UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 8-K
____________________
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): August 1, 2016
____________________
Gran Tierra Energy Inc. | ||
(Exact name of registrant as specified in its charter) | ||
____________________ | ||
Nevada | 001-34018 | 98-0479924 |
(State or other jurisdiction of incorporation) |
(Commission File Number) | (IRS Employer Identification Number) |
200, 150-13th Avenue S.W. Calgary, Alberta, Canada T2R 0V2 | ||
(Address of principal executive offices and Zip Code) | ||
(403) 265-3221 | ||
(Registrant’s telephone number, including area code) |
____________________
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 8.01 | Other Events. |
As previously reported on a Current Report on Form 8-K filed July 7, 2016 with the Securities and Exchange Commission, on June 30, 2016, Gran Tierra Energy International Holdings Ltd., a wholly-owned indirect subsidiary of Gran Tierra Energy Inc. (“Gran Tierra”), entered into a share purchase agreement (the “Acquisition Agreement”) with Tribeca Oil & Gas Inc., Macquarie Bank Limited and Rorick Ventures Group Inc., as vendors (the “Vendors”), and Petrolatina Energy Limited (“PetroLatina”) providing for the acquisition of PetroLatina for cash consideration of $525 million (the “Acquisition”). Funding for the Acquisition will consist of an initial payment of $500 million at closing, subject to closing adjustments, and a deferred payment of $25 million to be paid prior to December 31, 2016. The Acquisition was unanimously approved by the board of directors of Gran Tierra. The Vendors collectively hold more than 80% of the shares of PetroLatina. Under the terms of the Acquisition Agreement, it is a condition of closing that all of the remaining shares of PetroLatina are acquired pursuant to the drag-along provisions of the Articles of Association of PetroLatina upon the closing of the Acquisition. The Acquisition is subject to the satisfaction or waiver of customary closing conditions, including, among other things, regulatory approvals. Approval from the Agencia Nacional de Hidrocarburos (National Hydrocarbon Agency) of Colombia, was received on July 29, 2016 and the Acquisition is expected to close prior to August 31, 2016.
As the Acquisition is deemed probable, attached as Exhibit 99.1 and incorporated by reference herein are the audited consolidated financial statements of PetroLatina and its subsidiaries as of December 31, 2015 and 2014, and for the years then ended, including the footnotes thereto. The independent auditors’ report of BDO LLP is also included in Exhibit 99.1.
Attached as Exhibit 99.2 and incorporated herein by reference are the unaudited pro forma consolidated financial statements of Gran Tierra as of March 31, 2016, for the three months ended March 31, 2016 and for the year ended December 31, 2015, including the footnotes thereto.
Item 9.01 | Financial Statements and Exhibits. |
(d) Exhibits
Exhibit Number |
Description | |
23.1 | Consent of BDO LLP, independent accountants. | |
99.1 | Audited financial statements of PetroLatina Energy Limited as of December 31, 2015 and 2014, and for each of the two years then ended. | |
99.2 | Unaudited pro forma consolidated financial statements as of March 31, 2016, for the three months ended March 31, 2016, and for the year ended December 31, 2015. |
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SIGNATURE
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 hereunto duly authorized.
Dated: August 1, 2016 | GRAN TIERRA ENERGY INC. | ||
By: | /s/ David Hardy | ||
Name: | David Hardy | ||
Title: | V.P. Legal and General Counsel |
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EXHIBIT INDEX
Exhibit Number |
Description | |
23.1 | Consent of BDO LLP, independent accountants. | |
99.1 | Audited financial statements of PetroLatina Energy Limited as of December 31, 2015 and 2014, and for each of the two years then ended. | |
99.2 | Unaudited pro forma consolidated financial statements as of March 31, 2016, for the three months ended March 31, 2016, and for the year ended December 31, 2015. |
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Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
Gran Tierra Energy Inc.
Calgary, Canada
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-140171, 333-153376, 333-156993 and 333-205801) and Form S-8 (No. 333-146815, 333-156994, 333-171122 and 333-183029) of Gran Tierra Energy Inc. of our report dated August 1, 2016, relating to the consolidated financial statements of PetroLatina Energy Limited, which appears in the Form 8-K of Gran Tierra Energy Inc. dated August 1, 2016.
/s/ BDO LLP
London, United Kingdom
August 1, 2016
Exhibit 99.1
PetroLatina Energy Limited
Consolidated statement of comprehensive income
For the years ended 31 December 2015 and 2014
PetroLatina Energy Limited
Consolidated financial statements
As at and for the two years ended 31 December 2015
Independent Auditor’s Report
Board of Directors
PetroLatina Energy Limited
London, United Kingdom
We have audited the accompanying consolidated financial statements of PetroLatina Energy Limited and its subsidiaries, which comprise the consolidated statement of financial position as of December 31, 2015 and 2014, and the related consolidated statements of comprehensive income, changes in equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PetroLatina Energy Limited and its subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
/s/ BDO LLP
London, United Kingdom
August 1, 2016
PetroLatina Energy Limited
Consolidated statement of comprehensive income
For the years ended 31 December 2015 and 2014
Note | 2015 US$'000 | 2014 US$'000 | ||||||||||
Revenue | 4 | 81,682 | 82,365 | |||||||||
Impairment of oil and gas assets | 8, 9 | 47,651 | 7,516 | |||||||||
Depreciation of property, plant and equipment | 8 | 15,094 | 15,446 | |||||||||
Cost of sales to related party | 22 | 23,105 | 13,575 | |||||||||
Other cost of sales | 12,092 | 11,699 | ||||||||||
Total cost of sales | 97,942 | 48,236 | ||||||||||
Gross (loss) / profit | (16,260 | ) | 34,129 | |||||||||
Administrative expenses | (6,928 | ) | (5,722 | ) | ||||||||
(Loss) / profit from operations | 5 | (23,188 | ) | 28,407 | ||||||||
Other income / (expense) | 30 | (4 | ) | |||||||||
Finance income | 6 | 124 | 112 | |||||||||
Derivative | - | (545 | ) | |||||||||
Other finance expenses | (4,237 | ) | (2,797 | ) | ||||||||
Total finance expense | 6 | (4,237 | ) | (3,342 | ) | |||||||
(Loss) / profit before tax | (27,271 | ) | 25,171 | |||||||||
Taxation | 7 | (16,977 | ) | (11,194 | ) | |||||||
(Loss) / profit for the year | (44,248 | ) | 13,977 | |||||||||
Total (loss)/profit and comprehensive (loss)/income for the year attributable to equity shareholders of the parent | (44,248 | ) | 13,977 |
The notes form part of these consolidated financial statements.
PetroLatina Energy Limited | |
Consolidated statement of financial position | |
As at 31 December 2015 and 2014 | |
Note | 2015 | 2014 | ||||||||||
US$'000 | US$'000 | |||||||||||
ASSETS | ||||||||||||
Non-current assets | ||||||||||||
Restricted cash | 14 | 3,363 | 4,705 | |||||||||
Property, plant and equipment | 8 | 88,399 | 136,076 | |||||||||
Intangible Exploration and Evaluation Assets | 9 | 13,568 | 14,349 | |||||||||
Deferred tax asset | 17 | 2,578 | 571 | |||||||||
107,908 | 155,701 | |||||||||||
Current assets | ||||||||||||
Inventories | 11 | 221 | 674 | |||||||||
Trade and other receivables | 12 | 3,483 | 2,444 | |||||||||
Withholding taxes | 13 | 2,887 | 2,858 | |||||||||
Other Assets | 128 | - | ||||||||||
Cash and cash equivalents | 21,514 | 13,935 | ||||||||||
28,233 | 19,911 | |||||||||||
Total Assets | 136,141 | 175,612 | ||||||||||
LIABILITIES | ||||||||||||
Non-current liabilities | ||||||||||||
Provisions | 18 | 5,924 | 7,047 | |||||||||
Loans and borrowings | 16 | 71,011 | 58,659 | |||||||||
Deferred tax liability | 17 | 8,363 | 545 | |||||||||
85,298 | 66,251 | |||||||||||
Current liabilities | ||||||||||||
Trade and other payables | 15 | 15,247 | 28,298 | |||||||||
Short term loans and borrowings | 16 | 494 | 802 | |||||||||
Income tax | 5,785 | 6,696 | ||||||||||
21,526 | 35,796 | |||||||||||
Total Liabilities | 106,824 | 102,047 | ||||||||||
Total Net Assets | 29,317 | 73,565 | ||||||||||
EQUITY | ||||||||||||
Share capital | 19 | 31,733 | 31,733 | |||||||||
Share premium | 94,044 | 94,044 | ||||||||||
Share option reserve | 117 | 117 | ||||||||||
Accumulated deficit | (96,577 | ) | (52,329 | ) | ||||||||
Total equity | 29,317 | 73,565 |
The financial statements were approved by the Board of Directors and authorised for issue on 1 August 2016.
/s/ Juan Carlos Rodriguez
Director
The notes form part of these consolidated financial statements.
PetroLatina Energy Limited
Consolidated statement of cash flows
For the years ended 31 December 2015 and 31 December 2014
Note | 2015 | 2014 | ||||||||||
US$’000 | US$’000 | |||||||||||
(Loss) / profit for the year | (44,248 | ) | 13,977 | |||||||||
Other (income) / expense | (30 | ) | 4 | |||||||||
Derivative revaluation | 6 | - | (902 | ) | ||||||||
Derivative settlement | 6 | - | 1,447 | |||||||||
Share-based payments | 3 | - | 156 | |||||||||
Depreciation of property, plant and equipment | 8 | 15,094 | 15,446 | |||||||||
Impairment of oil and gas assets | 8,9 | 47,651 | 7,516 | |||||||||
Finance income | 6 | (124 | ) | (112 | ) | |||||||
Finance expense | 6 | 3,555 | 2,797 | |||||||||
Decommissioning | 1,110 | - | ||||||||||
Taxation | 7 | 16,977 | 11,194 | |||||||||
Cash flows from operating activities before changes in working capital and provisions | 39,985 | 51,523 | ||||||||||
Decrease / (increase) in inventories | 11 | 453 | (391 | ) | ||||||||
(Increase) / decrease in trade and other receivables | 12 | (1,196 | ) | 10,935 | ||||||||
(Decrease) / increase in trade and other payables | 15 | (13,980 | ) | 10,260 | ||||||||
Cash generated from continuing operations | 25,262 | 72,327 | ||||||||||
Income taxes paid | (9,371 | ) | (334 | ) | ||||||||
Net cash inflow from operating activities | 15,891 | 71,993 | ||||||||||
Investing activities | ||||||||||||
Finance income | 6 | 124 | 112 | |||||||||
Purchase of property, plant and equipment | 8 | (6,465 | ) | (58,576 | ) | |||||||
Payments for oil & gas exploration and development assets | 9 | (18,555 | ) | (3,274 | ) | |||||||
Farm Out proceeds | 9 | 6,787 | - | |||||||||
Restricted cash | 14 | 262 | (1,907 | ) | ||||||||
Sale of other asset | 30 | (4 | ) | |||||||||
Net cash flows used in investing activities | (17,816 | ) | (63,649 | ) |
The notes form part of these consolidated financial statements.
PetroLatina Energy Limited
Consolidated statement of cash flows
For the years ended 31 December 2015 and 31 December 2014
Note | 2015 | 2014 | ||||||||||
US$’000 | US$’000 | |||||||||||
Financing activities | ||||||||||||
Issue of ordinary share capital | 19 | - | 128 | |||||||||
Shares redemption | 19 | - | (18,000 | ) | ||||||||
Short and long term loans drawn down during the period | 16 | 11,628 | 19,241 | |||||||||
Derivative settlement | 6 | - | (1,447 | ) | ||||||||
Interest paid | 6 | (3,204 | ) | (2,797 | ) | |||||||
Net cash flows from / (used in) financing activities | 8,424 | (2,875 | ) | |||||||||
Increase in cash and cash equivalents excluding restricted cash | 6,499 | 5,469 | ||||||||||
Cash and cash equivalents at the start of the year | 13,935 | 8,466 | ||||||||||
Exchange (losses)/gains on cash and cash equivalents | 1,080 | - | ||||||||||
Cash and cash equivalents at the end of the year | 21,514 | 13,935 |
The notes form part of these consolidated financial statements.
PetroLatina Energy Limited
Consolidated statement of changes in equity
For the years ended 31 December 2015 and 31 December 2014
Share capital | Share premium | Share option reserve | Accumulated deficit | Total equity | ||||||||||||||||
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | ||||||||||||||||
Balance at 1 January 2014 | 31,606 | 111,158 | 2,116 | (68,183 | ) | 76,697 | ||||||||||||||
Total comprehensive income for the year | - | - | - | 13,977 | 13,977 | |||||||||||||||
Issue of share capital – Exercise of Warrants | 800 | 5,729 | - | - | 6,529 | |||||||||||||||
Share capital - Buy Back and cancelled | (809 | ) | (5,691 | ) | - | - | (6,500 | ) | ||||||||||||
Issue of share capital – Exercise of Options - Share-based payment | 137 | 846 | (1,999 | ) | 1,877 | 862 | ||||||||||||||
Issue of share capital – Redeemable Shares | 18,000 | |||||||||||||||||||
Redemption of Redeemable Shares | (18,000 | ) | (18,000 | ) | - | - | (18,000 | ) | ||||||||||||
Balance as at 31 December 2014 | 31,733 | 94,044 | 117 | (52,329 | ) | 73,565 | ||||||||||||||
Total comprehensive loss for the year | - | - | - | (44,248 | ) | (44,248 | ) | |||||||||||||
Balance as at 31 December 2015 | 31,733 | 94,044 | 117 | (96,577 | ) | 29,317 |
The following describes the nature and purpose of each reserve within owners' equity:
Reserve | Descriptions and purpose |
Share capital | Amount subscribed for share capital at nominal value. |
Share premium | Amount subscribed for share capital in excess of nominal value. |
Share option reserve | Fair value amounts resulting from the issue of share options. |
Accumulated deficit | Cumulative net gains and losses recognised in the consolidated statement of comprehensive income. |
The notes form part of these consolidated financial statements.
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
1 | Accounting policies |
The particular accounting policies adopted are described below. They have all been applied consistently throughout the current year and preceding year.
Nature of Operations
The principle activity of PetroLatina Energy Limited a company incorporated in the United Kingdom, and its subsidiaries (the “Company” or “Group”) is the exploration, development and production of oil and gas assets in Colombia.
