Petro Rio SA

BOVESPA:PRIO3

Earnings Call Transcript 2018-Q1

[Operator]

Good afternoon, ladies and gentlemen. Welcome to PetroRio's conference call to discuss first quarter 2018 results. Thank you for standing by. [Operator Instructions]

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 and clicking on the banner 1Q '18.

As a reminder, this conference is being recorded. The presentation will be available.

Before proceeding, let me mention that forward-looking statements that might be made during this conference call 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 or performance. They involve risks, uncertainties and assumptions as they are related to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry 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 Tanure, CEO of the company; and then to Mr. Blener Mayhew, CFO, New Business and Investor Relations Officer. You may proceed.

[Nelson Tanure, executive]

Good afternoon, everyone. This is Nelson Tanure, CEO of the company. I would like to thank all of you for your interest in getting to know more about PetroRio and for joining us to discuss first quarter '18 earnings.

Before speaking about the first quarter of the year, I think it's worthwhile quickly looking at the history of PetroRio, which essentially was born in the beginning of 2015; and since then, the company has had a very positive track record. In 2015, we had only one asset, Polvo Field. And since then, we've added another 3 assets to our portfolio. We currently produce oil at Polvo; we produce gas at Manati, where Petrobras is the operator; and have another 2 fields being developed in [indiscernible] Basin. In this period, we were also able to significantly improve our cash position and to preserve the balance sheet of the company.

So looking back at the last 3 years, we believe this was a very positive period.

In always thinking about the long-term and creating value to the company and consequently to our shareholders, we believe that we have good years ahead of us. There are some highlights for our company that I believe is worthwhile sharing with all of our shareholders.

Recently, we were included among the best companies to work for in Brazil and in the state of Rio de Janeiro. That made us very proud. Another very relevant point is the complete alignment between the vision of the company to create value, and this alignment involves all PetroRio employees, the vision of the company itself and its investors.

A tangible example to mention is that approximately 70% of all PetroRio employees are shareholders. Just like you who are participating in this call, please note that we are also investing in the company, and we believe in the outlook for the company in the long term.

Some other important points and already talking about the first quarter of '18. We have a very successful track record in terms of our operations and health, safety in the environment. These have remained at very high levels. Recently, we completed almost 6 years with no accidents leading to stoppages at Polvo Field, a landmark that makes us very proud.

But now speaking more specifically about the first quarter '18 and just mention the highlights for the period before I turn the floor to our CFO, Blener, that will give you more details on our sectors and performance.

So starting with Polvo Field. Polvo had a very good performance. The results were good enough to give us confidence to now drill a producing well at Polvo. As soon as the company has tangible results about the performance of the first well, we will inform the market immediately.

The second big point about our field is that, unlike 2017 when we were able to negotiate with BW, the FPSO operator, not to have any scheduled downtime for equipment maintenance of the FPSO, this year it was necessary to do maintenance. Therefore, for 6 days in the first quarter, the field stopped for maintenance of the FPSO and that explains a little our production that was slightly lower than last year. However, due to the increasing Brent oil price and the good commercialization of our oil, we were able to generate results that were good enough and that practically offset the loss that we had during these 6 days of scheduled shutdown.

Moving to our second asset, Manati. The field performed very well. Petrobras has shown to be an excellent partner in this asset, so no novelties there.

And finally and going beyond the financial results that will be explained momentarily, it is worth saying that, as always, PetroRio is dedicated to prospecting new businesses, both in Brazil and abroad. And currently, the company is negotiating the acquisition of many different assets. These negotiations are -- have different status of progress. As soon as we have any concrete facts to inform our shareholders, we will do so.

But the take-home message is that all of our investors can be sure that the company is looking for new investments for intelligent acquisitions just like Polvo has proven to be. Hopefully, the wells that we are drilling at Polvo will also be successful as was the acquisition of Manati.

Well, ladies and gentlemen, in terms of the highlights to introduce our first quarter '18, this is it. I now turn the floor to Blener. Thank you very much.

[Blener Mayhew, executive]

Thank you, Nelson. Good afternoon to all. Again, I would like to thank you for your interest in PetroRio.

Let us go to the first slide, please. Here are the highlights for the first quarter of 2018. In the first quarter of this year, net revenue was BRL 117 million, up 56% from first quarter '17. Gross selling price was $64.70 compared to $52.50 in the first Q '17, EBITDA of BRL 14.8 million and operating efficiency of 84.8%. It is important to underscore that this operating efficiency includes a scheduled shutdown for maintenance that we do once a year. We were able not to do the scheduled maintenance stoppage last year, so we joined last year's and this year's scheduled shutdown. So we have this discounted phase when the operation stopped. However, if we were to exclude this event, our operating efficiency would be 94.6%.

