Petro Rio SA

BOVESPA:PRIO3

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon, ladies and gentlemen. Welcome to PetroRio's conference call to discuss first quarter 2020. Thank you for standing by. [Operator Instructions] This event is also being broadcast simultaneously over the Internet via webcast. It maybe access through PetroRio's Investor Relations website at www.ri.petrorio.com.br (sic) [ www.ir.petroriosa.com.br ] and clicking on the banner Q1 '20 earnings release.

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. 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.

And I would like to turn the conference over to Mr. Nelson Tanure, Chairman of the Board; Mr. Roberto Monteiro, CEO, CFO and New Businesses; Mr. Francilmar Fernandes, COO; and Mr. Emiliano Fernandes, Head of Legal, Regulatory and Management. Mr. Tanure. Please go ahead.

[Nelson Tanure, executive]

Hello, everyone. Welcome to our first quarter 2020 earnings conference call. I'd like to send special greetings to all PetroRio employees, those who work at the office and aboard our vessels. It's been a while since we've been together face-to-face. We only meet using Zoom. So I hope you're all well and healthy and respecting the recommendations of the authorities regarding social distancing and adopting responsible behaviors to care for yourselves and your families. I hope to be able to see you soon.

Here at the company, we adopted a number of measures to ensure the continuity of our excellence in operating safety. Among them, we reduced a number of employees at all the fields operated by PetroRio and all of our office personnel is now working from home. We adopted a number of measures to help us weather this difficult coronavirus outbreak and lower oil prices among them, reduced POB, People on Board, and the extension of onboard periods at our fields. We also adopted several preboarding monitoring procedures and protocols as well as rapid tests to ensure the safety of all personnel boarding our platforms.

Among other measures, we also reduced the salaries of all onshore employees by 25% and reduced the salaries of the management by 50%. We also postponed all CapEx, which is not exclusively linked to maintenance. In other words, drilling new wells, both at Polvo and Frade is postponed until further notice. Our goal is to resume these plans as soon as possible. But for now, they are on hold. And lastly, but also relevant, we worked hard to roll over the company's debt so that all debt will have a long-term maturity. We believe that we will be successful in all of these efforts. They have been progressing. Some are complete, others are underway and close to completion, and we hope to weather the storm well.

So to speak about our first quarter, the period was essentially very good. Despite a Brent price decline, which started in March of this year, the company had hedging arrangements. In the first 2 months of the year, we're positive. The first 2 months of the quarter were positive. So the impact of all this crises, coronavirus and OPEC, Russia and Saudi Arabia having trouble coming to an agreement, that did not impact the company. Our oil was hedged, so the offtakes in Q1 were at $65 per barrel.

In addition, the fields operated with high operating safety, both Polvo and Tubarão Martelo, TBMT. And also to stress the results of the first quarter that were positive, we drilled a new well at Polvo Field, which proved to be very successful. This is a well in our reservoir which was not producing until then in the Eocene region. This reservoir is posting a very high productivity at the higher end of our expectations. So this is very encouraging for us, both due to the result itself and to what it can represent for new drilling campaigns by PetroRio.

And worth of note, still in Q1, we embraced a very important acquisition which will bring better and better results for the company in terms of optimizing costs and increasing production, which was the acquisition of TBMT Field, Tubarão Martelo. This will be reflected in our figures with a production that will reach and ideally will go way beyond 40,000 barrels. For now, we are recognizing in our income statement and balance sheet only the debt related to this acquisition. But it is important to keep in mind the counterpart, i.e., a very relevant incremental production of this asset. So overall, results were very positive for the reasons that I mentioned.

And before I end my part, I just have a couple of more comments to make. The first, I would like to thank PetroRio's Board of Directors that guided the company for almost 5 years. The Board was renewed recently. That was a significant renewal and some Board members who had been with us for a long time left. So I would like to thank each and every one of you for your contribution, your vision and the ease with which you have always supported PetroRio's growth, and I would like to welcome the new Board members who have a very positive individual experience, all of them. And I am sure they will have a lot to add to the company in this space of turbulence that we are facing now due to COVID-19 and low oil prices, and when this is behind us, when we resume the growth that we were having. So welcome aboard, and I am very happy.