Basis of accounting
These consolidated financial statements were prepared for purposes of inclusion in a Form 8-K to be filed with the United States Securities and Exchange Commission, see also Note 25. The financial statements do not constitute statutory accounts within the meaning of section 434 of Companies Act 2006 in the United Kingdom. The Company prepared the statutory financial statements, as permitted by rules and regulations of the Companies Act 2006, financial statements under Generally Accepted Accounting Practice in the United Kingdom (‘UK GAAP’) for each of the two years ended 31 December 2015, which have each been filed with the Registrar of Companies in the United Kingdom. Those statutory accounts for each of the two years ended 31 December 2015 have been reported on by BDO LLP acting as the Independent Auditors under applicable law and the International Standards on Auditing (UK and Ireland). The Independent Auditors' Reports’ on the Annual Reports and Financial Statements for 2015 and 2014 were unqualified, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.
Directors’ responsibilities
The consolidated financial statements of the Group have been prepared by and are the responsibility of the directors of PetroLatina Energy Limited. The directors are responsible for preparing the financial statements in accordance with applicable law and regulations. Company law of England and Wales, the country in which the Company is incorporated requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB). In preparing these financial statements, the directors are required to select suitable accounting policies and then apply them consistently, make judgements and accounting estimates that are reasonable and prudent and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Basis of preparation
These financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRS) as issued by the International Accounting Standards Board (IASB).
The consolidated financial statements have been prepared on a historical cost basis. The consolidated financial statements are presented in US Dollars (“US$”) and all values are rounded to the nearest thousand ($000), except when otherwise indicated.
The IFRS financial information has been drawn up on the basis of accounting standards, interpretations and amendments effective at the beginning of the accounting period.
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PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
1 | Accounting policies (continued) |
Basis of consolidation
The consolidated financial statements incorporate the financial statements of PetroLatina Energy Limited and entities controlled by the Company up to 31 December each year. Control is achieved when the Company has the power over the investee, is exposed, or has rights, to variable return from its involvement with the investee, and has the ability to use its power to affects its returns.
On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any interest of non-controlling shareholders is stated at the non-controlling’s proportion of the fair values of the assets and liabilities recognised. Any excess of the cost of acquisition over the fair values of identifiable net assets is recognised as goodwill. The results of subsidiaries acquired or disposed during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by other members of the Group. All intercompany transactions and balances between Group entities are eliminated on consolidation.
Going concern
Whilst the group’s production has increased, despite the low price environment, the Group has maintained a robust cashflow. The Group currently has access to sufficient financial resources to meet its working capital requirements for the following 12 months from the date of approval of these financial statements. At the year end, the Group had cash and cash equivalents of US$ 21.51 million (2014: US$13.94 million). The Group has a US$80 million reserve based lending facility with BNP Paribas. At the year end, US$8 million remained undrawn. Since the year end the Group has drawn down this amount. Please refer to note 25 – Post year end events. The Group has postponed its exploratory contractual commitments for more than 12 months with approval of ANH and therefore its plans for the remainder of 2016 include the drilling of one development well and certain additions of facilities in Acordionero.
The Group is aware of BNP Paribas decision to halt the redevelopment of its reserve-based lending business, and notes that BNP Paribas remains fully committed to service existing reserve-based lending clients, such as the Group, to provide them with solutions that best fit their needs. As of the date of approval of these financial statements, the Group remains fully compliant with its obligations under the senior credit facility with BNP Paribas, including all financial covenant and other tests set out in the Group’s senior debt facility with BNP Paribas. The Group undertakes forward looking forecast of the covenants in order to make an assessment of compliance.
Revenue recognition
Sales revenues relating to the sale of crude oil and gas are recognised when the product is received by the customer and are net of taxes and royalty interests. Revenue is recognized when the revenue can be measured reliably and it is likely that the entity will receive economic benefit.
Production testing revenue and cost
Revenues generated from new oil or gas well test production whilst a development decision is pending from the local Oil & Gas authority are recognised as revenue consistently with crude oil or gas revenues. All costs associated with test production are recognised in cost of sales.
9 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
1 | Accounting policies (continued) |
Oil and gas assets
The following policy definitions provide the guidelines for the accounting treatment of Oil and Gas assets including properties, wells, facilities, pipelines and other related oil and gas producing assets during all stages of exploration and production activities.
The Group applies the successful efforts based method of accounting for oil and gas operations.
Under the successful efforts based method of accounting, costs are capitalised if they lead to or represent the development of the oil and gas assets that either have to be appraised or have been appraised as successful. If evaluation of the oil and gas asset leads to the conclusion that the asset is not economic, the costs incurred in acquiring this asset are expensed through the statement of comprehensive income as an impairment charge. Oil and gas assets are capitalised and assessed for economic viability on a field by field basis.
For evaluated properties with economic values exceeding the exploration and development costs incurred after the grant of the license, these related costs, which may include geological and geophysical costs, costs of drilling exploration and development wells, costs of field (defined as an exploration area) production facilities, including commissioning and infrastructure costs, are capitalised. These expenditures are combined into asset groups which have independent cash flows and subsequently are depreciated over the expected economic lives of those asset groups. The expenditure within the asset group with a useful life equal to the producing life of the field is depleted on a unit-of-production basis. The assets formed by capitalisation of these costs are referred to as oil and gas assets.
The costs incurred to evaluate potential assets prior to the grant of Exploration and Production (“E&P”) licenses are expensed.
Once the costs are capitalised as oil and gas assets, the cost is amortized over the life of the asset, over the unit of production basis. The applicable depreciation rate is calculated considering the capital expenditures incurred in developing the reserves, plus the future capex needed to develop the proved undeveloped reserves and the probable reserves, divided into the number of proved reserves plus probable reserves, stated on the most recent reserves report, which should be released at least once a year by an independent petroleum engineering firm.
If the management does not intend to develop the proved and probable undeveloped reserves, these reserves will not be included in the calculation, and nor will the future cost to develop such reserves.
Workovers are capitalised within proven oil and gas assets, provided that these result in an increase in reserves or in a reduction of future costs, otherwise, they are expensed.
Amounts received relating to proceeds from a farm-out are recognised in the statement of financial position by offsetting it against the asset to which it relates. If farm-out proceeds received exceed the net book value of the asset to which it relates, the excess is recognised as other income in the statement of comprehensive income. Farm out fees received are recognised when the Group becomes contractually entitled to the farm-out proceeds.
Intangible oil and gas assets – Exploration and Evaluation (“E&E”)
Intangible oil and gas assets represent costs that have been incurred after the grant of the license where the properties still have to be evaluated and where production of hydrocarbons has yet to commence. Costs related to such unevaluated properties are not amortised until such time as the related property has been appraised and put on production.
Exploration and evaluation assets are regarded as intangible fixed assets until it has been established whether they are associated with commercially producible reserves of hydrocarbons or not. If the efforts associated with the costs of these assets are successful, these assets are reclassified into development and/or producing assets, which are subject to regular impairment reviews on a field-by-field basis.
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PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
1. | Accounting policies (continued) |
Impairment review
Impairment reviews of E&E assets are carried out on a field-by-field basis. An assessment is made of whether there are any indicators of impairment. If there are indicators of impairment then a full impairment review is carried out.
After a well has been drilled, its future economic performance is evaluated. If the economic value of the well exceeds the drilling cost, the costs of the well are reclassified from E&E to proven oil and gas assets. If the economic value of the well is lower than its cost, impairment is recognised in the statement of comprehensive income before the costs of the well are reclassified from E&E to proven oil and gas assets.
Impairment reviews of proven oil and gas assets are carried out on a field-by-field basis. At each reporting date an impairment review is carried out by comparing the carrying value of the proven oil and gas assets to the higher of the value in use and fair value less costs to sell of the relevant field. If the net book value is higher than the underlying economic value of the asset, as defined by value in use or fair value less costs to sell, then the difference is written off to the statement of comprehensive income as impairment. Expected future cash flows are calculated using production profiles and costs determined on a field-by-field basis by in-house engineers and independent petroleum engineering firms, using appropriate petroleum engineering techniques, and using oil price forecasts, which are developed by the Group for business planning purposes.
Decommissioning
Where a material liability for the removal of production facilities and site restoration at the end of the productive life of a field exists, a provision for decommissioning is recognised. The amount recognised is the present value of estimated future expenditure determined in accordance with local conditions and requirements. The unwinding discount arising on the recognition of the provision is released to the statement of comprehensive income and included within finance expense. An oil and gas asset of an amount equivalent to the provision is also created within the cost of the asset and depreciated on a unit of production basis. Changes in estimates are recognised prospectively, with corresponding adjustments to the provision and the associated fixed asset. Any gain or loss resulting from the utilisation of the provision is recognised in cost of sales as it is incurred.
Joint arrangements
Joint arrangements are arrangements in which the Group shares joint control with one or more parties. Joint control is the contractually agreed sharing of control of an arrangement, and exists only when decisions about the activities that significantly affect the arrangement’s returns require the unanimous consent of the parties sharing control.
Joint arrangements are classified as either joint operations or joint ventures based on the rights and obligations of the parties to the arrangement. In joint operations, the parties have rights to the assets and obligations for the liabilities relating to the arrangement, whereas in joint ventures, the parties have rights to the net assets of the arrangement.
Joint arrangements that are not structured through a separate vehicle are always joint operations. Joint arrangements that are structured through a separate vehicle may be either joint operations or joint ventures depending on the substance of the arrangement. In these cases, consideration is given to the legal form of the separate vehicle, the terms of the contractual arrangement and, when relevant, other facts and circumstances. When the activities of an arrangement are primarily designed for the provision of output to the parties, and the parties are substantially the only source of cash flows contributing to the continuity of the operations of the arrangement, this indicates the parties to the arrangements have rights to the assets and obligations for the liabilities.
The Group accounts for all its joint arrangements as joint operations by recognising the assets, liabilities, and expenses for which it has rights or obligations, including its share of such items held or incurred jointly.
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PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
1 | Accounting policies (continued) |
Property, plant and equipment
Property, plant and equipment assets, currently comprising:
- | Fixtures, fittings and equipment (straight line, 3-5 years) |
- | Field plant and machinery (straight line, 3-5 years) |
- | Proven Oil & Gas assets - unit of production basis over life of assets – based upon P1 and P2 reserves, taking in to account expected future capital expenditure to develop the P2 reserves. |
If property, plant and equipment is disposed it is de-recognised from the statement of financial position as at the date of disposal.
Taxation
The tax expense represents the sum of the current tax charge and the movement in deferred tax.
Current tax, including UK corporation and any overseas tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the reporting date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial information and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.
Deferred tax assets and liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
Wealth Tax
Effective January 1, 2015, the Colombian Congress introduced a new wealth tax that is calculated on a taxable base (net equity) in excess of COP$1 billion ($0.4 million) as at January 1 of the applicable taxation year. The applicable rates for January 1, 2015, 2016, and 2017 are 1.15%, 1.00% and 0.40%, respectively. The expense is calculated every year and is recognised within taxation in the income statement in the year in which the tax is payable. No provision is made for future wealth tax payable.
Maintenance expenditure
Expenditure on major maintenance, refits or repairs is capitalised where it fulfils one of the following:
- | enhances the life or performance of an asset above its originally assessed standard of performance; |
- | replaces an asset, or part thereof, which was separately depreciated and which is then written off; or |
- | restores the economic benefits of an asset which has been fully depreciated. |
All other maintenance expenditures are charged to the statement of comprehensive income as incurred.
12 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
1 | Accounting policies (continued) |
Inventories
Inventories are stated at the lower of cost and net realisable value.
Financial instruments
Financial assets
The Group classifies its financial assets within the category discussed below. The Group has not classified any of its financial assets as held to maturity.
The Group’s accounting policy for its loans and receivables is as follows:
Loans and receivables: These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers (i.e. trade receivables) but also incorporate other types of contractual monetary assets. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue and are subsequently carried at amortised cost, using the effective interest rate method less provision for impairment.
Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the Group will be unable to collect all of the amounts due under the terms of the receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable.
From time to time the Group may elect to renegotiate the terms of trade receivables due from customers with which it has previously had a good trading history. Such renegotiations may lead to changes in the timing of payments rather than changes to the amounts owed and, in consequence, the new expected cash flows would be discounted at the original effective interest rate.
Cash and cash equivalents comprise cash on hand, deposits with a maturity of three months or less and other short-term highly liquid investments that are readily convertible into known amounts of cash. The term deposits are US Dollar denominated Certificates of Deposit with restricted access and varying maturity dates, placed as guarantees for Letters of Credit required for the performance and assurance on oil and gas field contracts.
Financial liabilities
The Group’s accounting policy for each category is as follows:
Held at amortised cost: Trade payables and other short and long-term monetary liabilities are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.
Bank and other borrowings: These instruments are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the consolidated statement of financial position. Interest expense in this context includes the amortisation over the life of the instrument of the initial transaction costs and premium payable on redemption, as well as any interest or coupon payable while the liability is outstanding. Upon settlement of borrowings, the liability is derecognised and any difference between the carrying value of the liability at the date of settlement and the fair value of the settlement is recognised as profit or loss.
13 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
1 | Accounting policies (continued) |
Derivatives: This category comprises only out-of-the-money derivatives. They are carried in the consolidated statement of financial position at fair value with changes in fair value and settlements recognised in the consolidated statement of comprehensive income within financing. The Group does not hold or issue derivative instruments for speculative purposes, but for hedging purposes. Other than these derivative financial instruments, the Group does not have any liabilities held for trading nor has it designated any other financial liabilities as being at fair value through profit or loss. Once the derivative is settled or cancelled, the derivative is derecognised and any fair value movement is recognised as profit or loss.
Share capital
Financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial liability. The Group’s ordinary shares are classed as equity instruments.
Provisions
Provisions for anticipated settlement costs and associated expenses arising from any legal and other disputes are made where a reliable estimate can be made of the probable outcome of the dispute. Where it is not possible to make such an estimate, no provision is made if the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. In addition, see the accounting policy for decommissioning provisions above.
Share-based payments and warrants
The Group reflects the economic cost of awarding shares and share options to employees and directors by recording an expense in the statement of comprehensive income equal to the fair value of the benefit awarded. The expense is recognised in the statement of comprehensive income over the vesting period of the award.
Fair value is measured by the use of a Black-Scholes model, which takes into account conditions attached to the vesting and exercise of the equity instruments. The expected life used in the model is adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioral considerations.
Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is either charged against the statement of financial position or charged to the consolidated statement of comprehensive income and amortised over the remaining vesting period, the relevant treatment will depend on the nature of the service rendered.
