Earnings Call: Q2 2019

Aug 15, 2019

Good day, ladies and gentlemen. Welcome to the conference call to discuss Second Quarter twenty nineteen Results of PetroHilo. Thank you for standing by. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session for analysts and investors. This event has also been broadcast simultaneously over the Internet via webcast and may be accessed through PetroRio's Investor Relations website at ir.petroreusa.com.br by clicking on the banner 2Q twenty nineteen earnings release. Before proceeding, let me mention that forward looking statements that might be made during this conference call relative to the company's business perspectives, projections and operating and financial goals are based on the beliefs and assumptions of Petrovio'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 that 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 Kedar, Panuiri's CEO Mr. Roberto Montero, CFO and Mr. Milton Hanger, Head of Finance. Mr. Panuiri, please go ahead. Good afternoon, everyone. This is Nelson. Welcome to Petrofio's conference call to discuss Q2 'nineteen results. Thank you all for participating. I can see that the employees on this call. I know many of you are shareholders. Folks, it's great to have you on board. It's always a matter of pride to me to see you're interested in following our earnings conference call. And honestly, you're the ones creating all this value for the company. So it's only natural that you get interested in participating in all of this value creation. So this is great. To speak a little about our Q2 'nineteen results, to start more conceptually, but we think second quarter was very good. Again, this quarter was better than the previous quarter in a long sequence of historical quarters, if you can call them that, with each quarter exceeding the previous record mark. And this quarter, the main driver behind us was Friday field. In the first quarter, we recorded just a little of Friday's production as we closed the deal in the March, so just a few days were posted. But in the second quarter, we had the whole production and result of Friday. So this greatly explains such a significant result. And our expectation is that FLY revealed and the results of the company will continue to improve as we implement our efficient management methodology. And Roberto can comment more on that later with Francimar as well at the end. So the quarter was very good, as I said. We had solid field producing throughout the quarter. We also had a good performance at our Porvoo field. We had two offtakes in the quarter, so Pohu contributed really well. It is a field that also has a very promising future. We have a drilling campaign scheduled for the second half. In other words, we hope to very soon see Pogo once again showing all of its resilience. So this is a great focus for us in the second half of the year. And Manatee Field continues to operate very well. That field is like clockwork, and we're happy with its performance and production. There are some aspects related to the demand for gas from Petrobras, which impacted its results. But overall, it is a field that has been delivering good results. It is the most curious that fields that used to represent so much in terms of results and numbers for the company, now it is representing less and less because of our growth, although the field remains very important for us. So to conclude with the financial piece, we posted a record net revenue, which makes me very happy. Revenue in this quarter accounts for more than half the revenue for the full year 'eighteen. So this is actually news in terms of cash generation, EBITDA, free cash flow. Our production posted very good numbers or higher than any other number previously delivered so far. And our lifting cost was the very best ever. So essentially, we had very good and positive numbers, which we believe will be long lasting. Now I would like to share with you a couple of other points, which make us very happy regarding the company's performance. First, we recently received an award from In for Money and IB Mac as best oil and gas company in the 2016 through 2018 period. So that makes us very happy, particularly for all of you who work at the company and who lived that period. You will remember how hard it was and all the efforts and sacrifice we had to make to overcome the challenges and hurdles and to continue to grow the company. And frankly, even with the good results that we are delivering now, the results are the consequence. The cause is all the effort, dedication and discipline, the blood and sweat that we put into this company. So this award reflects a little the good performance we had during that period, and it is a 100% because of the effort of each and every one of you working day after day, so congratulations. We've had positive numbers in the past, but facing a lot of difficulties. We have bigger challenges ahead of us, but I'm sure that we'll put even more effort, and we have everything we need to continue to overcome these challenges and make the company continue to grow with sustainability. Another point that also makes me very proud and that I would like to share with all of you is the fact that our internship program once again attracted a significant