And then just 2 more comments. The first is that the first quarter of 2020 was actually my last as PetroRio's CEO. And to me, it was always a matter of a lot of pride even before I took over as CEO of PetroRio along the last 5, almost 6 years that I have been working with PetroRio to [ meet ]. It makes me proud to come to work every day with very competent and dedicated people and whose dreams are part of PetroRio to a great extent and who have contributed so much to the growth we have experienced over this time.

And I want to congratulate Roberto Monteiro, who's taking over as CEO. In a company where we have so many leaders, strong and very skilled leaders, Roberto definitely stands out. He has been a great leader of very positive influence at the company throughout this period, and he has been with the company almost as long as myself. And I am sure that he is the right choice. He'll be a great leader. And he has been actually a great leader at the company, a person people admire, that I myself admire. So Roberto, congratulations. I'm sure that you're more than ready. You've been preparing for this a long time. All of us have high expectations, and I know that you also have very high expectations regarding what you will deliver. Call on me for support and on all the company's staff. We've always worked as a team and we'll continue to do so to support you. Congratulations. You do deserve this position.

I now turn the floor to Francilmar.

[Francilmar Fernandes, executive]

Thank you, Nelson. Good afternoon, everyone. I hope you're well and healthy. Let us begin with the operational highlights on Slide 5. This first quarter was another exceptional quarter for the company. We increased the production by 102%. We doubled production in the yearly comparison, while we cut lifting costs by almost half, reaching $17.3 per barrel, an all-time low lifting cost. This results from the ongoing work to optimize resources, increase the production at Polvo Field and maintenance of Frade's production. Lastly, we were able to complete the company's reserve certification report, increasing 1P reserves by almost 7x and 2P reserves by practically 8x.

On the next slide, Slide 6, let us focus on production. Frade Field performed practically stable quarter-on-quarter, reflecting production stability at the field. Polvo Field had a slight production increase, which does not totally reflect the contribution of the new wells, given that the last well flowed first oil in the end of March. Manati Field had a shutdown due to the client's lack of demand for gas, and we're waiting for new developments to resume production at the field.

Moving to Slide 7, please. It is important to observe the graph with the historic evolution of the lifting cost per barrel, which is a historic low for the company. This stems primarily from all of the actions to optimize our assets, i.e., cost reductions, personnel optimization as well as it also reflects increased production at Polvo and maintenance of production at Frade Field. This does not yet consider the 30% working interest of Frade acquired from Petrobras that is waiting for ANP's approval, nor all of the actions for Tubarão Martelo Field. We believe that as soon as we put all of this into action, several initiatives are being implemented, particularly related to TBMT Field, which will contribute to reduce lifting costs even further. We are working to reduce the lifting cost to $15 per barrel or a little less.

On Slide 8, focusing on operating performance, we see that Frade continues to perform very well, above 99%. The operating unit is performing really smoothly, no problems there. Production is responding really well to all initiatives that we have implemented so far, which are short-term actions. Mid-term actions, which were planned, namely in the certification program, chemical injection to reduce BS&W, are at a final stage of planning and have been put on hold given the current situation that prevents any action at this point. Long-term actions mainly linked to drilling campaigns, what can be done and has, has been done. All the part related to project designs, studies, et cetera, all of that continues and is quite advanced. The final part related to commissioning, et cetera, will be postponed until we have more visibility on what's to come. It is quite interesting to observe that after a year of production, the company kept output at practically the same level as when we took over, 18% higher than what we ourselves had estimated at the beginning. We are very happy and proud to have operated the field for 1 year, showing that both the strategy and its execution are unfolding really well.

For Polvo Field on Slide 9, we see a considerable improvement in operating efficiency of the field as a result of resumed production of the wells. I'd like to remind you that in the previous quarter, we had several wells that failed exactly when we were drilling other wells. And due to wells competing for drilling rig time, we were not able to use the rig immediately, and it ended up impacting the field's operating efficiency. And another important point to remember is that Q1 '20 does not include production from these new wells, given that the last well drilled only started production in the end of March.

