Welcome to PetroRio's conference call to discuss fourth quarter and full year 2019 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. Should you need assistance during the conference call, please dial star zero for an operator.
This event is also being broadcast simultaneously over the Internet and may be accessed through PetroRio's investor relations website at www.petroriosa.com.br/ir by clicking on the banner Q4 2019 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 Queiroz Tanure, CEO, Mr. Francilmar Fernandes, COO, and Mr. Roberto Monteiro, CFO. Mr. Tanure, please go ahead.
Good afternoon, everyone, and thank you very much for joining us on this earnings conference call. As always, I can see a lot of PetroRio employees listening to the call. 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 this value. You're building something very beautiful. 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 of last year, together with Manati, all operating at a very high safety level. Safety is everything. I mean, environmental safety, occupational safety, and health, these are our essential pillars, not negotiable with many others. This is a top priority for us.
We grew the company. We acquired Frade Field. We had a drilling campaign at Polvo at the beginning of the second half of 2019. We also made many investments at Frade Field, which brought positive results. We continued to grow. Recently, we announced the acquisition of Tubarão Martelo field, TBMT. This was already in 2020. Some other macro-level comments.
The evolving culture and sense of ownership, operating discipline, financial discipline of PetroRio are 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. A quick reflection now that we will look at our 2019 numbers. Roberto will get into more details, as well as Francilmar. 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. We were able to grow the company, improving, creating value, improving our margins in a more challenging environment with $10 less in the price of our Brent oil. This is a good context in which to analyze our numbers.
In terms of safety, as I mentioned, safety is very important. Polvo operated with operating efficiency and safety indicators, which were very high, satisfactory, and that achieved our expectations. Frade Field as well. We took over the operation in March. Chevron had done very solid work in terms of safety and best practices, 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. 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.
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, it 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 field 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 bbl. It was true in the end of 2019, when we were producing close to 30,000 bbl, and will remain true as we grow. Every barrel counts for us. In terms of efficiency and timely response time and focus, this also generates good benefits 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. In addition to all positive effects, efficiency, synergies, we have a much more positive environmental impact. To continue, I want to quickly mention some tangible 2019 data.
We started 2019 with two fields as our primary revenue stream, Manati and Frade fields. We had a production of approximately 12,000 bbl a day. We ended 2019 with more than 30,000 bbl. We proceeded to have three assets generating revenue. In Frade 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.
The company becomes more and more solid and is getting ready to face bigger challenges, such as the acquisition of Tubarão Martelo, which, just like Frade, comes with an FPSO, which will belong to PetroRio. That will be operated by ourselves. This is very positive. 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 at the beginning of 2019 was approximately $30 per barrel. We ended 2019 with a lifting cost of approximately $19. This very summarized way to see how we create value. Well, this was a company 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 saw its costs reducing more than 1/3 while growing. This is indeed the best hedging strategy that an oil and gas company can have, by being very efficient, with very low costs, with 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. 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 a range 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 in helping those who need help. Thank you all of you who work here, and thank you to our investors. I will turn the floor to Francilmar. 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 of very representative results, mainly due to the operations starting at Frade field. We had a significant reduction in our lifting cost, which reached $19.70 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 asset's 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. 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 over the operation, the FPSO, the subsea system, and the whole operation. In addition, in the end of the year, we had the acquisition of Tubarão Martelo 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 Polvo field had a 2.3% drop in production in the yearly comparison. 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. Only now will we see the effect of new wells.
Manati's production had a more substantial reduction, 26%, mainly due to the natural decline of the field, that after high production for many years, started to show more 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 $22.9 per barrel in 2019.
Let's consider the start of production at Frade in April, 50% stake from Chevron, plus the impact stake more towards the end of the year. 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. With TBMT, 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 PetroRio. Some initiatives more towards the end of 2018 and along 2019, the set of initiatives which were implemented to increase production to offset the natural decline of the field.
All of our day-to-day actions, some short-term actions that have been completed, some more complicated actions which require a 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 acids 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. 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 Polvo fields operating performance with a more significant reduction in operating efficiency in Q4 2019, a lot stemming from a reduced efficiency of the Polvo FPSO. It had some unscheduled stoppages for emergency maintenance, and that led to reduced efficiency. Coupled to that, we had failure of an ESP pump in the beginning of the drilling campaign, so we had more downtime at the well. We had the re-completion 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 bbl, 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.
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. We need to perform technical and laboratory analyses 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 days, so we can define our next steps. Speaking about the drilling campaign at Frade, we are at an advanced stage of market procurement and talking to suppliers. We 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, we have an estimated CapEx for this first well of $70 million. 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&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, Emiliano and his team. Thank you, Nelson. Thank you, everyone.
