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EX-32.1 - GRAN TIERRA ENERGY INC.v184077_ex32-1.htm
EX-31.1 - GRAN TIERRA ENERGY INC.v184077_ex31-1.htm
EX-31.2 - GRAN TIERRA ENERGY INC.v184077_ex31-2.htm
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q 
     
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
   
FOR THE QUARTERLY PERIOD ENDED March 31, 2010
OR
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
   
FOR THE TRANSITION PERIOD FROM __________ TO  __________
 
Commission file number 001-34018
 
GRAN TIERRA ENERGY INC. 
(Exact name of registrant as specified in its charter)
     
Nevada
 
98-0479924
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification number)
 
300, 625 11th Avenue S.W.
Calgary, Alberta, Canada
 
T2R 0E1
(Address of principal executive offices)
 
(Zip code)
(403) 265-3221
(Registrant’s telephone number,
including area code)
 
300, 611 10th Avenue SW
Calgary, Alberta, Canada  T2R 0B2
(Former Address, Changed Since Last Report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  x  NO  o
 
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.   YES   ¨     NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO x 
 
On May 7, 2010, the following numbers of shares of the registrant’s capital stock were outstanding: 233,606,307 shares of the registrant’s Common Stock, $0.001 par value; one share of Special A Voting Stock, $0.001 par value,  representing 8,446,032 shares of Gran Tierra Goldstrike Inc., which are exchangeable on a 1-for-1 basis into the registrant’s Common Stock; and  one share of Special B Voting Stock, $0.001 par value,  representing 11,566,398 shares of Gran Tierra Exchangeco Inc., which are exchangeable on a 1-for-1 basis into the registrant’s Common Stock.


 
 
   
Page
 
PART I - FINANCIAL INFORMATION
 
     
ITEM 1.
FINANCIAL STATEMENTS
3
     
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
16
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
28
     
ITEM 4.
CONTROLS AND PROCEDURES
28
     
ITEM 4T.
CONTROLS AND PROCEDURES
29
     
 
PART II - OTHER INFORMATION
 
     
ITEM 1.
LEGAL PROCEEDINGS
29
     
ITEM 1A.
RISK FACTORS
29
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
38
     
ITEM 6.
EXHIBITS
39
     
SIGNATURES
39
   
EXHIBIT INDEX
40


2

PART I - FINANCIAL INFORMATION 
 
ITEM 1 - FINANCIAL STATEMENTS

Gran Tierra Energy Inc.
Condensed Consolidated Statements of Operations and Retained Earnings (Unaudited)
(Thousands of U.S. Dollars, Except Share and Per Share Amounts)

   
Three Months Ended March 31,
 
   
2010
   
2009
 
             
REVENUE AND OTHER INCOME
           
Oil and natural gas sales
  $ 92,932     $ 33,151  
Interest
    178       414  
      93,110       33,565  
EXPENSES
               
Operating
    10,185       7,086  
Depletion, depreciation, accretion, and impairment
    40,343       27,529  
General and administrative
    7,190       5,125  
Derivative financial instruments gain (Note 10)
    (44 )     -  
Foreign exchange loss (gain)
    14,294       (20,222 )
      71,968       19,518  
                 
INCOME BEFORE INCOME TAXES
    21,142       14,047  
Income tax (expense) recovery (Note 7)
    (11,182 )     85  
NET INCOME AND COMPREHENSIVE INCOME
    9,960       14,132  
RETAINED EARNINGS, BEGINNING OF PERIOD
    20,925       6,984  
RETAINED EARNINGS, END OF PERIOD
  $ 30,885     $ 21,116  
                 
NET INCOME PER SHARE — BASIC
  $ 0.04     $ 0.06  
NET INCOME PER SHARE — DILUTED
  $ 0.04     $ 0.06  
 
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC (Note 5)
    248,818,662       238,907,060  
 
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED (Note 5)
    256,863,106       248,914,219  

(See notes to the condensed consolidated financial statements)

3

Gran Tierra Energy Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(Thousands of U.S. Dollars, Except Share Amounts)

   
March 31,
   
December 31,
 
   
2010
   
2009
 
       
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 265,676     $ 270,786  
Restricted cash
    240       1,630  
Accounts receivable
    87,024       35,639  
Inventory (Note 2)
    4,160       4,879  
Taxes receivable
    1,721       1,751  
Prepaids
    2,489       1,820  
Deferred tax assets (Note 7)
    4,311       4,252  
                 
Total Current Assets
    365,621       320,757  
                 
Oil and Gas Properties (using the full cost method of accounting)
               
Proved
    454,217       474,679  
Unproved
    234,400       234,889  
                 
Total Oil and Gas Properties
    688,617       709,568  
                 
Other capital assets
    4,039       3,175  
                 
Total Property, Plant and Equipment (Note 4)
    692,656       712,743  
                 
Other Long Term Assets
               
Restricted cash
    840       162  
Deferred tax assets (Note 7)
    6,903       7,218  
Other long term assets
    315       347  
Goodwill
    102,581       102,581  
                 
Total Other Long Term Assets
    110,639       110,308  
                 
Total Assets
  $ 1,168,916     $ 1,143,808  
                 
 
4

Gran Tierra Energy Inc.
Condensed Consolidated Balance Sheets (Unaudited) (continued)
(Thousands of U.S. Dollars, Except Share Amounts)
 
     
March 31,
     
December 31,
 
     
2010
     
2009
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current Liabilities
               
Accounts payable (Note 8)
  $ 22,149     $ 36,786  
Accrued liabilities (Note 8)
    35,204       40,229  
Derivative financial instruments (Note 10)
    -       44  
Taxes payable
    40,804       28,087  
Asset retirement obligation (Note 6)
    450       450  
                 
Total Current Liabilities
    98,607       105,596  
                 
Long Term Liabilities
               
Deferred tax liabilities (Note 7)
    218,981       216,625  
Deferred remittance tax (Note 7)
    944       903  
Asset retirement obligation (Note 6)
    4,387       4,258  
                 
Total Long Term Liabilities
    224,312       221,786  
                 
Commitments and Contingencies (Note 9)
               
Shareholders’ Equity
               
Common shares (Note 5)
    3,022       1,431  
(232,937,045 and 219,459,361 common shares and 20,488,841 and 24,639,513 exchangeable shares, par value $0.001 per share, issued and outstanding as at March 31, 2010 and December 31, 2009 respectively)
               
Additional paid in capital
    808,912       766,963  
Warrants
    3,178       27,107  
Retained earnings
    30,885       20,925  
                 
Total Shareholders’ Equity
    845,997       816,426  
                 
Total Liabilities and Shareholders’ Equity
  $ 1,168,916     $ 1,143,808  

(See notes to the condensed consolidated financial statements)