On Slide 10, we have more detail on the drilling campaign carried out at Polvo Field. The final result of the campaign was exceptional because in addition to being on budget, we were able to expand the scope of the project a little. We had originally planned to drill 2 wells with only 1 being a producing well. In the end, we were able to put 2 wells into production. And mainly because, well, POL-L, you can see POL-L in green, on the schematic. Well, POL-L is a reservoir of excellent quality. Although the oil is a bit more viscous, it has proven to be of good productivity.

We've been producing for practically 2 months with very stable pressure, showing that the reservoir has indeed a considerable volume, even greater than we expected. And this has been confirmed day by day. We can see in the drawing that the reservoir is quite large, one of the largest of Polvo Field. And this gives us a lot of confidence and a lot of data obtained during the whole drilling campaign to dive into the study of this reservoir. And it is likely that we will have infill drilling in the same reservoir to be able to flow all the oil. This will definitely beat the target, the goal of the new wells since this is gaining more relevance in the company's portfolio. It is very important to stress that the campaign, in addition to the good economic result, had no accidents or incidents of any sort. That reaffirms the company's focus on safety that we are able to enforce in all of our operations.

Finally, I'd like to address the fight against the coronavirus outbreak. It is fundamental for the company to ensure safety and health of all personnel working aboard our platforms, both our own and third-party partners. With that, in addition to many actions already mentioned by Nelson, several other initiatives were implemented to: first, prevent anyone who has the virus from boarding our facilities; and second, if someone does go aboard and we were not able to identify that they have the virus, to prevent them from contaminating their peers. So several other measures have been taken on the platforms and vessels to improve the level of hygiene and to keep the necessary distance. So far, the result has been good. We have had no positive cases in our facilities, and very few cases of people who are off duty. So that allows us to maintain normal production with no downtime, and this is our goal. We want to keep it that way.

With that, I turn the floor to my friend, Emiliano.

[Emiliano Lourenço Gomes, executive]

Thank you, Francilmar. For starters, I believe everyone is curious about the process of transfer of rights of Frade and TBMT, either because of their importance to PetroRio or because of the pandemic and the possible impact that this may have on these processes. Well, I'd like to let everyone know straightaway that these processes are unfolding well normally. ANP has not been very much impacted, mainly due to the commitment of its directors and civil servants who continue to work normally. So the processes are unfolding as expected so far, so that we do not envision any problems related to these processes because of COVID-19 pandemic on the part of ANP. We also believe that because the acquisition of Frade and TBMT involve a deep discussion of the guarantee for abandonment, we should expect approval by the end of the second half of the year, with TBMT approval perhaps happening in the third quarter, which is good. We also remind you that unlike Frade, where we are the operator of the asset, the acquisition of TBMT will bring synergies with the joint operation of both assets as well as will allow us to place claims that will be essential for a unified production system of Polvo and TBMT.

Another important piece of news in the regulatory arena is related to royalty reduction on incremental production of Polvo that I think you all followed. This results from ANP's Resolution 749/2018, and it was approved in February of this year. I guess you'll remember that PetroRio was the first oil company to have a royalty reduction period based on this new resolution and was ANP's leading case in the enforcement of this royalty percentage reduction as an incentive to production at mature fields, which was the case of Polvo.

On Slide 11, I draw your attention to a graph where the gray band represents the base curve of the field before investments made and the green band represents new production. All production represented in green and all incremental production resulting from additional investments that we have been making at Polvo Field will be subject to 5% royalties, which is very good news and the result of this new public policy implemented by ANP. That will entail a very good results in mature fields, as is the case of Polvo. There is no doubt that this royalty reduction makes investing more attractive and has a direct impact on the lifespan of Polvo and on the life span of other assets that might come to enjoy the same benefits.

I believe these are the main updates, and I turn the floor to our CEO, Roberto Monteiro. Thank you very much.

[Roberto Monteiro, executive]

Thank you, Emiliano. Well, I will be starting on Slide 12, please. We'll start focusing on some financial highlights, and then we'll move to our earnings leverage and reserves.

Well, the first thing I would like to highlight is that in Q1 we had an EBITDA, and here, I am adjusting EBITDA by our hedging result of BRL 239 million, 7.2x higher than Q1 2019. So I guess this is an important indicator which shows quite well everything that the company has done. Obviously, the current scenario is challenging, globally speaking, which I believe that this number represents well everything we have achieved.

