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GTE Gran Tierra Energy

Filed: 2 Nov 20, 7:00pm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2020

or
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from __________ to __________
 
Commission file number 001-34018
 
GRAN TIERRA ENERGY INC.
(Exact name of registrant as specified in its charter)
 
Delaware
98-0479924
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
900, 520 - 3 Avenue SW
Calgary,AlbertaCanadaT2P 0R3
 (Address of principal executive offices, including zip code)
(403) 265-3221
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.001 per shareGTENYSE American
Toronto Stock Exchange
London Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   
Yes     No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.  
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.                                                                  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).      Yes No

On October 30, 2020, 366,981,556 shares of the registrant’s Common Stock, $0.001 par value, were issued.





Gran Tierra Energy Inc.

Quarterly Report on Form 10-Q

Quarterly Period Ended September 30, 2020

Table of contents
 
  Page
PART IFinancial Information 
Item 1.Financial Statements
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
PART IIOther Information
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.Exhibits
SIGNATURES
1


 CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q regarding our financial position, estimated quantities and net present values of reserves, business strategy, plans and objectives of our management for future operations, covenant compliance, capital spending plans, our financial condition, our liquidity, benefits of the changes in our capital program or expenditures, outlook for the business and financial position, the impacts of the novel coronavirus (COVID-19) pandemic and those statements preceded by, followed by or that otherwise include the words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “project”, “target”, “goal”, “plan”, “budget”, “objective”, “could”, “should”, or similar expressions or variations on these expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct or that, even if correct, intervening circumstances will not occur to cause actual results to be different than expected. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements, including, but not limited to, our ability to comply with covenants in our credit agreement and indentures and make borrowings under our credit agreement; our ability to obtain amendments to the covenants in our credit agreement so as to avoid an event of default under our credit agreement and senior notes; a reduction in our borrowing base and our ability to repay any excess borrowings; sustained or future declines in commodity prices and the demand for oil; continued or future excess supply of oil and natural gas; potential future impairments and reductions in proved reserve quantities and value; continued spread of the COVID-19 virus and extensions of previously announced lockdowns and possible future restrictions against oil and gas activity in Colombia and Ecuador; our operations are located in South America, and unexpected problems can arise due to guerilla activity and other local conditions; technical difficulties and operational difficulties may arise which impact the production, transport or sale of our products; geographic, political and weather conditions can impact the production, transport or sale of our products; our ability to raise capital; our ability to identify and complete successful acquisitions; our ability to execute business plans; unexpected delays and difficulties in developing currently owned properties may occur; the timely receipt of regulatory or other required approvals for our operating activities; the failure of exploratory drilling to result in commercial wells; unexpected delays due to the limited availability of drilling equipment and personnel; current global economic and credit market conditions may impact oil prices and oil consumption differently than we currently predict, which could cause us to further modify our strategy and capital spending program; volatility or declines in the trading price of our common stock and the continued listing of our shares on a national stock exchange; and those factors set out in Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in our 2019 Annual Report on Form 10-K (the "2019 Annual Report on Form 10-K"), and in our other filings with the Securities and Exchange Commission (“SEC”). The unprecedented nature of the current pandemic and downturn in the worldwide economy and oil and gas industry makes, including the unpredictable nature of the resurgence of cases and governmental responses, it more difficult to predict the accuracy of forward-looking statements. The information included herein is given as of the filing date of this Quarterly Report on Form 10-Q with the SEC and, except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to, or to withdraw, any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based.

GLOSSARY OF OIL AND GAS TERMS
 
In this document, the abbreviations set forth below have the following meanings:
 
bblbarrel
BOPDbarrels of oil per day
NARnet after royalty
 
Sales volumes represent production NAR adjusted for inventory changes. Our oil and gas reserves are reported NAR. Our production is also reported NAR, except as otherwise specifically noted as "working interest production before royalties."

PART I - Financial Information

Item 1. Financial Statements
 
2


Gran Tierra Energy Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(Thousands of U.S. Dollars, Except Share and Per Share Amounts)
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
OIL SALES (Note 7)$53,142 $132,491 $173,045 $443,049 
 
EXPENSES
Operating19,645 35,603 69,933 104,119 
Workover1,076 10,979 14,740 30,025 
Transportation1,286 3,179 8,549 16,167 
COVID-19 related costs (Note 8)1,108 1,529 
Depletion, depreciation and accretion31,340 49,812 131,118 164,430 
Goodwill impairment (Note 4)0 102,581 
Asset impairment (Note 4)104,731 507,093 
General and administrative4,562 7,637 16,476 25,874 
Severance122 140 1,469 1,082 
Foreign exchange loss4,275 6,840 20,094 5,581 
Financial instruments (gain) loss (Note 11)(713)12,285 51,869 (2,890)
Other loss67 11,305 67 11,305 
Interest expense (Note 5)14,029 12,153 40,204 30,655 
 181,528 149,933 965,722 386,348 
INTEREST INCOME0 130 345 660 
(LOSS) INCOME BEFORE INCOME TAXES(128,386)(17,312)(792,332)57,361 
INCOME TAX EXPENSE (RECOVERY)
Current (Note 9)637 3,049 560 13,923 
Deferred (Note 9)(21,202)8,472 (62,796)31,752 
(20,565)11,521 (62,236)45,675 
NET AND COMPREHENSIVE (LOSS) INCOME$(107,821)$(28,833)$(730,096)$11,686 
NET (LOSS) INCOME PER SHARE
BASIC AND DILUTED$(0.29)$(0.08)$(1.99)$0.03 
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC (Note 6)366,981,556 372,195,176 366,981,556 379,701,405 
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED (Note 6)366,981,556 372,195,176 366,981,556 379,701,664 
(See notes to the condensed consolidated financial statements)
3


Gran Tierra Energy Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(Thousands of U.S. Dollars, Except Share and Per Share Amounts)
 As at September 30, 2020As at December 31, 2019
ASSETS  
Current Assets  
Cash and cash equivalents (Note 12)$21,385 $8,301 
Restricted cash and cash equivalents (Note 12)423 516 
Accounts receivable4,502 36,291 
Investment (Note 11)33,209 94,741 
Taxes receivable48,166 135,838 
Other current assets14,289 15,001 
Total Current Assets121,974 290,688 
Oil and Gas Properties  
Proved715,772 1,258,934 
Unproved285,276 310,809 
Total Oil and Gas Properties1,001,048 1,569,743 
Other capital assets6,303 7,650 
Total Property, Plant and Equipment (Note 3)1,007,351 1,577,393 
Other Long-Term Assets  
Deferred tax assets40,600 44,003 
Taxes receivable38,479 25,869 
Restricted cash and cash equivalents (Note 12)3,007 2,258 
Other16 1,872 
Goodwill (Note 4)0 102,581 
Total Other Long-Term Assets82,102 176,583 
Total Assets$1,211,427 $2,044,664 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Current Liabilities  
Accounts payable and accrued liabilities$68,408 $195,513 
Derivatives (Note 11)3,184 775 
   Equity compensation award liability (Note 6 and 11)471 3,053 
Total Current Liabilities72,063 199,341 
Long-Term Liabilities  
Long-term debt (Notes 5 and 11)784,311 700,459 
Deferred tax liabilities0 59,762 
Asset retirement obligation45,585 43,419 
   Equity compensation award liability (Note 6 and 11)1,860 4,806 
Other long-term liabilities3,316 4,267 
Total Long-Term Liabilities835,072 812,713 
Contingencies (Note 10)
Shareholders’ Equity  
Common Stock (Note 6) (366,981,556 and 366,981,556 shares issued and outstanding of Common Stock, par value $0.001 per share, as at September 30, 2020, and December 31, 2019, respectively)10,270 10,270 
Additional paid-in capital1,284,405 1,282,627 
Deficit(990,383)(260,287)
Total Shareholders’ Equity304,292 1,032,610 
Total Liabilities and Shareholders’ Equity$1,211,427 $2,044,664 
(See notes to the condensed consolidated financial statements)
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Gran Tierra Energy Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Thousands of U.S. Dollars)
 Nine Months Ended September 30,
 20202019
Operating Activities  
Net (loss) income$(730,096)$11,686 
Adjustments to reconcile net (loss) income to net cash provided by operating activities: 
Depletion, depreciation and accretion131,118 164,430 
Goodwill impairment (Note 4)102,581 
Asset impairment (Note 4)507,093 
Deferred tax (recovery) expense(62,796)31,752 
Stock-based compensation (recovery) expense (Note 6)(707)1,092 
Amortization of debt issuance costs (Note 5)2,774 2,574 
Unrealized foreign exchange loss22,335 5,303 
Financial instruments loss (gain) (Note 11)51,869 (2,890)
Cash settlement of financial instruments9,970 (2,275)
Other non-cash loss2,026 11,305 
Cash settlement of asset retirement obligation(199)(707)
Non-cash lease expenses1,494 1,366 
Lease payments(1,404)(1,603)
Net change in assets and liabilities from operating activities (Note 12)23,288 (83,606)
Net cash provided by operating activities59,346 138,427 
Investing Activities  
Additions to property, plant and equipment(56,378)(310,579)
Property acquisitions, net of cash acquired0 (77,772)
Changes in non-cash investing working capital(69,549)20,138 
Net cash used in investing activities (Note 12)(125,927)(368,213)
Financing Activities  
Proceeds from bank debt, net of issuance costs (Note 5)88,382 246,000 
Repayment of bank debt (Note 5)(7,000)(189,000)
Repurchase of convertible notes0 (115,000)
Repurchase of shares of Common Stock0 (37,560)
Lease payments(307)
Proceeds from issuance of Senior Notes, net of issuance costs0 289,298 
Net cash provided by financing activities81,075 193,738 
Foreign exchange loss on cash, cash equivalents and restricted cash and cash equivalents(754)(1,506)
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents13,740 (37,554)
Cash, cash equivalents and restricted cash and cash equivalents, beginning of period (Note 12)11,075 54,308 
Cash, cash equivalents and restricted cash and cash equivalents, end of period (Note 12)$24,815 $16,754 
Supplemental cash flow disclosures (Note 12)  

