Earnings Call: Q4 2019

Feb 20, 2020

Welcome to PetroRio's Conference Call to discuss Fourth Quarter and Full Year twenty nineteen Results. Thank you for standing by. At this time, all participants are in listen only mode. Later, we will have a question and answer session for analysts and investors when further instructions to participate will be provided. This event is also being broadcast simultaneously over the Internet and may be accessed through PetroRio's Investor Relations website at www.petroriusa.com. Brir by clicking on the banner Q4 twenty nineteen earnings release. As a reminder, before proceeding, let me mention that forward looking statements that might be made during this conference call relative to the company's business perspective, projections and operating and financial goals are based on the beliefs and assumptions of PetroRio's management and on information currently available to the company. Forward looking statements are not a guarantee of success. They involve risks, uncertainties and assumptions as they are related to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of PetroRio and could cause results to differ materially from those expressed in such forward looking statements. I would now like to turn the conference over to Mr. Nelson Quiroz Temuri, CEO Mr. Francois Marc Fernandez, COO and Mr. Roberto Monteiro, CFO. Mr. Tanuri, please go ahead. Good afternoon, everyone, and thank you very much for joining us on this earnings conference call. And as always, I can see a lot of PetroRio employees listening to the call. And folks, this always makes me very happy. You are also owners of this company. Almost everyone who works here is a shareholder. You are the ones that create all of this value and you're building something very beautiful. So that makes me very happy. To speak a little about 2019, we had a very positive year. The first point to highlight is safety. We had very high operating safety and operating efficiency at Polvo Field and at Frade Field, which we acquired in March, together with Manati, all operating at a very high safety level and safety is everything. I mean, environmental safety, occupational safety and health, these are our essential pillars, not negotiable with many others, but this is a top priority for us. And we grew the company. We acquired Frade Field. We had a drilling campaign at Polvo Field beginning in the 2019. But we also made many investments at Frade Field, which brought positive results and we continued to grow. Recently, we announced the acquisition of Tubarao Martello Field, TBNT, but this was already in 2020. And some other macro level comments. The evolving culture and sense of ownership, operating discipline, financial discipline of PetroRio, focused on attracting talented people and give them great challenges with high expectations regarding what they can produce. This is very important for our company to continue to grow sustainably. And a quick reflection, now that we will look at our 2019 numbers. Roberto will get into more details as well as Francois Mar. But it is worth pointing out that the median Brent price in 2018 was $72 All of the results we will show now that were positive and improving compared to 2018 happened with a Brent price of $63 So we were able to grow the company, improving, creating value, improving our margins in a more challenging environment with $10 less than the price of our Brent oil. So this is a good context in which to analyze our numbers. In terms of safety, as I mentioned, safety is very important. Volvo operators have operating efficiency and safety indicators, which were very high, satisfactory and that achieved our expectations. Friday field as well, we took over the operation in March. Chevron had done very solid work in terms of safety and best practices. So we could learn a lot from what they did at the field and apply them at Polvo as well as apply many of our own Polvo best practices in Frade. That led to many improvements in the already very positive indicators of the field. And these improvements become even more expressive when we consider all the investments made to rationalize costs at Frade Field and to improve reservoir management to consequently have better production at Frade Field. And Manati operated by Petrobras continues to be operated with very high and satisfactory safety levels. Along those lines, it is with a quick reminder of PetroRio's business model and how we create value. This is what we call CRP model. Essentially, is a strong focus to rationalize costs and to have efficient costing together with a very efficient reservoir management. That means the thorough analysis of seismic and geological data, production systems and to maximize the fuel production in a sustainable fashion. An easy way to understand this is that every barrel is important to us. This was true when the company produced 6,000 barrels. It's true in the 2019 when we were producing close to 30,000 barrels and will remain true as we grow. Every barrel counts for us. And in terms of efficiency and timely response time and focus, this also generates good benefit for the environment. Polvo and Frade field, when operated separately, had a much greater impact in terms of emissions than what they have today, Polvo and Frade, with all the synergies derived from a joint operation have a much more positive environmental