Edgar Filing: GRAN TIERRA ENERGY, INC.

form10q.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 June 30, 2011

¨	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)

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 ¨

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 x 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.

Large Accelerated Filer x	Accelerated Filer ¨
Non-Accelerated Filer ¨	(do not check if a smaller reporting company) Smaller Reporting Company ¨

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

On August 3, 2011, the following numbers of shares of the registrant’s capital stock were outstanding: 261,011,061 shares of the registrant’s Common Stock, $0.001 par value; one share of Special A Voting Stock, $0.001 par value, representing 7,811,112 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 8,881,718 shares of Gran Tierra Exchangeco Inc., which are exchangeable on a 1-for-1 basis into the registrant’s Common Stock.

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	3

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41

ITEM 4.	CONTROLS AND PROCEDURES	41

PART II - OTHER INFORMATION

ITEM 1A.	RISK FACTORS	42

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	52

ITEM 5.	OTHER INFORMATION	52

ITEM 6.	EXHIBITS	52

SIGNATURES		52

EXHIBIT INDEX		53

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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 June 30,						Six Months Ended June 30,
	2011			2010			2011			2010

REVENUE AND OTHER INCOME
Oil and natural gas sales	$	161,664		$	83,717		$	283,960		$	176,649
Interest		456			397			679			575
		162,120			84,114			284,639			177,224
EXPENSES
Operating		23,160			9,529			39,556			19,714
Depletion, depreciation, accretion, and impairment (Note 5)		46,965			31,641			110,322			71,984
General and administrative		16,410			9,594			30,048			16,784
Equity tax (Note 8)		221			-			8,271			-
Financial instruments gain (Note 6)		(1,292	)		-			(1,522	)		(44	)
Loss (gain) on acquisition (Note 3)		2,601			-			(21,699	)		-
Foreign exchange loss		14,495			3,126			19,694			17,420
		102,560			53,890			184,670			125,858

INCOME BEFORE INCOME TAXES		59,560			30,224			99,969			51,366
Income tax expense (Note 8)		(27,993	)		(12,853	)		(54,689	)		(24,035	)
NET INCOME AND COMPREHENSIVE INCOME		31,567			17,371			45,280			27,331
RETAINED EARNINGS, BEGINNING OF PERIOD		71,810			30,885			58,097			20,925
RETAINED EARNINGS, END OF PERIOD	$	103,377		$	48,256		$	103,377		$	48,256

NET INCOME PER SHARE — BASIC	$	0.11		$	0.07		$	0.17		$	0.11
NET INCOME PER SHARE — DILUTED	$	0.11		$	0.07		$	0.16		$	0.10
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC (Note 6)		277,297,728			254,344,474			269,159,453			251,234,950
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED (Note 6)		284,451,536			263,853,024			277,530,126			260,922,669

(See notes to the condensed consolidated financial statements)

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Gran Tierra Energy Inc.

Condensed Consolidated Balance Sheets (Unaudited)

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

	June 30,		December 31,
	2011		2010

ASSETS
Current Assets
Cash and cash equivalents	$	211,355	$	355,428
Restricted cash (Note 12)		11,465		250
Accounts receivable		156,350		43,035
Inventory (Note 2)		7,109		5,669
Taxes receivable		20,274		6,974
Prepaids		2,486		1,940
Deferred tax assets (Note 8)		2,643		4,852

Total Current Assets		411,682		418,148

Oil and Gas Properties (using the full cost method of accounting)
Proved		567,422		442,404
Unproved		434,254		278,753

Total Oil and Gas Properties		1,001,676		721,157

Other capital assets		7,379		5,867

Total Property, Plant and Equipment (Note 5)		1,009,055		727,024

Other Long Term Assets
Restricted cash (Note 12)		1,359		1,190
Deferred tax assets (Note 8)		12,082		-
Other long term assets		297		311
Goodwill		102,581		102,581

Total Other Long Term Assets		116,319		104,082

Total Assets	$	1,537,056	$	1,249,254

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable (Note 9)	$	49,727	$	76,023
Accrued liabilities (Note 9)		74,300		32,120
Bank debt (Notes 12 and 14)		31,250		-
Taxes payable		40,723		43,832
Asset retirement obligations (Note 7)		322		338

Total Current Liabilities		196,322		152,313

Long Term Liabilities
Deferred tax liabilities (Note 8)		231,558		204,570
Equity tax payable (Note 8)		10,293		-
Asset retirement obligations (Note 7)		10,468		4,469
Other long term liabilities		5,811		1,036

Total Long Term Liabilities		258,130		210,075

Commitments and Contingencies (Note 10)
Subsequent Event (Note 14)
Shareholders’ Equity
Common shares (Note 6)		5,846		4,797
(260,977,461 and 240,440,830 common shares and 16,726,430 and 17,681,123 exchangeable shares, par value $0.001 per share, issued and outstanding as at June 30, 2011 and December 31, 2010, respectively)
Additional paid in capital		971,601		821,781
Warrants (Note 6)		1,780		2,191
Retained earnings		103,377		58,097

Total Shareholders’ Equity		1,082,604		886,866

Total Liabilities and Shareholders’ Equity	$	1,537,056	$	1,249,254

(See notes to the condensed consolidated financial statements)

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Gran Tierra Energy Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Thousands of U.S. Dollars)

	Six Months Ended June 30,
	2011			2010

Operating Activities
Net income	$	45,280		$	27,331
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depletion, depreciation, accretion, and impairment		110,322			71,984
Deferred taxes (Note 8)		(5,406	)		(18,031	)
Stock-based compensation (Note 6)		5,945			3,360
Unrealized gain on financial instruments (Note 11)		(1,354	)		(44	)
Unrealized foreign exchange loss		16,102			13,997
Settlement of asset retirement obligations (Note 7)		(309	)		-
Equity taxes		6,251			-
Gain on acquisition (Note 3)		(21,699	)		-
Net changes in non-cash working capital
Accounts receivable		(100,955	)		(35,435	)
Inventory		(213	)		(487	)
Prepaids		(211	)		(377	)
Accounts payable and accrued liabilities		(2,521	)		(14,216	)
Taxes receivable and payable		(18,120	)		4,887