Where an option or a warrant is issued to a third party the directors value the service received at fair value. Where this is not ascertainable the directors will value the service based on the fair value of the instruments issued as described above.
Post-retirement benefits
The Group contributes to a defined contribution scheme. Contributions are charged to the statement of comprehensive income as they become payable.
14 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
1 | Accounting policies (continued) |
Foreign currencies
The Group’s consolidated financial statements are presented in US Dollars, which is also the parent company’s functional currency. For each entity, the Group determines the functional currency and items included in the financial statements of each entity are measured using that functional currency. On disposal of a foreign operation any foreign exchange gains or losses that are held in reserves in respect of the foreign operation disposed of are reclassified to profit or loss.
Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the reporting date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Exchange gains or losses on translation are included in the statement of comprehensive income.
Leases
Operating leases and the corresponding rental charges are charged to the statement of comprehensive income on a straight-line basis over the life of the lease.
Critical accounting judgments and key sources of estimation uncertainty
The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.
Estimates and assumptions with significant risk to cause a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:
Oil and gas reserves
Measurements of depreciation, depletion, amortization, impairment and obligations for abandonment costs are determined in part on the estimated reserves of oil and gas of the Group. The commercial reserves are determined by external specialists by using estimates of oil in the place of production or marketing (in place), recovery factors and future oil prices. Future development costs are estimated using assumptions as to the number of wells required to produce the commercial reserves, the cost of these wells and associated production facilities, and other capital costs.
Estimates of reserves of oil and gas are subject to numerous uncertainties inherent in estimating quantities of proved reserves. The accuracy of these estimates is a function of the quality of data, engineering and geological interpretation of that information and technical experience to interpret it. Although the reserves used for the preparation of the accompanying financial statements are those produced from wells and existing facilities and those probable reserves, the results of subsequent drilling, if any, testing and production can cause a downward or upward revision of previous estimates. In addition, the volumes considered commercially recoverable fluctuate with changes in sales prices and operating costs.
Reserve estimates are inherently imprecise. In addition, estimates of reserves associated with new discoveries are less precise than those properties that currently produce oil and gas. Therefore, it is expected that the reserves estimates the Company change as additional information becomes available in the future. Balances within the financial statements that may be significantly impacted by changes in estimates are oil and gas properties, asset retirement obligations and the corresponding amounts of depletion, depreciation and amortization.
15 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
1 | Accounting policies (continued) |
Carrying value of Oil and Gas assets
Assets intended for the extraction and exploration of oil and gas are depreciated using the unit of production method based on proven and probable reserves. The calculation of the depreciation rate of the production unit could be affected to the extent that actual production in the future is different from current forecast production based on proven and probable reserves. This usually results from significant changes in any of the factors or assumptions used to estimate reserves. These factors could include: oil price volatility, classification of proven and probable reserves, and unexpected operational aspects.
Recovery of Exploration and Evaluation costs:
The Group capitalizes costs of exploration and evaluation under IFRS 6, until it is able to determine if exploration efforts are successful and if they were successful, check if there are impairment indicators requiring adjustments to asset value before being reclassified to assets under development and production.
Impairment indicators:
The recoverable amounts of cash generating units and individual assets have been determined based on discounted future cash flows. These calculations require the use of estimates and assumptions. It is reasonably possible that the oil price assumption may change, which would impact the estimated life of the field and may require an adjustment of importance in the carrying value of tangible assets. The Company monitors internal and external indicators of impairment related to its development and exploration assets. As a result of the decline in commodity prices, the Group completed an impairment test on its proven oil and gas assets and recognized an impairment of US$39.8 million, and additionally recognized an impairment for its Evaluation and Exploration assets of US$7.9 million. For more details of impairment charges during the year please refer to Note 8 - Property, Plant and Equipment and Note 9 - Intangible Exploration and Evaluation Assets.
Abandonment of fields and other facilities:
According to petroleum and environmental regulations, the Group must recognize the costs for the abandonment of oil extraction facilities, which include cost of plugging and abandoning wells, decommissioning and environmental recovery of the affected areas.
The estimated cost for the abandonment and decommissioning of these facilities are recorded at the currency at the time of the installation of these assets. The estimated obligation for dismantling and abandonment is reviewed annually and adjusted to reflect the best estimate due to technological changes, political, economic, environmental, security and relations with stakeholders issues.
The calculations of these estimates are complex and involve significant judgments by the management, such as internal cost projections, future inflation rates and discount rates. Significant variations in external factors used for the estimate may also significantly impact the financial statements.
Contingencies:
By their nature, contingencies will only be resolved when one or more events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events.
Taxes
The calculation of the income tax provision requires an interpretation of the local rules where the Group companies operate. Significant judgments are required for the determination of estimated income tax and to evaluate the recoverability of tax assets, which are based on estimates of future fiscal performance and ability to generate sufficient results during the periods in which they are deferred taxes deductible. Deferred tax liabilities are recorded according to estimates of the net assets that in the future will not be tax deductible.
To the extent that future cash flows and income differ materially from estimates, the ability of the Group to use the tax losses at the reporting date could be affected. In addition, changes in tax laws could limit the ability of the Group to obtain tax deductions in future years.
16 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
1 | Accounting policies (continued) |
Adoption of new and amended Accounting Standards
(i) | New standards, amendments and interpretations effective |
The International Accounting Standards Board (IASB) issued various amendments and revisions to International Financial Reporting Standards and IFRIC interpretations. The amendments and revisions were applicable but did not result in any material changes to the financial statements of the Group.
(ii) | New standards, amendments and interpretations that are not yet effective |
The following new standards, interpretations and amendments, which have not been applied in these financial statements, will or may have an effect on the Company’s future financial statements:
IFRS 9, “Financial instruments” addresses the classification, measurement and recognition of financial assets and financial liabilities and introduces new rules for hedge accounting. The effective date is 1 January 2018. The Group is assessing the impacts on the adoption of IFRS 9 and has not determined the transition method that will be used.
IFRS 15, “Revenue from Contracts with Customers”, replaces IAS 11, “Construction Contracts”, IAS 18, “Revenue” and related interpretations and introduces the principles to be applied by an entity to measure and recognize of revenue. The new standard is based on the principle that revenue is recognized when control of a good or service transfers to a customer – so the notion of control replaces the existing notion of risks and rewards. The standard permits a modified retrospective approach for the adoption. Under this approach entities will recognize transitional adjustments in retained earnings on the date of initial application ( 1 January 2017), without restating the comparative period. Companies will only need to apply the new rules to contracts that are not completed as of the date of initial application. The effective date is 1 January 2018. The Group is assessing the impacts on the adoption of IFRS 15 and has not determined the transition method that will be used.
IFRS 16, “Leases”: This standard supersedes the existing standard on leasing, IAS 17 – Leases, and related interpretations, and establishes the principles for the recognition, measurement, presentation and disclosure on leasing for both parties to a contract, in other words, clients (lessee) and suppliers (lessor). Lessees are required to recognize a leasing liability reflecting future payments of the leasing and a “right to use an asset” for almost all leases contracts, excepting some short-term leases and contracts of assets of a small amount. For lessors the accounting treatment remains almost unchanged, with the classification of leases in operational or financial leases, and the accounting of these two kinds of lease contracts in different manners. The standard comes into effect on 1 January 2019. A company can choose to apply IFRS 16 before that date but only if it also applies IFRS 15 “Revenue from Contracts with Customers”. The Group is assessing the impacts of the adoption of IFRS 16 and has not defined the transition method that will be used.
There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group’s financial statements.
17 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
2 | Financial instruments - risk management |
Analysis of the Group’s financial assets and liabilities is presented below:
Financial Assets | ||||||||
Loans and receivables | ||||||||
2015 | 2014 | |||||||
US$'000 | US$'000 | |||||||
Cash and cash equivalents | 21,514 | 13,935 | ||||||
Restricted cash | 3,363 | 4,705 | ||||||
Loans and receivables | 3,389 | 2,444 | ||||||
28,266 | 21,084 |
Financial liabilities at amortised cost | 2015 | 2014 | ||||||
US$'000 | US$'000 | |||||||
Loans and borrowings – current and non-current | 71,505 | 59,031 | ||||||
Trade and other payables | 13,193 | 27,325 | ||||||
84,698 | 86,356 |
Maturity analysis of financial assets and liabilities (see borrowings note for further disclosure)
Financial Assets | ||||||||
2015 | 2014 | |||||||
US$'000 | US$'000 | |||||||
Up to 3 months | 24,903 | 16,228 | ||||||
3 to 6 months | - | 4,856 | ||||||
Over 6 months | 3,363 | - | ||||||
28,266 | 21,084 |
18 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
2 | Financial instruments - risk management (continued) |
Financial Liabilities | ||||||||
2015 | 2014 | |||||||
US$'000 | US$'000 | |||||||
Up to 3 months | 13,193 | 21,231 | ||||||
3 to 6 months | - | 4,136 | ||||||
Over 6 months | 71,505 | 60,989 | ||||||
84,698 | 86,356 |
General objectives, policies and processes
The Board has overall responsibility for the determination of the Group’s risk management objectives and policies and, whilst retaining responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Group’s finance function. The overall objective of the Board is to set policies that seek to reduce risk exposure as far as possible without unduly affecting the Group’s competitiveness and flexibility. Further details regarding these policies are set out below:
Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Group is mainly exposed to credit risk from credit sales. It is Group policy, implemented locally, to assess the credit risk of new customers before entering into contracts. The Group’s review includes external credit ratings, when available. Potential customers that fail to meet the Group’s benchmark credit worthiness may transact with the business on a prepayment only basis. As at December 2015, the Group is reliant on Ecopetrol S.A., Shell Colombia S.A and Trafigura Petroleum Colombia SAS. The Group monitors its trading with its customers and ensures payment is made on a regular basis. Ecopetrol S.A is a part state owned company. Shell Colombia S.A, Trafigura Petroleum Colombia SAS and Trenaco S.A are local commodity trading companies trading crude amongst other products. The Group assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. At December 2015, the balance due from Trenaco S.A. of US$961,389 was impaired and provided for as the balance was considered overdue and unlikely to be recovered.
Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. The Group reviews the banks and financial institutions it deals with to ensure that standards of credit worthiness are maintained. The Group does not hold deposits with financial institutions rated by at least two rating agencies at less than IBB, F1 by Fitch Ratings Ltd and BAA3 by Moody’s Investor Services Limited in respect of its short-term instruments and ratings of at least A by Fitch Ratings Ltd and A1 by Moody's Investor Services in respect of its long-term instruments. Restricted cash held for Agencia Nacional de Hidrocarburos (“ANH”) contracts are excluded from this.
The Group monitors the utilisation of credit ratings and available credit evaluation information as appropriate and at the reporting date does not envisage any losses from the non-performance of counterparties.
19 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
2 | Financial instruments - risk management (continued) |
Liquidity risk
Liquidity risk arises from the Group’s management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The most significant component of liquidity risk affecting the Group is a potential adverse movement in the market price of crude oil.
The Group’s policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. To achieve this aim, it seeks to maintain cash balances (or agreed facilities) to meet expected requirements for a period of at least 90 days. The Group seeks to reduce liquidity risk by fixing interest rates (and hence cash flows) on its long term borrowings.
The Directors receive rolling 12 month cashflow projections on a monthly basis as well as information regarding cash balances. As soon as funding shortfalls are identified, the Directors take action to identify and subsequently secure the necessary funds from existing or new investors or in the form of short and long term borrowings. Further information on liquidity is included in note 1 (Going Concern and Non-Current Liabilities).
Included within non-current liabilities is an amount of US$71 million (2014: US$59 million) which relates the Group’s credit facility with BNP Paribas. The Company drew an initial tranche of US$60 million and repaid the outstanding balance on the previous facility in full and utilised the balance in projects executed during 2014. The Company drew an additional US$12 million during the year, and post year end has drawn down the remaining US$8 million.
As at 31 December 2015 and 2014 there were no covenant breaches.
Capital management policies
The Group considers its capital to be its ordinary share capital, share premium, other reserves, accumulated deficit and external borrowings. The Board of Directors has established principles for the management of the Group’s capital resources based on a long-term strategy that continually evaluates and monitors the achievement of corporate objectives and the development of the Group’s portfolio of oil and gas assets in Colombia. Specific capital management policies include the following:
§ | Holding sufficient resources to maintain and develop license commitments and to maximize discretionary spending on further developing its oil and gas assets; |
§ | The reinvestment of profits into new and existing assets that fit the corporate objectives; |
§ | To identify the appropriate mix of debt, equity and partner sharing opportunities in order to maintain and comply with license commitments and further develop its portfolio of oil and gas assets with a view of generating the highest returns to shareholders overall with the most advantageous timing of investment flows; |
§ | Retain maximum flexibility to allocate capital resources between exploration and appraisal, and production and development projects based on available funds and the quality of opportunities. |
On a regular basis, management receives financial and operational performance reports that enable continuous management of assets, liabilities and liquidity.
Market risk
The most significant component of market risk affecting the Group is the market price of crude oil.
20 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
2 | Financial instruments - risk management (continued) |
Crude oil price sensitivity analysis
A sensitivity analysis based on a 47% (2014: 45%) price volatility assumption is used internally by management to estimate the potential impact of reasonably viewed possible variations in crude oil market prices, based upon recent trends. As at 31 December 2015, a 47% (2014: 45%) increase in the average sales price obtained during the year would have increased revenues by US$37,648,892 (2014: US$37,064,000) and would have decreased the loss to US$6,598,986 (2014: US$51,041,369). On the other hand, a 47% (2014: 45%) decrease in the average sales price would have reduced revenues by US$37,648,892 (2014: US$37,064,000) and would have increased the loss to US$81,896,770 (2014: US$23,086,631). A corresponding effect on net assets would have also been reflected.
Interest rate risk
The Group is exposed to cashflow interest rate risk from its deposits of cash and cash equivalents with banks. The cash balances maintained by the Group are proactively managed in order to ensure that the maximum level of interest is received for the available funds but without affecting the working capital flexibility the Group requires.
The Group has short and long term loans, which carry fixed and floating interest rates within the terms of the agreements. The Group does not consider itself materially exposed to cashflow interest rate risk from its borrowings. Under the terms of the loan agreement with BNP Paribas, the Group is able to fix the applicable margin by electing the agreed margin rate based on an ABR or Eurodollar loan basis. The agreed margins are 2.75% for an ABR or 3.75% for a Eurodollar loan. By electing the fixed margin, the Company considers that it has minimised the exposure of the Group to cashflow interest rate risk, and further that changes to the Libor rate do not represent a significant risk to the Group. No subsidiary company of the Group is permitted to enter into any borrowing facility or lease agreement without the prior consent of the Board of Directors.