As regards hedging contracts in the first quarter, we posted BRL 206 million in realized hedge income. This is hedging that has been settled. We make money with it. This is money that flowed into our cash, BRL 206 million. For Q2 hedging, this income has not been realized yet, but we already recorded mark-to-market income of more than BRL 130 million. Another highlight was the strong negative impact of foreign exchange variation, more than BRL 417 million (sic) [ BRL 427 million ]. It is worth noting that we are a dollarized company. Our revenue is 100% in dollars. We're almost 100% in dollars. So our liabilities have to be in dollars as well, in order not to have a currency problem in a steep foreign exchange variation up or down, which is what happened. Here in our earnings, we correct all our liabilities, adjusting to the new exchange rate, but the past result is not adjusted. It is the historic result. So with that, we always have these sharp effects. But there are noncash effects at the end of the day, and these are not worrying effects because our EBITDA is essentially in dollars.

And lastly, I would like to highlight our strong cash position. We ended April with $158 million in cash. The accounting number for the quarter is slightly lower than this, the quarter ending in March, because of accounts receivable and hedging contracts to be settled, which were all posted as receivables in March. In April, that's when it actually turned into cash, and we reached this $158 million in cash.

Moving to the next slide, Slide 13. We will speak a little about the company's financial performance in the quarter, more specifically our numbers. And here, I should make a general comment. We always report ex-IFRS 16, so we'll be focusing on this column here related to Q1 2020 ex-IFRS. I guess there are some points here to be highlighted. Of course, our income of BRL 128 million. This income was very much negatively impacted by foreign exchange variation. FX and variation is included in this line item of other financial income expenses. That is posted at BRL 317 million, but FX variation was much greater than this. And some positive points that we have such as hedge contracts exercised of BRL 206 million. This hedge has already been turned into cash. Those $158 million already include these hedging operations. This BRL 206 million are already included in that number. And the mark-to-market hedging, that will be an effect to be recognized next quarter, in Q2. We are now the second quarter, which on March 30, amounted to BRL 134 million.

And finally, one last point to mention here. In that line item of other operating income expenses amounted to positive BRL 164 million. Here we had a small amount, which reflected an increase of the discount rate of our provision for abandonment, mainly. And in the case of IFRS, of IFRS leases. This was determined by the new auditors, Ernst & Young, that started working with us in this quarter. This quarter was already audited by EY, so they asked us to make this adjustment. When you increase the discount rate of items in your liabilities, the liabilities end up being reduced at present value, thus we had a gain related to this discount rate change, which is nothing really -- it's merely an accounting effect, but there you have it. It is what it is.

So these are the points to be highlighted regarding income. But like I said on the previous slide, the number that best summarizes the quarter is adjusted EBITDA of BRL 238 million, BRL 239 million, 7x higher year-on-year. And I think this number is what best reflects the work that we did in the past few months related to M&A, redevelopment of Polvo Field, acquisition of Frade and Tubarão Martelo, and strong work to cut costs done by the company.

Moving to the next slide, #14. I will speak a little about our leverage. Looking at the chart on the left with no adjustments of any sort, our net-debt-over-EBITDA ratio is 2.3x. Even with this number being totally under control in our point of view, it is important to underscore some factors, which are included in this number and that, if excluded, this ratio would be a lot lower. Firstly, the BRL 528 million of loan from Prisma, $100 million. Well, it was recognized in Q1 balance sheet without any corresponding counterpart in the EBITDA, which is normal when you resort to debt for an M&A deal, which was the case here. We acquired the FPSO in head of farm-in, for $140 million and borrowed $100 million. So when we do that, 100% of the debt is posted to our balance sheet without the corresponding EBITDA or revenue resulting from the deal. So this alone accounts for BRL 528 million.

Another point is accounts receivable of BRL 213 million. What we did here was our offtakes were concentrated in the month of March, both related to Polvo and Frade. So although these sales happened in March at a low price, hedging helped keep the price at $65 per barrel. So no problem there. But you sell and post the offtakes as accounts receivable at the turn of the quarter, which is exactly what happened. We had accounts receivable amounting to BRL 213 million, and this was not included when we closed the quarter. This had not been turned into cash as this was still a receivable.