5

Gran Tierra Energy Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Thousands of U.S. Dollars)

 
Three Months Ended March 31,
 
 
2010
 
2009
 
     
Operating Activities
       
Net income
  $ 9,960     $ 14,132  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depletion, depreciation, accretion, and impairment
    40,343       27,529  
Deferred taxes
    (10,054 )     (3,982 )
Stock based compensation (Note 5)
    1,362       1,125  
Unrealized (gain) loss on financial instruments (Note 10)
    (44 )     87  
Unrealized foreign exchange loss (gain)
    12,707       (18,298 )
Settlement of asset retirement obligations (Note 6)
    -       (52 )
Net changes in non-cash working capital
               
Accounts receivable
    (46,208 )     (25,260 )
Inventory
    97       (57 )
Prepaids
    (669 )     (460 )
Accounts payable and accrued liabilities
    (17,796 )     (3,176 )
Taxes receivable and payable
    12,747       774  
   
Net cash provided by (used in) operating activities
    2,445       (7,638 )
   
Investing Activities
               
Restricted cash
    712       -  
Additions to property, plant and equipment
    (27,072 )     (21,627 )
Proceeds from disposition of oil and gas property
    600       -  
Long term assets and liabilities
    32       (299 )
   
Net cash used in investing activities
    (25,728 )     (21,926 )
   
Financing Activities
               
Proceeds from issuance of common shares
    18,173       520  
   
Net cash provided by financing activities
    18,173       520  
   
Net decrease in cash and cash equivalents
    (5,110 )     (29,044 )
Cash and cash equivalents, beginning of period
    270,786       176,754  
   
Cash and cash equivalents, end of period
  $ 265,676     $ 147,710  
                 
Cash
  $ 101,580     $ 22,877  
Term deposits
    164,096       124,833  
Cash and cash equivalents, end of period
  $ 265,676     $ 147,710  
                 
Supplemental cash flow disclosures:
               
Cash paid for taxes
  $ 10,147     $ 1,540  
Non-cash investing activities:
               
Non-cash working capital related to property, plant and equipment
  $ 10,328     $ 8,413  

 (See notes to the condensed consolidated financial statements)
 
6

Gran Tierra Energy Inc.
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(Thousands of U.S. Dollars)

 
Three Months Ended
 
Year Ended
 
 
March 31, 2010
 
December 31, 2009
 
     
Share Capital
       
Balance, beginning of period
  $ 1,431     $ 226  
Issue of common shares
    1,591       1,205  
   
Balance, end of period
    3,022       1,431  
   
                 
Additional Paid in Capital
               
Balance, beginning of period
    766,963       754,832  
Issue of common shares
    13,995       2,650  
Exercise of warrants (Note 5)
    23,929       2,777  
Exercise of stock options (Note 5)
    2,587       1,080  
Stock based compensation expense (Note 5)
    1,438       5,624  
   
Balance, end of period
    808,912       766,963  
   
                 
Warrants
               
Balance, beginning of period
    27,107       29,884  
Exercise of warrants (Note 5)
    (23,929 )     (2,777 )
   
Balance, end of period
    3,178       27,107  
                 
Retained Earnings
               
Balance, beginning of period
    20,925       6,984  
Net income
    9,960       13,941  
   
Balance, end of period
    30,885       20,925  
                 
Total Shareholders’ Equity
  $ 845,997     $ 816,426  

 (See notes to the condensed consolidated financial statements)
 
7

Gran Tierra Energy Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)

1. Description of Business
 
Gran Tierra Energy Inc., a Nevada corporation (the “Company” or “Gran Tierra”), is a publicly traded oil and gas company engaged in acquisition, exploration, development and production of oil and natural gas properties. The Company’s principal business activities are in Colombia, Argentina, Peru and Brazil.

2. Significant Accounting Policies 

These interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the interim consolidated financial statements, and revenues and expenses during the reporting period. In the opinion of the Company’s management, all adjustments (all of which are normal and recurring) that have been made are necessary to fairly state the consolidated financial position of the Company as at March 31, 2010, the results of its operations and its cash flows for the three month periods ended March 31, 2010 and 2009.

The note disclosure requirements of annual consolidated financial statements provide additional disclosures to that required for interim consolidated financial statements. Accordingly, these interim consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements as at and for the year ended December 31, 2009 included in the Company’s 2009 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on February 26, 2010. The Company’s significant accounting policies are described in Note 2 of the consolidated financial statements which are included in the Company’s 2009 Annual Report on Form 10-K and are the same policies followed in these unaudited interim consolidated financial statements, except as disclosed below. The Company has evaluated all subsequent events through to the date these unaudited interim consolidated financial statements were issued.
  
Inventory

Crude oil inventories at March 31, 2010 and December 31, 2009 are $2.9 million and $3.8 million, respectively. Supplies at March 31, 2010 and December 31, 2009 are $1.3 million and $1.1 million, respectively.

New Accounting Pronouncements

Variable Interest Entities
In June 2009, the Financial Accounting Standards Board (the “FASB”) issued revised accounting standards to improve financial reporting by enterprises involved with variable interest entities. The standards replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and: (1) the obligation to absorb losses of the entity; or, (2) the right to receive benefits from the entity. The implementation of this standard did not materially impact the Company’s consolidated financial position, operating results or cash flows.

Subsequent Events
In February 2010, the FASB issued Accounting Standards Update (“ASU”), "Subsequent Events (Topic 855)."  The amendments remove the requirements for an SEC filer to disclose a date, in both issued and revised financial statements, through which subsequent events have been reviewed.  This ASU was effective upon issuance.  The implementation of this update did not materially impact the Company’s consolidated financial position, operating results or cash flows.

Fair Value Measurements
In January 2010, the FASB issued ASU, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”. This ASU amends existing disclosure requirements about fair value measurements by adding required disclosures about items transferred into and out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchases, sales, issuances, and settlements relative to level 3 measurements; and clarifying, among other things, the existing fair value disclosures about the level of disaggregation. This is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  Early adoption is permitted.  The implementation of this update on January 1, 2010 did not materially impact the Company’s consolidated financial position, operating results or cash flows.

3. Segment and Geographic Reporting 

The Company’s reportable operating segments are Colombia and Argentina based on a geographic organization. The Company is primarily engaged in the exploration and production of oil and natural gas. Peru and Brazil are not reportable segments because the level of activity is not significant at this time and are included as part of the Corporate segment. The accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from oil and natural gas operations before income taxes.