(See notes to the condensed consolidated financial statements)
5


Gran Tierra Energy Inc.
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(Thousands of U.S. Dollars)
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Share Capital  
Balance, beginning of period$10,270 $10,285 $10,270 $10,290 
Repurchase and cancellation of Common Stock0 (15)0 (20)
Balance, end of period10,270 10,270 10,270 10,270 
Additional Paid-in Capital  
Balance, beginning of period1,283,798 1,295,106 1,282,627 1,318,048 
Stock-based compensation (Note 6)607 563 1,778 1,566 
Repurchase and cancellation of Common Stock0 (13,595)0 (37,540)
Balance, end of period1,284,405 1,282,074 1,284,405 1,282,074 
Deficit  
Balance, beginning of period(882,562)(258,459)(260,287)(298,588)
Net (loss) income(107,821)(28,833)(730,096)11,686 
  Cumulative adjustment for accounting
change related to leases
0 0 (390)
Balance, end of period(990,383)(287,292)(990,383)(287,292)
Total Shareholders’ Equity$304,292 $1,005,052 $304,292 $1,005,052 

(See notes to the condensed consolidated financial statements)

6


Gran Tierra Energy Inc.
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 oil and natural gas exploration and production 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 to that 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, 2019, included in the Company’s 2019 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 2019 Annual Report on Form 10-K and are the same policies followed in these interim unaudited condensed consolidated financial statements, except as noted below. The Company has evaluated all subsequent events through to the date these interim unaudited condensed consolidated financial statements were issued.

Recently Adopted Accounting Pronouncements

Financial Instruments - Credit Losses (ASC 326)

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses". This ASU replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to support credit loss estimates. In December 2019, the FASB issued ASU 2019-10, "Financial Instruments - Credit Losses, Derivatives and Hedging and Leases", which is codification improvement of ASU 2016-13. The Company adopted this ASU on January 1, 2020, the adoption of which had no impact on the Company.

At each reporting date, the Company assesses the expected lifetime credit losses on initial recognition of trade accounts receivable. Credit risk is assessed based on the number of days the receivable has been outstanding and the internal credit assessment of the customer. The expected loss rates are based on payment profiles over a period of 36 months prior to the period-end and the corresponding historical credit losses experienced within this period. Historical loss rates are adjusted to reflect current and forward looking economic factors of the country where the Company sells oil that affect the ability of the customers to settle the receivables. Trade receivables are written off when there is no reasonable expectation of recovery.

Risks and Measurement Uncertainty

In March 2020, the outbreak of the COVID-19 virus, which was declared a pandemic by the World Health Organization, has spread across the globe and impacted worldwide economic activity. In addition, global commodity prices declined significantly due to disputes between major oil producing countries combined with the impact of the COVID-19 pandemic and associated reductions in global demand for oil. Governments worldwide, including those in Colombia and Ecuador, the countries where the Company operates, enacted emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and physical distancing, caused material disruption to businesses globally resulting in an economic slowdown. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions; however, the success of these interventions is not currently determinable. The current challenging economic climate is having and may continue to have significant adverse impacts on the Company including, but not exclusively:
material declines in revenue and cash flows as a result of the decline in commodity prices;
declines in revenue and operating activities due to reduced capital programs and the shut-in of production;
impairment charges (see Note 4);
inability to comply with covenants and restrictions in debt agreements;
7


inability to access financing sources;
increased risk of non-performance by the Company’s customers and suppliers;
interruptions in operations as the Company adjusts personnel to the dynamic environment; and
inability to operate or delay in operations as a result COVID-19 restrictions in the countries in which the Company operates.

The unprecedented decline in oil prices has materially reduced the Company’s forecasted EBITDAX and the estimated value of its oil reserves. Based on current forecasted Brent pricing and production levels, which can change materially in very short time frames, the Company is forecasted to be in compliance with the amended financial covenants contained in the Company's Senior Secured Credit Facility (the "revolving credit facility") for at least the next year from the date of these financial statements. The amount available under the Company’s senior secured credit facility is based on the lenders determination of the borrowing base. The borrowing base is determined, by the lenders, based on the Company’s reserves and commodity prices. The next renewal of the borrowing base is scheduled for November 2020 and there is risk that the borrowing base may be reduced by the lenders. In addition, the Company’s ability to borrow under the credit facility may be limited by the terms of the indentures for the 6.25% Senior Notes and 7.75% Senior Notes.

The risk of non-compliance with the covenants in the lending agreements and the risk associated with maintaining the borrowing base is heightened in the current period of volatility coupled with the unprecedented disruption caused by the COVID-19 pandemic. Management currently expects that the Company will continue to meet the terms of the credit facility or obtain further amendments or waivers if and when required. The Company also expects to be able to maintain the borrowing base at a level in excess of the amount borrowed. However, there can be no assurances that the Company’s liquidity can be maintained at or above current levels during this period of volatility and global economic uncertainty.

The situation is dynamic and the ultimate duration and magnitude of the impact on the economy and the financial effect on the Company is not known at this time. Estimates and judgments made by management in the preparation of the financial statements are increasingly difficult and subject to a higher degree of measurement uncertainty during this volatile period. In the near term, matters in these financial statements that are most subject to be impacted by this volatile period are the Company's assessment of liquidity and access to capital, the carrying value of long-lived assets and the valuation of the deferred tax assets.

3. Property, Plant and Equipment
(Thousands of U.S. Dollars)As at September 30, 2020As at December 31, 2019
Oil and natural gas properties  
  Proved$3,937,361 $3,850,565 
  Unproved285,276 310,809 
 4,222,637 4,161,374 
Other(1)
32,297 26,287 
4,254,934 4,187,661 
Accumulated depletion and depreciation and impairment(3,247,583)(2,610,268)
$1,007,351 $1,577,393 
(1) Included in other are right-of-use assets for operating and finance leases, net book value of which was $5.1 million as at September 30, 2020 ($5.7 million as at December 31, 2019).

4. Impairment

Asset Impairment

(i) Oil and gas property impairment

For the three and nine months ended September 30, 2020, Gran Tierra recorded ceiling test impairment losses of $104.7 and $502.9 million, respectively, as a result of lower oil prices. The Company follows 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,
8


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 the Company's reserves. In accordance with GAAP, Gran Tierra used an average Brent price of $47.95 per bbl for the purposes of the September 30, 2020 ceiling test calculations (September 30, 2019 - $67.20). There was 0 ceiling test impairment for the three and nine months ended September 30, 2019.

(ii) Inventory Impairment

For the three and nine months ended September 30, 2020, the Company recorded $0.1 and $4.2 million, respectively, relating to the impairment of oil inventory due to the decline in commodity pricing. There was 0 inventory impairment for the three and nine months ended September 30, 2019.

Goodwill Impairment

For the three and nine months ended September 30, 2020, the Company recorded NaN and $102.6 million, respectively, of goodwill impairment relating to its Colombia business unit. The impairment was due to the carrying value of the unit exceeding its fair value as a result of the impact of lower forecasted commodity prices. The estimated fair value of the Colombia business 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. There was 0 goodwill impairment for the three and nine months ended September 30, 2019.

5. Debt and Debt Issuance Costs

The Company's debt at September 30, 2020 and December 31, 2019 was as follows:
(Thousands of U.S. Dollars)As at September 30, 2020As at December 31, 2019
6.25% Senior Notes$300,000 $300,000 
7.75% Senior Notes300,000 300,000 
Revolving credit facility200,000 118,000 
Unamortized debt issuance costs(18,925)(21,081)
Long-term debt781,075 696,919 
Long-term lease obligation(1)
3,236 3,540 
$784,311 $700,459 
(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 $3.3 million as at September 30, 2020 (December 31, 2019 - $3.3 million).

On June 1, 2020, the Company completed the semi-annual re-determination of the Company's revolving credit facility resulting in a reduction of the borrowing base from $300 million to $225 million with the next re-determination to occur in November 2020. Management has obtained a relief from compliance with certain financial covenants until October 1, 2021 ("the covenant relief period"), permitting the ratio of total debt to Covenant EBITDAX ("EBITDAX") to be greater than 4.0 to 1.0, Senior Secured Debt to EBITDAX ratio must not exceed 2.5 to 1.0, and EBITDAX to interest expense ratio for the trailing four quarter periods measured as of the last day of the fiscal quarters ending June 30, 2020 and September 30, 2020, must be at least 2.5 to 1.0; as of the last day of the fiscal quarters ending December 31, 2020 and March 31, 2021, must be at least 2.0 to 1.0; and back to at least 2.5 to 1.0 thereafter. The Company is required to comply with various covenants, which as disclosed above, have been modified in response to the current market conditions and the COVID-19 pandemic. As of September 30, 2020, the Company was in compliance with all applicable covenants in the revolving credit facility.

In addition to the covenant relief, the amendment to the credit agreement in connection with the semi-annual re-determination also amended the interest rate to either, at the borrower’s option, LIBOR plus a spread ranging from 2.90% to 4.90%, or base rate plus a spread ranging from 1.90% to 3.90%, with such spread in each case dependent upon our Senior Secured Leverage Ratio (as defined in the credit agreement), provided that during the covenant relief period the spread is increased by 125 basis points, (i) provided for a borrowing condition that we shall not have cash and cash equivalents (other than Excluded Cash, as defined in the credit agreement) in excess of $15.0 million, (ii) added certain mandatory prepayments, including for cash balances in excess of $15.0 million and (iii) amended and added certain negative covenants, including, without limitation, certain additional limitations on occurrence of indebtedness, liens and investments, the making of restricted payments, prepayments of indebtedness, and acquisitions and mergers.
9



After the expiration of covenant relief period, the Company must maintain compliance with the following financial covenants: limitations on Company's ratio of debt to 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 would 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.