impact than before. So in addition to all positive effects, efficiency, synergies, we have a much more positive environmental impact. To continue and to quickly mention some tangible 2019 data. We started 2019 with two fields as our primary revenue stream, Manati and Frade fields. And we had a production of approximately 12,000 barrels a day. We ended 2019 with more than 30,000 barrels, and we proceeded to have three assets generating revenue. In Fragi Field, in addition to a safe transition, as I previously mentioned, came with an FPSO that we have been operating since the beginning of last year and very safely. So the company becomes more and more solid and is getting ready to face bigger challenges, such as the acquisition of Tubularo Martello, which just like Frade comes with an FPSO, which will belong to PetroRio and that will be operated by ourselves. So this is very positive. And with many of the synergies and the way we operate these fields with the CRP model, a very summarized way to see the value created is analyzing our lifting cost. PetroRio's lifting cost in the 2019 was approximately $30 per barrel. We ended 2019 with a lifting cost of approximately $19 So this very summarized way to see how we create value. Well, this was a company that cost that used to cost the whole company, not just the fields, but the whole company. We used to cost approximately $30 per barrel, but the company starts costs reducing more than onethree while growing. And this is indeed the best hedging strategy that an oil and gas company can have, either being very efficient, with very low costs, with high very high production, all resulting in a very low lifting cost. This is our hedging strategy. To end, two more points I'd like to mention. As the company grows, delivering positive results with solid performance and a solid culture, we can also give back to society and contribute to the communities where we operate. So the company is very engaged in social, cultural, philanthropic and sports initiatives. Here in the state of Rio De Janeiro, mainly in the city of Rio, There are ways of many initiatives to list right now, but these activities are very important to PetroRio. They make us very proud to be able to contribute to the communities where we operate. We want to be an example company in terms of how we operate and how we behave and helping those who need help. So thank you all of you who work here and thank you to our investors. And now I turn the floor to Francois Mar. Thank you. Thank you, Nelson. Good afternoon, everyone. Let us move to our operating highlights. We can see in 2019 a 64.6% increase in production year on year, a very representative result mainly due to the operations starting at Frade Field. We had a significant reduction in our lifting cost, which reached $19.7 per barrel, which is what we were pursuing all along 2019. Production at Frade increased 15% compared to our own estimates in the beginning of the assets transition process. Our operating efficiency in the quarter was 99.7% at Frade Field, maintaining excellent level of performance at the field. Still a 97% reduction in our lost time incident rates. So all of these items here confirm the company's capacity. And we're very happy to have handled the transition of the asset in record time. In around four months only, we were able to complete the whole transition and to take full control of the operation, the FPSO, the subsea system and the whole operation. In addition, in the end of the year, we had the acquisition of Tubarao Moretello field, which will bring significant synergy gains to the company. Now speaking a bit more about the performance of our assets, it is worth pointing out that Pozo Field had a 2.3% drop production in the yearly comparison. And this was mainly due to the natural decline of the field. As a reminder, in 2019, we did not drill any additional wells. We did not add any new producing well. And only now will we see the effect of new wells. Maneti's production had a more substantial reduction, 26%, mainly due to the natural decline of the field. But after flat production for many years, started to show more marked production decline. Talking more about lifting costs, we can see the evolution along the year in the chart. The top chart showing a considerable 30% reduction from 2018, reaching twenty two point nine dollars per barrel in 2019. And this considering the start of production at Frade in April, 50% stake from Chevron plus the impact stake more towards the end of the year. So in 2020, we should see an even more pronounced reduction in lifting costs. In the bottom graph, we see the evolution with the 30% working interest from Petrobras along this year, we should expect even more reduction. And with CBMP, it should drop even more. The numbers are still under review and we should see better numbers in the future. On the following slide, we will analyze our operating performance. We see the graph related to Frade field, showing production evolution as of the start of the transition from Chevron to Petrofio. Some initiatives more towards the 2018 and along 2019, the set of initiatives, which were implemented to increase production to offset the natural decline of the field. So all of our day to day actions, some short term actions that have been completed, some more complicated actions, which require little more