Net cash provided by operating activities		33,112			52,969

Investing Activities
Restricted cash		(8,139	)		661
Additions to property, plant and equipment		(179,155	)		(50,914	)
Proceeds from disposition of oil and gas property		-			1,200
Cash acquired on acquisition (Note 3)		7,747			-
Proceeds on sale of asset backed commercial paper (Note 3)		22,679			-
Long term assets and liabilities		13			20

Net cash used in investing activities		(156,855	)		(49,033	)

Financing Activities
Settlement of bank debt (Notes 3)		(22,853	)		-
Proceeds from issuance of common shares		2,523			18,504

Net cash (used in) provided by financing activities		(20,330	)		18,504

Net increase (decrease) in cash and cash equivalents		(144,073	)		22,440
Cash and cash equivalents, beginning of period		355,428			270,786

Cash and cash equivalents, end of period	$	211,355		$	293,226

Cash	$	135,142		$	194,465
Term deposits		76,213			98,761
Cash and cash equivalents, end of period	$	211,355		$	293,226

Supplemental cash flow disclosures:
Cash paid for interest	$	1,344		$	-
Cash paid for income taxes	$	64,205		$	32,512
Non-cash investing activities:
Non-cash working capital related to property, plant and equipment	$	39,118		$	21,220

(See notes to the condensed consolidated financial statements)

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Gran Tierra Energy Inc.

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

(Thousands of U.S. Dollars)

	Six Months Ended			Year Ended
	June 30, 2011			December 31, 2010

Share Capital
Balance, beginning of period	$	4,797		$	1,431
Issue of common shares		1,049			3,366

Balance, end of period		5,846			4,797


Additional Paid in Capital
Balance, beginning of period		821,781			766,963
Issue of common shares		142,233			19,119
Exercise of warrants (Note 6)		411			24,916
Exercise of stock options (Note 6)		928			2,300
Stock-based compensation expense (Note 6)		6,248			8,483

Balance, end of period		971,601			821,781


Warrants
Balance, beginning of period		2,191			27,107
Exercise of warrants (Note 6)		(411	)		(24,916	)

Balance, end of period		1,780			2,191

Retained Earnings
Balance, beginning of period		58,097			20,925
Net income		45,280			37,172

Balance, end of period		103,377			58,097

Total Shareholders’ Equity	$	1,082,604		$	886,866

(See notes to the condensed consolidated financial statements)

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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 condensed 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 June 30, 2011, the results of its operations for the three and six month periods ended June 30, 2011 and 2010, and its cash flows for the six month periods ended June 30, 2011 and 2010.

The note disclosure requirements of annual consolidated financial statements provide additional disclosures to that required for interim condensed consolidated financial statements. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements as at and for the year ended December 31, 2010 included in the Company’s 2010 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2011. The Company’s significant accounting policies are described in Note 2 of the consolidated financial statements which are included in the Company’s 2010 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 condensed consolidated financial statements were issued.

Warrants

The Company issued warrants (“Replacement Warrants”) in connection with its acquisition of Petrolifera Petroleum Limited (“Petrolifera”) during March 2011 (Note 3). These warrants are derivative financial instruments and are recorded at fair value in the consolidated balance sheet as a current liability and as part of the consideration paid for the acquisition. Any changes in the fair value of these derivative instruments are recorded in net income when those changes occur. The Company determines the fair value of warrants using the Black-Scholes option pricing model. The Company does not use derivative financial instruments for speculative purposes.

Inventory

Crude oil inventories at June 30, 2011 and December 31, 2010 are $5.0 million and $3.6 million, respectively. Supplies at June 30, 2011 and December 31, 2010 are each $2.1 million.

New Accounting Pronouncements

Stock Compensation

In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), "Compensation–Stock Compensation (Topic 718)." The update clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The implementation of this update did not materially impact the Company’s consolidated financial position, operating results or cash flows.

Business Combinations

In December 2010, the FASB issued ASU, "Business Combinations (Topic 850), Disclosures of Supplementary Pro Forma Information for Business Combinations." The update is intended to conform reporting of pro forma revenue and earnings for material business combinations included in the notes to the financial statements and expand disclosure of non-recurring adjustments that are directly attributable to the business combination. The pro forma revenue and earnings of the combined entity are presented as if the acquisition had occurred as of the beginning of the annual reporting period. If comparatives are presented, the pro forma disclosures for both periods presented should be reported as if the acquisition had occurred as of the beginning of the comparable prior annual reporting period only. This ASU is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The implementation of this update did not materially impact the Company’s disclosures.

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3. Business Combination

On March 18, 2011 (the “Acquisition Date”), Gran Tierra completed its acquisition of all the issued and outstanding common shares and warrants of Petrolifera, a Canadian corporation, pursuant to the terms and conditions of an arrangement agreement dated January 17, 2011 (the “Arrangement”). Petrolifera is a Calgary-based crude oil, natural gas and natural gas liquids exploration, development and production company active in Argentina, Colombia and Peru. The transaction contemplated by the Arrangement was effected through a court-approved plan of arrangement in Canada. The Arrangement was approved at a special meeting of Petrolifera shareholders on March 17, 2011 and by the Court of Queen's Bench of Alberta on March 18, 2011.

Under the Arrangement, Petrolifera shareholders received, for each Petrolifera share held, 0.1241 of a share of Gran Tierra common stock, and Petrolifera warrant holders received, for each Petrolifera warrant held, 0.1241 of a Replacement Warrant to purchase a share of Gran Tierra common stock at an exercise price of $9.67 Canadian (“CDN”) dollars per share. Gran Tierra Replacement Warrants are only net exercisable, and expire on August 28, 2011.

Gran Tierra acquired all the issued and outstanding Petrolifera shares and warrants through the issuance of 18,075,247 Gran Tierra common shares, par value $0.001, and 4,125,036 Replacement Warrants. Upon completion of the transaction on the Acquisition Date, Petrolifera became an indirect wholly owned subsidiary of Gran Tierra. On a diluted basis, upon the closing of the Arrangement, Petrolifera and Gran Tierra security holders owned approximately 6.6% and 93.4% of the Company, respectively, immediately following the transaction. The total consideration for the transaction was approximately $143 million.