number of students interested in joining the company. This year, we had more than 16,000 applicants for our internship. We selected 15 or 16, So it was a very competitive process. And to you interns who might be on the call, for every one of you, there were another thousand who wanted to be in your place. So we expect a lot from you guys. Count on us to help you, but also what does make this company continue to grow? People are the drivers of Petrohilo. This is a virtuous cycle, and this is one of the main reasons excluding the continuous growth of the company, good people coming to join us. And a couple of more points, and I'll be done. I'll comment on the acquisition of approximately 18% working interest of froggy deals from Impact. We wanted this deal to have been completed by now, and we continue to expect this to happen soon. We are all working very hard for this to happen sooner than later, and our expectation remains unchanged. Finally, and I've touched on this, the company is getting ready for the drilling campaign at Ova field this year. This is among our goals for the next quarter to drill wells at Pogo. And we also announced previously the issuance of a Norwegian bond intended to raise around $400,000,000 so the company can be capitalized to have more firepower, to be able to continue very active in trying to buy new assets, new fields for PetroRio and to maintain our solid financial health. Well, before I turn the floor to Roberto, I guess you all have heard that Werner Mayhew left the company. For many years, he was the company's CFO and IRO. So Blaner, on behalf of the whole company, I'd like to thank you for your contribution to Pedro Rio. It was very much appreciated. We wish you good luck. And let me say a few words about Roberto. He already was our Chief Operations Officer and now takes over as CFO. Roberto has been with us for a long time, approximately 50% Petrogio. Well, he was CFO in the past, he's very knowledgeable about the company's numbers. He has great ambitious plans to improve our financial department even more. So, Roberto, you're not new to the company, and I'm excited that you're taking on this new role. I would like to welcome Francois Mar. He was one of the main people responsible for our successful drilling campaign last year at Polvo. Mar spent many weekends here making sure that our campaign would unfold well. So Francois Mar, welcome to your new role. You have a big challenge ahead of you, but we are confident that you are more than capable of delivering excellent results. We'll be spending all weekends at work with your new team, given that we have a new drilling campaign coming up. So that's it, everyone. Thank you all for participating, and I now turn the floor to our new CFO, Roberto Montevi. Thank you. Thank you very much, Nelson. This will be my last call as the Head of Operations. So let's start on Slide three, where we start presenting our operational highlights. I believe the main operational highlight in this quarter Everything unfolded really well. The operation is running well. I'd say everything is very smooth. All synergies are being captured as planned. Actually, some of them are a little ahead of schedule. We maintained a high operating efficiency both at Frade and Orvo. Actually, Frade's operating efficiency in this quarter was the highest that we posted at least in the last twelve months for sure. So all is unfolding really well. The drilling campaign at Porcel is planned to start in September. The drilling rig is 100% ready. All is 100% prepared. The only news here regarding the drilling campaign We'll see this later. We divided it into two phases with the possibility of starting earlier, but we'll talk more about this in a moment. Please go to Slide number four. I just like to draw your attention to the geographic location of our assets, particularly when we take into account Frade and Polvo, we see that they are located close together. And it is this proximity that allows us to derive great operating synergies, particularly regarding land and sea logistics, air logistics and so on and so forth. So I guess this plot serves this purpose to give you an overview and to help you understand where the synergies are coming from. It is very much related to the proximity of the fields. Well, moving on to Slide five, please. We see our operating efficiency. We see projects with more than 99% operating efficiency. So the field running very well, 100% under Petrovio's operatorship. And the bulk of it was a high operating efficiency, 97.6% in this quarter. We did have some BCS problems mainly related to VSD, which is not the part that is in the well, but the part that sits on the platform. This reduced a little operating efficiency at Polvo, but nothing too striking, nothing problematic. Today, we are back to a higher operating efficiency. But Friday, on the upper right hand corner of the slide, so this is the part that deserves to be highlighted. Looking closely, we can see great stability since March. In March, we produced 19,200 barrels. In February, 19,100 barrels in June. We are producing 18,978 barrels. In July, we also reopened one of the wells that were stopped at Friday. There were two wells idle. One because of fine solids and the other because hydrate