facility
We have a credit facility with a syndicate of lenders. Availability under the credit facility is determined by a proven reserves-based borrowing base, and remains subject to the satisfaction of conditions precedent set forth in the credit agreement. Loans under the credit agreement are scheduled to mature on September 18, 2018. The initial borrowing base is
$200 million
and the borrowing base will be re-determined semi-annually based on reserve evaluation reports, subject to a maximum of
$500 million
. The next borrowing base redetermination is in late May 2016. The borrowing base for the credit facility is supported by the present value of the petroleum reserves of our subsidiaries with operating branches in Colombia. The credit agreement includes a letter of credit sub-limit of up to
$100 million
. Amounts drawn down under the facility bear interest, at our option, at the USD LIBOR rate plus a margin ranging from
2.00%
per annum to
3.00%
per annum, or an alternate base rate plus a margin ranging from
1.00%
per annum to
2.00%
per annum, in each case based on the borrowing base utilization percentage. Undrawn amounts under the credit facility bear interest at
0.75%
per annum, based on the average daily amount of unused commitments. A letter of credit participation fee of
0.25%
per annum will accrue on the average daily amount of letter of credit exposure. Under the terms of the credit facility, we are required to maintain compliance with certain financial and operating covenants which include: the maintenance of a ratio of debt, including letters of credit, to net income plus interest, taxes, depreciation, depletion, amortization, exploration expenses and all non-cash charges minus all non-cash income ("EBITDAX") not to exceed 4.00 to 1.0; the maintenance of a ratio of senior secured obligations to EBITDAX not to exceed 3.00 to 1.00; and the maintenance of a ratio of EBITDAX to interest expense of at least 2.5 to 1.0. As at December 31, 2015, we were in compliance with all financial and operating covenants in our credit agreement. As of
March 31, 2016
, no amounts have been drawn on this facility. Under the terms of the credit facility, we are limited in our ability to pay any dividends to our shareholders without bank approval.
Notes
The Notes bear interest at a rate of
5.00%
per year, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2016. The Notes will mature on April 1, 2021, unless earlier redeemed, repurchased or converted.
The Notes are convertible at the option of the holder at any time prior to the close of business on the business day immediately preceding the maturity date. The conversion rate is initially
311.4295
shares of Common Stock per
$1,000
principal amount of Notes (equivalent to an initial conversion price of approximately
$3.21
per share of Common Stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, we will increase the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event in certain circumstances.
We may not redeem the Notes prior to April 5, 2019, except in certain circumstances following a fundamental change as defined in the indenture governing the Notes). We may redeem for cash all or any portion of the Notes, at our option, on or after April 5, 2019, if (terms used below are as defined in the indenture governing the Notes):
(i) the last reported sale price of our Common Stock has been at least
150%
of the conversion price then in effect for at least
20
trading days (whether or not consecutive) during any
30
consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption; and
(ii) we have filed all reports that we are required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act, as applicable (other than current reports on Form 8-K), during the twelve months preceding the date on which we provide such notice.
The redemption price will be equal to
100%
of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. No sinking fund is provided for the Notes.
If we undergo a fundamental change, holders may require us to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
Cash Flows
During the
three months ended March 31, 2016
, our cash and cash equivalents
decrease
d by
$94.0 million
as a result of cash
used in
investing activities of
$107.2 million
(including
$50.9 million
and
$19.4 million
of cash used in investing activities in relation to the Petroamerica and PGC acquisitions, respectively), partially offset by cash
provided by
operating activities of
$10.8 million
and cash
provided by
financing activities of
$1.2 million
. During the
three months ended March 31, 2015
, our cash and cash equivalents
decrease
d by
$128.4 million
as a result of cash
used in
investing activities of
$128.3 million
, partially offset by cash
provided by
operating activities of
$2.3 million
and cash
provided by
financing activities of
$0.5 million
.