The Group’s exposure to interest rates on financial assets and financial liabilities is detailed below.
Financial liabilities - The Group reviewed the interest rate sensitivity on year-end liabilities balances and determined that a one per cent increase or decrease in the interest rate earned on floating rate payables would not have resulted in a significant increase or decrease in net obligations.
Financial assets - The Group reviewed the interest rate sensitivity on year-end cash and cash equivalents (including restricted cash) balances and determined that a one per cent increase or decrease in the interest rate earned on floating rate deposits would not have resulted in a significant increase or decrease in net income receivable.
Interest rates on financial assets and liabilities
The interest rate profile of the Group’s financial assets and liabilities at 31 December 2015 was as follows:
ASSETS | Financial assets on which floating rate interest is earned | Financial assets on which no interest is earned | Total 2015 | |||||||||
Currency | US$'000 | US$'000 | US$'000 | |||||||||
Colombian Pesos | 3,363 | 1,762 | 5,125 | |||||||||
US Dollars | - | 23,078 | 23,078 | |||||||||
British Pounds | - | 63 | 63 | |||||||||
Total | 3,363 | 24,903 | 28,266 |
21 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
2 | Financial instruments - risk management (continued) |
LIABILITIES | Financial liabilities on which interest is paid | Financial liabilities on which no interest is paid | Total 2015 | |||||||||
Currency | US$'000 | US$'000 | US$'000 | |||||||||
Colombian Pesos | - | 7,981 | 7,981 | |||||||||
US Dollars | 71,505 | 5,212 | 76,717 | |||||||||
Total | 71,505 | 13,193 | 84,698 |
The profile at 31 December 2014 for comparison purposes was as follows:
ASSETS | Financial assets on which floating rate interest is earned | Financial assets on which no interest is earned | Total 2014 | |||||||||
Currency | US$'000 | US$'000 | US$'000 | |||||||||
Colombian Pesos | 4,705 | 478 | 5,183 | |||||||||
US Dollars | - | 15,856 | 15,856 | |||||||||
British Pounds | - | 45 | 45 | |||||||||
Total | 4,705 | 16,379 | 21,084 |
LIABILITIES | Financial liabilities on which interest is paid | Financial liabilities on which no interest is paid | Total 2014 | |||||||||
Currency | US$'000 | US$'000 | US$'000 | |||||||||
Colombian Pesos | 372 | 20,872 | 21,244 | |||||||||
US Dollars | 58,659 | 6,453 | 65,112 | |||||||||
Total | 59,031 | 27,325 | 86,356 |
Cash at bank at floating rates consisted of demand deposits subject to floating rates which earn interest at an average rate of 3.71% (2014: 2.38%).
22 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
2 | Financial instruments - risk management (continued) |
Foreign exchange risk
Foreign exchange risk arises because the Group has operations located in various parts of the world, which enter into transactions in currencies which are not the same as the functional currency of the Company and its subsidiaries. Although its wider market penetration reduces the Group’s operational risk, the Group’s net assets arising from such overseas operations are exposed to currency risk resulting in gains and losses on retranslation into US Dollars. Only in exceptional circumstances will the Group consider hedging its net investments in overseas operations, as generally it does not consider that the reduction in foreign currency exposure warrants the cash flow risk created from such hedging techniques for this foreign exchange effect. Wherever possible in order to monitor the continuing effectiveness of this policy, the Board, through their approval of capital expenditure budgets and review of the monthly management accounts, considers the effectiveness of the policy on an ongoing basis.
The following table discloses the exchange rates of those currencies utilised by the Group:
Foreign currency units to US$1.00 | Colombian Peso | British Pounds Sterling | ||||||
At 31 December 2015 | 3,149 | 0.6755 | ||||||
At 31 December 2014 | 2,392 | 0.6437 |
Currency exposures
The financial assets and liabilities of the Group that are not denominated in US dollars and are therefore exposed to currency fluctuations are shown below. The amounts shown represent the US dollar equivalent of local currency balances.
US dollar equivalent of exposed net monetary assets and liabilities | Colombian Peso US$’000 | British Pounds Sterling US$’000 | Total US$’000 | |||||||||
At 31 December 2015 | (4,909 | ) | 63 | (4,846 | ) | |||||||
At 31 December 2014 | (16,380 | ) | 45 | (16,335 | ) |
Foreign currency sensitivity analysis
The Group is mainly exposed to currency rate fluctuations of the Colombian Peso versus the US$, and measures its foreign currency risk through a sensitivity analysis considering 37.1% favorable and adverse changes in market rates on exposed monetary assets and liabilities denominated in Colombian Pesos. At 31 December 2015, a 37.1% strengthening of the Peso against the Dollar would have resulted in a US$2,896,680 increase/decrease (2014: US$2,097,818 decrease) in the net assets of the Group. A 37.1% weakening of the Peso against the Dollar would have resulted in a 6,320,626 increase/decrease (2014: US$2,564,000 increase) in net assets of the Group. Management meet frequently with the Board of Directors to provide consistent information and data flow to ensure that the achievement of objectives is evaluated and measured.
The above policies and practices are consistent with strategies and objectives employed in prior years and are expected to remain consistent in the extension of future resource allocation objectives.
23 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
3 | Staff costs (including directors’ and key management remuneration) |
The average number of employees of the Group during the year, including executive directors, was as follows:
2015 Number | 2014 Number | |||||||
Administration | 53 | 52 | ||||||
Technical | 152 | 144 | ||||||
205 | 196 |
2015 US$'000 | 2014 US$'000 | |||||||
Wages and salaries | 6,520 | 8,076 | ||||||
Share based payments | - | 156 | ||||||
Other Personnel Charges | 254 | 307 | ||||||
Social Security | 307 | 375 | ||||||
Pensions | 489 | 564 | ||||||
7,570 | 9,478 |
The Company does not administer its own pension scheme; instead it makes payments on behalf of its directors and employees into their own personal pension plans.
The directors believe that the directors (including non-executive directors) represent key management and therefore directors’ fees, benefits and emoluments represent the remuneration of key management personnel.
Compensation for directors consists of:
2015 US$'000 | 2014 US$'000 | |||||||
Wages and salaries | 672 | 782 | ||||||
Share based payments | - | 156 | ||||||
Pensions | 50 | 56 | ||||||
722 | 994 |
24 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
4 | Revenue |
2015 Units (BOE) | 2015 US$’000 | 2014 Units (BOE) | 2014 US$’000 | |||||||||||||
Total crude | 2,041,152 | 81,589 | 1,038,038 | 81,524 | ||||||||||||
Total gas | 3,336 | 93 | 29,440 | 841 | ||||||||||||
Total revenue | 81,682 | 82,365 |
All revenue in 2015 and 2014 arose in Colombia.
5 | Operating (loss) / profit |
(Losses) / Profits from operations are stated after charging/(crediting):
2015 US$'000 | 2014 US$'000 | |||||||
Depreciation, depletion and amortisation | ||||||||
- Oil and gas assets | 13,634 | 13,802 | ||||||
- Other fixed assets | 1,460 | 1,643 | ||||||
Impairments | ||||||||
- Oil and gas assets | 39,775 | 3,829 | ||||||
- Intangible E&E assets | 7,876 | 3,687 | ||||||
Operating lease rentals | ||||||||
- land and buildings | 325 | 596 | ||||||
Share based payments: | - | 156 | ||||||
Foreign exchange loss / (gain) | 266 | (365 | ) | |||||
6 | Finance income and expenses |
2015 US$'000 | 2014 US$'000 | |||||||
Finance income | ||||||||
Interest received on bank deposits | 124 | 112 | ||||||
Total interest income calculated using the effective interest method | 124 | 112 | ||||||
Total finance income | 124 | 112 | ||||||
Finance expense | ||||||||
Interest on financial liabilities | 3,202 | 2,332 | ||||||
Derivative valuation (*) | - | (902 | ) | |||||
Derivative hedge cash settlements | - | 1,447 | ||||||
Bank commissions | 1,035 | 465 | ||||||
4,237 | 3,342 |
(*) The Derivative valuation in 2014 considers the reversion balance of the financial instrument valuation which the Group had with Wells Fargo bank. The derivative was cancelled in September 2014.
25 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
7 | Taxation |
2015 US$'000 | 2014 US$'000 | |||||||
Current tax | 11,165 | 9,245 | ||||||
Deferred tax (note 17) | 5,812 | 1,949 | ||||||
16,977 | 11,194 |
The major components of tax expense and the reconciliation of the expected tax expense based on the domestic effective tax rate in the UK at 20.25% (2014: 21.5%) and the reported tax expense assessed in the Colombian companies in profit or loss are as follows:
Reconciliation of the total tax charge | 2015 US$'000 | 2014 US$'000 | ||||||
(Loss) / profit before tax for the year | (27,271 | ) | 25,171 | |||||
Taxable (losses) profits | (27,271 | ) | 25,171 | |||||
Expected tax (benefit)/charge based on the standard rate of corporation tax in UK 20.25% (2014: 21.5%) | (5,522 | ) | 5,411 | |||||
Effect of: | ||||||||
Expenses not deductible for tax purposes | 7 | 58 | ||||||
Tax losses carryforward | 1,018 | 1,246 | ||||||
Deferred tax asset not recognized | 9,286 | 3,541 | ||||||
Movement in Deferred Tax Asset (note 17) | (2,578 | ) | 2,902 | |||||
Movement in Deferred Tax Liability (note 17) | 8,523 | (725 | ) | |||||
Movement in temporary differences on local taxes | - | 214 | ||||||
Derecognition /(Use of) brought forward taxable losses (note 17) | 982 | (1,549 | ) | |||||
Tax expense from prior periods | 522 | - | ||||||
Effect of tax rates differences in foreign jurisdictions (UK 20.25%, Colombia: 25%, plus 9% CREE Tax ,plus 5% surcharge “CREE Tax” (2014: UK: 21.5%, Colombia: 25% plus 9% CREE Tax). | 4,739 | 96 | ||||||
Total tax for the year | 16,977 | 11,194 |
The Colombian companies prepare their tax provision on the basis of two methods: 1) taxable income or regular income tax (revenue less allowable costs and expenses) with a rate of 25%, CREE tax which rate is 9% and CREE surcharge of 5% (2015) under local tax regulations. 2) Minimum amount of income tax, which is determined based on the presumptive income method. Under this method, presumptive taxable income is measured as 3% of net assets (or tax equity) as of 31 December of the prior tax year as reported by the taxpayer on the corresponding tax return. The income tax rate is then applied to the greater of regular taxable income or presumptive taxable income (exempting certain business activities). Each year, taxpayers must compare the value resulting from the application of the foregoing two systems. The income tax provision for the taxable year will be calculated on the higher value resulting from this comparison.
26 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
7 | Taxation (continued) |
CREE tax- Colombian Tax Law 1607
In December 2012, the Colombian Congress passed a tax law which reduced the corporate income tax rate applicable to Colombian entities and branches of non-Colombian companies from 33 per cent to 25 per cent beginning 1 January 2013. This rate reduction was effectively offset by a new income tax, known as “CREE Tax”, with a tax rate of 9 per cent applicable from 2013 through 2015, and 8 per cent thereafter. The CREE tax works as an income tax except for certain limitations on the ability to claim costs and expenses. Tax loss carryforwards are not eligible to offset the CREE taxable amount. Lastly, the CREE’s taxable income amount may not be less than three per cent of the taxpayer’s net equity as of 31 December of the preceding taxable year. From 2013, the Company calculated its current tax expense based upon Tax Law 1607.
CREE Surcharge- Colombian Tax Law 1739
On December 23, 2014, the Colombian Congress created the CREE Surcharge by Law 1739, is an absolute rate increase, valid for four years, between 2015 and 2018 which is calculated on the same CREE taxable income exceeding $335,000. The surcharge applicable rates are: 5% for 2015, 6 % in 2016, 8 % for 2017 and 9% for 2018. The surcharge will be discontinued in 2019.
The total unrecognised losses for the Group of approximately US$22 million (2014: US$32 million), will be reviewed in future periods as the likelihood of their utilisation increases.
Wealth tax
Effective 1 January 2015, the Colombian Congress introduced a new wealth tax that is calculated on a taxable base (net equity) in excess of COP$1 billion (US$0.4 million) as at 1 January of the applicable taxation year. The applicable rates for 1 January 2015, 2016, and 2017 are 1.15%, 1.00% and 0.40%, respectively. Based on the Colombian companies’ taxable base, the 2015 wealth tax was US$276,050 and recorded as an expense in the statement of income, as and it was paid in two installments in May and September 2015.
27 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
8 | Property, plant and equipment |
Fixtures, fittings and equipment | Field, plant and | Proven oil and gas | Total | |||||||||||||
US$'000 | US$'000 | US$'000 | US$'000 | |||||||||||||
Cost | ||||||||||||||||
At 1 January 2014 | 810 | 4,816 | 146,220 | 151,846 | ||||||||||||
Additions | 1,341 | 6,460 | 16,790 | 24,591 | ||||||||||||
Transfers from intangibles | - | - | 30,268 | 30,268 | ||||||||||||
Other transfers | - | 4,322 | (4,322 | ) | - | |||||||||||
At 31 December 2014 | 2,151 | 15,598 | 188,956 | 206,705 | ||||||||||||
Additions | 474 | 369 | 1,244 | 2,087 | ||||||||||||
Decommissioning Provision | - | - | (1,111 | ) | (1,111 | ) | ||||||||||
Transfers from Intangibles | - | - | 6,216 | 6,216 | ||||||||||||
At 31 December 2015 | 2,625 | 15,967 | 195,305 | 213,897 | ||||||||||||
Depreciation, depletion and impairment | ||||||||||||||||
At 1 January 2014 | 514 | 3,439 | 47,402 | 51,355 | ||||||||||||
Charge for year | 197 | 1,446 | 17,631 | 19,274 | ||||||||||||
At 31 December 2014 | 711 | 4,885 | 65,033 | 70,629 | ||||||||||||
Charge for the year | 203 | 1,257 | 13,634 | 15,094 | ||||||||||||
Impairment | - | 563 | 39,212 | 39,775 | ||||||||||||
At 31 December 2015 | 914 | 6,705 | 117,879 | 125,498 | ||||||||||||
Net book value | 1,711 | 9,262 | 77,426 | 88,399 | ||||||||||||
At 31 December 2015 | ||||||||||||||||
At 31 December 2014 | 1,440 | 10,713 | 123,923 | 136,076 |
As a result of the decline in commodity prices, the Group completed an impairment test on its proven oil and gas assets, and the Directors considered and concluded, given that the carrying value exceeded the fair economic value of some of the Oil & Gas assets, in accordance with the Group’s accounting policies it was appropriate to recognize an impairment of US$39.8 million (2014: US$3.8 million) relating to assets in the: (i) Santa Lucia field (US$2.7 million), (ii) Angeles field (US$10.6 million), (iii) Serafin field (US$0.1 million), (iv) Tronos field (US$0.3 million), (v) Colon field (US$10.4 million), (vi) Juglar field (US$9.1 million), (vii) Gaitero field (US$6.2 million), and (viii) Zoe field for (US$0.023) million after taking into account that this well was used to obtain the production of the Chuira 1 Side track project. Based on the impairment analysis performed, and using oil and gas Brent futures estimates confirmed by Ryder Scott, the Group has assumed a gross sales price of between US$41/bbl in 2016, US$51.5/bbl in 2017, increasing to US$110.43/bbl in 2030 (2014: US$55/bbl in 2015, US$75/bbl in 2016, increasing to US$113/bbl in 2029). The Group has estimated costs, on a field by field basis as certified by Ryder Scott in the 2015 report, including transportation costs. The post-tax discount rate used was 10.3% (2014: 13%).