8

The following tables present information on the Company’s reportable geographic segments:

 
Three Months Ended March 31, 2010
 
(Thousands of U.S. Dollars except per unit of production amounts)
Colombia
 
Argentina
 
Corporate
 
Total
 
Revenues
  $ 89,433     $ 3,499     $ -     $ 92,932  
Interest income
    77       16       85       178  
Depreciation, depletion and accretion
    35,006       1,567       70       36,643  
Impairment of carrying value of oil and natural gas properties
    -       3,700       -       3,700  
Depreciation, depletion and accretion - per unit of production
    27.58       20.59       -       27.24  
Impairment of carrying value of oil and natural gas properties - per unit of production
    -       48.61       -       2.75  
Segment income (loss) before income taxes
    28,760       (4,644 )     (2,974 )     21,142  
Segment capital expenditures
  $ 17,553     $ 660     $ 1,291     $ 19,504  
                                 
 
Three Months Ended March 31, 2009
 
(Thousands of U.S. Dollars except per unit of production amounts)
 
Colombia
   
Argentina
   
Corporate
   
Total
 
Revenues
  $ 30,275     $ 2,876     $ -     $ 33,151  
Interest income
    224       40       150       414  
Depreciation, depletion and accretion
    25,923       1,530       76       27,529  
Depreciation, depletion and accretion - per unit of production
    30.16       18.26       -       29.19  
Segment income (loss) before income taxes
    17,581       (446 )     (3,088 )     14,047  
Segment capital expenditures
  $ 17,932     $ 448     $ 786     $ 19,166  
                                 
 
As at March 31, 2010
 
(Thousands of U.S. Dollars)
Colombia
 
Argentina
 
Corporate
 
Total
 
Property, plant and equipment
  $ 665,147     $ 19,909     $ 7,600     $ 692,656  
Goodwill
    102,581       -       -       102,581  
Other assets
    150,859       13,253       209,567       373,679  
Total Assets
  $ 918,587     $ 33,162     $ 217,167     $ 1,168,916  
                                 
 
As at December 31, 2009
 
(Thousands of U.S. Dollars)
 
Colombia
   
Argentina
   
Corporate
   
Total
 
Property, plant and equipment
  $ 681,854     $ 24,510     $ 6,379     $ 712,743  
Goodwill
    102,581       -       -       102,581  
Other assets
    123,380       12,574       192,530       328,484  
Total Assets
  $ 907,815     $ 37,084     $ 198,909     $ 1,143,808  

The Company’s revenues are derived principally from uncollateralized sales to customers in the oil and natural gas industry. The concentration of credit risk in a single industry affects the Company’s overall exposure to credit risk because customers may be similarly affected by changes in economic and other conditions. In 2010, the Company has one significant customer for its Colombian crude oil, Ecopetrol S.A. (“Ecopetrol”), a Colombian government agency. Sales to Ecopetrol accounted for 96% of the Company’s revenues in the first quarter of 2010. In Argentina, the Company has one significant customer, Refineria del Norte S.A (“Refiner”). Sales to Refiner accounted for 3% of the Company’s revenues in the first quarter of 2010.

9

4. Property, Plant and Equipment 

   
As at March 31, 2010
   
As at December 31, 2009
 
(Thousands of U.S. Dollars)
 
Cost
   
Accumulated DD&A
   
Net book value
   
Cost
   
Accumulated DD&A
   
Net book value
 
Oil and natural gas properties
                                   
Proved
  $ 667,151     $ (212,934 )   $ 454,217     $ 648,061     $ (173,382 )   $ 474,679  
Unproved
    234,400       -       234,400       234,889       -       234,889  
      901,551       (212,934 )     688,617       882,950       (173,382 )     709,568  
Furniture and fixtures and leasehold improvements
    4,294       (2,206 )     2,088       3,843       (2,185 )     1,658  
Computer equipment
    3,628       (1,947 )     1,681       3,148       (1,907 )     1,241  
Automobiles
    542       (272 )     270       513       (237 )     276  
Total Property, Plant and Equipment
  $ 910,015     $ (217,359 )   $ 692,656     $ 890,454     $ (177,711 )   $ 712,743  

Depreciation, depletion, accretion and impairment for the three months ended March 31, 2010 included a $3.7 million ceiling test impairment loss in our Argentina cost center. 

During the three months ended March 31, 2010, the Company capitalized $0.6 million (year ended December 31, 2009 - $1.6 million) of general and administrative expenses related to the Colombian full cost center, including $0.1 million (year ended December 31, 2009 - $0.2 million) of stock based compensation expense, and $0.2 million (year ended December 31, 2009 - $0.6 million) of general and administrative expenses in the Argentina full cost center, including $25,000 (year ended December 31, 2009 - $0.1 million) of stock based compensation.

The unproved oil and natural gas properties at March 31, 2010 consist of exploration lands held in Colombia, Argentina and Peru. As at March 31, 2010, the Company had $228.1 million (December 31, 2009 - $229.1 million) in unproved assets in Colombia, $0.5 million (December 31, 2009 - $0.4 million) of unproved assets in Argentina and $5.8 million (December 31, 2009 - $5.4 million) of unproved assets in Peru. These properties are being held for their exploration value and are not being depleted pending determination of the existence of proved reserves. Gran Tierra will continue to assess the unproved properties over the next several years as proved reserves are established and as exploration dictates whether or not future areas will be developed.

5. Share Capital 

The Company’s authorized share capital consists of 595,000,002 shares of capital stock, of which 570 million are designated as common stock, par value $0.001 per share, 25 million are designated as preferred stock, par value $0.001 per share and two shares are designated as special voting stock, par value $0.001 per share. On June 16, 2009, the shareholders of Gran Tierra approved an amendment to the Articles of Incorporation to increase the authorized number of shares of common stock from 300,000,000 to 570,000,000 shares. As at March 31, 2010, outstanding share capital consists of 232,937,045 common voting shares of the Company, 12,042,809 exchangeable shares of Gran Tierra Exchange Co., automatically exchangeable on November 14, 2013, and 8,446,032 exchangeable shares of Goldstrike Exchange Co., automatically exchangeable on November 10, 2012. The exchangeable shares of Gran Tierra Exchange Co, were issued upon acquisition of Solana. The exchangeable shares of Gran Tierra Goldstrike Inc. were issued upon the business combination between Gran Tierra Energy Inc., an Alberta corporation, and Goldstrike, Inc., which is now the Company. Each exchangeable share is exchangeable into one common voting share of the Company. The holders of common stock are entitled to one vote for each share on all matters submitted to a stockholder vote and are entitled to share in all dividends that the Company’s board of directors, in its discretion, declares from legally available funds. The holders of common stock have no pre-emptive rights, no conversion rights, and there are no redemption provisions applicable to the common stock. Holders of exchangeable shares have substantially the same rights as holders of common voting shares.