formation. We solved the problem of this hydrate well and reopened it. In the month of July, we had days producing 20,000 barrels or a little under 20,000 barrels. So I'd say that our Fragi operation is fully under control, and we are managing to somehow control really well the natural decline at Fragi with midterm actions which are also on the slide. Our objective is that Friday in the mid run is to do what we call a water shutoff, a polymer injection to contain water, to contain the water produced, and also well stimulation, primarily related to cleaning the well or eliminating fine solids in the well. So these are the midterm actions for Friday, which should help us maintain the field decline very much under control until we begin our drilling campaign, which I will address later on. Well, going to the next slide, we see the lifting cost. We can see $24 per barrel. This $24 per barrel in a consolidated fashion show the importance of Frade in our operation. This number already includes everything related to operations and maintenance as well as air logistics, all included, all synergies included. There were still some transient costs as part of these $24 such as transition costs, which ended in August. And the land and sea logistics that were not yet captured, actually, we were still paying for some things twice because of the two companies. There were, the full return schedules and so on and so forth. But now from August onward, everything is running a 100% optimized. So our expectation is that this lifting cost will be lowered from $24 per barrel in a consolidated fashion, and we should easily get to $20 per barrel by year end, as we have said in the previous earnings call. Moving to the next slide, Slide number seven, regarding Poland's drilling campaign. No great novelties here except that we have scheduled and are planning to start this campaign in September. We have the possibility of drilling up to four wells. Obviously, they kind of depend on one another. So we'll evolve as we are successful, but the targets are the same, more or two months for every well and an estimated CapEx of $30,000,000 to $60,000,000 Well, if we move to Frade Field, perhaps this is very novelty, the drilling campaign at Frade. We have a global revitalization plan for the field, an initial revitalization plan with four producing wells and three injection wells. As part of this overarching global plan, we defined two phases. The first, as you can see, with one producing well and two water injection wells. We have to remember that at Friday, the main reason why the field is declining is the lack of energy in the reservoir, lack of water. That's why these two injection wells are so important. And then producing well that is located in a well known reservoir with discovery and all. So I'd say the risk is really well controlled. These three wells at the first phase will cost according to our present estimates between $190,000,000 and $200,000,000 for 100% of the field. And what is interesting regarding Petrovio making investments in phases is that we can try to move this first phase forward to 2020. Again, perhaps by mid twenty twenty, this drilling campaign should be happening. Now, of course, it all depends on the drilling rig and on equipment, but orders moving ahead and is aligned for us to get there. With that, I'll turn the floor to Milton. I'd like to thank everyone and Saint Nelson for the possibility to return to my background area of interest, finance. And good luck to Francois Mori, who, as of next quarter, will be leading operations. And we also mentioned that Francois Mori is a homegrown star. He has been here since the beginning of the company, since the beginning of PetroRio. Actually, first before the birth of PetroRio. Last last year, he was one of the main people responsible for the drilling campaign. So from Tsumar, good luck. Wilson, over to you to talk about our financials. Thank you, Roberto. Good afternoon, everyone. Well, moving to the financial part of our presentation. Overall, the second quarter was quite emblematic with strong and positive results considering the addition of Frode Fields to the company's results. With that, we hit some record marks, starting with our net revenue with almost million. EBITDA was also very strong, around BRL $260,000,000 ex IFRS 16 effect, which was 643% higher than the adjusted EBITDA of Q1 twenty nineteen, reflecting the start up of Friday field, which was not reflected in Q1 twenty nineteen. In terms of EBITDA per barrel, another record mark, an all time high in our history of practically $31 per barrel. Net income totaled more than BRL 160,000,000, more than 130% up year on year. And not only in terms of accounting indicators, but also cash generation, free cash flow. We also had another record reaching the highest cash generation in the history of this company. This clearly influenced positively our indebtedness metric because the net debt is reduced. And with that, we can proceed with strong deleveraging trajectory for the coming quarters, which puts the company in a very comfortable in a very healthy position as regards to our debt level. Moving to the next slide, we have our income statement. I'd like to draw your attention to some figures, especially the