Key points:
- Gran Tierra's credit facility is now paid off
- The bond exchange is progressing
- This frees cashflow for further drilling in Ecuador
Gran Tierra (LON: GTE) shares are up 10% this morning as the company announces that it has paid off its revolving credit facility to zero. Further, GTE is expanding its drilling program in Ecuador and Colombia. A reasonable enough assumption is that high oil prices have allowed that paying off of the credit lines while also being able to find expansion. The big question is whether this has further to go. A reasonable response there is that it rather depends upon what the new drilling activity discovers.
Gran Tierra shares have reacted well as it has announced that it has paid off its revolving credit facility: “We have significantly strengthened our balance sheet by steadily reducing our credit facility balance from $207 million as of June 30, 2020 to $0 as of June 2, 2022.”
This does not, though, mean that the company is debt free. There's still that exchange of the varied senior notes going on. The 6.25% 2025 notes and the 7.750% 2027 notes are being exchanged – not in total, but in part at least – for 8.75% 2029 amortising notes.
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This pushes out the required payback date, which is a part of the aim of course. Also, amortising notes, by their definition, pay down the capital over time, reducing the possible problems of facing a balloon payment at some future date. The higher interest rates look reasonable enough given market changes to the general level of rates plus the extension of the maturity.
The basic thought here would be that Gran Tierra is now reasonably capital secure. This rather matters for there are many exploration companies out there which drill, prospect, by continually calling on more investor capital. GTE is, instead, funding this from internal resources which of course reduces risk to investors.
Production is running at around 30k barrels of oil production daily and that has increased another 10% in the past couple of weeks. There are varied infill projects going on at the producing sites. Further, there's the preparation for drilling in Ecuador.
The base profile of Gran Tierra is therefore of a middling oil exploration company funding expansion through that internal cashflow generation. They've used recent high prices to pay down debt and yet still have that cashflow to enable further activity. Clearly the market likes this profile as the GTE shares are up 95% YTE and 185% over the past 12 months. The big question of course becoming what happens next?
That rather depends upon two different things. The first is that the cashflow is being spent on that further expansion, not returned to investors. So, the value of Gran Tierra shares in the future will depend upon the results of that cashflow spend. In effect, how much oil is there – or isn't there – in those locations in Ecuador where new drilling is to take place? The second is, as with every producing oil company, the global price of oil.
The advantage Gran Tierra has is that it is currently internally funding, there are no large and urgent debt repayments. So, there's time for those two big influences to work out. Liquidity in London is limited so there may well be further reaction as the North American markets open up.