Interest Expense

The following table presents total interest expense recognized in the accompanying interim unaudited condensed consolidated statements of operations:
Three Months Ended September 30,Nine Months Ended September 30,
(Thousands of U.S. Dollars)2020201920202019
Contractual interest and other financing expenses$13,191 $11,364 $37,430 $28,081 
Amortization of debt issuance costs838 789 2,774 2,574 
$14,029 $12,153 $40,204 $30,655 

6. Share Capital
Shares of Common Stock
Balance at December 31, 2019 and September 30, 2020366,981,556 

Equity Compensation Awards

The following table provides information about performance stock units (“PSUs”), deferred share units (“DSUs”), and stock option activity for the nine months ended September 30, 2020:
PSUsDSUsStock Options
Number of Outstanding Share UnitsNumber of Outstanding Share UnitsNumber of Outstanding Stock OptionsWeighted Average Exercise Price/Stock Option ($)
Balance, December 31, 201911,371,367 1,251,994 10,612,872 2.78 
Granted16,063,219 1,708,720 8,653,255 0.71 
Exercised(2,531,995)
Forfeited(1,629,187)(992,287)2.02 
Expired(2,847,970)3.48 
Balance, September 30, 202023,273,404 2,960,714 15,425,870 1.56 

For the three and nine months ended September 30, 2020, stock-based compensation expense was $1.3 million and stock-based compensation recovery was $0.7 million, respectively (three and nine months ended September 30, 2019 - expense of NaN and $1.1 million, respectively).

At September 30, 2020, there was $5.3 million (December 31, 2019 - $6.7 million) of unrecognized compensation cost related to unvested PSUs and stock options, which is expected to be recognized over a weighted average period of 1.8 years. During the nine months ended September 30, 2020, the Company paid out $3.2 million for PSUs which were vested on December 31, 2019 (nine months ended September 30, 2019 - $10.2 million for PSU's which were vested on December 31, 2018).

Net (Loss) Income per Share

10


Basic net (loss) income per share is calculated by dividing net (loss) income 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 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 that are 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 September 30,Nine Months Ended September 30,
 2020201920202019
Weighted average number of common shares outstanding366,981,556 372,195,176 366,981,556 379,701,405 
Shares issuable pursuant to stock options0 0 0 14,315 
Shares assumed to be purchased from proceeds of stock options0 0 0 (14,056)
Weighted average number of diluted common shares outstanding366,981,556 372,195,176 366,981,556 379,701,664 
Common shares outstanding, as at period end366,981,556 366,981,556 366,981,556 366,981,556 

For the three and nine months ended September 30, 2020, all options (three and nine months ended September 30, 2019 - 10,316,496 and 10,247,016, respectively), on a weighted average basis, were excluded from the diluted (loss) income per share calculation as the options were anti-dilutive.

7. Revenue

The Company's revenues are generated from oil sales at prices which reflect the blended prices received upon shipment by the purchaser at defined sales points or are defined by contract relative to ICE Brent and adjusted for Vasconia or Castilla crude differentials, quality, and transportation discounts each month. For the three and nine months ended September 30, 2020, 100% (three and nine months ended September 30, 2019 - 100%) of the Company's revenue resulted from oil sales. During the three and nine months ended September 30, 2020, quality and transportation discounts were 22% and 27%, respectively, of the average ICE Brent price (three and nine months ended September 30, 2019 - 16% and 15%, respectively). During the three and nine months ended September 30, 2020, the Company's production was sold primarily to two major customers in Colombia (three and nine months ended September 30, 2019 - three).

As at September 30, 2020, accounts receivable included NaN of accrued sales revenue related to September 2020 production (December 31, 2019 - $0.1 million related to December 31, 2019 production).

8. COVID-19 Costs

The COVID-19 pandemic resulted in extra operating and transportation costs related to COVID-19 health and safety preventative measures including incremental sanitation requirements and enhanced procedures for trucking barrels and crew changes in the field. Below is a break-down of the costs:

Three Months Ended September 30,Nine Months Ended September 30,
(Thousands of U.S. Dollars)2020201920202019
Operating expenses$1,012 $$1,433 $
Transportation costs96 96 
COVID-19 costs$1,108 $$1,529 $


11


9. Taxes

The Company's effective tax rate was 8% for the nine months ended September 30, 2020, compared to 79% in the comparative period of 2019. Current income tax expense was lower in the nine months ended September 30, 2020, compared to the corresponding period in 2019, primarily as a result of lower income in Colombia. The deferred income tax recovery for the nine months ended September 30, 2020, was the result of a ceiling test impairment loss in Colombia; which was partially offset by losses incurred in Colombia 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 depreciation in Colombia.

For the nine months ended September 30, 2020, the difference between the effective tax rate of 8% and the 32% Colombian tax rate was primarily due to an increase in the valuation allowance, foreign translation adjustments, the non-deductibility of goodwill impairment for tax purposes, and the non-deductible portion (50%) of the unrealized loss on the PetroTal shares.
For the nine months ended September 30, 2019, the difference between the effective tax rate of 79% and the 33% Colombian tax rate was primarily due to foreign currency translation adjustments, an increase in the valuation allowance and the impact of foreign tax rates.

10. 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 HPR royalties. Discussions with the ANH are ongoing. 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 September 30, 2020, the Company had provided letters of credit and other credit support totaling $96.6 million (December 31, 2019 - $120.6 million) as security relating to work commitment guarantees in Colombia and Ecuador contained in exploration contracts and other capital or operating requirements.

11. Financial Instruments and Fair Value Measurement

Financial Instruments

At September 30, 2020, the Company’s financial instruments recognized on the balance sheet consisted of: cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, investment, accounts payable and accrued liabilities, derivatives, long-term debt, equity compensation award liability and other long-term liabilities.

Fair Value Measurement

The fair value of investment, derivatives and equity compensation award liability is remeasured at the estimated fair value at the end of each reporting period.

Investment in PetroTal

The fair value of the Company's investment in PetroTal was estimated to be $33.2 million at September 30, 2020, based on the closing stock price of PetroTal of $0.18 CAD and the foreign exchange rate at that date. PetroTal is a publicly-traded energy company incorporated and domiciled in Canada engaged in exploration, appraisal and development of crude oil and natural gas in Peru. PetroTal's shares are listed on the Toronto Stock Exchange Venture under the trading symbol 'TAL' and on the London Stock Exchange Alternative Investment Market under the trading symbol 'PTAL'. Gran Tierra through a subsidiary holds approximately 246 million common shares representing approximately 30% of PetroTal's issued and outstanding common shares. Gran Tierra has the right to nominate two directors to the board of PetroTal.

Commodity and Foreign Currency Derivatives

12


The fair value of commodity price and foreign currency 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 the possibility of 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.

PSUs and DSUs

The fair value of the PSUs liability was estimated based on a pricing model using inputs such as quoted market prices in an active market, and PSUs performance factor. The fair value of DSUs liability is measured using quoted market prices in an active market.

The fair value of investment, derivatives and PSUs and DSUs liability at September 30, 2020, and December 31, 2019, was as follows:
(Thousands of U.S. Dollars)As at September 30, 2020As at December 31, 2019
Investment$33,209 $94,741 
Derivative liability$3,184 $775 
PSUs and DSUs liability
2,327 7,859 
$5,511 $8,634 

The following table presents gains or losses on financial instruments recognized in the accompanying interim unaudited condensed consolidated statements of operations:
Three Months Ended September 30,Nine Months Ended September 30,
(Thousands of U.S. Dollars)2020201920202019
Commodity price derivative (gain) loss$(2,206)$(24)$(12,983)$464 
Foreign currency derivatives loss33 337 3,566 392 
Investment loss (gain)1,055 11,972 60,124 (3,746)
Financial instruments loss405 1,162 
$(713)$12,285 $51,869 $(2,890)

Investment loss (gain) for the three and nine months ended September 30, 2020 and 2019, was related to the fair value loss (gain) on the PetroTal shares Gran Tierra received in connection with the sale of its Peru business unit in December 2017. For the three and nine months ended September 30, 2020 and 2019, this investment loss (gain) was unrealized.

Financial instruments not recorded at fair value include the Company's 6.25% Senior Notes due 2025 (the "6.25% Senior Notes") and 7.75% Senior Notes due 2027 (the "7.75% Senior Notes"). At September 30, 2020, the carrying amounts of the 6.25% Senior Notes and the 7.75% Senior Notes were $291.9 million and $290.6 million, respectively, which represented the aggregate principal amount less unamortized debt issuance costs, and the fair values were $103.6 million and $105.6 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.

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 consist of quoted prices (unadjusted) in active markets for identical assets and liabilities and have the highest priority. Level 2 and 3 inputs are based on significant other observable inputs and significant unobservable inputs, respectively, and have lower priorities. The Company uses appropriate valuation techniques based on the available inputs to measure the fair values of assets and liabilities.

At September 30, 2020, the fair value of the investment and DSUs liability was determined using Level 1 inputs, the fair value of derivatives and PSUs liability was determined using Level 2 inputs.
13



The Company uses available market data and valuation methodologies to estimate the fair value of debt. The fair value of debt is the estimated amount the Company would have to pay a third party to assume the debt, including a 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 Company’s Senior Notes and revolving credit facility to new issuances (secured and unsecured) and secondary trades of similar size and credit statistics for both public and private debt. The disclosure in the paragraph above regarding the fair value of cash and restricted cash and cash equivalents and Senior Notes was based on Level 1 inputs and the fair value of credit facility was based on Level 2 inputs.

The Company’s non-recurring fair value measurements include asset retirement obligations. 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.

