Financial Instruments, Fair Value Measurements and Credit Risk | 9 Months Ended |
Sep. 30, 2014 |
Fair Value Disclosures [Abstract] | ' |
Financial Instruments, Fair Value Measurements and Credit Risk | ' |
Financial Instruments, Fair Value Measurement, Credit Risk and Foreign Exchange Risk |
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Financial Instruments |
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At September 30, 2014, the Company’s financial instruments recognized in the balance sheet consist of cash and cash equivalents, restricted cash, accounts receivable, trading securities, accounts payable, accrued liabilities, foreign currency derivatives included in current assets and liabilities and contingent consideration and contingent liability included in other long-term liabilities. |
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Fair Value Measurement |
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The fair value of the trading securities, foreign currency derivatives, contingent consideration and contingent liability are being remeasured at the estimated fair value at each reporting period. |
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The fair value of the trading securities which were received as consideration on the sale of the Company's Argentina business unit (Note 3) was estimated based on quoted market prices in an active market. |
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The fair value of foreign currency derivatives was based on the estimated maturity value of foreign exchange non-deliverable forward contracts using applicable forward exchange rates. The most significant variable to the cash flow calculations is the estimation of forward foreign exchange rates. The resulting future cash inflows or outflows at maturity of the contracts are the net value of the contract. |
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The fair value of the contingent consideration, which relates to the acquisition of the remaining 30% working interest in certain properties in Brazil, was estimated based on the consideration expected to be transferred and discounted back to present value by applying an appropriate discount rate that reflected the risk factors associated with the payment streams. The discount rate used is determined in accordance with accepted valuation methods. |
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The fair value of the contingent liability which relates to a dispute with Ecopetrol (Note 9) was estimated based on the fair value of the amount awarded using market oil prices in Colombia. |
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The fair value of the trading securities, foreign currency derivative assets and liabilities, contingent consideration and the contingent liability related to the Ecopetrol dispute at September 30, 2014, and December 31, 2013, were as follows: |
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(Thousands of U.S. Dollars) | | September 30, 2014 | | December 31, 2013 | | | | | | | |
Trading securities (Note 3) | | $ | 11,711 | | | $ | — | | | | | | | | |
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Foreign currency derivative asset | | 414 | | | — | | | | | | | | |
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| | $ | 12,125 | | | — | | | | | | | | |
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Foreign currency derivative liability | | $ | 652 | | | $ | — | | | | | | | | |
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Contingent consideration liability | | 1,061 | | | 1,061 | | | | | | | | |
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Contingent liability (Note 9) | | 4,400 | | | 4,400 | | | | | | | | |
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| | $ | 6,113 | | | $ | 5,461 | | | | | | | | |
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The following table presents gains or losses on financial instruments recognized in the accompanying interim unaudited condensed consolidated statements of operations: |
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(Thousands of U.S. Dollars) | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Trading securities loss | $ | 2,540 | | | $ | — | | | $ | 2,201 | | | $ | — | |
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Foreign currency derivatives loss (gain) | 250 | | | — | | | (4,424 | ) | | — | |
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| $ | 2,790 | | | $ | — | | | $ | (2,223 | ) | | $ | — | |
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These losses and gains are presented as financial instruments loss or gain in the interim unaudited condensed consolidated statements of operations and cash flows. |
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The fair value of long-term restricted cash approximates its carrying value because interest rates are variable and reflective of market rates. The fair values of other financial instruments approximate their carrying amounts due to the short-term maturity of these instruments. |
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GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs consist of quoted prices (unadjusted) in active markets for identical assets and liabilities and have the highest priority. Level 2 and 3 inputs are based on significant other observable inputs and significant unobservable inputs, respectively, and have lower priorities. The Company uses appropriate valuation techniques based on the available inputs to measure the fair values of assets and liabilities. |
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At September 30, 2014, the fair value of the trading securities acquired in connection with the disposal of the Argentina business unit (Note 3) was determined using Level 1 inputs. At September 30, 2014, the fair value of the foreign currency derivatives was determined using Level 2 inputs. At September 30, 2014, and December 31, 2013, the fair value of the contingent consideration payable in connection with the Brazil acquisition was determined using Level 3 inputs and the fair value of the contingent liability which relates to a dispute with Ecopetrol (Note 9) was determined using Level 1 inputs. The disclosure in the paragraph above regarding the fair value of cash and restricted cash is based on Level 1 inputs. |
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The Company’s non-recurring fair value measurements include asset retirement obligations. The fair value of an asset retirement obligation is measured by reference to the expected future cash outflows required to satisfy the retirement obligation discounted at the Company’s credit-adjusted risk-free interest rate. The significant level 3 inputs used to calculate such liabilities include estimates of costs to be incurred, the Company’s credit-adjusted risk-free interest rate, inflation rates and estimated dates of abandonment. Accretion expense is recognized over time as the discounted liabilities are accreted to their expected settlement value, while the asset retirement cost is amortized over the estimated productive life of the related assets. |
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Credit Risk |
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Credit risk arises from the potential that the Company may incur a loss if a counterparty to a financial instrument fails to meet its obligation in accordance with agreed terms. The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash, accounts receivables and foreign currency derivatives. The carrying value of cash, accounts receivable and foreign currency derivatives reflects management’s assessment of credit risk. |
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At September 30, 2014, cash and cash equivalents and restricted cash included balances in savings and checking accounts, as well as term deposits and certificates of deposit, placed primarily with financial institutions with strong investment grade ratings or governments, or the equivalent in the Company’s operating areas. |
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The Company purchases non-deliverable forward contracts for purposes of fixing exchange rates at which it will purchase or sell Colombian pesos to settle its income tax installment payments. With the exception of these foreign currency derivatives, any foreign currency transactions are conducted on a spot basis with major financial institutions in the Company’s operating areas. |
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At September 30, 2014, the Company had the following open foreign currency derivative positions: |
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Forward contracts | | | | | | | | |
Currency | | Contract Type | Notional (Millions of Colombian Pesos) | Weighted Average Fixed Rate Received (Colombian Pesos - U.S. Dollars) | Expiration | | | | | | | | |
Colombian pesos | | Buy | 15,811.90 | | 1,885 | | Feb-15 | | | | | | | | |
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Colombian pesos | | Sell | 10,275.30 | | 1,895 | | Feb-15 | | | | | | | | |
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For the nine months ended September 30, 2014, 95% (nine months ended September 30, 2013 - 96%) of the Company's revenue and other income from continuing operations was generated in Colombia. |
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Foreign Exchange Risk |
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Unrealized foreign exchange gains and losses primarily result from fluctuation of the U.S. dollar to the Colombian peso due to Gran Tierra’s current and deferred tax liabilities, which are monetary liabilities mainly denominated in the local currency of the Colombian operations. As a result, foreign exchange gains and losses must be calculated on conversion to the U.S. dollar functional currency. A strengthening in the Colombian peso against the U.S. dollar results in foreign exchange losses, estimated at $80,000 for each one peso decrease in the exchange rate of the Colombian peso to one U.S. dollar. |
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In Colombia, the company receives 100% of its revenues in U.S. dollars and the majority of its capital expenditures are in U.S. dollars or are based on U.S. dollar prices. In Brazil, prices for oil are in U.S. dollars, but revenues are received in local currency translated according to current exchange rates. The majority of the Company's capital expenditures within Brazil are based on U.S. dollar prices, but are paid in local currency translated according to current exchange rates. In Peru, capital expenditures are based on U.S. dollar prices and may be paid in local currency or U.S. dollars. |