The fair value of Gran Tierra’s common shares was determined as the closing price of the common shares of Gran Tierra as at the Acquisition Date. The fair value of the Replacement Warrants was estimated on the Acquisition Date using the Black-Scholes option pricing model with the following assumptions:

Exercise price (CDN dollars per warrant)	$	9.67
Risk-free interest rate		1.3	%
Expected life	0.45 Years
Volatility		44	%
Expected annual dividend per share	Nil
Estimated fair value per warrant (CDN dollars)	$	0.32

Gran Tierra’s Replacement Warrants issued as a result of the acquisition meet the definition of a derivative. Because the exercise price of the Replacement Warrants is denominated in Canadian dollars, which is different from Gran Tierra’s functional currency, the Replacement Warrants are not considered indexed to Gran Tierra’s common shares and the Replacement Warrants cannot be classified within equity. Therefore the Replacement Warrants, which expire in August 2011, are classified as a current liability on Gran Tierra’s condensed consolidated balance sheet.

The acquisition is accounted for using the acquisition method, with Gran Tierra being the acquirer, whereby Petrolifera’s assets acquired and liabilities assumed are recorded at their fair values as at the Acquisition Date and the results of Petrolifera have been consolidated with those of Gran Tierra from that date.

The following table shows the allocation of the consideration transferred based on the fair values of the assets and liabilities acquired:

(Thousands of U.S. Dollars)
Consideration Transferred:
Common shares issued net of share issue costs	$	141,690
Replacement warrants		1,354
	$	143,044

Allocation of Consideration Transferred (1):
Oil and gas properties
Proved	$	58,457
Unproved		161,278
Other long term assets		4,417
Net working capital (including cash acquired of $7.7 million and accounts receivable of $6.4 million)		(17,223	)
Asset retirement obligations		(4,901	)
Bank debt		(22,853	)
Other long term liabilities		(14,432	)
Gain on acquisition		(21,699	)
	$	143,044

(1) The allocation of the consideration transferred is not final and is subject to change.

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As shown above in the allocation of the consideration transferred, the fair value of identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration transferred. Consequently, Gran Tierra reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that all acquired assets and assumed liabilities were recognized and that the valuation procedures and resulting measures were appropriate. As a result, Gran Tierra recognized a gain of $21.7 million, which is reported as “Gain on acquisition”, in the consolidated statement of operations. The gain reflects the impact on Petrolifera’s pre-acquisition market value of a lack of liquidity and capital resources required to maintain current production and reserves and further develop and explore their inventory of prospects. Subsequent to the initial allocation of the consideration reported in the first quarter of 2011, further assessment of Petrolifera’s tax position resulted in a reduction of the gain on acquisition to $21.7 million from $24.3 million previously reported. A corresponding adjustment has been made to the net working capital deficiency assumed.

As part of the assets acquired and included in the net working capital in the allocation of the consideration transferred, the Company assigned $22.5 million in fair value to investments in notes that Petrolifera received in exchange for asset backed commercial paper (“ABCP”) with a face value of $31.3 million. On March 28, 2011, these notes were sold to an unrelated party for proceeds of $22.7 million after the associated line of credit was settled.

The associated ABCP line of credit that Gran Tierra assumed was with a Canadian Chartered Bank, to a maximum of CDN$23.2 million with an initial expiry in April 2012. Gran Tierra settled this line of credit immediately after the completion of the acquisition of Petrolifera for the face value of CDN$22.5 million in borrowings plus accrued interest.

Also upon the acquisition of Petrolifera, Gran Tierra assumed a second line of credit agreement (“Second ABCP line of credit”) with the same Canadian chartered bank to a maximum of CDN$5.0 million, which was fully drawn as at the Acquisition Date. This Second ABCP line of credit, which expired on April 8, 2011, was secured by ineligible master asset vehicles Classes 1 & 2 (“MAV IA 1 & 2”) notes with a face value of $6.6 million. Gran Tierra retained the option to settle the Second ABCP line of credit of CDN$5.0 million through delivery to the lender of the MAV IA 1 & 2 notes. Subsequent to the acquisition, Gran Tierra elected to record this second line of credit at fair value and planned at that time to settle the debt through delivery of the MAV IA 1 & 2 notes upon expiry. Accordingly, a value of $nil was recorded for the debt upon its acquisition. Gran Tierra settled such borrowings by delivery of the MAV IA 1 & 2 notes on April 8, 2011.

Gran Tierra also assumed a reserve-backed credit facility upon the Petrolifera acquisition (Note 12). The amount outstanding under this credit facility is included as part of net working capital in the allocation of consideration transferred and is reflected as a current liability in the statement of financial position as at June 30, 2011. This credit facility had an outstanding balance of $31.3 million at June 30, 2011.

The pro forma results for the three months ended June 30, 2011 and the three and six months ended June 30, 2011 and 2010 are shown below, as if the acquisition had occurred on January 1, 2010. Pro forma results are not indicative of actual results or future performance.

	Three Months Ended June 30,		Six Months Ended June 30,
(Unaudited) (Thousands of U.S. Dollars except per share amounts)	2010		2011		2010
Oil and natural gas sales and interest	$	98,130	$	293,834	$	206,012
Net income	$	19,719	$	12,457	$	31,540
Net income per share - basic	$	0.07	$	0.05	$	0.12
Net income per share - diluted	$	0.07	$	0.04	$	0.10

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The supplemental pro forma earnings of Gran Tierra for the three and six months ended June 30, 2011 were adjusted to exclude $4.4 million of acquisition costs recorded in general and administrative expense and the $21.7 million gain on acquisition recognized in the 2011 results of Gran Tierra because they are not expected to have a continuing impact on Gran Tierra’s results of operations. The consolidated statement of operations for the six months ended June 30, 2011 includes revenues of $10.9 million from Petrolifera for the period subsequent to the Acquisition Date. Net income from Petrolifera for the period since the Acquisition Date was not material.