But the scheduled shutdown is behind us now. So our operating efficiency should go back to about 94%, 95% or even higher for the remaining of the year.

Now let us go to Slide 2. Here, we speak a little about the macroeconomic outlook for the Brent oil price. The quarter was marked by a strong appreciation of Brent prices, reaching the highest level since 2014. Average Brent price in the first Q increased 23% compared to the average price of the first Q '17. Brent price appreciation is explained by good fundamentals, both in terms of demand and supply as well as by geopolitical factors consistently balancing the market. On the supply side, OPEC has maintained the expected production cuts, primarily due to Saudi Arabia's commitment to the agreement and production from Venezuela. The demand for oil also shows resilience, estimating a growth of 1.5 million barrels per day.

Going to Slide 3. We had one offtake of 463,000 barrels. The gross value of this offtake was $64.71. And even having a lower-volume offtake compared to last year's first quarter, our revenue was 57% higher. This is explained by the increasing Brent oil price. I would like to remind you that we sold at $64, and today, looking at the screen in front of me, Brent price is at $75, $76 per barrel. So we expect that in 2018, in the second quarter, our results will be even better.

Please go to Slide 4. Let us speak a little about our production. We had a scheduled downtime, like I said in my initial remarks, that led to a reduced operating efficiency. However, as I said, this maintenance stoppage was expected and planned. We produced on average 6,100 barrels per day, and our operating efficiency was 84.8%. This downtime is now in the past, and we shouldn't see any reduction in operating efficiency for the remaining of the year.

Going to Slide 5, please. The [ rent ] operating costs for Polvo Field were very much in line with what was expected. We had $23 million in 2016, $22 million in 2017, $24 million for 2018, and considering that there are some temporary and exchange rate fluctuations, we believe that these costs are in keeping with what was expected. But since production was reduced due to the scheduled maintenance, when we calculate the cost per barrel, the cost per barrel was $44. However, this is temporary and temporal and we believe that these costs will go back to normal levels in the coming quarters.

There is still a possibility that these costs will be even lower than before, historically the lowest for the field depending on the results of the drilling campaign.

On Slide 6, we speak a little about Manati Field. It is clockwork, as you know, always producing gas and producing according to the demand. Petrobras is both the buyer and the operator of the field. According to the demand for gas, they produce more [ OS ] gas at Manati.

Also regardless of this -- regardless of the demand, we have an offtake contract that protects us against negative fluctuations. So Petrobras always sells gas to itself at least at the level of take-or-pay.

Please turn to Slide 7 for the company's income statement. Here, we can see it's clear that there was an 8% reduction in the offtake. So we had a revenue increase of 57%, so we have BRL 117 million of revenue in the quarter; direct cost of the field of BRL 66 million; royalties, BRL 10 million. That gives us an operational result of BRL 39 million, 108% higher than last year.

G&A and G&G expenses were BRL 28 million; other revenues, BRL 3 million; and an EBITDA of BRL 14 million. Here we have depreciation, financial results reaching a net income of BRL 2.6 million.

Here on this slide, it is important to highlight the EBITDA, which is a cash-generation metric. It is worth emphasizing that the company generated BRL 14 million even in a period when the offtake did not correspond to our whole production in the period. We still have a balance of oil in our inventory. We also have accounts receivable related to gas sales to Petrobras. And we have the scheduled maintenance that reduced the production of the field. When we factor all of these into the equation, still we had a significant cash generation that, once again, shows that the company is able to generate cash from its operations. So we expect this year, we will have a progressive EBITDA. Quarter-after-quarter, we believe we will deliver higher and higher EBITDA, not only due to the increase of Brent price that we have seen, but also with the expectation to have increased production vis-a-vis the 3 wells that we are drilling. So I hope that every quarter of the year, we will have a higher and more robust EBITDA.

Moving to Slide 8. Here, we are talking about general and administrative expenses, BRL 29 million compared to BRL 18 million last year. Here, there are some onetime-off issues and some expenses that were to be recorded in the fourth quarter and ended up being posted now. There were some expenses that we expected to happen along 2018 that ended up happening before we expected. We had some labor terminations and also the payment of bonuses to the company. So a number of factors explain this higher G&A expense. We also have a temporary team that is helping us with the drilling campaign of the wells.

However, we don't believe that this is a true G&A expense increase. We expect the G&A expenses will be at a much lower level by year-end. But of course, since the company is growing and expanding, we are budgeting G&A expenses perhaps 15% to 20% higher than in 2017, but not 54%. G&A expenses should be around 15% to 20% higher.