revenue line, up almost 130% in the quarter and almost 100% in the half year. Our revenue totaled almost $690,000,000. And it's important to highlight that this was not just a change in terms of level and size of our revenue, but above all, of our profitability. So if we compare the first half and the 2019, excluding IFRS 16 effect, first, to have a good comparison, EBITDA margin increased to 39% from 28%, 11 percentage points of improvement. If we consider adjusted EBITDA, 14 percentage points with an EBITDA margin of more than 40%. Considering the impact of IFRS 16, our EBITDA margin in the quarter was almost 60% and year to date, higher than 50%. Therefore, in general, a very strong and positive result that makes us proud. Moving to the next slide, we see the evolution of our results per barrel. We start now to follow this metric of EBITDA per barrel. We can see that from the beginning of 2017 to date, we see a clear ascending curve and have been improving our profitability per barrel. Even in the year on year comparison, Q2 twenty nineteen against the Q2 twenty eighteen, we can already observe an improvement despite a reduction in Brent oil prices between these two quarters. It is also important to point out that synergies between Pogo and Friday have not been fully captured in Q2 numbers. There's a lot of work being done. And we have been focused on reducing costs to a minimum by capturing synergies between the fields. With that, we posted this result of almost $31 per barrel. Similar to players and competitors in the industry that produce more than 2,000,000 barrels a day. That shows how we despite being a smaller company, we were able to generate a lot of cash per barrel, trying to reach maximum efficiency and profitability. This really reflects our DNA, which is to increase the size of the company through M and A deals and improve profitability by managing our assets and consequently creating as much value as possible to our shareholders. Moving to the next slide, to give you more on our leverage. Well, in 2018, the company did not have a relevant debt. And that's why we have observed a negative net debt. But this starts to change in 2019 with the loans granted by Finap, ICBC and Chevron for the acquisition of Frodefield. So when you see a significant leap of net debt over adjusted EBITDA ratio, which is 3.3x. But this has reduced markedly in Q2 twenty nineteen, given the company's cash generation and cash inflow increment from FAGI. It is important to show that this indicator is at one time and a half. If we take into account the last twelve months and considering that in these twelve months, only one quarter had full contribution from Friday. Thus, we have a clear indication that our debt level will drop in the coming quarters. This puts the company in a very comfortable position for future funding and greater firepower for future acquisitions. On the next slide, regarding our funding and the characteristics of the loans that we are getting, generally speaking, we have been building a stronger relationship with several banks, both Brazilian and international. We observed a number of banks approaching, wanting to do more business with us, and we have been able to get some loans at very attractive costs, as you can see on the slide. Today, the main debt of Petrovio is with Chevron through vendor finance at a cost of LIBOR was 3% per annum. We also signed the PPE, expert prepayment agreement, this year with PetroChina and with ICBC. ICBC, they were the bank in charge of the operation at a cost of LIBOR plus 3% per annum. ICBC is one of the largest banks worldwide. And we also signed recently, as previously announced, a nice credit line with Finap geared to innovation and improvement at Polvo Field. It has everything to do with our business case. Also, we have access to mainly short term working capital credit facilities with a number of partnering banks. Moving on with the presentation to our last slide talking about duration. Currently, our duration is relatively short because the bulk of our debt will be repaid in the next two years through vendor finance. And this puts us in very comfortable position to reduce our leverage, and it gives us room for future leverage. So naturally, we are looking into expanding this duration, which is currently short to give us more and more strength and momentum to grow either for drilling campaigns or for the acquisition of new assets incorporating new reserves for the company. The fact is that we have good room in our balance sheet to find more and more credit deals to enhance our purchasing power and to develop our assets. With that, I end my participation in this presentation. I'd like to thank all of you for joining us and turn the floor back to our CEO, Nelson. Thank you. Well, thank you very much, everyone, for participating in our Q2 twenty nineteen earnings conference call. I hope you have enjoyed it. And now we open the call to questions. Thank you. Our first question comes from the webcast, Marcelo Cotino. According to news published by the company, deposition of 18% from Ipax will not have a cash effect. So is it paid already? And if so, was this paid with the corresponding production? Miss Amun, good afternoon. Let me clarify regarding impacts. The