Well, this is Roberto. Thank you, Francilmar. I will go over PetroRio's financial highlights for 2019. As you could expect, the first number to be highlighted is our net revenue of BRL 1.6 billion for 2019, a historical mark. Another all-time high mark is our EBITDA, close to BRL 800 million, with an EBITDA margin of 48%, also an all-time high. A cash generation of BRL 570 million along 2019, so all of the indicators are very strong.
Now, getting into M&A, we had the Frade deal, the remaining 30% working interest of Frade during Q4 2019. In the first quarter of 2020, as a subsequent fact, the acquisition of Tubarão Martelo field, as well as the $65 per barrel hedging, covering approximately 70% of sales of the first half of the year.
Well, moving to the next slide 11, I will highlight only our 2019 EBITDA ex IFRS 16 of BRL 791 million. I would just like to note that this EBITDA takes into account Polvo and Manati fields. When this EBITDA includes Frade field, 50% as of March, 12% as of October, which is the stake from Inpex. It does not include any Petrobras stake of 30%, and obviously, it does not include any input from Tubarão Martelo, TBMT.
What I mean by that is that we started 2020 with strong, "contracted growth for our EBITDA." Now I will focus more on our M&A. On slide 12, you can see our trajectory starting in 2014. Strong M&A deals activities. In 2019, we had three M&A deals. Considering actually 2018 and 2019. Three M&A deals referring Frade, Chevron, Inpex, and then Petrobras more towards the end of the year.
In 2020, we started with the TBMT acquisition and OSX-3 FPSO. Now focusing on 2020, Tubarão Martelo and OSX-3, I'd like to show you on slide 13 the current snapshot of these two fields operating independently. We have one FPSO at Tubarão Martelo field, one FPSO at Polvo field. We have the logistic base in Niterói belonging to Dommo, the logistic base at Açu port belonging to PetroRio. We have the support supply vessels.
We operate Frade and Polvo with three supply vessels. Dommo has its own vessels, helicopters. We have our own helicopters. Dommo has its own helicopter. I talked about the support base. This is the current snapshot, the current situation. When we think about a tie-back 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, Tubarão Martelo plus Polvo. They will be operated as a cluster. The logistic base will be unified. Supply vessels will be rationalized. We won't need so many. The same goes for the helicopters. Finally, the FPSO will be able to operate the cluster and both fields with only one FPSO.
In the end, Polvo plus Tubarão 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 10 years. We are talking about abandonment by 2035, where we had 40 million barrels worth of reserves according to our estimates, and we're going to have a production cost below BRL 15 per barrel.
Perhaps this will be the biggest revitalization project for PetroRio in recent years. 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 x. I'd like to make note of one point.
This 1.1 x 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 million. When we calculate net debt, we don't take into account accounts receivable. It's not in our cash.
BRL 374 million were in our cash in January. If we were to consider these BRL 374 million, if they were out of accounts receivable, and if they were posted in cash, our net debt over EBITDA ratio would have reached a 0.4 x. We have excellent financial solidity. We have firing power. We have a lot of momentum to continue to grow. Moving to the next 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. Albeit a short-term debt, we have very attractive loans and funding. We can see all of the loan rates. They are LIBOR + 3% per annum or lower. 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 CFO in the middle of 2019, leaving the operational department. 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&A deals, trading, all of these financial areas.
I would like to particularly thank the financial team and the operational team, the legal and administrative team, because they gave me a lot of support regarding the M&A process. They still provide a lot of support to our operation now, integrating this new asset to make it work, to make the necessary and relevant cost reductions, and so on and so forth. 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. If you have a question, please dial star one on your touch-tone phone now. If at any time your question has been answered, please dial star two to remove yourself from the questioning queue. We have a question from the webcast from Mr. Rodrigo Siqueira.
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 Norwegians and the Chinese? What about Garoupa and Papa-Terra made available by Petrobras? Are they interesting to PetroRio? Any negotiations with Shell to acquire the Parque das Conchas complex?
Hello, Rodrigo. Thank you for the questions. As always, we cannot make any comments about our M&A pipeline. What I can tell you, though, is that we are interested in considering many fields which are close to Polvo field, close to Frade field, and yes, we are very active in all of these processes by Petrobras. We are interested in assessing Garoupa, Papa-Terra, and so on and so forth. For now, that's all I can give you about M&A possible deals.
Next question, also from Rodrigo Siqueira 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?
Well, Rodrigo, again, regarding the acquisition of Petrobras' 30% stake, we are awaiting approval from ANP, the 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 ANP process. We normally allow something between 6 and 9 months, since we submit the protocol to ANP, in other words, since the acquisition date.
Regarding the Frade drilling campaign, as Francilmar Fernandes 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 Frade.
Our next question comes from Christian Audi with Santander.