4. Segment and Geographic Reporting

The Company’s reportable operating segments are Colombia, Argentina, Peru and Corporate, based on a geographic organization. The Company is primarily engaged in the exploration and production of oil and natural gas. In the three and six months ended June 30, 2011, Peru became a reportable geographic segment due to the significance of its loss before income taxes as compared to the consolidated results of operations. Prior year comparative geographic segment presentation has been conformed to this presentation with the Peru related results and asset information disaggregated from the Corporate segment. Brazil is included as part of the Corporate segment and is not a reportable segment because the level of activity is not significant at this time. The accounting policies of the reportable geographic segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on income or loss from oil and natural gas operations before income taxes.

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

	Three Months Ended June 30, 2011
(Thousands of U.S. Dollars except per unit of production amounts)	Colombia		Argentina			Peru			Corporate			Total
Revenues	$	148,473	$	12,857		$	-		$	334		$	161,664
Interest income		158		28			134			136			456
Depreciation, depletion, accretion and impairment		39,609		5,505			1,530			321			46,965
Depreciation, depletion, accretion and impairment - per unit of production		28.49		21.45			-			-			28.45
Segment income (loss) before income taxes		73,729		(3,099	)		(2,371	)		(8,699	)		59,560
Segment capital expenditures	$	54,216	$	7,138		$	11,287		$	28,848		$	101,489

	Three Months Ended June 30, 2010
(Thousands of U.S. Dollars except per unit of production amounts)	Colombia		Argentina			Peru			Corporate			Total
Revenues	$	80,603	$	3,114		$	-		$	-		$	83,717
Interest income		142		3			-			252			397
Depreciation, depletion, and accretion		30,321		1,224			3			93			31,641
Depreciation, depletion, and accretion - per unit of production		26.33		18.71			-			-			26.00
Segment income (loss) before income taxes		37,089		(1,109	)		(242	)		(5,514	)		30,224
Segment capital expenditures	$	28,894	$	3,814		$	1,609		$	539		$	34,856

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	Six Months Ended June 30, 2011
(Thousands of U.S. Dollars except per unit of production amounts)	Colombia		Argentina			Peru			Corporate		Total
Revenues	$	265,777	$	17,849		$	-		$	334	$	283,960
Interest income		245		28			134			272		679
Depreciation, depletion, accretion, and impairment		69,645		6,652			33,463			562		110,322
Depreciation, depletion, accretion, and impairment - per unit of production		26.75		18.85			-			-		37.27
Segment income (loss) before income taxes		131,615		(3,529	)		(34,996	)		6,879		99,969
Segment capital expenditures (1)	$	96,480	$	18,760		$	25,574		$	29,778	$	170,592

	Six Months Ended June 30, 2010
(Thousands of U.S. Dollars except per unit of production amounts)	Colombia		Argentina			Peru			Corporate			Total
Revenues	$	170,036	$	6,613		$	-		$	-		$	176,649
Interest income		219		19			-			337			575
Depreciation, depletion, accretion, and impairment		65,327		6,491			11			155			71,984
Depreciation, depletion, accretion, and impairment - per unit of production		26.98		45.86			-			-			28.09
Segment income (loss) before income taxes		65,849		(5,753	)		(491	)		(8,239	)		51,366
Segment capital expenditures	$	46,447	$	4,474		$	2,136		$	1,303		$	54,360

	As at June 30, 2011
(Thousands of U.S. Dollars)	Colombia		Argentina		Peru		Corporate		Total
Property, plant and equipment	$	781,474	$	150,258	$	32,559	$	44,764	$	1,009,055
Goodwill		102,581		-		-		-		102,581
Other assets		235,148		39,586		8,498		142,188		425,420
Total Assets	$	1,119,203	$	189,844	$	41,057	$	186,952	$	1,537,056

	As at December 31, 2010
(Thousands of U.S. Dollars)	Colombia		Argentina		Peru		Corporate		Total
Property, plant and equipment	$	654,416	$	29,031	$	28,578	$	14,999	$	727,024
Goodwill		102,581		-		-		-		102,581
Other assets		155,798		15,220		18,575		230,056		419,649
Total Assets	$	912,795	$	44,251	$	47,153	$	245,055	$	1,249,254

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 2011, the Company has one significant customer for its Colombian crude oil, Ecopetrol S.A. (“Ecopetrol”). Sales to Ecopetrol accounted for 88% and 96% of the Company’s revenues in the second quarters of 2011 and 2010, respectively. Sales to Ecopetrol accounted for 89% and 96% of the Company’s revenues for the six month periods ended June 30, 2011 and 2010, respectively. In Argentina, the Company has two significant customers, Refineria del Norte S.A (“Refiner”) and Shell C.A.P.S.A. (“Shell”). Sales to Refiner accounted for 2% and 4% of the Company’s revenues for the three month periods ended June 30, 2011 and 2010, respectively and 3% and 4% of the Company’s revenues for the six month periods ended June 30, 2011 and 2010, respectively. Sales to Shell accounted for 7% and 4% of the Company’s revenues for the three and six month periods ended June 30, 2011, respectively.

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5. Property, Plant and Equipment

	As at June 30, 2011							As at December 31, 2010
(Thousands of U.S. Dollars)	Cost		Accumulated DD&A			Net book value		Cost		Accumulated DD&A			Net book value
Oil and Gas Properties
Proved	$	1,012,173	$	(444,751	)	$	567,422	$	777,262	$	(334,858	)	$	442,404
Unproved		434,254		-			434,254		278,753		-			278,753
		1,446,427		(444,751	)		1,001,676		1,056,015		(334,858	)		721,157
Furniture and fixtures and leasehold improvements		5,883		(3,185	)		2,698		5,233		(2,831	)		2,402
Computer equipment		6,799		(2,613	)		4,186		5,521		(2,358	)		3,163
Automobiles		1,029		(534	)		495		779		(477	)		302
Total Property, Plant and Equipment	$	1,460,138	$	(451,083	)	$	1,009,055	$	1,067,548	$	(340,524	)	$	727,024

On August 26, 2010, the Company entered into an agreement to acquire a 70% participating interest in four blocks in Brazil. With the exception of one block which has a producing well, the remaining blocks are unproved properties. The agreement was effective September 1, 2010, subject to regulatory approvals, and the transaction was completed on June 15, 2011. Purchase consideration of $40.1 million recorded as corporate segment capital expenditures in 2011 and 2010, included cash payments of $22.6 million and an obligation to fund certain exploratory activities, including the drilling of two exploratory wells in the acquired areas. The 70% share of all benefits and costs with respect to the period between the effective date and the completion of the transaction were an adjustment to the consideration paid for the four blocks.