Another thing that happens, which I also alluded to in the previous slide, is the foreign exchange variation restates the company's liabilities, its debt as well as its cash. And when you're in a position of more net debt, the whole position is adjusted according to the exchange rate at the moment of quarter closing. But EBITDA, EBITDA for the last 12 months is obviously not restated according to the foreign exchange rate. So that leads to some imbalance in moments of dramatic currency fluctuations. Finally, the hedging contracts that we exercised in Q1 2020 had a gain of BRL 206 million, but it was settled in April. Cash was accounted for in the first days of April. So this was not accounted for in the EBITDA of the first quarter either, nor in the company's cash position.

Now if we were to adjust for all of these factors, our net debt-over-EBITDA ratio would have been approximately 0.8, less than 1x. So we believe that this number, in absolute terms, is a number that is under control and reflects a number of things that in moments of high FX volatility do distort the number a little.

Moving to Slide 15. The next slide, still on funding and leverage. We would like to make a point here. Actually, we already mentioned this. That ratio is not -- I mean, there's nothing pointing to any problems, nothing of that sort. Duration is totally under control in terms of the absolute leverage of the company. Now the work we have ahead of us that will be a focus for the company in the coming months is short versus long term. Now having a short-term debt is not a great problem if the company is financially sound, which is our case. We are very healthy from the operating standpoint if we generate cash. With oil prices at $30, we generate cash. So it is not a problem for the company to have debt concentrated in the short term, as is our case here, as we can see. However, this is more labor intensive. We have to keep rolling over the debt and so on and so forth.

So considering that, we're implementing 2 major actions. We will be focusing on 2 major actions at the company. The first, the Prisma loan, a [ VAT ] loan of BRL 528 million that we mentioned, should be converted to the long term. The bridge loan contract that was signed when we acquired the field set forth the replacement of guarantees and the arrangement of a so-called Project Finance for Tubarão Martelo. So now the FPSO is in our name. It's ours. The field merger should be approved by ANP eventually, and we will be able to give all guarantees to convert this loan to the long term. Thus, Prisma should be converted to the long term. In principle, we are thinking of January 2023, with amortizable installments starting amortization in 2021 and stretching all the way to 2023. So this is the Prisma loan that we are working on with the Prisma people. Our relationship with them is great, and we should be focusing on this in the coming months. So we should have some news on that front in the second quarter, perhaps Q3. Well, this loan should be converted to a long-term debt.

And something else that remains in our radar, no doubt about it, is the issuance of bonds in the United States. In the past, we considered Norway, the Norwegian law. But we were not able to go forward with the issuance for a number of reasons, and we are now looking into the possibility of issuing debt securities in the United States. We are in informal contact with some banks and some players and so on and so forth. Obviously, now is not the right timing, but we believe the market will reopen sometime this year. And then we would be able to go through with the issuance to refinance a good deal of our debt. And this is not about increasing our leverage, the company's absolute leverage. This is about rolling over a debt to the long term.

Now moving to the last slide, actually to the one before the last slide, Slide 16. I would like to share with you the company's reserves. And I believe this is perhaps the slide that best summarizes everything we've done in recent times. As you can see, we reached 114 million barrels of proved reserves, 1P reserves. This is now, Q1 2020. A year ago, we had 17 million barrels of 1P reserves, so a very significant increase in terms of proved reserves. Basically, Frade deal added 60 million barrels of 1P reserves for the company, and it is important to remember that when we acquired Frade, the reserves report was 60 million. We had production for 1 year at Frade, sustaining production levels at 60 million. That stems mainly from more accurate management and monitoring the reservoir more closely and so on and so forth.

Additionally, the Tubarão Martelo deal. Actually, 2 things happened at that cluster: the TBMT deal and the revitalization of Polvo. They added 40 million barrels to this cluster of Tubarão Martelo plus Polvo. Well, number one, we have a dramatic cost reduction because of the tieback of both productions, and we had the Eocene campaign that opened up new infill drilling opportunities for Polvo. So we reached 114 million barrels. If we look at the bottom right-hand corner, we have the reserve life table. In other words, how long these reserves will last. And you can see that in Polvo, and this is because of 2P reserves, we had a life span of 9 years stretching out to 25 years. And this extension is due to these 2 effects, the Eocene reservoir, and particularly the Tubarão Martelo deal.