Now moving to Slide 9, please. We started the quarter with BRL 622 million. We had BRL 130 million of revenue from sales of gas and oil; operating costs, G&G and G&A expenses of BRL 141 million; royalties, BRL 13 million; financial result and funding, BRL 23 million; and M&A and CapEx, BRL 12 million. That results in a final balance of BRL 562 million. But when we add our oil inventory and our accounts receivable from gas sales to Petrobras, that gives us BRL 640 million. This is the result of our cash flow in the quarter. And we believe, like I said, that considering the whole context when we sold a volume of oil that was not too significant, only one offtake in the quarter, with that production stoppage and some higher costs, all together, we think that this is a phenomenal result for the company.

Now on Slide 10, we have our outlook for 2018. We are very excited with the recent oil price increase. A little while ago, the price was at $50 or $55 of the most. When it hit $58, we were very happy. And now, oil prices are increasing to $60, $65, $68, $70, $72, now reaching $77, $78. This is, indeed, a good recovery moment for the industry. Our costs are fixed, so every dollar increase in the Brent price is one more dollar in the company's EBITDA. It is the contribution margin that increases for the company. So we are very excited about 2018.

We also have the beginning of the drilling campaign, like we said, in the beginning of March, 3 wells. And despite geological risks, the company is very optimistic about the results. We think that this can be transformational for the company, and I hope to be able to inform you about the results of the first wells still in May.

We have also advanced in negotiations of M&A processes that we are participating in and acquisition of assets. Many of these negotiations started in 2017. These are seeds that we planted. But these are long and complex negotiations, so they naturally take a lot of time to come to fruition.

They are very time-consuming, but we believe that we are advancing well, and hopefully, in the coming months, we will be informing the market about the acquisition of some fields. We are at advanced stages of negotiations in more than 1 process and there are negotiations happening in parallel.

Finally, and this comes as a surprise, we have seen increased interests by investors and shareholders in our stock. Our shareholders base is more and more diversified with more professional investors. We have seen hedge funds from Europe and the United States buying our shares. We have seen pension funds -- foreign pension funds. So more and more investors who are far away investors from different geographies are hearing about PetroRio, have looked at our numbers, have studied our success story and are buying shares of the company, sometimes with significant positions. And they are betting on the future of the company. We are very pleased with that.

Well, I would like to thank all of you for your attention for joining us today. I will close now and open the floor to questions. Thank you very much.

[Operator]

[Operator Instructions] Our first question was asked via the web by [ Marcello ] [indiscernible], a shareholder. "I would like to know what is the current perspective regarding additional drilling at Polvo. What is your expectation?"

[Unknown Executive]

Marcello, thank you for your question. Well, we can't give you any tangible perspective. But when we have production flow into the platform, that's when we are going to have some tangible visibility. But what we believe, according to our estimates, is if you look part of the certificate of reserves, we have 1P, 2P, 3P reserves. We think that we can add reserves that are at 2P and 3P and they can be added to 1P reserves, reaching perhaps 24 million barrels of reserves, transforming 2P into 1P. Polvo is at around 10 million, 12 million. Perhaps we can double the size of Polvo reserves that potentially can extend the lifespan of the field until 2026, '27. I'd like to remind you that our concession for Polvo stretches until 2032. We are drilling 3 wells. We're in the -- drilling the first one and we believe that we will be able to inform you very soon about our results, hopefully in May. Thank you.

[Operator]

[Operator Instructions] Our next question is by Raul Grego, Eleven Financial.

[Raul Grego Lemos, analyst]

My question has to do with investments. The company has a lot of cash, and for a while, you've been talking about new acquisitions. Could you give us a timeframe so that we can -- so that you can help us with our modeling? When can we expect an acquisition? And are the negotiations at an advanced stage?

[Unknown Executive]

Raul, well, unfortunately, it's part of our business to maintain these negotiations confidential, not only for regulatory reasons, but also because of the confidentiality and strategy of the company. We want to avoid competition. And we want to make sure that we will win the projects that we are interested in and that we will make things happen, so sometimes confidentiality is fundamental. What I can tell you, though, just to illustrate, I can speak a little about the Brasoil. Brasoil, we started talking with Brasoil board in January of 2016 and we only signed the contract with Brasoil in November of 2016, so 11 months of conversations until we executed the contract. We were able to complete the acquisition, buy the stake of other shareholders, have get approval from CADE by March of 2017. So until we have the figures in the balance sheet of the company, 15 to 16 months, and this was in a project that was reasonably simple. We acquired a company. And so the whole ANP approval process, things related to abandonment, et cetera, were a lot simpler. And we also bought the stake of a nonoperator asset. We do take on some responsibilities regarding the operation, and in this case, this process has become a lot more complex. Oftentimes, they involve Petrobras, that is a state-owned company. It is regulated by a number of bodies, the Federal Court of Accounts, IBAMA and others. And sometimes we negotiate with international companies and we negotiate with the Brazilian counterpart, but decisions are made abroad. So these processes tend to drag. So we ask you to please be patient. We know we've been talking about this for a while. We say that we are at advanced stages of negotiation. Our cash position is ready for acquisition. But we are very optimistic that we will be delivering good news very soon. Thank you.