Warrants

At March 31, 2010, the Company has 3,846,362 warrants outstanding to purchase 1,923,181 common shares for $1.25 per share, expiring between September 1, 2010 and February 2, 2011, and 9,992,520 warrants outstanding to purchase 4,996,260 common shares for $1.05 per share, expiring between June 20, 2012 and June 30, 2012. For the three months ended March 31, 2010, 8,118,018 common shares were issued upon the exercise of 9,090,098 warrants (three months ended March 31, 2009, 789,317 common shares were issued upon the exercise of 2,069,300 warrants). Included in warrants exercised in the three months ended March 31, 2010 are 7,145,938 warrants to purchase 7,145,938 common shares for $14.4 million, assumed on the acquisition of Solana Resources Limited in November 2008.

10

Stock Options

As at March 31, 2010, the Company has a 2007 Equity Incentive Plan, formed through the approval by shareholders of the amendment and restatement of the 2005 Equity Incentive Plan, under which the Company’s board of directors is authorized to issue options or other rights to acquire shares of the Company’s common stock. On November 14, 2008, the shareholders of Gran Tierra approved an amendment to the Company’s 2007 Equity Incentive Plan, which increased the number of shares of common stock available for issuance thereunder from 9,000,000 shares to 18,000,000 shares.

The Company grants options to purchase common shares to certain directors, officers, employees and consultants. Each option permits the holder to purchase one common share at the stated exercise price. The options vest over three years and have a term of ten years, or three months after the grantee’s end of service to the Company, whichever occurs first. At the time of grant, the exercise price equals the market price. For the three months ended March 31, 2010, 1,208,994 common shares were issued upon the exercise of 1,208,994 stock options (three months ended March 31, 2009 – 43,820). The following options are outstanding as of March 31, 2010:

 
Number of
 
Weighted Average
 
 
Outstanding
 
Exercise Price
 
 
Options 
 
$/Option
 
Balance, December 31, 2009
    11,088,616     $ 2.43  
Granted in 2010
    2,700,000       5.90  
Exercised in 2010
    (1,208,994 )     (2.14 )
Forfeited in 2010
    (111,668 )     (2.48 )
Balance, March 31, 2010
    12,467,954     $ 3.20  

The weighted average grant date fair value for options granted in 2010 was $3.33. The intrinsic value of options exercised for the three months ended March 31, 2010 was $4.5 million (three months ended March 31, 2009 - $75,890).

The table below summarizes stock options outstanding at March 31, 2010:

   
Number of
   
Weighted Average
   
Weighted
 
   
Outstanding
   
Exercise Price
   
Average
 
Range of Exercise Prices ($/option)
 
Options
   
$/Option
   
Expiry Years
 
0.50 to 1.30
    1,965,671     $ 1.05       6.1  
1.31 to 2.00
    320,974       1.75       6.8  
2.01 to 3.50
    6,401,309       2.45       8.4  
3.51 to 5.50
    585,000       4.42       9.5  
5.51 to 7.75
    3,195,000       5.96       9.8  
Total
    12,467,954     $ 3.20       8.4  

The aggregate intrinsic value of options outstanding at March 31, 2010 is $37.7 million based on the Company’s closing stock price of $5.90 for that date. At March 31, 2010, there was $11.3 million of unrecognized compensation cost related to unvested stock options which is expected to be recognized over the next three years.

For the three months ended March 31, 2010, the stock based compensation expense was $1.4 million (three months ended March 31, 2009 - $1.3 million) of which $1.1 million (three months ended March 31, 2009 - $1.0 million) was recorded in general and administrative expense and $0.2 million was recorded in operating expense in the consolidated statement of operations (three months ended March 31, 2009 – $0.1 million). For the three months ended March 31, 2010, $0.1 million of stock based compensation was capitalized as part of exploration and development costs (three months ended March 31, 2009 – $0.2 million).

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model based on assumptions noted in the following table. The Company uses historical data to estimate option exercises, expected term and employee departure behavior used in the Black-Scholes option pricing model. Expected volatilities used in the fair value estimate are based on historical volatility of the Company’s stock. The risk-free rate for periods within the contractual term of the stock options is based on the U.S. Treasury yield curve in effect at the time of grant.

 
Three Months Ended March 31,
 
2010
2009
Dividend yield (per share)
$
nil
$
nil
Volatility
 
90%
 
97%
Risk-free interest rate
 
0.4%
 
0.6%
Expected term
 
3 years
 
3 years
Estimated forfeiture percentage (per year)
 
10%
 
10%

11

Weighted Average Shares Outstanding

   
Three Months Ended March 31,
 
   
2010
   
2009
 
Weighted average number of common and exchangeable shares outstanding
    248,818,662       238,907,060  
Shares issuable pursuant to warrants
    5,518,333       9,903,126  
Shares issuable pursuant to stock options
    5,013,174       2,750,940  
Shares to be purchased from proceeds of stock options
    (2,487,063 )     (2,646,907 )
Weighted average number of diluted common and exchangeable shares outstanding
    256,863,106       248,914,219  

Net Income Per Share

For the three month period ended March 31, 2010, options to purchase 3,195,000 common shares were excluded from the diluted income per share calculation as the instruments were anti-dilutive. For the three months ended March 31, 2009, options to purchase 504,850 common shares were excluded from the diluted income per share calculation as the instruments were anti-dilutive.

6. Asset Retirement Obligation

As at March 31, 2010, the Company’s asset retirement obligation was comprised of a Colombian obligation in the amount of $3.6 million (December 31, 2009 - $3.5 million) and an Argentine obligation in the amount of $1.2 million (December 31, 2009 - $1.2 million). The undiscounted asset retirement obligation is $7.8 million. Changes in the carrying amounts of the asset retirement obligations associated with the Company’s oil and natural gas properties were as follows:

   
Three Months Ended
   
Year Ended
 
 
March 31, 2010
   
December 31, 2009
 
Balance, beginning of period
  $ 4,708     $ 4,251  
Settlements
    -       (52 )
Disposal
    -       (734 )
Liability incurred
    39       921  
Foreign exchange
    17       24  
Accretion
    73       298  
Balance, end of period
  $ 4,837     $ 4,708  
                 
Asset retirement obligation - current
  $ 450     $ 450  
Asset retirement obligation - long term
    4,387       4,258  
Balance, end of period
  $ 4,837     $ 4,708  

7. Income Taxes
 
The income tax expense (recovery) reported differ from the amount computed by applying the US statutory rate to income before income taxes for the following reasons:

   
Three Months Ended March 31,
 
(Thousands of U.S. Dollars)
 
2010
   
2009 (1)
 
Income before income taxes
  $ 21,142     $ 14,047  
      35.00 %     35.00 %
Income tax expense expected
    7,400       4,916  
Permanent differences
    1,816       440  
Foreign currency translation adjustments
    4,166       (5,926 )
Impact of foreign taxes
    (840 )     97  
Enhanced tax depreciation incentive
    (1,292 )     (859 )
Stock based compensation
    449       333  
Increase in valuation allowance
    1,721       2,726  
Partnership and branch loss pick-up in the United States and Canada
    (1,248 )     (1,812 )
Other
    (990 )     -  
Total income tax expense (recovery)
  $ 11,182     $ (85 )
                 
Current income tax
    21,236       3,897  
Deferred tax recovery
    (10,054 )     (3,982 )
Total income tax expense (recovery)
  $ 11,182     $ (85 )

(1)
For the three months ended March 31, 2010, the Company has used the United States statutory tax rate of 35% in the reconciliation of income taxes. Previously, the Company used the Canadian statutory rate in the reconciliation. This change was determined on the basis that Gran Tierra is a United States resident corporation and a reconciliation beginning with the United States statutory tax rate is more informative. The 2009 comparative income tax reconciliation has been recomputed using the United States statutory rate. This change in presentation has no impact on the income tax amounts reported in the consolidated statements of operations for the three months ended March 31, 2009.