Depreciation, depletion, accretion and impairment (“DD&A”) for the six months ended June 30, 2011 includes a ceiling test impairment loss of $33.4 million in Gran Tierra’s Peru cost center. This impairment loss was a result of the inclusion of dry well costs and seismic costs associated with the asset base of the Peru cost center for ceiling test determination purposes. For the six months ended June 30, 2010, a $3.7 million ceiling test impairment loss was included in the Company’s Argentina cost center. This impairment loss was a result of a redetermination of the income tax effect on the present value of future cash inflows used to determine the Argentina ceiling for that country’s ceiling test.

During the six months ended June 30, 2011, the Company capitalized $3.7 million (year ended December 31, 2010 - $4.1 million) of general and administrative expenses related to the Colombian cost center, including $0.2 million (year ended December 31, 2010 - $0.3 million) of stock-based compensation expense, and $1.0 million (year ended December 31, 2010 - $1.2 million) of general and administrative expenses in the Argentina full cost center, including $0.1 million (year ended December 31, 2010 - $0.2 million) of stock-based compensation.

The unproved oil and natural gas properties at June 30, 2011 consist of exploration lands held in Colombia, Argentina, Peru, and Brazil, including additions related to the newly acquired Petrolifera assets. As at June 30, 2011, the Company had $307.2 million (December 31, 2010 - $228.8 million) of unproved assets in Colombia, $58.8 million (December 31, 2010 - $9.4 million) of unproved assets in Argentina, $31.7 million (December 31, 2010 - $28.2 million) of unproved assets in Peru, and $36.6 million (December 31, 2010 - $12.4 million) of unproved assets in Brazil for a total of $434.3 million (December 31, 2010 - $278.8 million). 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.

6. 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. As at June 30, 2011, outstanding share capital consists of 260,977,461 common voting shares of the Company, 8,915,318 exchangeable shares of Gran Tierra Exchange Co., automatically exchangeable on November 14, 2013, and 7,811,112 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 Resources Limited (“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 shareholder 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.

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Warrants

At June 30, 2011, the Company had 6,298,230 warrants outstanding to purchase 3,149,115 common shares for $1.05 per share, expiring between June 20, 2012 and June 30, 2012 and 4,125,036 Replacement Warrants outstanding, issued upon the acquisition of Petrolifera (Note 3), to purchase 4,125,036 common shares for CDN$9.67, expiring August 28, 2011. For the six months ended June 30, 2011, 525,817 common shares were issued upon the exercise of 1,051,634 warrants (six months ended June 30, 2010, 8,352,494 common shares were issued upon the exercise of 9,559,050 warrants). Included in warrants exercised in the six months ended June 30, 2010 were 7,145,938 warrants to purchase 7,145,938 common shares for $14.4 million, assumed on the acquisition of Solana in November 2008.

The fair value of the Replacement Warrants as of June 30, 2011 was determined using the Black-Scholes option pricing model with the following assumptions:

Exercise price (CDN dollars per warrant)	$	9.67
Risk-free interest rate		1.2	%
Expected life	0.16 Years
Volatility		42	%
Expected annual dividend per share	Nil
Estimated fair value per warrant (CDN dollars)	$	0.003

The consolidated statement of operations for the three months ended June 30, 2011 includes an unrealized gain arising from the change in fair value of the Replacement Warrants of $1.3 million.

Stock Options

As at June 30, 2011, the Company has a 2007 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. The number of shares of common stock available for issuance thereunder is 23,306,100 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 six months ended June 30, 2011, 670,881 common shares were issued upon the exercise of 670,881 stock options (six months ended June 30, 2010 – 1,268,993). The following options were outstanding as of June 30, 2011:

	Number of Outstanding			Weighted Average Exercise Price
	Options			$/Option
Balance, December 31, 2010		10,943,058			3.49
Granted in 2011		3,700,996			8.25
Exercised in 2011		(670,881	)		(2.95	)
Forfeited in 2011		(62,501	)		(4.09	)
Balance, June 30, 2011		13,910,672			4.78

The weighted average grant date fair value for options granted in the six months ended June 30, 2011 was $5.07 (six months ended June 30, 2010 - $3.33). The intrinsic value of options exercised for the three months ended June 30, 2011 was $3.4 million (three months ended June 30, 2010 - $4.8 million).

The table below summarizes stock options outstanding at June 30, 2011:

	Number of Outstanding		Weighted Average Exercise Price		Weighted Average
Range of Exercise Prices ($/option)	Options		$/Option		Expiry Years
0.50 to 2.00		1,369,171		1.14		5.1
2.01 to 3.50		5,072,752		2.46		7.2
3.51 to 5.50		466,666		4.43		8.3
5.51 to 7.00		3,141,087		5.93		8.6
7.01 to 8.40		3,860,996		8.24		7.0
Total		13,910,672		4.78		6.9

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The aggregate intrinsic value of options outstanding at June 30, 2011 is $31.7 million (December 31, 2010 - $49.9 million) based on the Company’s closing stock price of $6.61 (December 31, 2010 - $8.05) at that date. At June 30, 2011, there was $17.7 million (December 31, 2010 - $6.1 million) of unrecognized compensation cost related to unvested stock options which is expected to be recognized over the next three years. As at June 30, 2011, 5,911,291 (December 31, 2010 – 5,426,367) options were exercisable.