time and they are at their final stage of preparation and should take place in the coming months, such as well stimulation through assets and acidification process that we should perform most likely between March and April and some polymer injection operations to reduce water production at the wells. And in the long term, the drilling campaign that should happen by year end or next year. On the bottom chart, we can see the production curve. We are very happy to see a 15% production increase compared to our own initial estimates, which were already higher than what the previous operator had estimated in their production program, which shows the potential of the field and the result of our great work. In the following slide, we see both the fields operating performance with a more significant reduction in operating efficiency in Q4 twenty nineteen, a lot stemming from a reduced efficiency of the Pogo FPSO. It had some unscheduled stoppages for emergency maintenance and that led to reduced efficiency. Coupled with that, we had failure of a BCS pump in the beginning of the drilling campaign. So we had more downtime at the well. And we had the recompletion of one well. We ended up spending a little more time on this well, but this helped drive production at the field with the well producing around 700 barrels, which helped drive the field's production up again in January. Speaking about the drilling campaign of 2019. With one well, we were able to test three targets. The two primary targets were Ipanema and Leblon carbonate reservoirs, similar to what we already produced at the field. And there was a secondary target, a sandstone reservoir. The results of the reservoirs were positive. We collected fluid samples and these fluids originally showed a higher level of viscosity than what we have been producing at the field. So we need to perform technical and laboratory analysis to choose the best process to improve the profile of the oil with some kind of viscosity reducing agent. This is being analyzed and we should have an answer in the next steps So we can define our next in the next phase, so we can define our next steps. Now speaking about the drilling campaign at Frade, we are at an advanced stage of market procurement and talking to suppliers. Are at a final stage of preparation for the subsea part. We should drill four producing wells and three injector wells. Drilling should begin along the second half of the year. We have a lot in our inventories, so we have an estimated CapEx for this first well of $70,000,000 And we should extend to 2021 and adjust the results. And we will adjust the results along the way. I would like to thank the whole corporate team, all the teams, the M and A, legal, financial, HR, management, everyone who provides support so we can achieve these great results so that we can make the engine run smoothly in so little time. Thank you, Roberto and his team, Milano and his team. Thank you, Nelson. Thank you, everyone. Well, is Roberto. Thank you, Fransciomer. I will go over PetroRio's financial highlights for 2019. And as you could expect, the first number to be highlighted is our net revenue of BRL 1,600,000,000.0 for 2019, a historical mark. Another all time high mark is our EBITDA, close to BRL 800,000,000 with an EBITDA margin of 48%, also an all time high. Our cash generation of BRL $570,000,000 along 2019. So all of the indicators are very strong. Now getting into M and A. We had the Frade deal, the remaining 30% working interest of Frade during Q4 twenty nineteen. And in the 2020, as a subsequent fact, the acquisition of Tubarao Martello field as well as the $65 per barrel hedging, covering approximately 70% of sales at the first half of the year. Well, moving to the next slide, Slide 11. I will highlight only our 2019 EBITDA ex IFRS 16 of BRL791 million. And I would just like to note that this EBITDA takes into account Polvo and Manati fields. When this EBITDA includes Fraudis field, 50% as of March, 12% as of October, which is the stake from impact, but it does not include any Petrobras stake of 30%. And obviously, it does not include any input from Tubarao Martelo, TB and T. What I mean by that is that we started 2020 with strong contracted growth for our EBITDA. And now I will focus more on our M and A. On Slide 12, you can see our trajectory starting in 2014, strong M and A deals activities. In 2019, we have three M and A deals considering actually 2018 and 2019. So three M and A deals referring Friday, Chevron impacts and then Petrobras more towards the end of the year. In 2020, we started with the TBMT acquisition and OFX-three FPSO. And now focusing on 2020, Tubarao Martelo and OFX-three, I'd like to show you on Slide 13, the current snapshot of these two fields operating independently. We have one FPSO at Tubarao Martelo Field, one FPSO at Pogo Field. We have the logistic base in Niteroi belonging to Domo, the logistic base at Acu Port belonging to PetroRio. We have the support supply vessels. We operate Frade and Polvo with three supply vessels. Domo has its own vessels, helicopters. We have our own helicopters. Domo has its own helicopter. I talked about the support base. So this is the current snapshot, the current situation. When we think about a tieback between the two fields, in addition to increasing production of the fields, we'll add production from both