12

   
As at
 
(Thousands of U.S. Dollars)
 
March 31, 2010
   
December 31, 2009
 
Deferred Tax Assets
           
Tax benefit of loss carryforwards
  $ 21,828     $ 22,318  
Tax basis in excess of book value
    3,150       1,691  
Foreign tax credits and other accruals
    15,674       15,508  
Capital losses
    1,645       1,481  
Deferred tax assets before valuation allowance
    42,297       40,998  
Valuation allowance
    (31,083 )     (29,528 )
    $ 11,214     $ 11,470  
                 
Deferred tax assets - current
  $ 4,311     $ 4,252  
Deferred tax assets - long-term
    6,903       7,218  
      11,214       11,470  
                 
Deferred Tax Liabilities
               
Long-term - book value in excess of tax basis
    (218,981 )     (216,625 )
                 
Net Deferred Tax Liabilities
  $ (207,767 )   $ (205,155 )

The Company was required to calculate a deferred remittance tax in Colombia based on 7% of profits which are not reinvested in the business on the presumption that such profits would be transferred to the foreign owners up to December 31, 2006. As of January 1, 2007, the Colombian government rescinded this law; therefore, no further remittance tax liabilities will be accrued. The historical balance which was included in the Company’s financial statements as of March 31, 2010 was $0.9 million (December 31, 2009 - $0.9 million).

As at March 31, 2010, the Company has deferred tax assets relating to net operating loss carryforwards of $21.8 million (December 31, 2009 - $22.3 million) and capital losses of $1.6 million (December 31, 2009 - $1.5 million) before valuation allowances. Of these losses, $16.9 million (December 31, 2008 - $18.2 million) are losses generated by the foreign subsidiaries of the Company. Of the total losses, $0.1 million (December 31, 2009 - $0.1 million) will begin to expire by 2011 and $23.4 million of net operating losses (December 31, 2009 - $23.7 million) will begin to expire thereafter.

13

8. Accounts Payable and Accrued Liabilities

The balances in accounts payable and accrued liabilities and are comprised of the following:

 
As at March 31, 2010
 
(Thousands of U.S. Dollars)
Colombia
 
Argentina
 
Corporate
 
Total
 
Property, plant and equipment
  $ 15,994     $ 231     $ 689     $ 16,914  
Payroll
    2,005       149       799       2,953  
Audit, legal, and consultants
    -       -       1,212       1,212  
General and administrative
    3,340       240       208       3,788  
Operating
    31,295       1,191       -       32,486  
Total
  $ 52,634     $ 1,811     $ 2,908     $ 57,353  
                                 
                                 
 
As at December 31, 2009
 
(Thousands of U.S. Dollars)
Colombia
 
Argentina
 
Corporate
 
Total
 
Property, plant and equipment
  $ 17,723     $ 844     $ 213     $ 18,780  
Payroll
    1,792       339       1,052       3,183  
Audit, legal, and consultants
    -       137       1,472       1,609  
General and administrative
    2,542       284       213       3,039  
Operating
    48,756       1,648       -       50,404  
Total
  $ 70,813     $ 3,252     $ 2,950     $ 77,015  

9. Commitments and Contingencies 

Leases 

Gran Tierra holds three categories of operating leases: office, vehicle and housing. The Company pays monthly amounts of $173,000 for office leases, $12,000 for vehicle leases and $6,000 for certain employee accommodation leases in Colombia, Argentina, Peru, and Brazil. Future lease payments at March 31, 2010 are as follows:

   
As at March 31, 2010
 
   
Payments Due in Period
 
Contractual Obligations
 
Total
   
Less than 1 Year
   
1 to 3 years
   
3 to 5 years
   
More than 5 years
 
(Thousands of U.S. Dollars)
                             
Operating leases
  $ 6,424     $ 2,278     $ 2,917     $ 1,229     $ -  
Software and telecommunication
    1,610       1,083       527       -       -  
Drilling, completion, facility construction and oil transportation services
    44,386       43,828       558       -       -  
Total
  $ 52,420     $ 47,189     $ 4,002     $ 1,229     $ -  

Guarantees 

Corporate indemnities have been provided by the Company to directors and officers for various items including, but not limited to, all costs to settle suits or actions due to their association with the Company and its subsidiaries and/or affiliates, subject to certain restrictions. The Company has purchased directors’ and officers’ liability insurance to mitigate the cost of any potential future suits or actions. The maximum amount of any potential future payment cannot be reasonably estimated.

The Company may provide indemnifications in the normal course of business that are often standard contractual terms to counterparties in certain transactions such as purchase and sale agreements. The terms of these indemnifications will vary based upon the contract, the nature of which prevents the Company from making a reasonable estimate of the maximum potential amounts that may be required to be paid. Management believes the resolution of these matters would not have a material adverse impact on the Company’s liquidity, consolidated financial position or results of operations.

14

Contingencies
 
Ecopetrol and Gran Tierra Energy Colombia Ltd. “Gran Tierra Colombia”, the contracting parties of the Guayuyaco Association Contract, are engaged in a dispute regarding the interpretation of the procedure for allocation of oil produced and sold during the long term test of the Guayuyaco-1 and Guayuyaco-2 wells. There is a material difference in the interpretation of the procedure established in Clause 3.5 of Attachment-B of the Guayuyaco Association Contract. Ecopetrol interprets the contract to provide that the extended test production up to a value equal to 30% of the direct exploration costs of the wells is for Ecopetrol’s account only and serves as reimbursement of its 30% back-in to the Guayuyaco discovery. Gran Tierra Colombia’s contention is that this amount is merely the recovery of 30% of the direct exploration costs of the wells and not exclusively for benefit of Ecopetrol. There has been no agreement between the parties, and Ecopetrol has filed a lawsuit in the Contravention Administrative Court in the District of Cauca regarding this matter. Gran Tierra Colombia filed a response on April 29, 2008 in which it refuted all of Ecopetrol’s claims and requested a change of venue to the courts in Bogotá.  At this time no amount has been accrued in the financial statements as the Company does not consider it probable that a loss will be incurred. Ecopetrol is claiming damages of approximately $5.4 million.