28 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
9 | Intangible exploration and evaluation assets |
2015 US$'000 | 2014 US$'000 | |||||||
Cost and Net book value | ||||||||
At 1 January | 14,349 | 11,075 | ||||||
Additions | 20,098 | 37,229 | ||||||
Impairment of assets (1) | (7,876 | ) | (3,687 | ) | ||||
Transfer to oil and gas assets (see note 8) | (6,216 | ) | (30,268 | ) | ||||
Farm Out Putumayo-04 (2) | (6,787 | ) | - | |||||
Cost and Net book value at 31 December | 13,568 | 14,349 |
The amounts for intangible E & E assets represent costs incurred on active oil and gas exploration projects.
(1) | In accordance with the oil and gas asset accounting policy set out in note 1, E & E assets are evaluated when circumstances exist that suggest that they are facts and circumstances which may indicate a potential trigger for impairment as well as when E & E assets are reclassified to the development and producing phase. The outcome of ongoing exploration, and therefore whether the carrying value of assets will be recovered, is inherently uncertain. Accordingly the Group must recognize an impairment of US$7.9 million (2014: US$3.69 million): Juglar field of US$1.5 million, Mochuelo-01 well US$4.7 million, Angeles-20 well US$1.5 million and Zoe field US$0.2 million. |
As at 31 December 2015, the Group’s unevaluated Oil & Gas assets split into deferred exploration costs on the Putumayo of US$2.6 million, US$2.05 million relating to seismic and geophysical study costs in the Llanos areas, Chuira-02 drilling and completion costs of US$8.1 million, and others minor projects of US$0.5 million. In performing an assessment of the carrying value of the exploration and evaluation assets at the reporting date, the Directors concluded that no further additional impairment existed to the Group's unevaluated Oil & Gas assets at 31 December 2015 was required.
(2) | During the year, the Group entered into a farm-out agreement with Gran Tierra Energy Colombia, under which PetroLatina’s Colombian operating subsidiary continues to retain a 30% legal interest in Putumayo -4. Subject to approval of the ANH to the assignment for this block, Gran Tierra acquired a 70% undivided participating interest in, and became the operator of the block. |
See Note 24 for details of capital commitments.
29 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
10 | Investments |
As at 31 December 2015, the Group comprised the Company and the following directly and indirectly held subsidiaries and interests:
Proportion of ownership interest at: | Country of incorporation | Shareholder | Principal activity | |||||||||||
2015 | 2014 | |||||||||||||
PetroLatina (CA) Limited | 100 | % | 100 | % | United Kingdom | Petrolatina Energy Limited | Intermediate Holding Company (“IHC”) | |||||||
Taghmen Argentina Limited | 100 | % | 100 | % | United Kingdom | Petrolatina Energy Limited | Dormant | |||||||
Taghmen Colombia S.L. | 100 | % | 100 | % | Spain | PetroLatina (CA) Limited | IHC | |||||||
Petróleos Del Norte SA (see * and note 21) | 100 | % | 100 | % | Colombia | Taghmen Colombia S.L. | Operating Company Holds 5% of participating interest in La Paloma Block | |||||||
Rend Lake Corporation | 100 | % | 100 | % | Panama | PetroLatina (CA) Limited | IHC | |||||||
Rend Lake Sucursal Colombia | 100 | % | 100 | % | Colombian Branch of Rend Lake Corporation | Rend Lake Corporation | 95% Shareholder in the PetroCaribe Temporary Union, owner of the La Paloma block | |||||||
PetroLatina Energy Sucursal Colombia | 100 | % | 100 | % | Colombian Branch of PELE | PELE | 85% Shareholder in the Midas Temporary Union, owner of the Midas block | |||||||
North Riding Inc. | 100 | % | 100 | % | Panama | Petrolatina (CA) Limited | IHC | |||||||
North Riding Sucursal Colombia | 100 | % | 100 | % | Colombian Branch of North Riding Inc | North Riding Inc | 15% Shareholder in the Midas Block | |||||||
Transporte Del Norte SA (**) | 0.04 | % | 4 | % | Colombia | Petróleos Del Norte SA | Operating Company |
* | In June 2006 the Group acquired, and since then has held, a controlling interest of 92.42% of the issued and outstanding share capital of PDN. The remaining 7.58% of the issued and outstanding shares of PDN were held in a trust in Colombia and their release from such trust was subject to the final resolution of pending litigation. The judgment at first and second instance was in favour for PDN. PELE owned 100% at the year-end (2014: 96.09%). Final judgment in the litigation has at year end resulted in the shares held in trust being returned to PDN for cancellation. As a result the share capital under litigation has been diluted to 0% (2014: 3.91%). |
** | Post year end, this remaining interest has been sold. |
30 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
11 | Inventories |
2015 | 2014 | |||||||
US$'000 | US$'000 | |||||||
Crude oil inventory | 221 | 674 |
12 | Trade and other receivables |
2015 | 2014 | |||||||
US$'000 | US$'000 | |||||||
Trade and other receivables | 3,340 | 2,253 | ||||||
Prepayments | 13 | 86 | ||||||
Advance Payments to contractors | 70 | 105 | ||||||
3,483 | 2,444 |
As at 31 December 2015, there were receivables considered overdue of US$961,389 which were impaired and fully provided for (2014: US$ Nil). The Board of Directors considered that the carrying values adequately represented the fair value of all other trade and other receivables. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable, including cash and restricted cash noted below.
13 | Withholding taxes |
2015 | 2014 | |||||||
US$'000 | US$'000 | |||||||
Withholding taxes | 807 | 691 | ||||||
Prepaid income taxes | 2,080 | 2,167 | ||||||
2,887 | 2,858 |
The Colombian group’s subsidiaries are required every year to pay in advance part of its coming year tax income. At 31 December 2015 the Group’s subsidiaries had paid in advance US$2.08 million (2014: US$2.1 million). Three of the Group’s subsidiaries in Colombia are tax payers. The Group intends to offset amounts paid in advance against the amount of tax payable during the year (as set out in note 7).
14 | Restricted cash |
2015 US$‘000 | 2014 US$‘000 | |||||||
Colombian Pesos denominated investments | 3,363 | 4,705 |
As of 31 December 2015, the Group had US$3.36 million of restricted cash, of which US$2,653,691 related to funds for decommissioning liabilities associated with the Colombian assets according to the terms of the E&P agreements with Ecopetrol and ANH, and US$709,564 related to term deposits to guarantee Phase 1 of Midas contract with ANH. The maturities of the Group’s restricted cash are over 6 months.
31 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
15 | Trade and other payables |
Current payables
2015 | 2014 | |||||||
US$'000 | US$'000 | |||||||
Trade payables | 6,457 | 17,526 | ||||||
Redemption Share payable | 109 | 248 | ||||||
Withheld taxes and social security costs | 771 | 1,106 | ||||||
VAT Taxes | 1,283 | 297 | ||||||
Accruals | 6,262 | 9,420 | ||||||
Other payables | 859 | 131 | ||||||
15,741 | 28,728 |
Trade payables are classified as financial liabilities carried at amortised cost and due within the next three months. The Company sold some of its production to a new customer and as result of the location of that customer incurred additional VAT obligations during the year which historically had not been incurred.
16 | Loans and borrowings |
The book value and fair value of loans and borrowings are as follows:
Book 2015 | Book 2014 | |||||||
US$'000 | US$'000 | |||||||
Non-current | ||||||||
Helm Bank | - | 372 | ||||||
BNP Paribas | 71,011 | 58,659 | ||||||
Total non-current | 71,011 | 59,031 | ||||||
Total non-current loans and borrowings | 71,011 | 59,031 |
Fair value of the loans and borrowings is $72m and $60.3m in 2015 and 2014, respectively.
32 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
16 | Loans and borrowings (continued) |
Principal terms and the debt repayment schedule of the Group’s loans and borrowings are as follows as at 31 December 2015 and 2014.
Currency | Nominal Rate | Year to Maturity | ||||
Helm Bank | COP | 5.5% + DTF* | On demand | |||
BNP – Senior Secured Debt Facility | USD | 3.75% + Libor | 2018 |
* DTF is the rate that banks pay to 90 days fixed term deposits holders, and is issued by the National Republic Bank.
The maturity analysis shows the remaining contractual maturities of the Group’s borrowings, including interest:
2015 | Floating rate | Fixed rate | Total | |||||||||
US$’000 | US$’000 | US$’000 | ||||||||||
Expiry within 1 year | 3,247 | - | 3,247 | |||||||||
Expiry within 1 and 2 years | 3,244 | - | 3,244 | |||||||||
Expiry in more than 2 years but less than 5 years | 74,241 | - | 74,241 | |||||||||
80,732 | - | 80,732 |
2014 | Floating rate | Fixed rate | Total | |||||||||
US$’000 | US$’000 | US$’000 | ||||||||||
Expiry within 1 year | 2,869 | 372 | 3,241 | |||||||||
Expiry within 1 and 2 years | 2,948 | - | 2,948 | |||||||||
Expiry in more than 2 years but less than 5 years | 64,530 | - | 64,530 | |||||||||
70,347 | 372 | 70,719 |
Included within non-current liabilities in 2015 is an amount of US$71 million (2014: US$58.66 million) relating to the loan facility with BNP Paribas (net of US$1.34 million of deferred legal costs incurred in connection with the loan, which have been capitalized over the term of the credit facility, during the year US$0.35 million was amortized to the comprehensive income statement leaving an outstanding balance of US$0.99 million) based on the approved borrowing base of US$80 million, and US$ nil (2014: US$0.4 million) in current liabilities with Helm Bank.
Senior Secured Credit Facility
The Group has a Senior Secured Credit Facility of up to US$200 million with BNP Paribas. The facility is secured over all of the assets of the Group. On 17 October 2014, the borrowing base was established at US$80 million, and an initial US$60 million was drawdown to fully repay the previous credit facility with Wells Fargo and to fund certain projects defined in the drilling and operational program.
On 29 April 2015 the Group decided to request an additional drawdown of US$12 million from the US$20 million available under the credit facility with BNP Paribas for the purposes of supporting the development plan and allow the Group to continue with new projects which the Group defined in its strategic plan to further develop its undeveloped reserves into new proved producing reserves.
33 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
16 | Loans and borrowings (continued) |
At the year end, the Group has US$8 million undrawn commitment to be used as needed, and incurs and recognises a commitment fee rate of 2% over this amount. Since the year end, the Group has drawn down this remaining undrawn US$8 million.
The Senior Secured Credit Facility consists of the following terms:
· | The agreement established an initial 4 year term with no capital repayments before the maturity date. Interest is paid on a quarterly basis. |
· | An interest rate payable of 3.75% + (1 month, 2 month, or 3 months US LIBOR, as elected by the Group. |
· | The Group must accomplish certain covenants related to: current ratio (not lower than 1:1); Debt to EBITDA ratio (not higher than 3.5:1); Interest Coverage ratio (not lower than 2.5:1). |
17 | Deferred tax asset (“DTA”) and liability (“DTL”) |
Deferred tax asset
The Group recognised deferred tax assets for the amount of income taxes recoverable in future periods in respect of deductible temporary differences related to accruals and other provisions.
The Group has approximately US$22 million (2014: US$24 million), of tax losses carried forward. These losses relate to its Colombian subsidiaries that have a history of losses, do not expire, and may not be used to offset taxable income elsewhere in the Group. The subsidiaries neither have any taxable temporary difference nor any tax planning opportunities available that could partly support the recognition of these losses as deferred tax assets. On this basis, the Group has determined that it cannot recognise deferred tax assets on the tax losses carried forward.
Deferred tax movement is as follows:
2015 | 2014 | |||||||
US$'000 | US$'000 | |||||||
At 1 January | 571 | 3,884 | ||||||
Recognition of deferred asset arising from recoverable tax losses carried forward | - | 982 | ||||||
Reversed or use of brought forward taxable losses | (982 | ) | (3,884 | ) | ||||
Recognition of deferred asset of deductible temporary differences | 2,578 | - | ||||||
Deferred tax liability expected to be released concurrently with DTL | 411 | (411 | ) | |||||
At 31 December | 2,578 | 571 |
The total unrecognised losses for the Group of approximately US$22 million (2014: US$24 million), will be reviewed in future periods as the likelihood of their usage increases.
34 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
17 | Deferred tax asset (“DTA”) and liability (“DTL”) (continued) |
Deferred tax liability
The deferred tax liability is calculated for the income taxes payable in future periods in respect of taxable temporary differences originated in the variations of the exchange rate of tax base of the non monetary assets which are determined in a different currency and the differences in carrying value of property plant and equipment and intangible assets. The deferred tax is calculated at 40% which is the prevailing tax rate from 2016. The movement on the deferred tax account is as shown below:
2015 | 2014 | |||||||
US$'000 | US$'000 | |||||||
At 1 January | 545 | 1,681 | ||||||
Statement of comprehensive income | 7,407 | (725 | ) | |||||
Deferred tax liability expected to be released concurrently with DTA | 411 | (411 | ) | |||||
At 31 December | 8,363 | 545 |
18 | Provisions |
Plug and US$'000 | ||||
At 1 January 2014 | 6,457 | |||
Provided during the year | 1,587 | |||
Unused amounts and reversed during the year | (997 | ) | ||
At 31 December 2014 and at 1 January 2015 | 7,047 | |||
Provided during the year | 773 | |||
Unused amounts and reversed during the year | (362 | ) | ||
Reduction in provision during the period | (1,534 | ) | ||
Balance at 31 December 2015 | 5,924 |
In common with other oil companies with operations in Colombia, the Group acknowledges its environmental and decommissioning obligations. Therefore, where a material liability for site restoration exists after a well has been drilled, the Group recognises a provision for plugging and abandonment.