Thank you, Nelson, Francilmar, and Roberto. My question is, this capital use dynamic, as you mentioned, you have many M&A opportunities that you're looking into. At the same time, you have very interesting campaigns, such as the Frade drilling campaign. Given the recent deal with Tubarão Martelo, what are you thinking? Are you thinking we've had two recent M&As, 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. Perhaps you could give us more color in terms of what other actions are you implementing to improve corporate governance? Finally, my third question, what about the TBMT 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. Thank you.
Christian , could you repeat the final part of the question regarding Tubarão Martelo? There 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. The part on the board, I'll give the floor to Nelson. Well, regarding the first part of your question, it had to do with focusing on M&As, capital allocation, and so on and so forth. Well, we continue to be very active in M&A. We've seen 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. Of course, they do help us in terms of assessing a possible M&A deal, but project execution is very separate from M&A activities. We have sufficient muscle to work on both fronts. The company is keen to maintain a net debt over EBITDA ratio that makes sense. It is at 1.1 x now.
We believe the company should run between 1x and 1.5 x, so that we can maintain our financial performance and our firing power. What we may do in the future to maintain this level of net debt over 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. 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. 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. 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 Tubarão Martelo, TBMT. What we are doing at TBMT, well, TBMT is producing about 5,800 bbl per day. What's happening at Tubarão Martelo field is a campaign. I'm not sure we should call it revitalization campaign. It's not a true revitalization. What's happening is the connection of a new well at Tubarão Martelo.
We will remember that Tubarão Martelo has three producing wells, and there are three wells not producing. One of these wells that are not producing had an ESP failure, so it's in downtime. There are two wells left that never produced anything. Of these two, one of them will start producing. 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 bbl a day. That well that had the ESP pump failure produced, if I'm not mistaken, 700 bbl a day. When it starts up again, it will produce more than that because it stayed a long time in downtime. 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 kind of difficult to give you an accurate number. In Baúna, we have well 10, the last well. It should be connected when we connect the Polvo FPSO to the Tubarão Martelo FPSO, the OSX-3 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. They've been contributing a lot. The mandate of the current board will end soon in the next shareholders meeting. When we have anything on that, we'll communicate to the market. Stay assured that we are tuned to the best practices, and we are open to suggestions on many fronts, actually.
Shareholders and investors can make their own suggestions. We are always very open to suggestions. When we have something more tangible on this, we will communicate to the market. Thank you.
Thank you for the answers. I have one last question, going back to M&A. We see the Brazilian market with the Brazilian real depreciating, the stock exchange increasing. It is a very interesting dynamic for the Brazilian market, considering the Latin America dynamic. Do you feel that these M&A opportunities 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 is more competition for those assets? How do you see this dynamic in terms of M&A opportunities and competitors competing for these assets? Thank you.
Well, Christian , regarding M&A, what we see is that in the past, at the beginning of the process that happened in 2018. 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." There was more competition, consequently. Those first three deals happened, Anchova, Baúna, and the third one-
Now the outlook is the landscape is competitive, but we don't see a pent-up demand anymore. It seems that things are more rational now. Now, from the standpoint of possible M&A opportunities, I'm not going to detail any target specifically, but we see good opportunities in Brazil. 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. It's very similar also to what's happening with Petrobras. What we envision is a brighter and brighter future from the macro standpoint.
Thank you. Very clear.
Thank you for the question.
Ladies and gentlemen, as a reminder, if you want to ask a question, please dial star one. Next question from webcast by Claudio 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&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, let me rephrase that. You're right. Our debt is concentrated on the short term, albeit with very attractive interest rates. Yes, the majority of the debt is a short-term debt.
To have CapEx available and to enjoy M&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 144-A. That issuance would refinance the debt, in other words, exchanging short-term debt by longer-term debt. 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. That is one possibility.
The second possibility has to do with equity. Either with our treasury shares. Today, the company has a little over 6% of all shares in our treasury. There's this possibility. 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 1.5 x, which is a level that we believe is ideal for the kind of company that we are. That requires CapEx and that has enough muscles to enjoy M&A opportunities.
Next question, also from webcast. From Diogo. What about the revitalization campaign at Tubarão Martelo that was being conducted by Dommo, They didn't complete it. Are you going to complete it?
Good afternoon, Diogo. Well, the revitalization campaign at Tubarão Martelo, 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. The second well is one of those two wells that never were put into operation.
That campaign is being done. It's being executed by Dommo. Of course, because of the deal, we are being informed of what is happening along the rehabilitation campaign. The campaign is being executed by Dommo. Dommo is the operator of the field. They'll continue to be the operator of the field until we get approval from ANP. 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 Tanure 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. We started 2020 on the right footing. I'd like to thank all investors for your trust. I'd like to thank all of our employees. You are 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 will continue to be like this.
Finally, regarding Tubarão Martelo deal, I would like to thank everyone from Dommo and BX 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.