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 flow in order to assure it can execute at least a portion of its capital spending.

At September 30, 2020, the Company had outstanding commodity price derivative positions as follows:
Period and type of instrumentVolume,
bopd
ReferenceSold Put ($/bbl, Weighted Average)Purchased Put ($/bbl, Weighted Average)Sold Call ($/bbl, Weighted Average)Premium ($/bbl, Weighted Average)
Collars: October 1, to December 31, 202011,000 ICE Brent27.05 35.68 43.43 0.54 
Collars: January 1, to June 30, 20219,000 ICE Brent35.56 45.22 52.48 n/a
Swaptions: July 1, to December 31, 20213,000 ICE Brentn/an/a56.75 n/a

Foreign Currency Derivatives

The Company utilizes foreign currency derivatives to manage the variability in cash flows associated with the Company's forecasted Colombian peso ("COP") denominated expenses. At September 30, 2020, the Company had outstanding foreign currency derivative positions as follows:
Period and type of instrumentAmount Hedged
(Millions of COP)
U.S. Dollar Equivalent of Amount Hedged (Thousands of U.S. Dollars)(1)
ReferenceFloor Price
(COP, Weighted Average)
Cap Price (COP, Weighted Average)
Collars: October 1, to December 31, 202036,750 9,474 COP3,306 3,425 
(1) At September 30, 2020 foreign exchange rate.

12. Supplemental Cash Flow Information

The following table provides a reconciliation of cash and cash equivalents and restricted cash and cash equivalents with the Company's interim unaudited condensed consolidated balance sheet that sum to the total of the same such amounts shown in the interim unaudited condensed consolidated statements of cash flows:
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(Thousands of U.S. Dollars)As at September 30,As at December 31,
2020201920192018
Cash and cash equivalents$21,385 $13,959 $8,301 $51,040 
Restricted cash and cash equivalents - current423 676 516 1,269 
Restricted cash and cash equivalents -
long-term (included in other long-term assets)
3,007 2,119 2,258 1,999 
$24,815 $16,754 $11,075 $54,308 





Net changes in assets and liabilities from operating activities were as follows:
Nine Months Ended September 30,
(Thousands of U.S. Dollars)20202019
Accounts receivable and other long-term assets$31,108 $3,476 
Derivatives694 (658)
Inventory(2,377)(3,403)
Prepaids(183)353 
Accounts payable and accrued and other long-term liabilities(57,621)(21,687)
Taxes receivable and payable51,667 (61,687)
Net changes in assets and liabilities from operating activities$23,288 $(83,606)

Changes in non-cash investing working capital for the nine months ended September 30, 2020, are comprised of a decrease in accounts payable and accrued liabilities of $69.9 million and an increase in accounts receivable of $0.3 million (nine months ended September 30, 2019, an increase in accounts payable and accrued liabilities of $19.7 million and an increase in accounts receivable of $0.4 million).

The following table provides additional supplemental cash flow disclosures:
Nine Months Ended September 30,
(Thousands of U.S. Dollars)20202019
Cash paid for income taxes$11,603 $38,022 
Cash paid for interest$35,408 $25,850 
Non-cash investing activities:
Net liabilities related to property, plant and equipment, end of period$7,805 $105,342 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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 third quarter of 2020
During the third quarter of 2020, we repaid $7.0 million of the amount drawn under the revolving credit facility, reduced our current accounts payable by $49.8 million or 53% since the end of the second quarter of 2020 and increased our cash balance by $5.9 from the end of the previous quarter
During the third quarter, we collected a total of $50.0 million in VAT and income tax refunds from the Colombian government and paid $4.9 million in VAT and income tax for a net reduction of $45.1 million in taxes receivable. Year-to-date, we have collected a total of $97.0 million in VAT and income tax refunds
With 2020's oil price volatility and logistical challenges due to COVID-19, we elected to keep third quarter 2020 capital expenditures relatively low at $7.4 million which is 94% decrease from the comparative quarter of 2019. We plan to restart development drilling operations in the fourth quarter of 2020 by drilling one to two new oil wells by 2020 year-end
Net loss was $107.8 million compared with a net loss of $28.8 million and a net loss of $370.6 million in the third quarter of 2019 and the second quarter of 2020, respectively
NAR production was 17,051 BOPD, 39% lower than the third 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 which has since been resolved by the end of the third quarter of 2020, and the shut-in of minor fields due to low price environment for the majority of the third quarter, partially offset by a decrease in royalties driven by lower oil prices
Oil sales volumes(1) were 17,066 BOPD, 38% and 11% lower than the third quarter of 2019 and the second quarter of 2020, respectively. The quarter's decrease in oil sales volumes was commensurate with lower production
Oil sales were $53.1 million, 60% lower and 57% higher compared to the third quarter of 2019 and the second quarter of 2020, respectively
Operating expenses decreased by 45% and increased by 9% compared to the third quarter of 2019 and the second quarter of 2020, respectively
Workover expenses decreased by 90% and 21% compared to the third quarter of 2019 and the second quarter of 2020, respectively, as a result of more cost efficient workover design, reduced staffing, and new contracts for workover rigs and electronic submersible pumps we forecast a 30%-35% decrease in cost per workover compared to 2019
Transportation expenses decreased by 60% compared to the third quarter of 2019 and the second quarter of 2020, respectively
Operating netback(2) was $31.1 million compared with $82.7 million in the third quarter of 2019 and increased by $19.9 million or 177% from the prior quarter
Adjusted EBITDA(2) was $21.8 million compared with $73.7 million in the third quarter of 2019 and increased by $3.9 million or 22% from the prior quarter
Funds flow from operations(2) decreased by 86% to $8.1 million compared with the third quarter of 2019, as a result of lower production and a 30% decrease in the price of Brent and increased $2.1 million or 35% from the prior quarter
Quality and transportation discounts per bbl were $9.49 compared to $10.05 in the third quarter of 2019. The decrease was due to lower Castilla differentials, slightly offset by higher Vasconia differentials during the third quarter of 2020
General and administrative ("G&A") before stock-based compensation decreased by 41% and 14% compared to the third quarter of 2019 and the second quarter of 2020, respectively, due to a mix of temporary and permanent cost saving measures, such as lowering consulting, travel and general office expenses in response to the low oil price environment and COVID-19 experienced during the current quarter
16


(Thousands of U.S. Dollars, unless otherwise indicated)Three Months Ended September 30,Three Months Ended June 30,Nine Months Ended September 30,
 20202019% Change202020202019% Change
Average Daily Volumes (BOPD)
Consolidated
Working Interest Production Before Royalties18,944 32,918 (42)20,165 22,864 35,454 (36)
Royalties(1,893)(5,155)(63)(1,757)(2,600)(5,929)(56)
Production NAR17,051 27,763 (39)18,408 20,264 29,525 (31)
Decrease (Increase) in Inventory15 (58)126 858 117 65 80 
Sales(1)
17,066 27,705 (38)19,266 20,381 29,590 (31)
Net (Loss) Income$(107,821)$(28,833)(274)$(370,649)$(730,096)$11,686 (6,348)
Operating Netback
Oil Sales$53,142 $132,491 (60)$33,824 $173,045 $443,049 (61)
Operating Expenses(19,645)(35,603)(45)(18,003)(69,933)(104,119)(33)
Workover Expenses(1,076)(10,979)(90)(1,361)(14,740)(30,025)(51)
Transportation Expenses(1,286)(3,179)(60)(3,226)(8,549)(16,167)(47)
Operating Netback(2)
$31,135 $82,730 (62)$11,234 $79,823 $292,738 (73)
G&A Expenses Before Stock-Based Compensation$4,506 $7,645 (41)$5,237 $17,183 $24,782 (31)
G&A Stock-Based Compensation Expense (Recovery)56 (8)800 1,292 (707)1,092 (165)
G&A Expenses, Including Stock-Based Compensation$4,562 $7,637 (40)$6,529 $16,476 $25,874 (36)
Adjusted EBITDA(2)
$21,790 $73,717 (70)$17,851 $74,157 $264,981 (72)
Funds Flow From Operations(2)
$8,056 $59,021 (86)$5,974 $36,257 $222,740 (84)
Capital Expenditures$7,354 $116,495 (94)$4,747 $56,378 $310,579 (82)
(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 and 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 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 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 (recovery). Adjusted EBITDA, as presented, is defined as EBITDA adjusted for goodwill and asset impairment, unrealized foreign exchange gains or losses, stock-based compensation expense or recovery, loss on redemption of Convertible Notes, other non-cash losses and unrealized financial instruments gains or losses. Management uses these supplemental measures to analyze performance and income or loss generated by our principal business activities prior to the consideration of how non-cash items affect that income or loss, 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:
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 Three Months Ended September 30,Three Months Ended June 30,Nine Months Ended September 30,
(Thousands of U.S. Dollars)20202019202020202019
Net (loss) income$(107,821)$(28,833)$(370,649)$(730,096)$11,686 
Adjustments to reconcile net (loss) income to EBITDA and Adjusted EBITDA
DD&A expenses31,340 49,812 42,484 131,118 164,430 
Interest expense14,029 12,153 13,365 40,204 30,655 
Income tax expense (recovery)(20,565)11,521 (76,575)(62,236)45,675 
EBITDA (non-GAAP)$(83,017)$44,653 $(391,375)$(621,010)$252,446 
Goodwill impairment — — 102,581 — 
Asset impairment104,731 — 398,458 507,093 — 
Unrealized foreign exchange loss (gain)3,080 6,412 (1,544)22,335 5,303 
Stock-based compensation expense (recovery)56 (8)1,292 (707)1,092 
Loss on redemption of Convertible Notes 11,305 —  11,305 
Other non-cash loss2,026 — — 2,026 — 
   Unrealized financial instruments (gain) loss(5,086)11,355 11,020 61,839 (5,165)
Adjusted EBITDA (non-GAAP)$21,790 $73,717 $17,851 $74,157 $264,981 