Gran Tierra has several lawsuits and claims pending for which the Company currently cannot determine the ultimate result. Gran Tierra records costs as they are incurred or become determinable. Gran Tierra believes the resolution of these matters would not have a material adverse effect on the Company’s consolidated financial position or results of operations.
 
10. Financial Instruments, Fair Value Measurements and Credit Risk 

The Company’s financial instruments recognized in the balance sheet consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, and derivative financial instruments. The estimated fair values of the financial instruments have been determined based on the Company’s assessment of available market information and appropriate valuation methodologies; however, these estimates may not necessarily be indicative of the amounts that could be realized or settled in a market transaction. As at March 31, 2010, the fair values of financial instruments approximate their book amounts due to the short term maturity of these instruments. Most of the Company’s accounts receivable relate to oil and natural gas sales and are exposed to typical industry credit risks. The Company manages this credit risk by entering into sales contracts with only credit worthy entities and reviewing its exposure to individual entities on a regular basis. The book value of the accounts receivable reflects management’s assessment of the associated credit risks.

Additionally, foreign exchange gains/losses result from the fluctuation of the U.S. dollar to the Colombian peso due to Gran Tierra’s deferred tax liability, a monetary liability, which is denominated in the local currency of the Colombian foreign operations. As a result, a foreign exchange gain/loss 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 $110,000 for each one peso decrease in the exchange rate of the Colombian peso to one U.S. dollar.

The Company’s revenues are derived principally from uncollateralized sales to customers in the oil and natural gas industry. The concentration of credit risk in a single industry affects the Company’s overall exposure to credit risk because customers may be similarly affected by changes in economic and other conditions. For the three months ended March 31, 2010, the Company had one significant customer for its Colombian crude oil, Ecopetrol. In Argentina, the Company had one significant customer, Refineria del Norte S.A.

The Company recognizes the fair value of its derivative instruments as assets or liabilities on the balance sheet. The Company currently does not have any financial derivatives. Previously, none of the Company's derivative instruments qualified as fair value hedges or cash flow hedges, and accordingly, changes in fair value of the derivative instruments were recognized as income or expense in the consolidated statement of operations and retained earnings with a corresponding adjustment to the fair value of derivative instruments recorded on the balance sheet.

11. Related Party Transaction

On February 1, 2009, the Company entered into a sublease for office space with a company (“sublessee”), of which two of Gran Tierra’s directors are shareholders and directors and one such director is an officer of the sublessee. The term of the sublease runs from February 1, 2009 to August 31, 2011 and the sublease payment is $8,000 per month plus approximately $4,600 for operating and other expenses. The terms of the sublease were consistent with market conditions in the Calgary, Alberta, Canada real estate market.

15

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statement Regarding Forward-Looking Information 

This report contains forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation, statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our projected financial position and results, estimated quantities and net present values of reserves, business strategy, plans and objectives of our management for future operations, covenant compliance and those statements preceded by, followed by or that otherwise include the words “believe”, “expects”, “anticipates”, “intends”, “estimates”, “projects”, “target”, “goal”, “plans”, “objective”, “should”, or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct nor can we assure adequate funding will be available to execute our planned future capital program. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements, including, but not limited to, those set out in Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q.   Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

The following discussion of our financial condition and results of operations should be read in conjunction with the Financial Statements as set out in Part I – Item 1 of this Quarterly Report on Form 10-Q, as well as the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on February 26, 2010.

Overview

We are an independent international energy company incorporated in the United States and engaged in oil and natural gas acquisition, exploration, development and production. We are headquartered in Calgary, Alberta, Canada and operate in South America in Colombia, Argentina and Peru, and have a business development office in Brazil.

In September 2005, we acquired our initial oil and gas interests and properties, which were in Argentina. During 2006, we increased our oil and gas interests and property base through further acquisitions in Colombia, Argentina and Peru. We funded acquisitions of our properties in Colombia and Argentina through a series of private placements of our securities that occurred between September 2005 and February 2006 and an additional private placement that occurred in June 2006.

Effective November 14, 2008, we completed the acquisition of Solana Resources Limited (“Solana”), an international resource company engaged in the acquisition, exploration, development and production of oil and natural gas in Colombia and incorporated in Alberta, Canada. At the date of acquisition, Solana held various working interests in nine blocks in Colombia including a 50% working interest in the Chaza Block, which includes the Costayaco field, and a 35% working interest in the Guayuyaco Block, which includes the Juanambu field.

During the third quarter of 2009, we opened a business development office in Rio de Janeiro, Brazil.

16

Financial and Operational Highlights
(Thousands of U.S. Dollars, Except Per Share Amounts)

   
Three Months Ended March 31,
 
   
2010
   
2009
   
% Change
 
                   
Production - Barrels of Oil Equivalent per Day
    14,949       10,480       43  
                         
Prices Realized - Per Barrel of Oil Equivalent
  $ 69.07     $ 35.15       97  
                         
Revenue and Other Income ($000's)
  $ 93,110     $ 33,565       177  
                         
Net Income ($000's)
  $ 9,960     $ 14,132       (30 )
                         
Net Income Per Share - Basic
  $ 0.04     $ 0.06       (33 )
                         
Net Income Per Share - Diluted
  $ 0.04     $ 0.06       (33 )
                         
Funds Flow From Operations (1)
  $ 54,274     $ 20,593       164  
                         
Capital Expenditures ($000's)
  $ 19,504     $ 19,166       2  

(1) Gran Tierra has disclosed a non-GAAP measure “funds flow from operations” which does not have any standardized meaning prescribed under GAAP. Management uses this financial measure to analyze operating performance and the income (loss) generated by Gran Tierra’s principal business activities prior to the consideration of how non-cash items affect that income, and believes that this financial measure is also useful supplemental information for investors to analyze operating performance and Gran Tierra’s financial results. Investors should be cautioned that this measure should not be construed as an alternative to net income (loss) or other measures of financial performance as determined in accordance with GAAP. Gran Tierra’s method of calculating this measure may differ from other companies and, accordingly, it may not be comparable to similar measures used by other companies. Funds flow from operations, as presented, is net income (loss) adjusted for depletion, depreciation and accretion, deferred taxes, stock based compensation, unrealized loss (gain) on financial instruments and unrealized foreign exchange losses (gains).