[Operator]

Our next question was asked via the web from Edward [indiscernible]. "Do you have a fair price target for your share?"

[Unknown Executive]

Well, this is a question that varies from investor to investor. I cannot give you a price. I don't think that we should point to a target price. But I think that an interesting way of looking at this is thinking about the company's buyback plan. If the company, with our Treasury, opted to buy back shares in the market, it is because we think that the current price is attractive and that it has the potential to appreciate. This is kind of the metric that I would ask the market to look at.

[Operator]

[Operator Instructions] Our next question is from Raphael Figueredo, Eleven Financial.

[Raphael Figueredo, analyst]

I have actually 2 questions. The first is more of a broad view. What is your broad view about oil -- barrels of oil for this period that we are living now -- not only now, but looking more to the mid- to long term? The reason I ask is that I have a concern if there's any international movement that will drive down the price of oil. If that happens, what measures can be taken internally so that this will not hurt the company? My second question has to do with the FPSO stoppages. How do you do maintenance to avoid failure in the future and so that unscheduled maintenance will not come?

[Unknown Executive]

Raphael, thank you for your questions. Well, this is not a one million dollar question, it's more like a one billion dollar question. I think no one in the oil market can predict the price of oil. I mean, this depends on [ microeconomic factors, ] supply and demand and also geopolitical factors. We see threats of war with Trump and all, Korea, North Korea. That drove up the price of oil. It's kind of hard to do some guesswork here. What we do is prepare ourselves to have operating efficiency, reduce costs, listing costs and extract as much oil as possible and trying to sell our oil for the best price possible. We've been trying to do this for the last 3 years. We've had periods of oil costing $27, $35, $40 and we survived. We weathered the storm. Now we are in a period of a little more comfort. But undoubtedly, the company is always studying the market. We look at our hedge options. And we try to take advantage when we have an upswing in the market. We are studying possible ways of enjoying the current prices and to hedge the price for some months. But this is still being studied. As for your second question, well, there was no shutdown at the field, okay? It is natural to have some downtime in the field, but it wasn't an emergency. It wasn't something bad. It was regular operation. If you look at any oil field, if they are under 100%, we are at 95% efficiency. This 5% between 95% and 100% is the natural operation. Sometimes you have a change of shift, you have a machine failing, something that happens here and there, but nothing out of the ordinary. It's business as usual. There was no failures, different failures, in the first quarter.

[Operator]

[Operator Instructions] The next question was asked via the Internet by [ Rodrigo ], investor. "Regarding new investments. In the last meeting, you said that $1 billion would be available for acquisitions based on cash plus borrowings. Is this still the number? Or is it possible to increase it?"

[Unknown Executive]

Thank you, [ Rodrigo ], for your question. Yes, this amount is still in the horizon. This is the combination of company's cash and leverage because when we buy producing assets, we can use our cash flow and the target asset to help pay for part of the debt. So this is still in the horizon. However, this is a theoretical account. We look at the leverage of 5x. In other words, with $200 million, I can leverage 5x and I can buy an asset of up to $1 billion. But the company has G&A, working capital, Manati, Polvo, so we don't want to 0 our cash for an acquisition. That would not be responsible on our part. That is a theoretical account. The value should actually be a little under that. We need to keep a cash balance at the company to keep the company working.

[Operator]

[Operator Instructions] This concludes today's question-and-answer session. I would like to invite Mr. Blener Mayhew to proceed with the closing remarks. Please go ahead, sir.

[Blener Mayhew, executive]

Well, everyone, I would like to thank all of you for your ongoing interest in our company, for joining us until the very end of the call. This was the first quarter '18. PetroRio today is a profitable company that generates cash from our operations. We have 2 purchasing assets, one being developed and one in exploration. And we are trying to grow organically with more drilling at Polvo. And we are trying to grow via acquisition, buying assets that are in Brazil and abroad. We are very excited. I think 2018 will be a transformational year for the company, and hopefully it will be a transformational year for the shares of the company and for our investors. Thank you very much. Have a good weekend.

[Operator]

That does conclude PetroRio's conference call for today. Thank you very much for your participation, and have a good day.