The amount recognised is the present value of estimated future expenditure determined in accordance with local conditions and requirements.
35 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
19 | Share capital |
2015 | 2015 | 2015 | 2014 | 2014 | 2014 | |||||||||||||||||||
Ordinary | Deferred | Deferred B | Ordinary | Deferred | Deferred B | |||||||||||||||||||
Number | Number | Number | Number | Number | Number | |||||||||||||||||||
'000 | '000 | '000 | '000 | '000 | '000 | |||||||||||||||||||
Authorised | ||||||||||||||||||||||||
Ordinary shares of US$0.10 each | 224,446 | - | - | 224,446 | - | - | ||||||||||||||||||
Deferred Shares of £0.0011 (US$0.0021) each | - | - | - | - | - | - | ||||||||||||||||||
Deferred B Shares of US$0.10 each | - | - | - | - | - | - | ||||||||||||||||||
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |||||||||||||||||||
Aggregate nominal value | ||||||||||||||||||||||||
Ordinary shares of US$0.10 each | 22,444 | - | - | 22,444 | - | - | ||||||||||||||||||
Deferred Shares of £0.0011 (US$0.0021) each | - | - | - | - | - | - | ||||||||||||||||||
Deferred B Shares of US$0.10 each | - | - | - | - | - | - |
36 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
19 | Share capital (continued) |
2015 | 2015 | 2015 | 2014 | 2014 | 2014 | |||||||||||||||||||
Ordinary | Deferred | Deferred B | Ordinary | Deferred | Deferred B | |||||||||||||||||||
Number | Number | Number | Number | Number | Number | |||||||||||||||||||
‘000 | ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | |||||||||||||||||||
Issued – allotted, called up and fully paid | ||||||||||||||||||||||||
Ordinary shares of US$0.10 each | 140,318 | - | - | 140,318 | - | - | ||||||||||||||||||
Deferred Shares of £0.0011 (US$0.0021) each | - | - | - | - | - | - | ||||||||||||||||||
Deferred B Shares of US$0.10 each | - | - | - | - | - | - | ||||||||||||||||||
US$’000 | US$’000 | US$’000 | US$’000 | US$’000 | US$’000 | |||||||||||||||||||
Aggregate nominal value | ||||||||||||||||||||||||
Ordinary Shares of US$0.10 each | 14,032 | - | - | 14,032 | - | - | ||||||||||||||||||
Deferred Shares of £0.0011 (US$0.0021) each | - | - | - | - | - | - | ||||||||||||||||||
Deferred B Shares of US$0.10 each | - | - | - | - | - | - |
The issued share capital is reconciled as follows
Number | Number | Number | Number | Number | Number | |||||||||||||||||||
‘000 | ‘000 | ‘000 | ‘000 | ‘000 | ‘000 | |||||||||||||||||||
Balance at beginning of year | 140,318 | - | - | 139,040 | 47,773 | 175,554 | ||||||||||||||||||
Ordinary Shares of US$0.10 each issued | - | - | - | 9,370 | - | - | ||||||||||||||||||
Ordinary Shares of US$0.10 each bought back | - | - | - | (8,092 | ) | - | - | |||||||||||||||||
Deferred Shares of £0.0011 each cancelled | - | - | - | - | (47,773 | ) | - | |||||||||||||||||
Deferred Shares of (US$0.0021) each cancelled | - | - | - | - | - | (175,554 | ) | |||||||||||||||||
Balance at end of year | 140,318 | - | - | 140,318 | - | - |
37 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
19 | Share capital (continued) |
No shares were issued during the year ended 31 December 2015.
Details of the significant movements in share capital during the year ended 31 December 2014 are set out below:
Year ended 31 December 2014 | ||||||||||||
Description | Date of issue | Shareholder | Issue price per share $ | Number of ordinary shares issued | ||||||||
Exercise of Warrants | September 2014 | Macquarie | 0.10 | 8,000,000 | ||||||||
Exercise of Share Options | September 2014 | Director | 0.10 | 250,000 | ||||||||
Exercise of Share Options | October 2014 | Directors | 0.10 | 1,120,000 | ||||||||
Total shares issued during year ended 31 December 2014 | 9,370,000 |
The Ordinary Shares of US$0.10 each carry one vote per share. They entitle the holder to share equally in a distribution of the profits or assets of the Company by dividend with all other holders of Ordinary Shares, in proportion to the holders’ aggregate holding of all Ordinary Shares.
During the year ending 31 December 2014, the Company sought and obtained shareholder approval, through separate class meetings, from the Deferred Shareholder and the Deferred B Shareholders to cancel all issued and outstanding Deferred Shares and Deferred B Shares respectively. Such shares were cancelled through a reduction in share capital and share premium.
The Deferred B Shares were fully paid deferred ordinary shares of US$0.10 each. They had no practical economic value as they were non-voting and carried no rights, including no rights to receive notices, vote at general meetings, and participate in dividends or a return of capital on the liquidation of the Company.
The Deferred Shares were fully paid deferred ordinary shares of £0.0011 (US$0.0021) each. The Deferred Shares were issued prior to reincorporation as a public limited company in 2004 and had no practical economic value as they are non-voting and carried no rights, including no rights to receive notices, vote at general meetings, participate in dividends or a return of capital on the liquidation of the Company.
In addition, the Company sought shareholder approval from all shareholders, excluding Tribeca Oil and Gas Inc., (“TOGI”) and Tribeca Oil and Gas Financing Inc., (“TOGF”) to complete the previously agreed buy-back certain shares in the Company held TOGI. The Company completed the buy-back of 8,092,660 shares from TOGI through the advanced loan of US$6.5 million previously made to TOGI and the shares were cancelled.
The Company also created a new class of redeemable shares, which following approval from shareholders were issued, allotted and redeemed from all shareholders on a 1 redeemable share for each 1 ordinary share held basis. The redeemable shares were redeemed at the rate of US$0.128 per redemption share.
There was no movement in the ordinary share capital during year ending 31 December 2015.
38 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
19 | Share capital (continued) |
Detail of ordinary share capital movements during year ending 31 December 2014
Description | |
Date of issue | |
Shareholder | Issue price per share $ | Amount of Share capital US$'000 |
|
|||||
Buy Back | December 2014 | TOGI | 0.10 | 809 | ||||||||
Warrants Exercised | September 2014 | Macquarie B. | 0.10 | (800 | ) | |||||||
Exercise of Share Options | September 2014 | Director | 0.10 | (25 | ) | |||||||
Exercise of Share Options | October 2014 | Directors | 0.10 | (112 | ) | |||||||
Total capital movements during year ended 31 December 2014 | 128 |
Redemption of redeemable shares
The Company created in 2014 a new class of redeemable share, which the Company bonused to shareholders on a 1 redeemable share for each ordinary share held. The redeemable shares were issued, allotted and redeemed for a cash payment of US$0.128 per redeemable share held. In total an amount of US$18 million was distributed to shareholders through the redemption of redeemable shares.
20 | Share based payments |
Share options
At 31 December 2015, the Group had options over 900,000 ordinary shares (2014: 900,000 ordinary shares) of US$0.10 each outstanding. The options were awarded to certain directors and employees under the terms of an existing unapproved share option plan. The options which were awarded to directors are recognized in the parent company accounts, and those awarded to employees have being recognized in the subsidiary company where their salaries are accrued and paid. The options vest over a two year period from the date of grant and once vested are immediately exercisable, in whole or in part, up to the fifth anniversary of the date of grant, at an exercise price of 44.5 pence per share (2014: 44.5 pence).
2015 | 2014 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
average | average | |||||||||||||||
Exercise price | 2015 | Exercise price | 2014 | |||||||||||||
(pence) | Number | (pence) | Number | |||||||||||||
Outstanding at 1 January | 44.5 | 900,000 | 44.5 | 2,270,000 | ||||||||||||
Granted during the year | 44.5 | - | 44.5 | 900,000 | ||||||||||||
Forfeited during the year | - | - | - | - | ||||||||||||
Exercised during the year | 44.5 | - | 44.5 | (1,370,000 | ) | |||||||||||
Lapsed during the year | 44.5 | - | 44.5 | (900,000 | ) | |||||||||||
Outstanding at 31 December | 44.5 | 900,000 | 44.5 | 900,000 |
39 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
20 | Share based payments (continued) |
900,000 options remain outstanding at 31 December 2015 (2014: 900,000 ordinary shares), with an exercise price of £0.445 (2014: £0.445) per option, and with an exercise period ending on 31 December 2016. For accounting purposes the fair value of these options were recognized into the comprehensive income and were calculated through a Black-Scholes calculation. The weighted average share price (at the date of exercise) of options exercised during the year was £0.445 per share.
The options noted above are held by certain members of the board and executive management team were granted options and warrants in October 2009. Two directors, Luc Gerard and Ciro Mendez hold 600,000 and 250,000 warrants that are exercisable into 600,000 and 250,000 shares respectively. These options expire on 31 December 2016, and have an exercise price of £0.445 per share. Under the terms of option instrument, the options are freely transferable. Post the year end, Luc Gerard and Ciro Mendez, who are associated with Tribeca Oil and Gas Inc ("TOGI”), the Company’s largest shareholder, assigned their options to TOGI, and as a result TOGI now holds 850,000 warrants exercisable into 850,000 shares at an exercise price of £0.445 per warrant until 31 December 2016. On a fully diluted basis, TOGI will hold 50.23% of the fully diluted share capital of the Company.
Warrants
As at 31 December 2015, no share warrants have been granted and are outstanding in respect of the ordinary shares.
As at 1 January 2014 60,000 share warrants were outstanding. During the year ending 31 December 2014, these 60,000 share warrants lapsed. In addition during the year ended 31 December 2014 8,000,000 share warrants were issued and exercised, resulting in 8,000,000 new ordinary shares being issued. The fairvalue of these warrants was expensed in previous periods.
21 | Contingent liabilities and litigation |
PDN
The Group’s results incorporate 100% of the activities of PDN. In June 2006 the Group acquired, and since then has held, a controlling interest of 92.42% of the issued and outstanding share capital of PDN. The remaining 7.58% of the issued and outstanding shares of PDN were held in a trust in Colombia and their release from such trust was subject to the final resolution of pending litigation. The judgment at first and second instance was in favour for PDN. PELE owned 100% at the year-end (2014: 96.09%). Final judgment in the litigation has at year end resulted in the shares held in trust being returned to PDN for cancellation. As a result the share capital under litigation has been diluted to 0% (2014: 3.91%). As a result the share capital under litigation has been diluted to 0% (2014: 3.91%).
PDN damages claim: “Bellavista case”
Administrative proceedings seeking direct reparation. PDN brought an action against the Ministry of Defense in December 2004. PDN seeks indemnification for damages suffered as a result of a terrorist attack perpetrated by the FARC guerrillas in December 2002, which totally destroyed the ´Bellavista´ pumping station. PDN argues that the attack was supposed to be directed at the Government in place, but affected PDN’s private property. PDN argues that the Army was not protecting the station at the time of the attack having ceased to do so in 1999, despite the difficult public order situation in the area. PDN demands payment of actual damages and losses in excess of US$7 million. Current status: PDN filed an appeal against the first judgement and currently is awaiting the final ruling of the Administrative State Court.
40 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
21 | Contingent liabilities and litigation (continued) |
Arbitration: “Source”
Source South American One S de RL (“Source”) entered into a Farm-In Agreement for the La Paloma and Midas E&P Contracts (the “Source Farm-In Agreement”) on 29 August 2013. Adverse unforeseen regulatory developments and changes resulted in the basis of the Source Farm-In Agreement being undermined. Source believe that despite such adverse changes, it is still able to pursue good faith discussions with Petróleos Del Norte SA (“PDN”) to enable Source to progress the project and address the unforeseen changes. PDN holds the alternative view in that the adverse changes have materially undermined the value and basis of the Source Farm-in Agreement, to the extent that the basis of the agreement is now not deliverable. At this point, Source believes that all disagreements among the parties are irreconcilable and accordingly Source has indicated that it intends to initiate an arbitration proceeding pursuant to clause 22.1 of the Source Farm-In Agreement. Source is seeking redress for all its investments and expenditures to date under the Source Farm-In Agreement equivalent to US$12,000,000. The Group has not provided for this amount, as following legal advice, the Group consider that the claim, after review of the information available at this juncture, is not probable. However the Group has disclosed the claim as the Group considers that there is a possible claim.
22 | Related party transactions |
Details of key management personnel’s remuneration is given in note 3.
Transportes del Norte S.A. (“TDN”), a company controlled by Juan Carlos Rodriguez, a director and substantial shareholder in PELE, provides transportation services to the Company. During the year US$23,014,973 (2014: US$13,575,246) was incurred for services provided by TDN. At the year end, a total of US$nil (2014: US$1,228,112) was due and outstanding to TDN. All transactions were on an arm’s length basis.
In the year ending 31 December 2014, the Company sought shareholder approval from all shareholders, excluding Tribeca Oil and Gas Inc, (“TOGI”) and Tribeca Oil and Gas Financing Inc, (“TOGF”) to complete the previously agreed buy-back certain shares in the Company held TOGI. The Company completed the buy-back of 8,092,660 shares from TOGI through the advanced loan of US$6.5 million previously made to TOGI. No transactions were undertaken during 2015.
23 | Commitments under operating leases |
As at 31 December 2015, the Group has commitments under non-cancellable operating leases as set out below:
Land and Buildings | ||||||||
2015 US$’000 | 2014 US$’000 | |||||||
Operating leases commitments due: | ||||||||
Less than one year | 194 | 175 | ||||||
In two to five years | - | 140 | ||||||
Total | 194 | 315 |
41 |
PetroLatina Energy Limited
Notes forming part of the financial statements for the years ended 31 December 2015 and 31 December 2014
24 | Capital Commitments |
As at 31 December 2015, the Group had net commitments of US$ nil for the next 12 months. The Group has commitments commencing in 2017, over the following 3 years of approximately US$80.2 million to drill 6 exploratory wells, one in each of the following fields: Paloma, Midas, LLa-53, LLa-70, LLa-1, Put-25, and to shoot 4 seismic programs in Llanos and Putumayo fields.