   
Three Months Ended March 31,
 
Funds Flow From Operations - Non-GAAP Measure
 
2010
   
2009
 
             
Net income
  $ 9,960     $ 14,132  
Adjustments to reconcile net income to funds flow from operations
               
  Depletion, depreciation, accretion, and impairment
    40,343       27,529  
  Deferred taxes
    (10,054 )     (3,982 )
  Stock-based compensation
    1,362       1,125  
  Unrealized (gain) loss on financial instruments
    (44 )     87  
  Unrealized foreign exchange loss (gain)
    12,707       (18,298 )
 
Funds Flows From Operations
  $ 54,274     $ 20,593  

   
As at
 
   
March 31, 2010
   
December 31, 2009
   
% Change
 
                   
Cash & Cash Equivalents ($000's)
  $ 265,676     $ 270,786       (2 )
                         
Working Capital (including cash & cash equivalents) ($000's)
  $ 267,014     $ 215,161       24  
                         
Property, Plant & Equipment ($000's)
  $ 692,656     $ 712,743       (3 )

17

Financial Highlights for Three Months Ended March 31, 2010

·
In the first quarter of 2010, oil and gas production (net after royalty and inventory adjustments) averaged 14,949 barrels of oil equivalent per day (“BOEPD”), an increase of 43% over the same period in 2009, due mainly to production of crude oil from three new development wells in the Costayaco field in the Chaza Block in Colombia where Gran Tierra has a 100% working interest.

·
Revenue and other income increased by 177% over the same period in 2009 due to increased production and higher oil prices.

·
Net income of $10.0 million or $0.04 per share basic and diluted, compared to net income of $14.1 million or $0.06 per share basic and diluted in 2009. Net income was impacted by a foreign exchange loss, of which $12.7 million is an unrealized non-cash foreign exchange loss, resulting from the translation of a deferred tax liability recorded on the purchase of Solana. The deferred tax liability is denominated in Colombian pesos and the devaluation of 6% in the U.S. dollar against the Colombian Peso in the current quarter resulted in the foreign exchange loss.

·
Funds flow from operations for the three months ended March 31, 2010 increased 164% over the same quarter in the prior year primarily as a result of increased production from three additional development wells drilled in Colombia and a 96% improvement in the oil price received for that production.

·
Oil and gas property expenditures for the first quarter of 2010 include the successful drilling of the Juanambu – 2 well in the Guayuyaco block, in addition to facility construction and drilling site preparations in the Costayaco block.

·
Our cash and cash equivalents position of $265.7 million at March 31, 2010 decreased from $270.8 million at December 31, 2009 as a result of year-to-date capital expenditures, partially offset by cash provided by operating activities and proceeds from the issue of shares on the exercise of stock options and warrants.

·
Working capital (including cash and cash equivalents) was $267.0 million at March 31, 2010, which is a $51.9 million increase from December 31, 2009, due mainly to the increase in accounts receivable from year end. Accounts receivable at any period end other than year end include two months of oil sales in Colombia. Year end accounts receivable, traditionally include less than one month of oil sales as our purchaser prefers to settle all other outstanding amounts.

·
Property, plant and equipment as at March 31, 2010 was $692.7 million, a decrease from December 31, 2009, primarily as a result of depletion, depreciation and accretion (“DD&A”), partially offset by capital additions.
 
Operational Highlights for the Three Months Ended March 31, 2010

·
Successful Production Testing of Juanambu - 2
 
In February 2010, we completed logging operations of the Juanambu - 2 development well in the Juanambu field discovered in 2007 in the Guayuyaco Block in Colombia.  Testing of the well was completed early in March 2010 and the well came on production later in the month.

·
Moqueta - 1 Civil Work Completed
 
Location construction for the Moqueta - 1 exploration well in the Chaza Block in Colombia, approximately 5 kilometers north of the Costayaco field, was mostly completed by the end of March 2010. Drilling of the well is expected to begin in May 2010.

·
Costayaco - 11 Civil Work Commenced
 
In March 2010, we commenced civil work for the Costayaco - 11 injector well in the Chaza Block in Colombia. Drilling of the well is expected to begin in May 2010.

·
Dantayaco -1  Exploration Well
 
Drilling was completed on the Dantayaco - 1 exploration well in the Chaza Block, in the Putumayo basin of Colombia, at the end of 2009. During testing, only formation water was recovered and the well was plugged and abandoned on January 3, 2010.

·
Environmental Impact Assessment (“EIA”) Approval in Peru
 
The EIA approval for seismic and drilling operations has been approved for Block 128, Marañon Basin, Peru. Amendments to this approval are being reviewed. Seismic crew mobilization is planned for the second quarter, with drilling of up to four wells in Peru expected to commence in the third quarter, and continue through the fourth quarter, of 2010.

18

Consolidated Results of Operations

   
Three Months Ended March 31,
 
Consolidated Results of Operations
 
2010
   
2009
   
% Change
 
(Thousands of U.S. Dollars)
                 
Oil and natural gas sales
  $ 92,932     $ 33,151       180  
Interest
    178       414       (57 )
      93,110       33,565       177  
                         
Operating expenses
    10,185       7,086       44  
Depletion, depreciation, accretion, and impairment
    40,343       27,529       47  
General and administrative expenses
    7,190       5,125       40  
Foreign exchange loss (gain)
    14,294       (20,222 )     171  
Derivative financial instruments gain
    (44 )     -       -  
      71,968       19,518       269  
                         
Income before income taxes
    21,142       14,047       51  
Income tax (expense) recovery
    (11,182 )     85       (13,255 )
Net income
  $ 9,960     $ 14,132       (30 )
                         
Production, Net of Royalties
                         
Oil and NGL's ("bbl") (1)
    1,341,682       935,048       43  
Natural gas ("mcf") (1)
    22,518       49,028       (54 )
Total production ("boe") (1) (2)
    1,345,435       943,219       43  
                         
Average Prices
                       
                         
Oil and NGL's ("per bbl")
  $ 69.20     $ 35.27       96  
Natural gas ("per mcf")
  $ 3.90     $ 3.48       12  
                         
Consolidated Results of Operations ("per boe")
                       
                         
Oil and natural gas sales
  $ 69.07     $ 35.15       97  
Interest
    0.13       0.44       (70 )
      69.20       35.59       94  
                         
Operating expenses
    7.57       7.51       1  
Depletion, depreciation, accretion, and impairment
    29.99       29.19       3  
General and administrative expenses
    5.34       5.43       (2 )
Foreign exchange loss (gain)
    10.62       (21.44 )     150  
Derivative financial instruments gain
    (0.03 )     -       -  
      53.49       20.69       158  
                         
Income before income taxes
    15.71       14.90       5  
Income tax (expense) recovery
    (8.31 )     0.09       (9,333 )
Net income
  $ 7.40     $ 14.99       51  

(1) Gas volumes are converted to barrel of oil equivalent (“boe”) at the rate of six thousand cubic feet (“mcf”) of gas per barrel of oil, based upon the approximate relative energy content of gas and oil, which is not necessarily indicative of the relationship of oil and gas prices. At December 31, 2009, Gran Tierra changed from the conversion of gas volumes to boe at a rate of 20 mcf of gas per barrel of oil to provide volume information consistent with standard industry practice and to reflect natural gas’s relative energy content to a barrel of oil. As a result, the 2009 boe volumes presented have increased by 5,720 boe from those volumes previously disclosed. Natural gas liquids (“NGL”) volumes are converted to boe on a one-to-one basis with oil.
(2) Production represents production volumes adjusted for inventory changes.
  