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 gains or losses, financial instruments gains or losses, loss on redemption of Convertible Notes, other non-cash losses 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 September 30,Three Months Ended June 30,Nine Months Ended September 30,
(Thousands of U.S. Dollars)20202019202020202019
Net (loss) income$(107,821)$(28,833)$(370,649)$(730,096)$11,686 
Adjustments to reconcile net (loss) income to funds flow from operations
DD&A expenses31,340 49,812 42,484 131,118 164,430 
Goodwill impairment — — 102,581 — 
Asset impairment104,731 — 398,458 507,093 — 
Deferred tax expense (recovery)(21,202)8,472 (76,200)(62,796)31,752 
Stock-based compensation expense (recovery)56 (8)1,292 (707)1,092 
Amortization of debt issuance costs838 789 1,092 2,774 2,574 
Non-cash lease expense523 472 481 1,494 1,366 
Lease payments(429)(755)(460)(1,404)(1,603)
Unrealized foreign exchange loss (gain)3,080 6,412 (1,544)22,335 5,303 
Financial instruments (gain) loss(713)12,285 164 51,869 (2,890)
Loss on redemption of Convertible Notes 11,305 —  11,305 
Other non-cash loss2,026 — — 2,026 — 
Cash settlement of financial instruments(4,373)(930)10,856 9,970 (2,275)
Funds flow from operations (non-GAAP)$8,056 $59,021 $5,974 $36,257 $222,740 


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Additional Operational Results

 Three Months Ended September 30,Three Months Ended June 30,Nine Months Ended September 30,
 20202019% Change202020202019% Change
(Thousands of U.S. Dollars)
Oil sales$53,142 $132,491 (60)$33,824 $173,045 $443,049 (61)
Operating expenses19,645 35,603 (45)18,003 69,933 104,119 (33)
Workover expenses1,076 10,979 (90)1,361 14,740 30,025 (51)
Transportation expenses1,286 3,179 (60)3,226 8,549 16,167 (47)
Operating netback(1)
31,135 82,730 (62)11,234 79,823 292,738 (73)
COVID-19 related costs1,108 — 100 421 1,529 — 100 
DD&A expenses31,340 49,812 (37)42,484 131,118 164,430 (20)
Goodwill impairment — — — 102,581 — 100 
Asset impairment104,731 — 100 398,458 507,093 — 100 
G&A expenses before stock-based compensation4,506 7,645 (41)5,237 17,183 24,782 (31)
G&A stock-based compensation expense (recovery)56 (8)800 1,292 (707)1,092 (165)
Severance expenses122 140 (13)25 1,469 1,082 36 
Foreign exchange loss (gain)4,275 6,840 (38)(2,988)20,094 5,581 260 
Financial instruments (gain) loss(713)12,285 (106)164 51,869 (2,890)1,895 
Other loss67 11,305 (99)— 67 11,305 (99)
Interest expense14,029 12,153 15 13,365 40,204 30,655 31 
159,521 100,172 59 458,458 872,500 236,037 270 
Interest income 130 (100)— 345 660 (48)
(Loss) income before income taxes(128,386)(17,312)(642)(447,224)(792,332)57,361 (1,481)
Current income tax expense (recovery)637 3,049 (79)(375)560 13,923 (96)
Deferred income tax expense (recovery)(21,202)8,472 (350)(76,200)(62,796)31,752 (298)
(20,565)11,521 (279)(76,575)(62,236)45,675 (236)
Net (loss) income$(107,821)$(28,833)(274)$(370,649)$(730,096)$11,686 (6,348)
Sales Volumes (NAR)
Total sales volumes, BOPD17,066 27,705 (38)19,266 20,381 29,590 (31)
Brent Price per bbl$43.34 $62.03 (30)$33.39 $42.53 $64.75 (34)
Consolidated Results of Operations per BOE Sales Volumes NAR
Oil sales$33.85 $51.98 (35)$19.29 $30.99 $54.85 (44)
Operating expenses12.51 13.97 (10)10.27 12.52 12.89 (3)
Workover expenses0.69 4.31 (84)0.78 2.64 3.72 (29)
19


Transportation expenses0.82 1.25 (34)1.84 1.53 2.00 (24)
Operating netback(1)
19.83 32.45 (39)6.40 14.30 36.24 (61)
COVID-19 related costs0.71 — 100 0.24 0.27 — 100 
DD&A expenses19.96 19.54 24.23 23.48 20.35 15 
Goodwill impairment — — — 18.37 — 100 
Asset impairment66.71 — 100 227.28 90.80 — 100 
G&A expenses before stock-based compensation2.87 3.00 (4)2.99 3.08 3.07 — 
G&A stock-based compensation expense (recovery)0.04 — 100 0.74 (0.13)0.14 (193)
Severance expenses0.08 0.05 60 0.01 0.26 0.13 100 
Foreign exchange loss (gain)2.72 2.68 (1.70)3.60 0.69 422 
Financial instruments (gain) loss(0.45)4.82 (109)0.09 9.29 (0.36)2,681 
Other loss0.04 4.44 (99)— 0.01 1.40 (99)
Interest expense8.94 4.77 87 7.62 7.20 3.79 90 
101.62 39.30 159 261.50 156.23 29.21 435 
Interest income 0.05 (100)— 0.06 0.08 (25)
(Loss) income before income taxes(81.79)(6.80)(1,103)(255.10)(141.87)7.11 (2,095)
Current income tax expense (recovery)0.41 1.20 (66)(0.21)0.10 1.72 (94)
Deferred income tax expense (recovery)(13.50)3.32 (507)(43.46)(11.24)3.93 (386)
(13.09)4.52 (390)(43.67)(11.14)5.65 (297)
Net (loss) income$(68.70)$(11.32)(507)$(211.43)$(130.73)$1.46 (9,054)
 
(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 Production and Sales Volumes, BOPD
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Average Daily Volumes (BOPD)
Working Interest ("WI") Production Before Royalties18,944 32,918 22,864 35,454 
Royalties(1,893)(5,155)(2,600)(5,929)
Production NAR17,051 27,763 20,264 29,525 
Decrease (Increase) in Inventory15 (58)117 65 
Sales17,066 27,705 20,381 29,590 
Royalties, % of WI Production Before Royalties10 %16 %11 %17 %

Oil production NAR for the three and nine months ended September 30, 2020, decreased by 39% and 31%, respectively, compared to the corresponding periods of 2019, as a result of shut-in production at the Suroriente and PUT-7 Blocks due to
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force majeure related to a local farmers' blockade which has since been resolved by the end of the third quarter of 2020, and the shut-in of minor fields due to low price environment for the majority of the third quarter.

Royalties as a percentage of production for the three and nine months ended September 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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The Midas block includes Acordionero, Mochuelo and Ayombero fields and the Chaza block includes Costayaco and Moqueta fields
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Operating Netback
Three Months Ended September 30,Three Months Ended June 30,Nine Months Ended September 30,
(Thousands of U.S. Dollars)20202019202020202019
Oil Sales$53,142 $132,491 $33,824 $173,045 $443,049 
Transportation Expenses(1,286)(3,179)(3,226)(8,549)(16,167)
51,856 129,312 30,598 164,496 426,882 
Operating Expenses(19,645)(35,603)(18,003)(69,933)(104,119)
Workover Expenses(1,076)(10,979)(1,361)(14,740)(30,025)
Operating Netback(1)
$31,135 $82,730 $11,234 $79,823 $292,738 
U.S. Dollars Per bbl Sales Volumes NAR
Brent$43.34 $62.03 $33.39 $42.53 $64.75 
Quality and Transportation Discounts(9.49)(10.05)(14.10)(11.54)(9.90)
Average Realized Price33.85 51.98 19.29 30.99 54.85 
Transportation Expenses(0.82)(1.25)(1.84)(1.53)(2.00)
Average Realized Price Net of Transportation Expenses33.03 50.73 17.45 29.46 52.85 
Operating Expenses(12.51)(13.97)(10.27)(12.52)(12.89)
Workover Expenses(0.69)(4.31)(0.78)(2.64)(3.72)
Operating Netback(1)
$19.83 $32.45 $6.40 $14.30 $36.24 
(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.

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Oil sales for the three months ended September 30, 2020 decreased 60% to $53.1 million as a result of a 30% decrease in Brent price and lower sales volumes, offset by lower quality and transportation discounts when compared to the corresponding period of 2019. For the nine months ended September 30, 2020 oil sales decreased 61% to $173.0 million as a result of a 34% decrease in Brent price, lower sales volumes and higher quality and transportation discounts when compared to the corresponding period of 2019. Compared with the prior quarter, oil sales increased 57% as a result of a 30% increase in Brent price and lower quality and transportation discounts, offset by lower sales volumes.

The following table shows the effect of changes in realized price and sales volumes on our oil sales for the three and nine months ended September 30, 2020 compared to the prior quarter and the corresponding periods of 2019:

(Thousands of U.S. Dollars)

Third Quarter 2020 Compared with Second Quarter 2020Third Quarter 2020 Compared with Third Quarter 2019Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019
Oil sales for the comparative period$33,824 $132,491 $443,049 
Realized sales price increase (decrease) effect22,851 (28,470)(133,242)
Sales volumes decrease effect(3,533)(50,879)(136,762)
Oil sales for the three and nine months ended September 30, 2020$53,142 $53,142 $173,045 

Average realized price for the three and nine months ended September 30, 2020 decreased 35% and 44%, respectively, compared to 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 to the prior quarter, the average realized price increased 75% due to higher benchmark oil prices and lower Vasconia and Castilla differentials.