25 | Post Reporting date Events |
On 27 January 2016, the Company increased is borrowing under the BNP loan facility by drawing an additional US$8 million increasing total borrowings to US$80 million.
On March 2016 TDN, changed its name to Petro Trade and Logistics S.A. - PTL S.A, On 30 March 2016, the Group sold its remaining shareholding of 0.04% in TDN.
The Chuira-2ST well finished drilling on 28 December 2015, reaching a total depth of 9,365 ft (MD), and finding a 255 ft net pay on open natural fractures in the La Luna formation. This geological unit was completed with a pre-perforated liner and started an initial test on 6 January 2016. The initial test resulted in an average intermittent production of 35 bopd of 21° API on natural flow. A cleaning and stimulation job was carried out later with a coiled tubing unit in order to remove possible solids obstructions and dissolve natural carbonates and organics, improving the productivity; the final results has shown an average stabilized production in natural flow of 47 bopd of 22.4° API and the cumulative production as at 31 March 2016 is 3,169 barrels of oil.
On June 30, 2016, Gran Tierra Energy International Holdings Ltd., a wholly-owned indirect subsidiary of Gran Tierra, a company incorporated in Nevada and listed on NYSE MKT, entered into a share purchase agreement (the “Acquisition Agreement”) with Tribeca Oil & Gas Inc., Macquarie Bank Limited and Rorick Ventures Group Inc., as vendors (the “Vendors”), and Petrolatina Energy Limited (“PetroLatina”) providing for the acquisition of PetroLatina for cash consideration of $525 million (the “Acquisition”). Funding for the Acquisition will consist of an initial payment of $500 million at closing, subject to closing adjustments, and a deferred payment of $25 million to be paid prior to December 31, 2016. Subsequent to the signing of the Acquisition Agreement, Gran Tierra delivered $5 million to Macquarie Bank Limited, which funds are to be held in escrow and applied to the initial payment at closing (the “Escrow Funds”).
42 |
Exhibit 99.2
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
On June 30, 2016, Gran Tierra Energy International Holdings Ltd., a wholly-owned subsidiary of Gran Tierra Energy Inc., a Nevada corporation (“Gran Tierra”), entered into a share purchase agreement (the “Acquisition Agreement”) to acquire all of the issued and outstanding common shares of PetroLatina Energy Ltd. (“PetroLatina”) for cash consideration of $525 million (the "Acquisition"), subject to customary working capital and other adjustments. The Acquisition is also subject to customary closing conditions, including, among other things, any required regulatory approval. Approval from the Agencia Nacional de Hidrocarburos (National Hydrocarbon Agency) of Colombia was received on July 29, 2016, and the Acquisition is expected to close prior to August 31, 2016.
The accompanying unaudited pro forma consolidated balance sheet as at March 31, 2016, and the unaudited pro forma consolidated statements of operations for the three months ended March 31, 2016, and the year ended December 31, 2015, (the “Pro Forma Statements”) have been prepared in compliance with the requirements of SEC Regulation S-X using accounting policies in accordance with generally accepted accounting principles in the United States of America (“USGAAP”). Accounting policies used in the preparation of the Pro Forma Statements are consistent with those disclosed in the audited consolidated financial statements of Gran Tierra as at and for the year ended December 31, 2015. PetroLatina prepares its financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). PetroLatina’s IFRS financial statements have been adjusted to conform to USGAAP and certain historical PetroLatina amounts have been combined to conform to Gran Tierra’s presentation.
The pro forma adjustments are based on preliminary estimates and currently available information and assumptions that management believes are reasonable. The notes to the Pro Forma Statements provide a discussion of how such adjustments were derived and presented in the Pro Forma Statements. Changes in facts and circumstances or discovery of new information may result in revised estimates. As a result, there may be material adjustments primarily to oil and gas properties and deferred income taxes. See note 2(a) to the Pro Forma Statements.
The note disclosure requirements of annual consolidated financial statements provide additional disclosures to that required for pro forma consolidated financial statements. The Pro Forma Statements have been prepared from the following:
- | The unaudited interim consolidated financial statements of Gran Tierra (the "GTE interim financial statements") and the internal management accounts of PetroLatina as at and for the three months ended March 31, 2016, and; |
- | The audited consolidated financial statements of each of Gran Tierra and PetroLatina for the year ended December 31, 2015 (collectively the "Annual Financial Statements"). |
The Pro Forma Statements should be read in conjunction with the GTE interim financial statements and the Annual Financial Statements. The unaudited Pro Forma Statements give effect to the proposed Acquisition as if it had occurred as at March 31, 2016, for the purposes of the unaudited pro forma consolidated balance sheet and as at January 1, 2015, for the purposes of the unaudited pro forma consolidated statements of operations for the year ended December 31, 2015, and the three months ended March 31, 2016. In the opinion of Gran Tierra’s management, these Pro Forma Statements include all material adjustments to be in accordance with USGAAP.
The Pro Forma Statements are presented for illustrative purposes only and may not be indicative of the results of operations that would have occurred if the events reflected therein had been in effect on the dates indicated or the results which may be obtained in the future. In preparing the Pro Forma Statements, no adjustments have been made to reflect the potential operating synergies and administrative cost savings that could result from the combination of the Gran Tierra and PetroLatina operations. Actual amounts recorded upon consummation of the proposed Acquisition will differ from the Pro Forma Statements, and the differences may be material.
1 |
Gran Tierra Energy Inc.
Pro Forma Consolidated Balance Sheets (Unaudited)
As at March 31, 2016
(Thousands of U.S. Dollars)
Gran Tierra | PetroLatina | Adjustments | PetroLatina | Pro Forma Adjustments | Pro Forma Consolidated | |||||||||||||||||||||
(USGAAP) | (IFRS) | (USGAAP) | (USGAAP) | (USGAAP) | Notes | (USGAAP) | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||
Current Assets | ||||||||||||||||||||||||||
Cash and cash equivalents | $ | 51,308 | $ | 21,595 | $ | - | $ | 21,595 | $ | (173,227 | ) | 2,a,b,e | $ | (100,324 | ) | |||||||||||
Restricted cash | 18,474 | - | - | - | - | 18,474 | ||||||||||||||||||||
Accounts receivable | 35,573 | 3,085 | - | 3,085 | - | 38,658 | ||||||||||||||||||||
Marketable securities | 5,362 | - | - | - | - | 5,362 | ||||||||||||||||||||
Inventory | 10,690 | 192 | - | 192 | - | 10,882 | ||||||||||||||||||||
Taxes receivable | 34,712 | 4,470 | - | 4,470 | - | 39,182 | ||||||||||||||||||||
Other current assets | 5,992 | 20 | - | 20 | - | 6,012 | ||||||||||||||||||||
Total Current Assets | 162,111 | 29,362 | - | 29,362 | (173,227 | ) | 18,246 | |||||||||||||||||||
Oil and Gas Properties | - | 98,232 | (98,232 | ) | - | - | 2,c,d | - | ||||||||||||||||||
Proved | 472,062 | - | 140,965 | 140,965 | 222,558 | 2,a,c,d | 835,585 | |||||||||||||||||||
Unproved | 373,899 | - | 14,062 | 14,062 | 437,232 | 2,a,c,d | 825,193 | |||||||||||||||||||
Total Oil and Gas Properties | 845,961 | 98,232 | 56,795 | 155,027 | 659,790 | 1,660,778 | ||||||||||||||||||||
Other capital assets | 8,229 | 1,661 | - | 1,661 | - | 9,890 | ||||||||||||||||||||
Total Property, Plant and Equipment | 854,190 | 99,893 | 56,795 | 156,688 | 659,790 | 1,670,668 | ||||||||||||||||||||
Other Long-Term Assets | ||||||||||||||||||||||||||
Restricted cash | 6,414 | 3,490 | - | 3,490 | - | 9,904 | ||||||||||||||||||||
Deferred tax assets | - | 99 | (99 | ) | - | - | 2f | - | ||||||||||||||||||
Taxes receivable | 8,978 | - | - | - | - | 8,978 | ||||||||||||||||||||
Other long-term assets | 13,998 | - | - | - | - | 13,998 | ||||||||||||||||||||
Goodwill | 102,581 | - | - | - | - | 102,581 | ||||||||||||||||||||
Total Other Long-Term Assets | 131,971 | 3,589 | (99 | ) | 3,490 | - | 135,461 | |||||||||||||||||||
Total Assets | $ | 1,148,272 | $ | 132,844 | $ | 56,696 | $ | 189,540 | $ | 486,563 | $ | 1,824,375 | ||||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||||
Current Liabilities | ||||||||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 77,303 | $ | 7,272 | $ | - | $ | 7,272 | $ | - | $ | 84,574 | ||||||||||||||
Short term debt | - | - | - | - | 126,500 | 2e | 126,500 | |||||||||||||||||||
Taxes payable | 943 | 7,802 | - | 7,802 | - | 8,745 | ||||||||||||||||||||
Asset retirement obligation | 3,255 | - | - | - | - | 3,255 | ||||||||||||||||||||
Total Current Liabilities | 81,501 | 15,074 | - | 15,074 | 126,500 | 223,074 | ||||||||||||||||||||
Long-Term Liabilities | ||||||||||||||||||||||||||
Deferred tax liabilities | 30,880 | 6,192 | 6,170 | 12,362 | 281,237 | 2f | 324,479 | |||||||||||||||||||
Asset retirement obligation | 43,205 | 6,000 | (2,545 | ) | 3,455 | - | 2d | 46,660 | ||||||||||||||||||
Long term debt | - | 79,069 | - | 79,069 | - | 2e | 79,069 | |||||||||||||||||||
Other long-term liabilities | 8,096 | - | - | - | - | 8,096 | ||||||||||||||||||||
Total Long-Term Liabilities | 82,181 | 91,261 | 3,625 | 94,886 | 281,237 | 458,304 | ||||||||||||||||||||
Shareholders’ Equity | ||||||||||||||||||||||||||
Common Stock | 10,199 | 31,733 | - | 31,733 | (31,675 | ) | 2,g,h | 10,257 | ||||||||||||||||||
Additional paid in capital | 1,047,830 | 94,161 | - | 94,161 | 72,387 | 2e | 1,214,378 | |||||||||||||||||||
(Deficit) Retained earnings | (73,439 | ) | (99,385 | ) | 53,072 | (46,313 | ) | 38,114 | 2b | (81,638 | ) | |||||||||||||||
Total Shareholders’ Equity | 984,590 | 26,509 | 53,072 | 79,581 | 78,826 | 1,142,997 | ||||||||||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 1,148,272 | $ | 132,844 | $ | 56,696 | $ | 189,540 | $ | 486,563 | $ | 1,824,375 |
See accompanying notes to the Pro Forma Statements
2 |
Gran Tierra Energy Inc.
Pro Forma Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2016
(Thousands of U.S. Dollars, Except Per Share Amounts)
Gran Tierra | PetroLatina | Adjustments | PetroLatina | Pro Forma Adjustments | Pro Forma Consolidated | |||||||||||||||||||||
(USGAAP) | (IFRS) | (USGAAP) | (USGAAP) | (USGAAP) | Notes | (USGAAP) | ||||||||||||||||||||
REVENUE AND OTHER INCOME | ||||||||||||||||||||||||||
Oil and natural gas sales | $ | 57,403 | $ | 10,103 | $ | - | $ | 10,103 | $ | - | $ | 67,506 | ||||||||||||||
Interest income | 449 | 14 | - | 14 | - | 463 | ||||||||||||||||||||
57,852 | 10,117 | - | 10,117 | - | 67,969 | |||||||||||||||||||||
EXPENSES | ||||||||||||||||||||||||||
Operating | 31,395 | 5,316 | - | 5,316 | - | 36,711 | ||||||||||||||||||||
Depletion, depreciation, accretion | 36,912 | 2,935 | 2,573 | 5,508 | 1,412 | 2c | 43,833 | |||||||||||||||||||
Asset Impairment | 56,898 | - | - | - | - | 56,898 | ||||||||||||||||||||
General and administrative | 8,805 | 1,455 | - | 1,455 | - | 10,260 | ||||||||||||||||||||
Severance | 1,018 | - | - | - | - | 1,018 | ||||||||||||||||||||
Equity tax | 3,051 | 276 | - | 276 | - | 3,327 | ||||||||||||||||||||
Foreign exchange gain | 785 | 8 | 912 | 920 | - | 2f | 1,705 | |||||||||||||||||||
Interest and financing fees | - | 939 | - | 939 | 2,100 | 2e | 3,039 | |||||||||||||||||||
Financial instruments loss | 845 | - | - | - | - | 845 | ||||||||||||||||||||
Gain on acquisition | (11,712 | ) | - | - | - | - | (11,712 | ) | ||||||||||||||||||
127,997 | 10,929 | 3,485 | 14,414 | 3,512 | 145,924 | |||||||||||||||||||||
LOSS BEFORE INCOME TAXES | (70,145 | ) | (812 | ) | (3,485 | ) | (4,297 | ) | (3,512 | ) | (77,955 | ) | ||||||||||||||
Current income tax | (2,023 | ) | (1,688 | ) | - | (1,688 | ) | - | (3,711 | ) | ||||||||||||||||
Deferred income tax recovery (expense) | 27,136 | (308 | ) | 223 | (85 | ) | 551 | 2f | 27,602 | |||||||||||||||||
NET LOSS | $ | (45,032 | ) | $ | (2,808 | ) | $ | (3,262 | ) | $ | (6,070 | ) | $ | (2,962 | ) | $ | (54,064 | ) | ||||||||
Net loss per share - basic and diluted | $ | (0.15 | ) | $ | (0.15 | ) |
See accompanying notes to the Pro Forma Statements
3 |
Gran Tierra Energy Inc.