fields. We have a huge cost rationalization as we can see on Slide 14. We can consolidate our operations as if we were dealing with one single field to Braumatelo plus Ovo. They will be operated as a cluster. So the logistic phase will be unified, supply vessels will be rationalized. We won't need so many. The same goes for the helicopters. And finally, the FPSO will be able to operate the cluster and both fields with only one FPSO. So in the end, Porvoo Costa Baro Martelo as a cluster will be very similar to what we have at Frade today. We are going to have an increased useful life of at least ten years. So we are talking about abandonment by 2,035. We're at 40,000,000 barrels worth of reserves according to our estimates, and we're going to have a production cost below $15 per barrel. So perhaps this will be the biggest revitalization project for PetroRio in recent years. So now moving to Slide 15. It deals with the financial performance of the company. We can see that we continue with an excellent financial solidity. We have a net debt over EBITDA ratio of 1.1 times. And I'd like to make note of one point. This 1.1 times ratio does not take into account cash referring to sales in the month of December 2019. Because in December, as we can see in the balance sheet, we ended the year with accounts receivable at an atypical level of BRL $374,000,000. So when we calculate net debt, we don't take into account accounts receivable. It's not in our cash. But BRL $374,000,000 were in our cash in January. If we were to consider this BRL $374,000,000, if they were out of accounts receivable and if they were posted in cash, our net debt to EBITDA ratio would have reached to 0.4 times. So we have excellent financial solidity. We have firing power. We have a lot of momentum to continue to grow. Moving to the next slide, Slide 16. It has to do with funding. Our debt, albeit a short term debt, which is something we will try to address now in the coming quarters. So albeit a short term debt, we have very attractive loans and funding. We can see all of the loan rates there, LIBOR plus 3% per annum or lower. So the company continues very financially disciplined with financial solidity. And basically, this is all I have to point out about our funding and financials. I would like to make another comment. I would like to thank my financial team. I took over as CFO in the 2019, leaving the operational department. So I'd like to thank my whole financial team for the whole work that they did. We worked hard at all fronts in terms of funding, accounting, M and A deals, trading, all of these financial areas. So I would like to particularly thank the financial team and the operational team and the legal and administrative team because they gave me a lot of support regarding the M and A process. And they still provide a lot of support to operation now, integrating this new asset to make it work, to make the necessary and relevant cost reductions and so on and so forth. So I would like to congratulate the whole company for the work done in 2019. Thank you very much. Ladies and gentlemen, we will now begin the question and answer session for analysts and investors. We have a question from the webcast from Mr. Rodrigo Siquera. The media has been saying that PetroRio is negotiating the acquisition of part of the Peregrino field, right? Can you give us an update on the negotiations with the Norwegian and the Chinese? What about Garupa and Papateja made available by Petrobras? Are they interesting to PetroRio? Any negotiations with Shell to acquire the Petrobras conscious complex? Rodrigo. Thank you for the questions. As always, we cannot make any comments about our M and A pipeline. What I can tell you though is that we are interested in considering many fields, which are close to Polvo fields, close to Frade field. And yes, we are very active in all of these processes like Petrobras. So we are interested in assessing Europa, Papa Terra and so on and so forth. But for now, that's all I can give you about M and A possible deals. Next question also from Rodrigo Sequeira on the webcast platform. What is the status of the 30% stake acquisition from Petrobras at Frade? What is the status of the drilling campaign of Frade? Any expected date for the closing? Rodrigo, again, regarding the acquisition of Petrobras 30% stake, we are awaiting approval from AMP, Brazilian oil agency. We cannot give you a date for approval. We expect that this will follow the regular process. There's no reason for the process to be different than the regular A and P process. So we normally allow something between six and nine months since we submit the protocol to A and P. In other words, since the acquisition date. And regarding the Frade drilling campaign, as Francois Omar said, we intend to begin the drilling campaign in 2020, drilling the first well most likely in the second half of the year. This is in the company's plans. This is what we are structuring for Friday. Our next question comes from Christian Audi with Santander. My question is this capital use dynamic, as you mentioned, you have many M and A opportunities that you're looking into. At the same time, you have very interesting campaigns such as the Frade drilling campaign. And given the recent deal with Tubarao Martelo, what are you thinking? Are you thinking we've had to recent M and A, so let's focus