effective date of this deal is way previous to the current date. With the production of the field from that date to now, there is an adjustment in the price. This price adjustment led the transaction or the deal to have a zero value. This has not been paid yet. However, when the deal is authorized actually, it's not authorized, but when the deal is executed because it has gone through all levels and passed all levels of authorization in Japan. So now you're at a much more operational level, and it depends on the Japanese. So when this is done, we acquired the company that owns the field. So when that company comes, it comes with a positive cash balance. And this cash balance will be used to pay exactly what we owe for the deal. So we'll have a zero cash or zero effect, but this has not been paid yet because the deal has not been completed. When it is in when it's executed, when it's complete, and we expect this to happen in the third quarter, then this will be consolidated in the balance sheet with production, EBITDA and so on and so forth. Next question, also from the webcast, Rodrigo Sequeira. Regarding Fragi Field, what are the expectations with the drilling campaign to increase production? Any estimate for CapEx in this campaign? Do you intend to disclose reports of reserves? And in this drilling campaign, will you be accessing some targets in the pre salt? Hello. This is Francisco Mori speaking. I did do an interview. We are in the final phase of study for the drilling campaign. We estimate a CapEx of 190 to $200,000,000 for the full campaign. In terms of reserves, it's way too early. We are reviewing the study. The G and G team is reviewing the report, and then soon we're going to have more to disclose on that. And we just like to add to what said regarding the pre salt. That Friday, there is a prospect. There is a possibility of drilling in the pre salt. This is not included in the initial drilling campaign of one producing well and two injection wells. But Flavia does have a presold prospect. It could be a future target of a future drilling campaign. And this is not our core focus at the moment because we believe that there are lower risk initiatives that we should tackle at the field. Pre salt approval. Although we do have a prospect in the coquine layer, which is normally the layer of production in the pre salt, for logical reasons, Polka does not have that layer. So there's no possibility of drilling a pre salt well as we are used to reading in the media that is under the salt because they don't have that layer. But again, if that happens, there are some prospects at Polvo for later on for the future that are much less risky in terms of geological results than the pre salt, much lower risk than in the pre salt. Next question also from the webcast from Pedro Szpec. What about the royalties discount for mature fields? Does the company have this kind of benefit currently? Are you seeking to have it? Our company, Petra Hill, is entitled to that right. So, yes, we're going after that benefit. Petra Hill was one of the precursors of this idea. One of the precursors placing this request to AMP. According to AMP regulation, they are considering a reduction in the payment of royalties regarding the production of wells drilled last year. These wells would enjoy this benefit And the production from these wells, instead of being 10% royalties, it would pay less than that down to 5%. This is our expectation. But again, this is a new regulation from A and P. It entails a long process. We believe that the process is moving ahead. It's towards the end. So we estimate this benefit coming still this year. So this is it. Although we are entitled, said that right, we have not enjoyed the benefit yet, but it will happen eventually. Next question also from the webcast is from Thiago Nawel, Atina Capital. Congratulations to the whole company for the results. What is the initial expected impact from the first phase of the development of Fraudry? Thiago, good afternoon. I'm not going to tell you exactly the impact from the wells that they tend to drill. I'm going to give an overall answer. I think the take home message is at Friday Field, the wells that started producing at Friday, all of them started with an initial flow greater than 5,000 barrels a day. I'm not saying that this specific well will begin with 5,000 barrels a day. But what I'm saying is that in this region, in this reservoir, with the opportunities that were drilled before, all wells started with more than 5,000 barrels a day. So this would be the producing well. The other two wells are injection wells. They don't lead to a spontaneous production increase, but they do is reduce the decline rate of the field. So that's why we would inject water. We would not see an increase to production exactly when we start injecting water. The result of that will be seen over time. Over months, we would start seeing a reduction in the natural decline of the field. But at the right time, when we have the whole campaign designed and ready, then we will come back to that and talk about initial production and talk about flow. But I'd to remind you that the company traditionally does not give a precise guidance regarding initial production of wells. Last year, we didn't