Pro Forma Consolidated Statements of Operations (Unaudited)
For the Year Ended December 31, 2015
(Thousands of U.S. Dollars, Except Per Share Amounts)
Gran Tierra | PetroLatina | Adjustments | PetroLatina | Pro Forma Adjustments | Pro Forma Consolidated | |||||||||||||||||||||
(USGAAP) | (IFRS) | (USGAAP) | (USGAAP) | (USGAAP) | Notes | (USGAAP) | ||||||||||||||||||||
REVENUE AND OTHER INCOME | ||||||||||||||||||||||||||
Oil and natural gas sales | $ | 276,011 | $ | 81,682 | $ | - | $ | 81,682 | $ | - | $ | 357,693 | ||||||||||||||
Interest income | 1,369 | 154 | - | 154 | - | 1,523 | ||||||||||||||||||||
277,380 | 81,836 | - | 81,836 | - | 359,216 | |||||||||||||||||||||
EXPENSES | ||||||||||||||||||||||||||
Operating | 115,769 | 34,921 | - | 34,921 | - | 150,690 | ||||||||||||||||||||
Depletion, depreciation, accretion | 176,386 | 15,094 | 7,782 | 22,876 | (7,163 | ) | 2c | 192,099 | ||||||||||||||||||
Asset Impairment | 323,918 | 47,651 | (47,651 | ) | - | 53,108 | 2c | 377,026 | ||||||||||||||||||
General and administrative | 32,353 | 6,662 | - | 6,662 | - | 39,015 | ||||||||||||||||||||
Severance | 8,990 | - | - | - | - | 8,990 | ||||||||||||||||||||
Equity tax | 3,769 | 276 | - | 276 | - | 4,045 | ||||||||||||||||||||
Foreign exchange (gain) loss | (17,242 | ) | 266 | (4,931 | ) | (4,665 | ) | - | 2f | (21,907 | ) | |||||||||||||||
Interest and financing fees | - | 4,237 | 13,100 | 2e | 13,100 | |||||||||||||||||||||
Other gain | (502 | ) | - | - | 4,237 | - | 3,735 | |||||||||||||||||||
Financial instruments loss | 2,027 | - | - | - | - | 2,027 | ||||||||||||||||||||
645,468 | 109,107 | (44,800 | ) | 64,307 | 59,045 | - | 768,820 | |||||||||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | (368,088 | ) | (27,271 | ) | 44,800 | 17,529 | (59,045 | ) | (409,604 | ) | ||||||||||||||||
Current income tax | (15,383 | ) | (11,165 | ) | - | (11,165 | ) | - | (26,548 | ) | ||||||||||||||||
Deferred income tax recovery (expense) | 115,442 | (5,812 | ) | 9,907 | 4,095 | 17,919 | 2f | 137,456 | ||||||||||||||||||
NET INCOME (LOSS) | $ | (268,029 | ) | $ | (44,248 | ) | $ | 54,707 | $ | 10,459 | $ | (41,127 | ) | $ | (298,696 | ) | ||||||||||
Net loss per share - basic and diluted | $ | (0.94 | ) | $ | (0.87 | ) |
See accompanying notes to the unaudited Pro Forma Statements
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Gran Tierra Energy Inc.
Notes to the Pro Forma Statements (Unaudited)
(Expressed in U.S. Dollars, unless otherwise indicated)
1. Description of the transaction
Gran Tierra will acquire all of the issued and outstanding shares of PetroLatina under the terms of the Acquisition Agreement. PetroLatina is a private, independent exploration and production company, incorporated in England and Wales with assets primarily in the Middle Magdalena Basin of Colombia. Upon completion of the Acquisition, PetroLatina will become an indirect wholly-owned subsidiary of Gran Tierra. The Acquisition has not yet been consummated and may not close on these terms, if at all.
Consideration for the Acquisition will consist of an initial payment of $500 million at closing, subject to customary working capital and other adjustments, and a deferred payment of $25 million to be paid prior to December 31, 2016. Subsequent to the signing of the Acquisition Agreement, the Company paid $5 million, which funds are to be held in escrow and applied to the initial payment at closing.
On July 8, 2016, Gran Tierra issued approximately 57.8 million subscription receipts (“Subscription Receipts”) in a private placement to eligible purchasers at a price of $3.00 per Subscription Receipt for gross proceeds of approximately $173.5 million. Each Subscription Receipt will entitle the holder to automatically receive one share of Gran Tierra common stock upon closing of the Acquisition upon the satisfaction of certain conditions. The gross proceeds from the sale of the Subscription Receipts will be held in escrow until the Acquisition close date and will be recorded as restricted cash by the Company.
Gran Tierra expects to fund the Acquisition through a combination of Gran Tierra’s current cash balance, gross proceeds of $173.5 million from the sale of the Subscription Receipts, and $130.0 million of borrowings under a new term loan under the credit facility that is contingent upon closing of the Acquisition. Gran Tierra expects to repay the $79.1 million of PetroLatina long-term debt immediately upon closing of the Acquisition, which is expected to result in $70.4 million of borrowings outstanding under Gran Tierra’s revolving loan credit facility and the utilization of $109.0 net proceeds from issuance of convertible notes received after March 31, 2016 not reflected in the Pro Forma Statements, because the issuance of convertible notes was not directly attributable to the proposed Acquisition.
The Acquisition Agreement may be terminated by either Gran Tierra or the vendors under certain circumstances set forth in the Acquisition Agreement, including, among other circumstances, the failure of the Acquisition to be consummated on or before October 31, 2016. If the Acquisition Agreement is terminated by Gran Tierra as a result of the vendor’s breach of any representations, warranties, covenants or obligations, the vendors’ aggregate maximum liability will be limited to $5 million, and the escrowed funds will be returned to Gran Tierra. If the Acquisition Agreement is terminated as a result of Gran Tierra breaching any representations, warranties, covenants or obligations, Gran Tierra’s maximum liability will be limited to the loss of the escrowed funds deposited by Gran Tierra subsequent to the signing of the Acquisition Agreement.
2. Assumptions and adjustments
a) The Acquisition is expected to be accounted for as a business combination using the acquisition method, with Gran Tierra being the acquirer, whereby the assets acquired and liabilities assumed will be recognized at their fair values as at the closing date of the Acquisition, and the results of PetroLatina included with those of Gran Tierra from that date.
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The USGAAP values of net assets acquired and consideration paid for 100% ownership of PetroLatina is preliminarily allocated as follows:
(Thousands of U.S. Dollars) | ||||
Cash | $ | 525,000 | ||
Working capital & other adjustments | 12,201 | |||
Debt assumed | (79,069 | ) | ||
Cash Consideration | $ | 458,132 |
(Thousands of U.S. Dollars) | ||||
Oil and gas properties | ||||
Proved | 363,523 | |||
Unproved | 451,292 | |||
Other long-term assets | 5,151 | |||
Net working capital | 14,288 | |||
Long Term debt | (79,069 | ) | ||
Asset retirement obligation | (3,455 | ) | ||
Deferred income tax | (293,599 | ) | ||
$ | 458,132 |
The pro forma purchase price allocation is subject to change based on the finalization of purchase price adjustments and completion of management’s assessment of the fair values of the assets and liabilities acquired. Due to the timing of the announcement of the Acquisition and the fact that the Acquisition has not yet closed, Gran Tierra has not completed the final valuation necessary to determine the acquisition date fair market value of PetroLatina’s net assets. The unaudited pro forma consolidated balance sheet includes a preliminary allocation of the purchase price to reflect the estimated fair value of those assets and liabilities. Upon completion of the Acquisition, or as more information becomes available, Gran Tierra will complete a more detailed review of the preliminary allocation of the purchase price to reflect the acquisition date fair value of those assets and liabilities. As a result of that review, more information could become available that, when analyzed, could have a material impact on the pro forma financial statements.
Note 2(c) below describes differences between the prescribed USGAAP book value of oil and gas properties and PetroLatina’s IFRS book value at March 31, 2016.
b) Estimated transaction and severance costs of approximately $8.2 million have been recorded to retained earnings and cash, but not reflected in the pro forma consolidated statements of operations on the basis that these expenses are directly incremental to the Acquisition but are non-recurring in nature.
c) Gran Tierra follows the USGAAP 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 during the 12-month period prior to the balance sheet date, 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 Gran Tierra’s reserves.
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The pro forma USGAAP adjustments to PetroLatina’s previously recognized impairment loss resulted in USGAAP ceiling test impairment losses of $nil in the three months ended March 31, 2016, and the year ended December 31, 2015. Under IFRS, PetroLatina recorded impairments of property, plant and equipment of $nil and $39.8 million, respectively, for the three months ended March 31, 2016, and the year ended December 31, 2015. The impairment loss decrease was primarily due to the prescribed USGAAP ceiling test being based on proved reserves, discounted cash flows at 10%, and an inflow of cash related to unproved properties as compared with the IFRS impairment assessment being based on proved plus probable reserves with discounted cash flows at 15%.
Under USGAAP, unproved properties are evaluated as to whether impairment has occurred. This evaluation considers, among other factors, seismic data, requirements to relinquish acreage, drilling results and activity, remaining time in the commitment period, remaining capital plans, and political, economic, and market conditions. During any period in which factors indicate impairment, the cumulative costs incurred to date for such property are transferred to the full cost pool and are then subject to depletion. As a result of applying a preliminary USGAAP unproved property impairment assessment, $nil of unproved property costs were transferred to the USGAAP proved property full cost pool. Due to the timing of the announcement of the Acquisition, Gran Tierra has not yet obtained sufficient information to finalize its unproved property impairment assessment and, therefore, the pro forma USGAAP adjustments to unproved properties are subject to change.
The pro forma US GAAP adjustment to PetroLatina’s previously recognized impairment included the reversal of $20.7 million of exploration and evaluation (“E&E”) impairment charges which would not have been expensed under USGAAP and, therefore, have been included in proved property on PetroLatina’s USGAAP pro forma balance sheet at March 31, 2016. Where these costs were related to blocks subsequently relinquished or upon which no further exploration was planned, these costs were transferred to the proved property full cost pool in the relevant year.
E&E expenses of $nil and $7.9 million related to geological and geophysical costs, and pre-E&E phase expenses which would not have been expensed under USGAAP have been reversed in the pro forma consolidated statements of operations for the three months ended March 31, 2016, and the year ended December 31, 2015. These costs are included in unproved property on PetroLatina’s USGAAP pro forma balance sheet at March 31, 2016. Where these costs were related to blocks subsequently relinquished or upon which no further exploration was planned, these costs were transferred to the proved property full cost pool in the relevant year.
PetroLatina’s depletion, depreciation, accretion and impairment for the three months ended March 31, 2016, and the year ended December 31, 2015, has been increased by $2.6 million and decreased by $39.9 million, respectively, due to nil impairment losses as a result of the application of the prescribed USGAAP ceiling test and capitalization of PetroLatina’s previously recognized E&E expense, as described above. Higher depletion expense was a result of a higher USGAAP depletable base, partially offset by a lower USGAAP depletion rate. The reserves base used in the calculation of the USGAAP depletion rate is based upon proved reserves versus the proved and probable base used in the calculation of depletion rates under IFRS.
Proforma depletion, depreciation, accretion and impairment for the three months ended March 31, 2016, and the year ended December 31, 2015, has been increased by $1.4 million and $45.9 million, respectively, as a result of applying the prescribed USGAAP ceiling test to the combined Gran Tierra and PetroLatina Colombia cost center.
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d) Asset retirement obligations which will be assumed as a result of the Acquisition have been measured on the assumptions and terms consistent with those currently used by Gran Tierra for USGAAP, that is, the liability is based on estimates established by current legislation, discounted at Gran Tierra’s credit-adjusted risk-free interest rate and capitalized to oil and gas properties as an asset retirement cost. PetroLatina’s accounting policy was to discount its asset retirement obligations at its risk-free interest rate.
e) The Company believes that the Acquisition will be funded through a combination of Gran Tierra’s current cash balance, gross proceeds of $173.5 million from the sale of the Subscription Receipts, and $130.0 million of borrowings under a new term loan under the credit facility that is contingent upon the closing of the Acquisition. Gran Tierra expects to repay the $79.1 million PetroLatina long-term debt immediately upon closing of the Acquisition, which is expected to result in $70.4 million of borrowings outstanding under Gran Tierra’s revolving loan credit facility and the utilization of $109.0 net proceeds from issuance of convertible notes received after March 31, 2016 not reflected in the Pro Forma Statements, because the issuance of convertible notes was not directly attributable to the proposed Acquisition. Proforma cash balance and retained earnings has been adjusted for the estimated transaction, severance and financing costs not reflected in the pro forma consolidated statements of operations on the basis that these expenses are directly incremental to the Acquisition but are non-recurring in nature. Additionally, estimated debt financing and subscription receipt issuance costs of $10.4 million have been netted against cash.
On July 8, 2016, Gran Tierra issued approximately 57.8 million subscription receipts in a private placement to eligible purchasers at a price of $3.00 per Subscription Receipt for gross proceeds of approximately $173.5 million. Each Subscription Receipt will entitle the holder to automatically receive one share of Gran Tierra common stock upon closing of the Acquisition upon the satisfaction of certain conditions. The gross proceeds from the sale of the Subscription Receipts will be held in escrow until the Acquisition close date and will be recorded as restricted cash by the Company. Proforma financing cost for the three months ended March 31, 2016 and the year ended December 31, 2015 reflects an increase of $2.1 million and $13.1 million, respectively, due to the estimated interest expense on the new debt facility.
f) Deferred income tax recognized on PetroLatina’s USGAAP pro forma balance sheet has been determined using the liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax base, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled.
USGAAP proforma adjustments were made to the deferred income tax balance as the result of adjustments. Under IFRS, a temporary difference is calculated using the translation of tax pools at the period end foreign exchange rate. Under USGAAP, tax pools are translated using historical foreign exchange rates. The resulting deferred income tax balance under USGAAP was recalculated based on the USGAAP adjusted oil and gas property values and the historical foreign exchange rates and subsequently reduced to $0.1 million expense in the three months ended March 31, 2016, and $4.1 million recovery for the year ended December 31, 2015.
Proforma income tax recovery increased by $0.6 million and by $17.9 million for the three months ended March 31, 2016, and the year ended December 31, 2015, respectively, to reflect the tax effect on the pro forma adjustments described above, at the statutory tax rate of 39%.
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g) The elimination of PetroLatina’s equity accounts.
h) The calculation of net loss per share is based on the weighted average number of Gran Tierra’s shares of common stock outstanding for the three months ended March 31, 2016, and the year ended December 31, 2015, and gives effect to the issuance of 57,835,134 shares of Gran Tierra common stock issued as a result of the Acquisition,. The weighted average number of Gran Tierra’s shares of common stock outstanding used in this calculation is as follows:
Three months ended | For the year ended | |||||||
March 31, 2016 | December 31, 2015 | |||||||
Weighted average shares outstanding - basic and diluted | 293,812,226 | 285,333,869 | ||||||
Pro forma shares issued | 57,835,134 | 57,835,134 | ||||||
Pro forma weighted average shares outstanding - basic and diluted | 351,647,360 | 343,169,003 |
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