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 primary focus is on maximizing operating netback. The following table shows the percentage of oil volumes we sold in Colombia using each option for the three and nine months ended September 30, 2020 and 2019, and the prior quarter:
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Three Months Ended September 30,Three Months Ended June 30,Nine Months Ended September 30,
20202019202020202019
Volume transported through pipeline %— %15 %5 %%
Volume sold at wellhead48 %54 %49 %45 %48 %
Volume transported via truck to sales point52 %46 %36 %50 %50 %
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 nine months ended September 30, 2020 decreased by 60% and 47% to $1.3 million and $8.5 million, respectively, compared to the corresponding periods of 2019, as a result of lower sales volumes during current periods. On a per bbl basis, transportation expenses decreased by 34% and 24% to $0.82 and $1.53, respectively, for the three and nine months ended September 30, 2020, as a result of utilization of alternative transportation routes during current periods of 2020, which had lower cost per bbl compared to the corresponding periods of 2019.

For the three months ended September 30, 2020, transportation expenses decreased by 60% compared to $3.2 million in the prior quarter. On a per bbl basis, transportation expenses decreased by 55% from $1.84 in the prior quarter. The Q3 2020 decrease when compared to the prior quarter is a result of no volumes being shipped through the OTA pipeline during the current period and an adjustment relating to tariffs previously paid on the OTA pipeline.

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Operating expenses for the three and nine months ended September 30, 2020 decreased by 45% and 33% to $19.6 and $69.9 million, respectively, compared to the corresponding periods of 2019. On a per bbl basis, operating expenses decreased by $1.46 and $0.37, respectively for the three and nine months ended September 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 periods of 2019. By the end of the third quarter of 2020, we commenced activation of 10 shut-in oil fields and restarted our workover program in the Acordionero field.

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Operating expenses for the three months ended September 30, 2020, increased by 9% compared with the prior quarter. On a per bbl basis, operating expenses for the three months ended September 30, 2020, increased by $2.24, primarily as a result of the cost associated with restarting operating activities of previously shut-in wells and lower sales volumes during the current quarter.
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Workover expenses on a per bbl basis, decreased to $0.69 and $2.64 for the three and nine months ended September 30, 2020, compared to $4.31 and $3.72, respectively, in the corresponding periods of 2019 due to less workover activities performed during current periods. Workover expenses decreased by $0.09 per bbl compared to the prior quarter as a result of minimal workover activities focused in the Acordionero field during the third quarter of 2020. As a result of more cost efficient work over design, reduced staffing, and new contracts for workover rigs and electronic submersible pumps we forecast a 30%-35% decrease in cost per workover compared to 2019.
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COVID-19 Costs

The COVID-19 pandemic resulted in extra operating and transportation costs related to COVID-19 health and safety preventative measures including incremental sanitation requirements and enhanced procedures for trucking barrels and crew changes in the field. COVID-19 costs relating to operating activities for the three and nine months ended September 30, 2020 were $1.0 million and $1.4 million, respectively. COVID-19 costs relating to transportation activities for the three and nine months ended September 30, 2020 were $0.1 million.

DD&A Expenses
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
DD&A Expenses, thousands of U.S. Dollars$31,340 $49,812 $131,118 $164,430 
DD&A Expenses, U.S. Dollars per bbl19.96 19.54 23.48 20.35 

DD&A expenses for the three and nine months ended September 30, 2020, decreased 37% and 20% and increased by $0.42 and $3.13 per bbl, respectively, due to lower production and lower costs in the depletable base as a result of the ceiling test impairment compared to the corresponding periods in 2019.

For the three months ended September 30, 2020 DD&A expenses decreased 26% or by $4.27 per bbl when compared to the prior quarter, due to lower production volumes and the reduction of the depletable base as a result of higher ceiling test impairment taken in the prior quarter.

Impairment
Three Months Ended September 30,Nine Months Ended September 30,
(Thousands of U.S. Dollars)2020201920202019
Oil and gas property impairment$104,659 $— $502,941 $— 
Inventory impairment72 — 4,152 — 
Asset Impairment104,731 — 507,093 — 
Goodwill impairment — 102,581 — 
$104,731 $ $609,674 $ 

Asset Impairment

(i) Oil and gas property impairment

For the three and nine months ended September 30, 2020, we recorded ceiling test impairment losses of $104.7 million and $502.9 million, respectively, as a result of lower oil prices compared to the oil prices in the corresponding periods of 2019. 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 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 the 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 $47.95 per bbl for the purposes of the September 30, 2020 ceiling test calculations (September 30, 2019 - $67.20). There was no ceiling test impairment for the three and nine months ended September 30, 2019.
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(ii) Inventory Impairment

For the three and nine months ended September 30, 2020, we recorded $0.1 million and $4.2 million, respectively, of impairment relating to inventory due to the decline in the commodity prices in 2020. There was no inventory impairment for the three and nine months ended September 30, 2019.

Goodwill Impairment

For the three and nine months ended September 30, 2020, we recorded nil and $102.6 million, respectively, of goodwill impairment relating to our Colombia 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 fields and lower forecasted commodity prices. The estimated fair value of the Colombia 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. Our goodwill consisted entirely of $102.6 million relating to the Solana Resources Limited and Argosy Energy International L.P. acquisitions in 2008 and 2006, respectively. There was no goodwill impairment for the three and nine months ended September 30, 2019.

G&A Expenses
Three Months Ended September 30,Three Months Ended June 30,Nine Months Ended September 30,
(Thousands of U.S. Dollars)20202019% Change202020202019% Change
G&A Expenses Before Stock-Based Compensation$4,506 $7,645 (41)$5,237 $17,183 $24,782 (31)
G&A Stock-Based Compensation Expense (Recovery)56 (8)800 1,292 (707)1,092 (165)
G&A Expenses, Including Stock-Based Compensation$4,562 $7,637 (40)$6,529 $16,476 $25,874 (36)
U.S. Dollars Per bbl Sales Volumes NAR
G&A Expenses Before Stock-Based Compensation$2.87 $3.00 (4)$2.99 $3.08 $3.07 — 
G&A Stock-Based Compensation Expense (Recovery)0.04 — 100 0.74 (0.13)0.14 (193)
G&A Expenses, Including Stock-Based Compensation$2.91 $3.00 (3)$3.73 $2.95 $3.21 (8)

For the three and nine months ended September 30, 2020, G&A expenses before stock-based compensation decreased by 41% and 31%, respectively, from the corresponding periods of 2019, due to cost saving measures implemented in 2020. On a per bbl basis, for the three months ended September 30, 2020, G&A expenses before stock-based compensation decreased 4% to $2.87 compared to the corresponding period of 2019, due to headcount optimization and cost saving measures implemented during the current quarter, such as lowering consulting, travel and general office expenses. On a per bbl basis, for the nine months ended September 30, 2020, G&A expenses were comparable to the corresponding period of 2019. The G&A expenses per bbl are consistent with a 31% and 39% decrease in production for the three and nine months ended September 30, 2020 when compared to the same periods of 2019, respectively. For the three months ended September 30, 2020, G&A expenses before stock-based compensation decreased 14% or $0.12 per bbl when compared to the prior quarter due to the continued impact of cost saving measures including lower consulting, travel and general office expenses.

G&A expenses after stock-based compensation for the three and nine months ended September 30, 2020 decreased by 40% and 36% (3% and 8% per bbl), 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 September 30, 2020 decreased by 30% (22% per bbl), compared with the prior quarter, primarily due to a lower stock-based compensation resulting from lower share price in the current period.

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Foreign Exchange Gains and Losses

For the three and nine months ended September 30, 2020, we had a $4.3 million and $20.1 million, respectively, loss on foreign exchange compared with a $6.8 million and a $5.6 million, respectively, loss on foreign exchange in the corresponding periods of 2019. Accounts receivable, taxes receivable, deferred income taxes, accounts payable and investments are considered monetary items, 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 losses in the periods.

The following table presents the change in the U.S. dollar against the Colombian peso and Canadian dollar for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Change in the U.S. dollar against the Colombian pesostrengthened bystrengthened bystrengthened bystrengthened by
3%8%18%7%
Change in the U.S. dollar against the Canadian dollarweakened bystrengthened bystrengthened byweakened by
2%1%3%3%


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Financial Instrument Gains and Losses

The following table presents the nature of our financial instruments gains and losses for the three and nine months ended September 30, 2020, and 2019:
Three Months Ended September 30,Nine Months Ended September 30,
(Thousands of U.S. Dollars)2020201920202019
Commodity price derivative (gain) loss$(2,206)$(24)$(12,983)$464 
Foreign currency derivatives loss33 337 3,566 392 
Investment loss (gain)1,055 11,972 60,124 (3,746)
Financial instruments loss405 — 1,162 — 
$(713)$12,285 $51,869 $(2,890)

Income Tax Expense
Three Months Ended September 30,Nine Months Ended September 30,
(Thousands of U.S. Dollars)2020201920202019
Income (loss) before income tax$(128,386)$(17,312)$(792,332)$57,361 
Current income tax expense$637 $3,049 $560 $13,923 
Deferred income tax expense (recovery)(21,202)8,472 (62,796)31,752 
Total income tax expense (recovery)$(20,565)$11,521 $(62,236)$45,675 
Effective tax rate16 %(67)%8 %79 %

Current income tax expense was lower for the nine months ended September 30, 2020, compared to the corresponding period of 2019, primarily as a result of lower income in Colombia. The deferred income tax recovery for the nine months ended September 30, 2020, was the result of a ceiling test impairment loss in Colombia; which was partially offset by losses incurred in Colombia 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 in Colombia.
For the nine months ended September 30, 2020, the difference between the effective tax rate of 8% and the 32% Colombian tax rate was primarily due to an increase in the valuation allowance, foreign translation adjustments, the non-deductibility of goodwill impairment for tax purposes, and the non-deductible portion (50%) of the unrealized loss on the PetroTal shares.