For the six months ended June 30, 2011, the stock-based compensation expense was $6.2 million (six months ended June 30, 2010 - $3.6 million) of which $5.4 million (six months ended June 30, 2010 - $2.9 million) was recorded in general and administrative expenses and $0.5 million was recorded in operating expenses in the consolidated statement of operations (six months ended June 30, 2010 – $0.5 million). For the six months ended June 30, 2011, $0.3 million of stock-based compensation was capitalized as part of exploration and development costs (six months ended June 30, 2010 – $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 June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Dividend yield (per share)	$nil			$nil			$nil			$nil
Volatility		80	%		89	%		81	%		90	%
Risk-free interest rate		1.2	%		0.5	%		1.3	%		0.4	%
Expected term	4 - 6 years			3 years			4 - 6 years			3 years
Estimated forfeiture percentage (per year)		4	%		10	%		4	%		10	%

Weighted average shares outstanding

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
Weighted average number of common and exchangeable shares outstanding		277,297,728			254,344,474		269,159,453			251,234,950
Shares issuable pursuant to warrants		2,728,361			5,297,738		2,789,122			5,302,755
Shares issuable pursuant to stock options		5,191,288			4,210,812		6,079,268			4,384,964
Shares to be purchased from proceeds of stock options		(765,841	)		-		(497,717	)		-
Weighted average number of diluted common and exchangeable shares outstanding		284,451,536			263,853,024		277,530,126			260,922,669

Net Income per share

For the three months ended June 30, 2011, 4,125,036 Replacement Warrants and 3,815,996 options to purchase common shares (for the six months ended June 30, 2011 4,125,036 Replacement Warrants and 3,219,996 options to purchase common shares) were excluded from the diluted income per share calculation as the instruments were anti-dilutive. For the three months ended June 30, 2010, options to purchase 3,435,000 common shares (for the six months ended June 30, 2010, options to purchase 3,250,000 common shares) were excluded from the diluted income per share calculation as the instruments were anti−dilutive.

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7. Asset Retirement Obligations

As at June 30, 2011 the Company’s asset retirement obligations were comprised of Colombian obligations in the amount of $4.7 million (December 31, 2010 - $3.7 million), Argentine obligations in the amount of $5.7 million (December 31, 2010 - $1.1 million) and Brazil obligations in the amount of $0.4 million (December 31, 2010 - $nil). As at June 30, 2011, the undiscounted asset retirement obligations were $32.1 million (December 31, 2010 - $8.7 million). Changes in the carrying amounts of the asset retirement obligations associated with the Company’s oil and natural gas properties were as follows:

	Six Months Ended			Year Ended
(Thousands of U.S. Dollars)	June 30, 2011			December 31, 2010
Balance, beginning of period	$	4,807		$	4,708
Settlements		(309	)		(286	)
Disposal		-			(720	)
Liability incurred		1,088			719
Liability assumed in a business combination (Note 3)		4,901			-
Foreign exchange		23			58
Accretion		280			328
Balance, end of period	$	10,790		$	4,807

Asset retirement obligation - current	$	322		$	338
Asset retirement obligation - long term		10,468			4,469
Balance, end of period	$	10,790		$	4,807

8. Taxes

The income tax expense reported differs from the amount computed by applying the U.S. statutory rate to income before income taxes for the following reasons:

	Six Months Ended June 30,
(Thousands of U.S. Dollars)	2011			2010
Income before income taxes	$	99,969		$	51,366
		35	%		35	%
Income tax expense expected		34,989			17,978
Other permanent differences		(1,634	)		3,960
Foreign currency translation adjustments		4,956			5,638
Impact of foreign taxes		(3,134	)		(1,580	)
Enhanced tax depreciation incentive		-			(2,921	)
Stock based compensation		1,825			1,014
Increase in valuation allowance		24,065			3,354
Branch and other foreign income pick-up in the United States and Canada		(2,898	)		(3,408	)
Non-deductible third party royalty in Colombia		4,115			-
Non-taxable gain on acquisition		(7,595	)		-
Total income tax expense	$	54,689		$	24,035

Current income tax		63,439			42,066
Deferred tax (recovery)		(8,750	)		(18,031	)
Total income tax expense	$	54,689		$	24,035

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	As at

(Thousands of U.S. Dollars)	June 30, 2011			December 31, 2010
Deferred Tax Assets
Tax benefit of loss carryforwards	$	57,621		$	27,527
Tax basis in excess of book basis		26,854			7,975
Foreign tax credits and other accruals		15,426			16,895
Capital losses		2,448			1,413
Deferred tax assets before valuation allowance		102,349			53,810
Valuation allowance		(87,624	)		(48,958	)
	$	14,725		$	4,852

Deferred tax assets - current	$	2,643		$	4,852
Deferred tax assets - long term		12,082			-
		14,725			4,852

Deferred Tax Liabilities
Long-term - book value in excess of tax basis		(231,558	)		(204,570	)

Net Deferred Tax Liabilities	$	(216,833	)	$	(199,718	)

Equity tax for the six months ended June 30, 2011 of $8.3 million represents a Colombian tax of 6.2% on the balance sheet equity recorded in the Company’s Colombian branches as at January 1, 2011. The equity tax is assessed every four years. The tax for the four-year period from 2011 to 2014 is payable in eight semi-annual installments over the four-year period but is expensed in the first quarter of 2011 at the commencement of the four-year period. Accordingly, the equity tax expense for the previous four-year period was recorded prior to 2010 and no expense is recorded in the first half of 2010. The remainder of the equity tax liability at June 30, 2011 relates to an equity tax liability assumed upon the acquisition of Petrolifera.

As at June 30, 2011, the total amount of Gran Tierra’s unrecognized tax benefits was approximately $13.1 million (December 31, 2010 - $4.2 million), a portion of which, if recognized, would affect the Company’s effective tax rate. To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and are classified as a component of income taxes in the consolidated statement of operations. As at June 30, 2011, the total amount of interest and penalties included in unrecognized tax benefits in current income tax liabilities in the condensed consolidated balance sheet was approximately $1.8 million. The Company had no interest or penalties included in the consolidated statement of operations for the three and six months ended June 30, 2011 and 2010, respectively.