Now moving to my last slide. Let's talk about the next steps. I would like to end the presentation on these 4 points, which will be the focus of our attention in the coming months. The main point right now is the continuous focus on health, safety and efficiency. This will be undoubtedly our main focus in the coming months in the foreseeable future of the company. This will progress hand-in-hand with a meticulous and ongoing management of costs and expenses as to preserve the company's liquidity. This is the name of the game. This is what we do. We'll also work strongly on obtaining approval for Tubarão Martelo and Frade acquisitions. This is the main focus of Emiliano's agenda with ANP. The regulatory agency has been working very closely with us even during this pandemic moment. And lastly, perhaps not in the coming months, this is not happening in the next few months, although it is ongoing work i.e., the effort to convert our funding profile into long-term debt. This is not going to happen overnight, but it is going to be a major focus of ours in the coming months.

To conclude, I would like to truly thank PetroRio's employees, all PetroRio staff. And there are many of our people listening to this webcast. I would also like to thank Nelson very much and the Board of Directors for trusting me to take on this new role. As of the next quarter, I will be presenting as CEO of the company.

And with that, let me open the Q&A session. Thank you very much, and I hope you stay healthy and very serene and calm in these challenging times.

[Operator]

[Operator Instructions] Our first question comes from Rodrigo Almeida with Santander.

[Rodrigo Reis de Almeida, analyst]

To start, Roberto, congratulations on your new position as CEO of the company. It is well deserved. I have a couple of questions on my end. Well firstly, just speak about the strategy in the mid to long term. You have some options to grow organically with Tubarão Martelo, the Frade campaign. So I'd like to know from you, what is your priority? What do you see is more likely to happen in the midterm -- in mid-2021?

And my second question has to do with the debt. You talked about the Prisma debt, that negotiations are unfolding well. So could you comment on the debt with Chevron? If this is moving ahead? If there's anything on the table? I'd like to have some color on that and update, please.

[Roberto Monteiro, executive]

Well, so let's begin with our organic growth possibilities. Well, we have, I should say, and as you said it yourself, we have Tubarão Martelo and the tieback with Polvo in the -- and with the Tubarão Martelo tieback, we could add another Tubarão Martelo well into production. So that's a possibility. There's another project revitalization of Frade Field. And there's another project revitalization, new revitalization rounds at Polvo.

[Rodrigo Reis de Almeida, analyst]

And with that list?

[Roberto Monteiro, executive]

Well, we have worked for at least 2 years, perhaps more. But the main driver for us is the cost to add 1P proved reserves. Among all of these possibilities, what seems to us to be more efficient in terms of CapEx is the tieback of Tubarão Martelo, TBMT. This seems to be our most accretive project. We believe we can add barrels in the tieback project for Tubarão Martelo at less than $5 per barrel, something between $5 and $6 per barrel. So very low and I would say that perhaps this would be our top priority. Well, after that, we have Frade and Polvo Fields, their revitalization. Each field has its own particularities. But I should say that they're kind of equivalent at around $6 to $7 per barrel, slightly higher. But they are also excellent projects. But our main project, our top project right now is to the Tubarão Martelo tieback.

As to your second question, our debt profile. What have we been doing? We have been working at length with Prisma. Our relationship with them is great. But growing over a short-term debt to the long term is not something that happens overnight. Since January, both parties had it clear that we would be moving this to the long term, given the bridge loan contract already set forth a rollover of the debt to the long term. But the process tends to be sluggish. The FPSO became ours just a little while ago. We are in the middle of the transfer of rights process. So there are some hiccups here and there, but everything will be put behind us and we'll be able to turn the debt into long-term finance.