give you a guidance either because there are many uncertainties in this business and in this kind of project. Next question also from the webcast from Edwadovichenk. We have a record EBITDA at the company, but as mentioned, we have not incorporated all of the Porvoo Frade synergies. How relevant can this be for the EBITDA per barrel in the next quarter? Afternoon, Eduardo. Well, I look at this in the reverse way. I see this related to the lifting cost, but the analysis is basically the same. We just it's a matter of looking at the glass half full or half empty. Regarding the lifting cost in this quarter, we had a lifting cost of $24 a barrel. This lifting cost includes total transition costs, And it also includes some costs of things that were operating in the property. It sounds too much, but when you acquire a new when you acquire an oil field, you have the well, vessels, the wells, so you to start organizing everything. So what we still have to solve, and it's not to solve because it's solved. But what was not included in this quarter was the whole land logistics piece and the sea logistics piece. And it's two things. Sea logistics includes support vessels To move the support vessels around, you need to have them authorized by Obama according to an emergency plan. You have to submit this emergency plan to Obama, and we and this was approved. So we were from seven to three vessels. This is in October last Friday. Regarding Land Logistics, we started the operation with one logistics base here in Mitteroy and another one in Lazur, But we consolidated the whole of the Mitteroy operation. Francois Ma corrected me. We consolidated our operation in Acu and returned the Nicaroy bases on the Nicaroy base. This can happen around the quarter. In other words, some transition expenses. We had a program with Chevron. We operated the FPSO with Chevron people on board to ensure safety, efficiency, so on and so forth. But now all of this is over in the long third quarter. In the next third quarter, we will not have these costs. So our estimate is to get to $20 victim cost in a consolidated fashion. Next question also from the webcast coming from Hodulco Siquera. Regarding the bond issuance process, what is the status of this operation? Two, what are you going to use these resources for? Thank you, Jotuncu, for the question. Well, we have been saying that we are considering some funding options for the company. As mentioned by Nelson, the bond is an interesting alternative for us. And I would say that one of the main uses of the proceeds would be to enable a drilling campaign at Friday as explained by Roberto. And in terms of status, documentation is progressing. It's well advanced. This is a summer break period in Europe and The United States. So we are waiting for them to get back to us and we are waiting for attractive market conditions. This includes the Brent oil price. Brent price should recover. But the good thing is that we are ready. In addition, we have a comfortable cash position. So we're in a comfortable position to choose the right market moment. But the company is ready. So I can tell you the process is way advanced. Next question from webcast, Jovan Hickey. What is the profile of the assets that you are considering? Smaller fields, high producing fields? Hello, Diego. Regarding the fields that we are considering, well, we tend to look at fields. They would offer synergies to what we are having today, Friday and Volvo. Ideally, we would consider close by fields, fields where we can derive synergies from in terms of logistics, personnel, and so on and so forth. Some fields that would offer an upside in terms of revitalization. So it's not a matter of being a small field or a big field. What really matters is if it's a mature field, it's normally a field that was forgotten, not in the radar of large companies. So it feels better that large companies do not pay attention to. And with that, this kind of field becomes an opportunity for revitalization. You can see dynamic and very simple. Large companies, they have a large balance sheet, a large structure, so they tend to focus on development, large projects like the pre salt. And because they want to optimize their own resources, they kind of leave smaller fields aside. And that's when we have a great possibility of adding value. So this is our quest, and it is this kind of field that would be in our pipeline. Thank you. This concludes today's question and answer session. I would like to invite Mr. Roberto for his closing remarks. Well, again, I would like to thank all of you for joining PetroRio's earnings conference call. This quarter was a very strong one, a very interesting one. Once again, it shows the company's ability to create value with our strategy of acquiring mature fields, revitalizing mature fields, optimizing costs. I would also like to thank all of you who supported me during my time at PetroHero, and I'd like to wish Francois more good luck as of now. Actually, not as of now. Since last week, he became the COO, and he will handle the operational highlights in the coming quarters. Thank you very much, and have a good day. That concludes Petra Hill's conference call for today. Thank you very much for your participation, and have a good day.