more on campaigns or vice versa? That's my first question. My second question has to do with corporate governance. I know that you are very focused on a continuous improvement in terms of adding more Board members. So perhaps you could give us more color in terms of what other actions are you implementing to improve corporate governance? And finally, my third question, what about the TBNT campaign? I don't know whether you can share any ideas with us in terms of what kind of production could we expect from TBMT? Christian, could you repeat the final part of the question regarding Tubarao Martello? That was a sound cut for us. Yes, of course. My question was, could you share with us perhaps what kind of production level you're expecting? Once you finish the revitalization campaign, what kind of production could we have at this field? I'm going to answer the first question and the last. And the part on the Board, I'll give the floor to Nelson. Well, regarding the first part of your question, it has to do with focusing on M and A, capital allocation and so on and so forth. Well, we continue to be very active in M and A. We see many opportunities arising in Brazil in terms of mature fields and producing fields. These are different departments. The department that executes the drilling, the engineering team, that's a separate team. Now of course, they do help us in terms of assessing a possible M and A deal, but project execution is very separate from M and A activities. So we have sufficient muscles to work on both fronts. Now the company is keen to maintain a net debt over EBITDA ratio that makes sense. It is at 1.1x now. We believe the company should run between one and 1.5x so that we can maintain our financial performance and our firing power. So what we may do in the future to maintain this level of net debt to EBITDA ratio, well, the first thing would be to work on our debt. Our debt is concentrated in the short term debt. The rates are very good, but they are short term. So perhaps we could have an issuance to elongate the debt profile. It doesn't change the net debt over EBITDA ratio, but it does release cash flow in the short term. And another possibility is to have some treasury shares. Perhaps think about a follow on depending on the magnitude of the opportunities that we might have. So this is our mindset. We want to keep a net debt over EBITDA ratio that makes sense a very controlled indebtedness level as is the current situation. Regarding Tubarao Martello, TBMT, what we are doing at TBMT? Well, TBMT is producing about 5,800 barrels per day. And what's happening at Tubarao Martello Field is a campaign, I'm not sure you should call it revitalization campaign. It's not a true revitalization. What's happening is the connection of a new well at Tubarao Martelo. We will remember that Tubarao Martelo has three producing wells and there are three wells not producing. One of these wells that are not producing had ESP failure, so it's in downtimes. And there are two wells left that never produced anything. Of these two, one of them will start producing. And this failed ESP will be replaced. There will be a production increase. Our expectation is that we will see a production increase. I think it's too early to say what the production will be, but it will definitely improve from 5,800 barrels a day. That well, Nefabiaz, the pump failure produced, if I'm not mistaken, 700 barrels a day. So when it starts up again, it will produce more than that because it's been a long time in downtime. And then the new producing well, that's the unknown. We expect that it will begin with a similar production to the other producing wells, but it's difficult to give you an accurate number. In the event, we have well 10, the left well. It should be connected when we connect the POVO FPSO to the Tubarao Martello FPSO, the OSX-three FPSO. I'll turn the floor to Nelson now to speak about the Board of Directors and about governance. This is Nelson. About governance, we have a Board that has been for a while contributing a lot to this story of value creation. So they've been contributing a lot. But the mandate of the current Board will end soon in the next shareholders meeting. So when we have anything on that, we'll communicate to market. But stay assured that we are tuned to the best practices and we are open to suggestions on many fronts actually. So shareholders and investors can make their own suggestions. We're always very open to suggestions. And when we have something more tangible on this, we'll communicate to the market. Thank you. Thank you for the answers. And I have one last question going back to M and A. We see the Brazilian market with the Brazilian BRL depreciating, the stock exchange increasing. So it's a very interesting dynamic for the Brazilian market considering the Latin America dynamic. Do you see those M and A opportunities are better are increasing, are getting better now compared to the middle of last year. How do you see competition for these opportunities? As you mentioned, you mentioned mature producing fields. Do you think that the opportunities are increasing, but perhaps there's more competition for those assets? How do you see this dynamic in terms of M and A opportunities and competitors competing for these assets? Well, Christian, regarding M and A, what we see is that in the past, in the