Changes in the Company's unrecognized tax benefit are as follows:
(Thousands of U.S. Dollars)
Unrecognized tax benefit at January 1, 2011	$	4,175
Reduction of tax position related to prior years		(257	)
Additions to tax position related to the current year		9,190
Unrecognized tax benefit at June 30, 2011	$	13,108

The Company and its subsidiaries file income tax returns in the U.S. federal and state jurisdictions and certain other foreign jurisdictions. The Company is subject to income tax examinations for the calendar tax years ended 2005 through 2010 in most jurisdictions. The Company does not anticipate any material changes to the unrecognized tax benefits disclosed above within the next twelve months.

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As at June 30, 2011, the Company has deferred tax assets relating to net operating loss carryforwards of $57.6 million (December 31, 2010 - $27.5 million) and capital losses of $2.4 million (December 31, 2010 - $1.4 million) before valuation allowances. Of these losses, $48.3 million (December 31, 2010 - $20.5 million) are losses generated by the foreign subsidiaries of the Company. Of the total losses, $1.2 million will begin to expire in 2012 (December 31, 2010 - $nil) and $58.9 million (December 31, 2010 - $28.9 million) will begin to expire thereafter.

9. Accounts Payable and Accrued Liabilities

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

	As at June 30, 2011
(Thousands of U.S. Dollars)	Colombia		Argentina		Peru		Corporate		Total
Property, plant and equipment	$	24,469	$	7,116	$	1,185	$	17,316	$	50,086
Payroll		3,114		412		279		2,129		5,934
Audit, legal, and consultants		-		217		57		1,273		1,547
General and administrative		968		216		133		780		2,097
Operating		56,111		7,959		40		253		64,363
Total	$	84,662	$	15,920	$	1,694	$	21,751	$	124,027

	As at December 31, 2010
(Thousands of U.S. Dollars)	Colombia		Argentina		Peru		Corporate		Total
Property, plant and equipment	$	32,854	$	10,452	$	8,377	$	1,438	$	53,121
Payroll		3,256		186		-		2,300		5,742
Audit, legal, and consultants		-		140		16		1,676		1,832
General and administrative		1,039		590		70		363		2,062
Operating		43,037		2,141		173		35		45,386
Total	$	80,186	$	13,509	$	8,636	$	5,812	$	108,143

10. Commitments and Contingencies

Leases

Gran Tierra holds four categories of operating leases: compressor, office, vehicle and equipment and housing. The Company pays monthly amounts of $0.2 million for compressors, $0.3 million for office leases, $22,000 for vehicle and equipment leases and $6,000 for certain employee accommodation leases in Canada, Colombia, Argentina, Peru, and Brazil. Future lease payments at June 30, 2011 are as follows:

	As at June 30, 2011
	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	$	10,703	$	5,584	$	4,311	$	808	$	-
Bank debt		31,250		31,250		-		-		-
Software and telecommunication		3,072		1,858		1,032		182		-
Drilling, completion, facility construction and oil transportation services		103,543		71,853		22,069		9,621		-
Consulting		806		806		-		-		-
Total	$	149,374	$	111,351	$	27,412	$	10,611	$	-

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Indemnities

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.

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 the 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 $5.8 million.

Gran Tierra is subject to a third party 10% net profits interest on 50% of the Company’s production from the Costayaco field that arises from the original acquisition in 2006 of 50% of Gran Tierra’s interest in the Chaza Block Contract. There is currently a disagreement between Gran Tierra and the third party as to the calculation of the net profits interest. Gran Tierra and the third party have agreed to resolve this issue through an arbitration which is anticipated to be heard in Texas, in accordance with the rules of the American Arbitration Association, in the fourth quarter of 2011. 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. The disputed amount at June 30, 2011 is $7.0 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, results of operations or cash flows.

11. 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, bank debt 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. As at June 30, 2011, the fair values of financial instruments approximate their book amounts due to the short term maturity of these instruments except the fair values of derivative financial instruments as discussed below.

None of the these derivative instruments currently qualify as fair value hedges or cash flow hedges, and accordingly, changes in their fair value are 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. The derivative instruments comprise the Replacement Warrants (Notes 3 and 6) and a crude oil collar which expired in February 2010.

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 on the hierarchy consist of unadjusted quoted prices 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. When available, Gran Tierra measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.

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The Company does not have any assets or liabilities whose fair value is measured using the Level 1 or 2 methods. The Company classifies the Replacement Warrants as Level 3 and measures their fair values as discussed in Notes 3 and 6.

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.

12. Bank Debt and Credit Facilities

Effective July 30, 2010, a subsidiary of Gran Tierra, Solana, established a credit facility with BNP Paribas for a three-year term which may be extended or amended by agreement between the parties. This reserve based facility has a maximum borrowing base up to $100 million and is supported by the present value of the petroleum reserves of the Company’s two subsidiaries with operating branches in Colombia – Gran Tierra Energy Colombia Ltd. and Solana Petroleum Exploration (Colombia) Ltd. The initial committed borrowing base is $20 million. Amounts drawn down under the facility bear interest at the U.S. dollar LIBOR rate plus 3.5%. In addition, a stand-by fee of 1.50% per annum is charged on the unutilized balance of the committed borrowing base and is included in general and administrative expense. Under the terms of the facility, the Company is required to maintain and was in compliance with certain financial and operating covenants. As at June 30, 2011, the Company had not drawn down any amounts under this facility.

As part of the acquisition of Petrolifera on March 18, 2011, Gran Tierra assumed a $100 million reserve-backed credit facility with available and outstanding balance as at the Acquisition Date and June 30, 2011 of $31.3 million. This credit facility agreement with a syndicate of banks expires on June 30, 2012. Gran Tierra is required to make three scheduled reserve deposits of $3.8 million per quarter through September 30, 2011 at which time those deposits are applied to repay part of the principal. Two additional principal repayments of $3.8 million are to be made at the end of each of the following quarters with the final settlement of $12 million to be made June 30, 2012 when this agreement expires. As of June 30, 2011, $8.1 million, which includes $0.5 million reserved prior to the acquisition, has been placed in reserve and is recorded as restricted cash in current assets in the Company’s condensed consolidated balance sheet. Under the terms of this credit facility agreement, one-half of any potential farmout proceeds received by Gran Tierra related to Petrolifera's Argentine assets, up to a maximum of $5.0 million, are to be first allocated to reduce the final $12.0 million permanent debt repayment due and payable upon expiry of the agreement in June 2012. Any excess farmout proceeds are then to be evenly allocated to reduce Gran Tierra’s quarterly reserve payments or debt repayments. The credit facility bears interest at LIBOR plus 8.25%, is partially secured by the pledge of the shares of Petrolifera’s subsidiaries and has a provision for a borrowing base adjustment every six months.