Cash
provided by
operating activities
in the
three months ended March 31, 2016
, was primarily affected by
lower
oil and natural gas sales,
higher
transportation and G&A expenses and realized foreign exchange
loss
es and a
$0.5 million
change in assets and liabilities from operating activities. These amounts were partially offset by
lower
operating, severance, equity tax and income tax expenses and the absence of cash settlement of financial instruments.
Cash used in investing activities
in the
three months ended March 31, 2016
, included an
increase
in restricted cash of
$10.8 million
, capital expenditures incurred of
$26.2 million
plus
$19.4 million
of cash paid for property, plant and equipment for the PGC acquisition and net cash paid for the Petroamerica acquisition of
$50.9 million
, partially offset by
$0.1 million
of net cash inflows related to changes in assets and liabilities associated with investing activities. Cash used in investing activities in the
three months ended March 31, 2015
, included an
increase
in restricted cash of
$0.5 million
, capital expenditures incurred of
$73.4 million
, and net cash outflows related to changes in assets and liabilities associated with investing activities of
$54.3 million
.
Cash
provided by
financing activities
in the
three months ended
March 31, 2016
and 2015, related to proceeds from issuance of shares of our Common Stock upon the exercise of stock options.
Off-Balance Sheet Arrangements
As at
March 31, 2016
, we had no off-balance sheet arrangements.
Contractual Obligations
As at
March 31, 2016
, there were no material changes to our contractual obligations outside of the ordinary course of business from those as of
December 31, 2015
.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are disclosed in Item 7 of our
2015
Annual Report on Form 10-K, filed with the SEC on
February 29, 2016
, and have not changed materially since the filing of that document, other than as follows:
Full Cost Method of Accounting and Impairments of Oil and Gas Properties
In the
three months ended March 31, 2016
, we recorded ceiling test impairment losses in our Colombia and Brazil cost centers of
$54.6 million
and
$1.3 million
, respectively, related to lower oil prices. Holding all factors constant other than benchmark oil prices, it is reasonably likely that we will experience ceiling test impairment losses in our Brazil and Colombia cost centers in the
second
quarter of
2016
.
It is difficult to predict with reasonable certainty the amount of expected future impairment losses given the many factors impacting the asset base and the cash flows used in the prescribed U.S. GAAP ceiling test calculation. These factors include, but are not limited to, future commodity pricing, royalty rates in different pricing environments, operating costs and negotiated savings, foreign exchange rates, capital expenditures timing and negotiated savings, production and its impact on depletion and cost base, upward or downward reserve revisions as a result of ongoing exploration and development activity, and tax attributes. Subject to these factors and inherent limitations, we believe that ceiling test impairment losses in the
second
quarter of
2016
could exceed
$11 million
in Brazil and
$109 million
in Colombia. The calculation of the impact of lower commodity prices on our estimated ceiling test calculation was prepared based on the presumption that all other inputs and assumptions are held constant with the exception of benchmark oil prices. Therefore, this calculation strictly isolates the impact of commodity prices on the prescribed GAAP ceiling test. This calculation was based on pro forma Brent oil price of
$44.46
per bbl for the year ended
June 30, 2016
. These pro forma oil prices were calculated using a 12-month unweighted arithmetic average of oil prices, and included the oil prices on the first day of the month for the ten months ended
April
30,
2016
, and, for the two months ended
June 30, 2016
, estimated oil prices for the
second
quarter of
2016
using the forward price curve forecast of our independent reserves evaluator dated April 1 2016.
As noted above, actual cash flows may be materially affected by other factors. For example, in Colombia, cash royalties are levied at lower rates in low oil price environments and foreign exchange rates can materially impact the deferred tax
component of the asset base, operating costs, and the income tax calculation. In Brazil, foreign exchange rates can materially impact operating costs and the income tax calculation.
Holding all factors constant other than benchmark oil prices and related royalty rates, we do not expect any downward adjustment to our consolidated NAR reserve volumes during the
second
quarter of
2016
. This disclosure is based on a pro forma Brent oil price of
$44.46
per bbl for the year ended
June 30, 2016
, calculated as described above.