You asked about Chevron. Well, we are not talking with Chevron about exchanging the loan or rolling over or increasing the debt. What we do have is excellent relationship with them. This is what we have. We are in constant contact with them. They are always very diligent. They want to know how our operation is unfolding, how Frade is doing and so on and so forth. But we're not talking specifically about the debt where we design our cash flow and everything else. We don't include Chevron's debt as one of our priorities. Our priority right now is the Prisma loan, in turning that funding profile into long term. And so result of the short to long term issue, we had to issue bonds in the United States, 144A. So we're preparing the company for that. We have the auditors, and we are taking many steps to get the company prepared so that we can have the issuance in the United States. This is not going to increase the size of our debt, but it will definitely change our debt profile.

[Rodrigo Reis de Almeida, analyst]

Roberto, I just would like to ask a follow-up question. Talking about Manati. There are many things happening with that asset. Petrobras is possibly selling their working interest of the asset. And perhaps Manati will be turned into a gas storage reservoir. Could you give us an update on that? What are you thinking about that? What do you think about this project? And what do you think about the claim of force majeure by Petrobras to not live by their commitment to buy the gas?

[Roberto Monteiro, executive]

Okay. The way we see the force majeure claim by Petrobras is a forced interpretation of the contract. But this is how we see this. And because they are not enforcing the take-or-pay contract, because it decided not to comply with the take-or-pay contract, we're taking the necessary measures at this point. But again, to us, Manati accounts for a very small share of our revenue. It's a very small share of our EBITDA. So this doesn't really change anything for us in terms of the company's economics. But yes, we are taking the necessary measures that we think are applicable at this moment. Again, we see that this is a -- we see this as a forced interpretation of the contract that does not apply at all. And that will dictate our actions.

As regards the sale of Petrobras stake of Manati, we'll look into it. Indeed, [indiscernible] is considering buying that working interest either PetroRio or any other player. Well, they should think about this not as an E&P asset. As an E&P asset, have a few more years, perhaps the fit in one hand, in the figures of one hand. So there's not a great upside in that gas asset, nor great upsides in terms of E&P. The asset is there, it's moved, it's productive, works well. It has a Petrobras take-or-pay contract. Abandonment has been covered. So the asset is beautiful and round. But it will be very hard for people to pay great upsides for this asset, if you think about E&P. Now as a [ fit ] stream, we can have a different value proposition for the asset. So yes, we'll be looking into this. We'll look at the deal. We'll consider this from the midstream point of view. But I think there's a lot of water to go down this bridge. We'll always be attentive to all M&A possibilities. But like I said, before we do any deals, there's a lot of water under the bridge.

[Operator]

Next question from Bernardo Schoichet with Vista Capital.

[Bernardo Schoichet;Vista Capital;Analyst, analyst]

Could you please elaborate on possible M&A deals? You mentioned Manati. And do you continue to see traditional possibilities as you have in recent quarters and years? And of course, comparing what you've done and with the in-house opportunities that you currently have in this moment when you have to be very cautious about capital allocation.

And second, could you talk about your hedging strategy looking forward? Hedging operations helped your results and earnings a lot now. What kind of level seems to make sense to hedge prices of future offtakes. Do you have any preference for any specific instrumental structure?

[Unknown Executive]

Thank you, Bernardo. I'll speak a little about M&A, and then I'll talk about hedging. Regarding M&A, well, there are some processes out there in the market, something from Petrobras divestment, there is Manati, there is the Garoupa cluster, a shallow water cluster in the Campos Basin. So there are some other assets being put in the market. There has been talk about Papa-Terra and Petrobras and so on and so forth. So things happen. The way PetroRio sees oil is more of a long-term approach. We should be thinking about oil prices at $20. Actually, to date, the price has increased. I think it has reached $34 or $35 per barrel, but it's no use evaluating things at the heat of the moment.

We have to look things, taking a step back and perhaps right now, we should not consider oil prices at $50 or $60 per barrel, but still we continue paying a lot of attention to M&A opportunities. I think it is only natural to step a little on the brakes, that the market will step on the brakes of M&A activities because if you have cash and if you have financial health to hold on to the asset, you will do so because we see this as a cycle. This decline in oil prices is seen as a cycle, at least oil companies that we talk to think that way. So those that have financial health to hold on to their assets, they will. So they won't have to sell the assets at such a bad moment in terms of oil prices. Because that does depreciate the value of assets.