For the nine months ended September 30, 2019, the difference between the effective tax rate of 79% and the 33% Colombian tax rate was primarily due to foreign translation adjustments, an increase in the valuation allowance and the impact of foreign tax rates.
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Net Income and Funds Flow from Operations (a Non-GAAP Measure)
(Thousands of U.S. Dollars)Third Quarter 2020 Compared with Second Quarter 2020% changeThird Quarter 2020 Compared with Third Quarter 2019% changeNine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019% change
Net (loss) income for the comparative period$(370,649)$(28,833)11,686 
Increase (decrease) due to:
Sales price22,851 (28,470)(133,242)
Sales volumes(3,533)(50,879)(136,762)
Expenses:
   Operating(1,642)15,958 34,186 
   Workover285 9,903 15,285 
   Transportation1,940 1,893 7,618 
   Cash G&A731 3,139 7,599 
   Net lease payments73 377 327 
   Severance(97)18 (387)
   Interest, net of amortization of debt issuance
costs
(918)(1,827)(9,349)
   Realized foreign exchange(2,639)(767)2,519 
   Settlement of financial instruments(15,229)(3,443)12,245 
   Current taxes(1,012)2,412 13,363 
   Other income1,959 1,959 1,959 
   Covid-19 related costs(687)(1,108)(1,529)
   Interest income— (130)(315)
Net change in funds flow from operations(1) from comparative period
2,082 (50,965)(186,483)
Expenses:
   Depletion, depreciation and accretion11,144 18,472 33,312 
   Goodwill impairment— — (102,581)
   Asset impairment293,727 (104,731)(507,093)
   Deferred tax(54,998)29,674 94,548 
   Amortization of debt issuance costs254 (49)(200)
   Stock-based compensation1,236 (64)1,799 
   Financial instruments gain or loss, net of
financial instruments settlements
16,106 16,441 (67,004)
   Unrealized foreign exchange(4,624)3,332 (17,032)
   Loss on redemption of convertible debt(2,026)9,279 9,279 
   Net lease payments(73)(377)(327)
Net change in net (loss) income262,828 (78,988)(741,782)
Net loss for the current period$(107,821)71%$(107,821)(274)%$(730,096)(6,348)%

(1)Funds flow from operations 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 and reconciliation of this measure.

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Capital expenditures during the three months ended September 30, 2020 were $7.4 million:

(Millions of U.S. Dollars)
Colombia:
Exploration$1.7 
Development:
  Drilling and Completions— 
  Facilities1.1 
Other4.4 
7.2 
Corporate0.2 
$7.4 

During the three months ended September 30, 2020, we did not drill any exploration or development wells.

Liquidity and Capital Resources 
 As at
(Thousands of U.S. Dollars)September 30, 2020% ChangeDecember 31, 2019
Cash and Cash Equivalents and Current Restricted Cash and Cash Equivalents$21,808 147 $8,817 
Working Capital, Including Cash and Cash Equivalents$49,911 (45)$91,347 
Revolving Credit Facility$200,000 69 $118,000 
6.25% Senior Notes$300,000 — $300,000 
7.75% Senior Notes$300,000 — $300,000 

The outbreak of the COVID-19 virus, which was declared a pandemic by the World Health Organization, has spread across the globe and impacted worldwide economic activity. In addition, global commodity prices declined significantly due to disputes between major oil producing countries combined with the impact of the COVID-19 pandemic and associated reductions in global demand for oil. Governments worldwide, including those in Colombia and Ecuador, the countries where we operate, enacted emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused, and may continue to cause, material disruption to businesses globally resulting in an economic slowdown. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions however the success of these interventions is not currently determinable. The current challenging economic climate is having and may continue to have significant adverse impacts on our Company including, but not exclusively:
material declines in revenue and cash flows as a result of the decline in commodity prices;
declines in revenue and operating activities due to reduced capital programs and the shut-in of production;
impairment charges;
inability to comply with covenants and restrictions in debt agreements;
inability to access financing sources;
increased risk of non-performance by our customers and suppliers;
interruptions in operations as we adjust personnel to the dynamic environment; and
inability to operate or delay in operations as a result COVID-19 restrictions in the countries in which we operate

The unprecedented decline in oil prices has materially reduced our forecasted EBITDAX and the estimated value of our oil reserves. Based on current forecasted Brent pricing and production levels, which can change materially in very short time frames, we forecasted to be in compliance with the amended financial covenants contained in the revolving credit facility for at
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least the next year from the date of these financial statements. The amount available under our senior secured credit facility is based on the lenders determination of the borrowing base. The borrowing base is determined, by the lenders, based on our reserves and commodity prices. The next renewal of the borrowing base is scheduled for November 2020 and there is risk that the borrowing base may be reduced by the lenders. In addition, our ability to borrow under the credit facility may be limited by the terms of the indentures for the 6.25% Senior Notes and 7.75% Senior Notes.

The risk of non-compliance with the covenants in the lending agreements and the risk associated with maintaining the borrowing base is heightened in the current period of volatility coupled with the unprecedented disruption caused by the COVID-19 pandemic. Management currently expects that we will continue to meet the terms of the credit facility or obtain further amendments or waivers if and when required. We also expect to be able to maintain the borrowing base at a level in excess of the amount borrowed. However, there can be no assurances that our liquidity can be maintained at or above current levels during this period of volatility and global economic uncertainty.
The situation is dynamic and the ultimate duration and magnitude of the impact on the economy and the financial effect on our Company is not known at this time.
On June 1, 2020, we completed the semi-annual re-determination of our Senior Secured Credit Facility (the "revolving credit facility") resulting in a reduction of the borrowing base from $300 million to $225 million with the next re-determination to occur in November 2020. Management has obtained a relief from compliance with certain financial covenants until October 1, 2020, permitting the ratio of total debt to EBITDAX to be greater than 4.0 to 1.0, Senior Secured Debt to EBITDAX ratio must not exceed 2.5 to 1.0, and EBITDAX to interest expense ratio for the trailing four quarter periods measured as of the last day of the fiscal quarters ending June 30, 2020 and September 30, 2020, must be at least 2.5 to 1.0; as of the last day of the fiscal quarters ending December 31, 2020 and March 31, 2021 must be at least 2.0 to 1.0 and back to at least 2.5 to 1.0 thereafter. We are required to comply with various covenants, which as disclosed above, have been modified in response to the current market conditions and the COVID-19 pandemic. As of September 30, 2020, we were in compliance with all applicable covenants in the revolving credit facility.

After the expiration of covenant relief period, we must maintain compliance with the following financial covenants: limitations on our ratio of debt to EBITDAX to a maximum of 4.0 to 1.0; limitations on our 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.

In addition to the covenant relief, the amendment to the credit agreement in connection with the semi-annual re-determination also amended the interest rate to either, at the borrower’s option, LIBOR plus a spread ranging from 2.90% to 4.90%, or base rate plus a spread ranging from 1.90% to 3.90%, with such spread in each case dependent upon our Senior Secured Leverage Ratio (as defined in the credit agreement), provided that during the covenant relief period the spread is increased by 125 basis points, (i) provided for a borrowing condition that we shall not have cash and cash equivalents (other than Excluded Cash, as defined in the credit agreement) in excess of $15.0 million, (ii) added certain mandatory prepayments, including for cash balances in excess of $15.0 million and (iii) amended and added certain negative covenants, including, without limitation, certain additional limitations on occurrence of indebtedness, liens and investments, the making of restricted payments, prepayments of indebtedness, and acquisitions and mergers.

At September 30, 2020, we had $200.0 million drawn under the revolving credit facility with a syndicate of lenders with a borrowing base of $225.0 million. As of October 30, 2020, outstanding borrowings under our credit facility remained at $200.0 million. During the third quarter of 2020, we repaid $7.0 million of the amount drawn under the revolving credit facility. Accordingly, we had $25.0 million of availability under the revolving credit facility as of September 30, 2020. At September 30, 2020, we had $300.0 million aggregate principal amount of 6.25% Senior Notes due 2025, and $300.0 million aggregate principal amount of 7.75% Senior Notes due 2027 outstanding. An event of default under the revolving credit facility would result in a default under the indentures governing the senior notes, which could allow the note holders to require us to repurchase all of the outstanding Senior Notes.

In accordance with our investment policy, available cash balances are held in our primary cash management banks or may be 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.

Derivative Positions

At September 30, 2020, we had outstanding commodity price derivative positions as follows:
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Period and type of instrumentVolume,
bopd
ReferenceSold Put ($/bbl, Weighted Average)Purchased Put ($/bbl, Weighted Average)Sold Call ($/bbl, Weighted Average)Premium ($/bbl, Weighted Average)
Collars: October 1, to December 31, 202011,000 ICE Brent27.05 35.68 43.43 0.54
Collars: January 1, to June 30, 20219,000 ICE Brent35.56 45.22 52.48 n/a
Swaptions: July 1, to December 31, 20213,000 ICE Brentn/an/a56.75 n/a

Foreign Currency Derivatives

At September 30, 2020, we had outstanding foreign currency derivative positions as follows:
Period and type of instrumentAmount Hedged
(Millions COP)
U.S. Dollar Equivalent of Amount Hedged (Thousands of U.S. Dollars)(1)
ReferenceFloor Price
(COP, Weighted Average)
Cap Price (COP, Weighted Average)
Collars: October 1, to December 31, 202036,7509,474 COP3,306 3,425 
(1) At September 30, 2020 foreign exchange rate.

At September 30, 2020, our balance sheet included $3.2 million of current liabilities related to the above outstanding commodity price and foreign currency derivative positions.