19

Consolidated Results of Operations for the Three Months Ended March 31, 2010 Compared to the Results for the Three Months Ended March 31, 2009

Net income of $10.0 million, or $0.04 per share basic and diluted, was recorded for the three months ended March 31, 2010 compared to net income of $14.1 million, or $0.06 per share basic and diluted, for the same period in 2009. Higher oil revenues due to increased production and higher prices, more than offset increased operating, DD&A, and general and administrative expenses (“G&A”) for the current quarter. Net income for the first quarter of 2010 included a foreign exchange loss of $14.3 million, of which $12.7 million is an unrealized non-cash foreign exchange loss. Net income for the first quarter of 2009 included a $20.2 million foreign exchange gain, of which $18.3 million was an unrealized non-cash foreign exchange gain.

Crude oil and NGL production, net after royalties, for the three months ended March 31, 2010 increased to 1,341,682 barrels compared to 935,048 barrels for the same period in 2009 due mainly to increased production from our Colombia operations. Average realized crude oil prices for the current quarter increased to $69.20 per barrel from $35.27 per barrel for the first three months of 2009 reflecting higher West Texas Intermediate (“WTI”) oil prices.

Revenue and interest increased 177% to $93.1 million for the three months ended March 31, 2010 compared to $33.6 million in the same period in 2009 due to an increase of 43% in crude oil production, mainly due to three new development wells in the Costayaco field, and increased crude oil prices.

Operating expenses for the first quarter of 2010 amounted to $10.2 million, a 44% increase from the same period in 2009 due to expanded operations and increased production levels in Colombia. For the three months ended March 31, 2010, operating expenses on a boe basis were $7.57 per boe, a slight increase over the same period in 2009.

DD&A expense for the current quarter increased to $40.3 million compared to $27.5 million for the same quarter in 2009 due to increased production levels and a $3.7 million ceiling test impairment loss in our Argentina cost center. On a boe basis, DD&A for the three months ended March 31, 2010 was $29.99 compared to $29.19 for the same period in 2009.

G&A expenses of $7.2 million for the three months ended March 31, 2010, were 40% higher than the same period in 2009 primarily due to increased employee related costs reflecting the expanded operations in Colombia. However, due to higher production in 2010, G&A expenses per boe decreased 2% to $5.34 per boe for the current quarter, compared to $5.43 per boe for the first quarter of 2009.

The foreign exchange loss of $14.3 million, of which $12.7 million is an unrealized non-cash foreign exchange loss, for the first quarter of 2010 primarily represents a foreign exchange loss resulting from the translation of a deferred tax liability recorded on the purchase of Solana. In the first quarter of 2009, a $20.2 million foreign exchange gain was recorded, of which $18.3 million was an unrealized non-cash foreign exchange gain, primarily as a result of the translation of the Solana deferred tax liability. The deferred tax liability is denominated in Colombian pesos and the devaluation of 6% in the U.S. dollar against the Colombian Peso in the current quarter resulted in the foreign exchange loss. This compares to a 14% appreciation in the U.S. dollar against the Colombian Peso for the three months ended March 31, 2009 which resulted in the foreign exchange gain recorded in that period.

Income tax expense for the three months ended March 31, 2010 amounted to $11.2 million compared to an income tax recovery of $0.1 million recorded in the same period in 2009. The increase of $11.3 million in income tax expense over the same period in 2009 is primarily due to higher income before income taxes from increased oil prices received and higher production over the same period in the prior year as previously discussed. The effective tax rate to March 31, 2010 is 53% and has increased from the same period in 2009 primarily due to the increase in the foreign translation losses that are neither taxable nor deductible for tax purposes in each of the respective jurisdictions. The variance from the 35% U.S. statutory rate for the first quarter of 2010 results from non-deductible foreign currency translation losses as described above and an increase in valuation allowances taken on losses incurred in the U.S., Canada, Peru and Brazil, offset by enhanced tax depreciation taken on oil and gas capital expenditures. The variance from the 35% U.S. statutory rate for the first quarter of 2009 is primarily attributable to foreign translation gains that are not taxable for tax purposes in each of the respective jurisdictions recognition and valuation allowances taken on losses incurred in the U.S., Canada, and Peru.

Segmented Results of Operations

Our operations are carried out in Colombia, Argentina, Peru, and Brazil, and we are headquartered in Calgary, Alberta, Canada. Our reportable segments include Colombia, Argentina and Corporate with the latter including the results of our initial activities in Peru and Brazil. For the three months ended March 31, 2010, Colombia generated 96% of our revenue and other income.

20

Segmented Results – Colombia

   
Three Months Ended March 31,
 
Segmented Results of Operations – Colombia
 
2010
   
2009
   
% Change
 
(Thousands of U.S. Dollars)
                 
Oil and natural gas sales
  $ 89,433     $ 30,275       195  
Interest
    77       224       (66 )
      89,510       30,499       193  
                         
Operating expenses
    8,102       6,098       33  
Depletion, depreciation and accretion
    35,006       25,923       35  
General and administrative expenses
    3,072       1,607       91  
Foreign exchange loss (gain)
    14,570       (20,710 )     170  
      60,750       12,918       370  
                         
Segment income before income taxes
  $ 28,760     $ 17,581       64  
                         
Production, Net of Royalties
                       
                         
Oil and NGL's ("bbl") (1)
    1,265,569       851,271       49  
Natural gas ("mcf") (1)
    22,518       49,028       (54 )
Total production ("boe") (1) (2)
    1,269,322       859,442       48  
                         
Average Prices
                       
                         
Oil and NGL's ("per bbl")
  $ 70.60     $ 35.36       100  
Natural gas ("per mcf")
  $ 4.02     $ 3.48       16  
                         
Segmented Results of Operations ("per boe")
                       
                         
Oil and natural gas sales
  $ 70.46     $ 35.23       100  
Interest
    0.06       0.26       (77 )
      70.52       35.49       99  
                         
Operating expenses
    6.38       7.10       (10 )
Depletion, depreciation and accretion
    27.58       30.16       (9 )
General and administrative expenses
    2.42       1.87       29  
Foreign exchange loss (gain)
    11.48       (24.10 )     148  
      47.86       15.03       218  
                         
Segment income before income taxes
  $ 22.66