beginning of the process that happened in 2018, and I mean the beginning of the Petrobras divestment program when they started putting mature fields for sale. We thought that there was perhaps a pent up demand, that there was more competition consequently. And then the first three deals happened on Sova, Ibauna and the third one. And so now the outlook is the landscape is competitive, but we don't see a pent up demand anymore. So it seems that things are more rational now. Now from the standpoint of possible M and A opportunities, I'm not going to detail any target specifically, but we see good opportunities in Brazil. And we're excited about the move by many new operators in the pre salt. In addition to Petrobras, there are many new operators targeting the pre salt. Although PetroRio does not work with exploration, we see this movement with good eyes because these large companies, they will use their balance sheet, their expertise for exploration purposes. They will find magnificent fields in the pre salt. And most likely, the fields they are operating now will possibly be divested, which is a very similar move to what is happening in the rest of the world, very similar also to what's happening with Petrobras. So what we envision is a brighter and brighter future from the macro standpoint. Thank you. Very clear. Thank you for the question. Next question from webcast by Claudia Roberto. Despite the exceptional performance of the company, the debt profile is very much concentrated on the short term, considering that the company's business model considers M and A opportunities and that you will need a lot of CapEx looking forward. What are the company's plans to change the indebtedness profile of the company? Good afternoon, Claudio. Thank you for the question. I think I tried to address this point when I answered Christian's question, but let me rephrase that. You're right, our debt is concentrated on the short term, albeit with very attractive interest rates. But yes, the majority of the debt is a short term debt. So to have CapEx available and to enjoy M and A opportunities to begin, the company has a very strong cash generation. In addition to cash generation, we have two other tools. One, to do what we call reprofiling of the debt. In other words, elongating the debt. That means issuing bonds. It could be a bond with a Norwegian law or a bond with a U. S. Law, which would be the traditional 144A, and that issuance would refinance the debt. In other words, exchanging short term debt by longer term debt. And then the cash generation of the company, which is strong, would become even stronger because we wouldn't have to serve our debt obligations in the short term, but more towards the long term. So that is one possibility. The second possibility has to do with equity. I like with our treasury shares. Today, the company has a little over 6% of the shares of all shares in our treasury. So there's this possibility. And also the possibility of a follow on depending on the opportunity that presents itself to us. Our main point is that we want to keep a net debt over EBITDA ratio close to one to 1.5x, which is a level that we believe is ideal for the kind of company that we are that requires CapEx and that needs and that has enough muscles to enjoy M and A opportunities. Next question also from webcast from Diogo. What about the revitalization campaign at Tubarao Martello that was being conducted by DOMO and they didn't complete it? Are you going to complete it? UNIDENTIFIED the revitalization campaign at Turbarau Martello, it's called, as you mentioned, a rehabilitation campaign. It's actually a connection of two wells. One of the wells used to operate in the past and there was a failure in the pump, so they're doing a workover. And the second well is one of those two wells that never were put into operation. So that campaign is being done, it's being executed by Bromo. Of course, because of the deal, we have been informed of what is happening along the rehabilitation campaign. But the campaign is being executed by DOMO. DOMO is the operator of the field. They'll continue to be the operator of the field until we get approval from ANP. So the campaign is ongoing. And this oil will be part of the production of these two combined wells. We are now closing the question and answer session. I would like to invite Mr. Nelson Queiroz, Stenuri, for his closing remarks. Go ahead, sir. Well, thank you very much for your interest in the company, for your questions. On our end, we think that 2019 was a very positive year. We overcame challenges. We delivered consistent results. And we started 2020 on the right footing. I'd like to thank all the investors for your trust. I'd like to thank all of our employees. You're very important for everything we do, the operational team, the corporate team. We all carry the banner here. We are moved by blood, sweat and tears, and it will continue to be like this. And finally, regarding Tubarao Martello deal, I would like to thank everyone from Domo and BS Capital and Prisma because they dedicated a lot of time. We worked long hours, sometimes overnight. We were all very focused to complete this deal. That has been very positive for both parties. Thank you very much. This does conclude PetroRio's conference call for today. Thank you very much for your participation and have a good day.