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Cash Flows

The following table presents our primary sources and uses of cash and cash equivalents for the periods presented:
Nine Months Ended September 30,
(Thousands of U.S. Dollars)

20202019
Sources of cash and cash equivalents:
Net (loss) income$(730,096)$11,686 
Adjustments to reconcile net (loss) income to Adjusted EBITDA(1)
 and funds flow from operations(1)
DD&A expenses131,118 164,430 
Interest expense40,204 30,655 
Income tax expense(62,236)45,675 
Goodwill impairment102,581 — 
Asset impairment507,093 — 
Loss on redemption of convertible notes2,026 11,305 
Unrealized foreign exchange loss22,335 5,303 
Stock-based compensation (recovery) expense(707)1,092 
Unrealized financial instruments loss (gain)61,839 (5,165)
 Adjusted EBITDA(1)
74,157 264,981 
Current income tax expense(560)(13,923)
Contractual interest and other financing expenses(37,430)(28,081)
Non-cash lease expenses1,494 1,366 
Lease payments(1,404)(1,603)
Funds flow from operations(1)
36,257 222,740 
Proceeds from bank debt, net of issuance costs88,382 246,000 
Proceeds from issuance of Senior Notes, net of issuance costs 289,298 
Net changes in assets and liabilities from operating activities23,288 — 
Changes in non-cash investing working capital 20,138 
147,927 778,176 
Uses of cash and cash equivalents:
Additions to property, plant and equipment(56,378)(310,579)
Additions to property, plant and equipment - property acquisitions (77,772)
Repayment of bank debt(7,000)(189,000)
Repurchase of convertible notes (115,000)
Repurchase of shares of Common Stock (37,560)
Net changes in assets and liabilities from operating activities (83,606)
Changes in non-cash investing working capital(69,549)— 
Settlement of asset retirement obligations(199)(707)
Lease payments(307)— 
Foreign exchange loss on cash, cash equivalents and restricted cash and cash equivalents(754)(1,506)
(134,187)(815,730)
Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents$13,740 $(37,554)
 
(1) Adjusted EBITDA and funds flow from operations are a non-GAAP measures which do not have any standardized meaning prescribed under GAAP. Refer to “Financial and Operational Highlights - non-GAAP measures” for a definition and reconciliation of this measure.

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One of the primary sources of variability in our cash flows from operating activities is the fluctuation in oil prices, the impact of which we partially mitigate by entering into commodity price derivatives. Sales volume changes and costs related to operations and debt service also impact cash flow. Our cash flows from operating activities are also impacted by foreign currency exchange rate changes, the impact of which we partially mitigate by entering into foreign currency derivatives. During the nine months ended September 30, 2020, funds flow from operations decreased by 84% compared to the corresponding period of 2019 primarily due to a decrease in oil sales and an increase in interest expense, partially offset by lower cash G&A, lower operating expenses, lower current taxes and cash settlement of financial instruments.

Off-Balance Sheet Arrangements
 
As at September 30, 2020, we had no off-balance sheet arrangements.

Contractual Obligations

At September 30, 2020, we had $200.0 million drawn under our revolving credit facility.

Except for noted above, as at September 30, 2020, there were no other material changes to our contractual obligations outside of the ordinary course of business from those as at December 31, 2019.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are disclosed in Item 7 of our 2019 Annual Report on Form 10-K, and have not changed materially since the filing of that document, other than as follows:

Financial Instruments - Credit Losses

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses". This ASU replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires a broader range of reasonable and supportable information to support credit loss estimates. In December 2019, the FASB issued ASU 2019-10, "Financial Instruments - Credit Losses, Derivatives and Hedging and Leases", which is codification improvement of ASU 2016-13. We have adopted this ASU on January 1, 2020 and applied a current expected credit loss model to the accounts receivables that has resulted in no impact on our consolidated position, results of operation or cash flows.

Allowance for credit losses

At each reporting date, we assess the expected lifetime credit losses on initial recognition of trade accounts receivable. Credit risk is assessed based on the number of days the receivable has been outstanding and the internal credit assessment of the customer. The expected loss rates are based on payment profiles over a period of 36 months prior to the period-end and the corresponding historical credit losses experienced within this period. Historical loss rates are adjusted to reflect current and forward looking economic factors of the country where we sell oil affecting the ability of the customers to settle the receivables. Trade receivables are written off when there is no reasonable expectation of recovery.

Risks and Measurement uncertainty

In March 2020, the outbreak of the COVID-19 virus, which was declared a pandemic by the World Health Organization, has spread across the globe and impacted worldwide economic activity. In addition, global commodity prices declined significantly due to disputes between major oil producing countries combined with the impact of the COVID-19 pandemic and associated reductions in global demand for oil. Governments worldwide, including those in Colombia and Ecuador, the countries where we operate, enacted emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and physical distancing, have caused material disruption to businesses globally resulting in an economic slowdown. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions; however, the success of these interventions is not currently determinable. The current challenging economic climate is having and may continue to have significant adverse impacts on our Company including, but not exclusively:
material declines in revenue and cash flows as a result of the decline in commodity prices;
declines in revenue and operating activities due to reduced capital programs and the shut-in of production;
impairment charges;
inability to comply with covenants and restrictions in debt agreements;
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inability to access financing sources;
increased risk of non-performance by our customers and suppliers;
interruptions in operations as we adjust personnel to the dynamic environment; and
inability to operate or delay in operations as a result COVID-19 restrictions in the countries in which we operate

The situation is dynamic and the ultimate duration and magnitude of the impact on the economy and the financial effect on our Company is not known at this time. Estimates and judgments made by management in the preparation of the financial statements are increasingly difficult and subject to a higher degree of measurement uncertainty during this volatile period. In the near term, matters in these financial statements that are most subject to be impacted by this volatile period are our assessment of liquidity and access to capital, the carrying value of long-lived assets and the valuation of the deferred tax assets.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a Smaller Reporting Company, we are not required to provide information under this Item 3.

Item 4. Controls and Procedures
 
Disclosure Controls and Procedures
 
We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or Exchange Act). Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by Gran Tierra in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, as required by Rule l3a-15(b) of the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that Gran Tierra's disclosure controls and procedures were effective as of September 30, 2020.

Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

PART II - Other Information

Item 1. Legal Proceedings
 
See Note 10 in the Notes to the Condensed Consolidated Financial Statements (Unaudited) in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for any material developments with respect to matters previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019, and any material matters that have arisen since the filing of such report.

Item 1A. Risk Factors

There are numerous factors that affect our business and results of operations, many of which are beyond our control. In addition to information set forth in this quarterly report on Form 10-Q, including in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the risk factors described below, you should carefully read and consider the factors set out in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II, Item 1A, Risk Factors, of our Quarterly Report on Form 10-Q for the Quarters Ended March 31, 2020 and June 30, 2020. These risk factors could materially affect our business, financial condition and results of operations. The unprecedented nature of the current pandemic and downturn in the worldwide economy and oil and gas industry may make it more difficult to identify all the risks to our business, results of operations and financial condition and the ultimate impact of identified risks.

Prices and markets for oil and natural gas are unpredictable and tend to fluctuate significantly, which could cause temporary suspension of production and reduce our value.
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Substantially all of our revenues are derived from the sale of oil, the current and forward contract price which is based on world demand, supply, weather, pipeline capacity constraints, inventory storage levels, geopolitical unrest, world health events and other factors, all of which are beyond our control. Historically, the market for oil has been volatile, and for the past several years, the price of oil has been low. Recently, global oil and natural gas prices have declined to historic lows significantly due to a dispute between major oil producing countries combined with the impact of the shutdown in the world economy due to the COVID-19 pandemic. The market is likely to continue to be volatile in the future, and oil prices may remain at their currently depressed state. Furthermore, prices which we receive for our oil sales, while based on international oil prices, are established by contracts with purchasers with prescribed deductions for transportation and quality differentials. These differentials can change over time and have a detrimental impact on realized prices.

As a result of the low commodity price environment, we have temporarily suspended all development activities and operations in fields with zero or negative netbacks at current oil prices. We may consider shutting-in producing wells that are less economic than others. There can be no assurances when we will be able to resume production on suspended fields and what the restart costs will be. If our production and cash flows decline, it could have a material adverse effect on our results of operations and result in impairments and non-compliance with financial covenants in our debt instruments. For example, for the nine months ended September 30, 2020, we recorded $102.6 million impairment of goodwill and $507.1 million of oil and gas property and inventory impairment relating to our Colombia business unit. The goodwill 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 uneconomic oil production in and lower forecasted commodity prices. The oil and gas property impairment was a result of the net book value of oil and gas assets in our Colombia business unit, less related deferred income taxes, exceeding a calculated “ceiling”.

A continuation of the low demand for and prices of oil or sustained low prices may have a material adverse effect on our financial condition, the future results of our operations (including rendering existing projects unprofitable or requiring temporary suspension of fields), financing available to us, and quantities of reserves recoverable on an economic basis, as well as the market price for our securities.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.
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Item 6. Exhibits
Exhibit No.DescriptionReference
3.1Incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K, filed with the SEC on November 4, 2016 (SEC File No. 001-34018).
3.2Incorporated by reference to Exhibit 3.4 to the Current Report on Form 8-K, filed with the SEC on November 4, 2016 (SEC File No. 001-34018).
3.3Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on July 9, 2018 (SEC File No. 001-34018).
31.1Filed herewith.
   
31.2Filed herewith.
32.1Furnished herewith.

101.INS  XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH  Inline XBRL Taxonomy Extension Schema Document
101.CAL  Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB  Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE  Inline XBRL Taxonomy Extension Presentation Linkbase Document
104.The cover page from Gran Tierra Energy Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL (included within the Exhibit 101 attachments).


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
GRAN TIERRA ENERGY INC.
Date: November 2, 2020/s/ Gary S. Guidry
 By: Gary S. Guidry
 President and Chief Executive Officer
 (Principal Executive Officer)
  
Date: November 2, 2020/s/ Ryan Ellson
 By: Ryan Ellson
Executive Vice President and Chief Financial Officer
 (Principal Financial and Accounting Officer)

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