Business Environment Outlook
Our revenues are significantly affected by the continuing fluctuations in world oil prices. Oil prices are volatile and unpredictable and are influenced by concerns about the quantity of world supply and demand fundamentals, market competition between large producers, predominately members of OPEC (Organization of Petroleum Producing Countries), for market share, political influences, financial markets and the impact of the worldwide economy on oil supply and demand growth.
We believe that our current operations and
2016
capital expenditure program can be funded from cash flow from existing operations and cash on hand. Should our operating cash flow decline due to unforeseen events, including additional pipeline delivery restrictions in Colombia or continued downturn in oil and gas prices, we would consider financing our capital expenditure program with borrowings under our revolving credit facility, proceeds from the disposition of assets or capital markets transactions, or a combination thereof, or we would consider reducing our capital expenditure program. We are the operator in the majority of our blocks and therefore have discretion on the timing of our capital expenditures. Given the current economic environment and unstable conditions in the Middle East, North Africa, and Europe and the current over supply of oil in world markets, the oil price environment is unpredictable and unstable. We are unable to determine the impact, if any, these events may have on oil prices and demand. The timing and execution of our capital expenditure program are also affected by the availability of services from third party oil field contractors and our ability to obtain, sustain or renew necessary government licenses and permits on a timely basis to conduct exploration and development activities. Any delay may affect our ability to execute our capital expenditure program.
The credit markets, including the high yield bond market and other debt markets that provide capital to oil and gas companies have experienced adverse conditions. We have not been materially impacted by these conditions; however, continuing volatility in oil prices may continue to contribute to these adverse conditions, which could increase costs associated with renewing or issuing debt or affect our ability to access those markets.
Our future growth and acquisitions may depend on our ability to raise additional funds through equity and debt capital market transactions. Should we access such capital markets to fund capital expenditures or other acquisition and development opportunities, such funding may be affected by the market value of shares of our Common Stock. Issuing additional shares of Common Stock, or other equity securities convertible into Common Stock, may further dilute our existing shareholders. Any securities we issue may have rights, preferences and privileges that are senior to our existing equity securities. Borrowing money may also involve further pledging of some or all of our assets may require compliance with debt covenants and will expose us to interest rate risk. Depending on the currency used to borrow money, we may also be exposed to further foreign exchange risk. Our ability to borrow money and the interest rate we pay for any money we borrow will be affected by market conditions and we cannot predict what price we may pay for any borrowed money.
For over 40 years, the Colombian government has been engaged in a conflict with two main Marxist guerrilla groups: the Revolutionary Armed Forces of Colombia ("FARC") and the National Liberation Army ("ELN"). Both of these groups have been designated as terrorist organizations by the United States and the European Union. Another threat comes from criminal gangs formed from the former members of the United Self-Defense Forces of Colombia militia, a paramilitary group that originally sprouted up to combat FARC and ELN, which the Colombian government successfully dissolved. We operate principally in the Putumayo Basin in Colombia. Pipelines have been primary targets because such pipelines cannot be adequately secured due to the sheer length of such pipelines and the remoteness of the areas in which the pipelines are laid. The CENIT S.A-operated Trans-Andean oil pipeline (the "OTA pipeline”) which transports oil from the Putumayo region and which is one of our export routes, has been targeted by these guerrilla groups. In the
three months ended March 31, 2016
, the OTA pipeline was shutdown for approximately
six
days, however this was unrelated to the FARC and for operational reasons.
While peace talks continue between the Colombian government and the FARC, peace process negotiations between the government and FARC may not generate the intended outcome for both parties. The impact of such a peace process is not determinable on our operations. Continuing attempts by the Colombian government to reduce or prevent guerrilla activity may not be successful and guerrilla activity may continue to disrupt our operations in the future. Our efforts to increase security measures may not be successful and there can also be no assurance that we can maintain the safety of our or our contractors'
field personnel and Bogota head office personnel or operations in Colombia or that this violence will not continue to adversely affect our operations in the future and cause significant loss.