Under the terms of the Petrolifera facility, the Company is required to maintain and was in compliance with certain financial and operating covenants. Gran Tierra has classified this credit facility as current as the Company repaid the credit facility on August 5, 2011. A regulation of the Argentine Central Bank establishes that "new indebtedness and renewals of debts with foreign creditors engaged by local residents shall be kept for a minimum 365 days". Petrolifera entered into an amendment of this credit facility on August 4, 2010, which then renewed and restructured the existing debt. As a result, the principal debt that was loaned into Argentina could not be repaid and retired until August 2011.

Interest Expense

Interest expense on the facilities for the 104 day period from the Acquisition Date to June 30, 2011 was $0.8 million. This amount is recorded on the Consolidated Statements of Operations and Retained Earnings as part of general and administrative expense.

Restricted cash

Restricted cash comprises $8.1 million for future debt repayments associated with the credit facility assumed upon the acquisition of Petrolifera (Note 3) and cash resources pledged to secure letters of credit. Letters of credit currently secured by cash relate to work commitment guarantees contained in exploration contracts.

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13. Related Party Transaction

On February 1, 2009, the Company entered into a sublease for office space with a company, of which one of Gran Tierra’s directors is a shareholder and director. The term of the sublease runs from February 1, 2009 to August 31, 2011 and the sublease payment is $8,800 per month plus approximately $4,500 for operating and other expenses. The terms of the sublease were consistent with market conditions in the Calgary, Alberta, Canada real estate market.

On August 3, 2010, Gran Tierra entered into a contract related to the Peru drilling program with a company of which one of Gran Tierra’s directors is a shareholder and director. For the six months ended June 30, 2011, $2.2 million was capitalized and at June 30, 2011, $0.1 million was included in accounts payable related to this contract, the terms of which are consistent with market conditions.

On January 12, 2011, the Company entered into an agreement to sublease office space to a company of which Gran Tierra’s President and Chief Executive Officer serves as an independent Director. The term of the sublease runs from February 1, 2011 to January 30, 2013 and, at $4,400 per month plus approximately $5,700 of operating and other expense, the terms are consistent with market conditions in the Calgary, Alberta, Canada real estate market.

14. Subsequent Event

On August 5, 2011, the Company repaid its bank debt which was assumed upon the acquisition of Petrolifera (Note 12).

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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 values of reserves, business strategy, plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words “believes”, “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. 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 25, 2011.

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, Peru, and 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 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.

Effective March 18, 2011, we completed the acquisition of Petrolifera Petroleum Ltd. (“Petrolifera”), a Canadian based international oil and gas company which owns working interests in 11 exploration and production blocks; three located in Colombia, three in Peru and five in Argentina.

On August 26, 2010, the Company entered into an agreement to acquire a 70% participating interest in four blocks in Brazil. With the exception of one block which has a producing well, the remaining blocks are unproved properties. The agreement was effective September 1, 2010, subject to regulatory approvals, and the transaction was completed on June 15, 2011. Purchase consideration of $40.1 million, included cash payments of $22.6 million recorded in the Corporate cost centre and an obligation to fund certain exploratory activities, including the drilling of two exploratory wells in the acquired areas. First production contribution from the producing block was recorded in June 2011.

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HIGHLIGHTS

	Three Months Ended June 30,						Six Months Ended June 30,
	2011		2010		% Change		2011		2010		% Change

Production - Barrels of Oil Equivalent ("boe") per Day (1)		18,141		13,376		36		16,354		14,158		16

Prices Realized - per boe	$	97.93	$	68.78		42	$	95.93	$	68.93		39

Revenue and Other Income ($000s)	$	162,120	$	84,114		93	$	284,639	$	177,224		61

Net Income ($000s)	$	31,567	$	17,371		82	$	45,280	$	27,331		66

Net Income Per Share - Basic	$	0.11	$	0.07		57	$	0.17	$	0.11		55

Net Income Per Share - Diluted	$	0.11	$	0.07		57	$	0.16	$	0.10		60

Funds Flow From Operations ($000s) (2)	$	88,572	$	44,323		100	$	155,132	$	98,597		57

Capital Expenditures ($000s)	$	101,489	$	34,856		191	$	170,592	$	54,360		214

	As at
	June 30, 2011		December 31, 2010		% Change

Cash & Cash Equivalents ($000s)	$	211,355	$	355,428		(41	)

Working Capital (including cash & cash equivalents) ($000s)	$	215,360	$	265,835		(19	)

Property, Plant & Equipment ($000s)	$	1,009,055	$	727,024		39

(1) Gas volumes are converted to boes 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. The conversion ratio does not assume price equivalency and the price for a barrel of oil equivalent for natural gas may differ significantly from the price of a barrel of oil.

(2) Funds flow from operations is a non-GAAP measure which does not have any standardized meaning prescribed under United States Generally Accepted Accounting Principles (“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 (loss), and believes that this financial measure is also useful supplemental information for investors to analyze Gran Tierra's operating performance and 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 adjusted for depletion, depreciation, accretion and impairment (“DD&A”), deferred taxes, stock-based compensation, unrealized gain on financial instruments, unrealized foreign exchange losses (gains), settlement of asset retirement obligations, equity tax and loss(gain) on acquisition. Reconciliation from funds flow from operations to net income is as follows:

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	Three Months Ended June 30,				Six Months Ended June 30,
Funds Flow From Operations - Non-GAAP Measure ($000s)	2011		2010		2011		2010

Net income	$	31,567	$	17,371	$	45,280	$	27,331
Adjustments to reconcile net income to funds flow from operations
Depletion, depreciation, accretion and impairment		46,965		31,641		110,322		71,984