From our standpoint, we'll continue to look at M&A possibilities. I believe that our M&A pipeline will be on hold for a while. We won't be doing anything in the foreseeable future. But these things will naturally resume growth. We believe the oil price will be ranging from $40 to $50, and that's when the market will resume function. Our projects are very accretive. We have a low production cost, low lifting cost. So if the oil is at $40 or $50, with a little more visibility and consistency, we believe that a good deal of the market will go back to working as it was before.

As for hedging, we have a clear preference for this instrument, put options. It's not the spread or the color. Our preference is oil put option. This is all we did since the beginning of the year in Q1. And our oil put option strategy was always when we see some atypical oscillations. When we see some price appreciation, our strategy was always to hedge as much as the market allows. Now what do I mean by that? As much as market volatility will not make prices impossible. In the beginning of the year, when oil was at $69, we were able to hedge for 6 months, 100% in the first quarter and half for the second quarter. And this was because of the put option prices. At the time, we had very high volatility. And so we believe that we will resume hedging operations, but definitely, certainly, after oil prices pick up again.

Of course, we won't wait until the [ red ] oil gets to $60 to $70 to hedge our offtakes. But it should be at $45, $50. And then we should try to buy some protection in terms of oil put options to protect our cash and so on and so forth. But this is our strategy: put options and waiting for oil prices to rally a little. To date, we have trading until the end of July, 50% of our volume is hedged at $65. So for now, we are doing well from the hedging point of view. And now I think we have to wait a little to see what's going to happen. It's a little hard right now to forecast what's going to happen.

[Operator]

Next question was sent by Mr. [ Rodrigo Sequeira ]. What's the status of the Polvo campaign? POL-L well? Can it increase production beyond 2,500? What about POL-L with viscosity-reducing agents? What were the results?

[Unknown Executive]

Rodrigo, thank you for the questions. Okay. So let me start with the Eocene project. Eocene is POL-L. Let me go back to the presentation to make sure that this is right. Yes, Eocene is POL-L, reducing 2,500 barrels. It started with a little more than 2,500. It was at 2,800, 2,700. Now it's at 2,500. It could produce more if we had a bigger pump at the bottom of the well. But our Eocene is a midsize for Polvo so we are at the maximum speed limit of the [ buck ] producing 2,500. Now it is a very positive surprise for the company. It is a sandstone reservoir with a lot of permeability. The oil is a bit more viscous. But given the high permeability of the sandstone, the oil flows and it flows well. And it is good quality oil too. And I believe -- actually, I don't believe. Our reservoir team thinks we, at PetroRio, believe that in the future, there might be an opportunity to drill -- to do an infill drilling of this reservoir. Apparently, this reservoir is large. So there's a possibility of drilling another well in that same reservoir to help drain that reservoir. And the cost would be very low because the reservoir is well known. So that's one possibility.

And there are other prospects of Eocene with the company. These prospects have always existed. They've always been there, but we were always exploring what we knew more about. The Eocene -- this POL-L is the first one that is put into production. Now we always think twice because we knew that in the Eocene reservoir, the oil was a little more viscous. So we've always delayed that investment. But since we could put that well into production successfully enough, that opens up a whole new work front for the next campaigns. As regards oil and the dependent on tests with the viscosity-reducing agents, we started running some tests. We tested 1 or 2 products. They did reduce viscosity, but carbonate is less permeable. So it's more difficult to feed the well. To this point, we haven't managed to get anything that would make a lot of sense. We managed to produce 200 barrels a day in this well, a little over that, but nothing that made a lot of sense. So we stopped production at this well. And we stopped testing primarily because we suspended that campaign. So we got all the drilling rig personnel, we demobilized them and we suspended everything. So perhaps in the future, we might go back and consider another viscosity-reducing product. But right now, I don't think that we will be taking this well into consideration. So it's a bad combination, heavy oil and low permeability. And this is limiting. As much as improved the viscosity of the oil pumped, you cannot do anything inside the well.

[Operator]

[Operator Instructions] Next question was sent by Mr. [ Celestino ].

[Unknown Analyst]

I have 2 questions. What about short-term debt? Were you able to elongate the funding profile? And with the lifting cost of under $15, what would be the profitability of the company if we consider an average price of $45 as of the second half of 2020?

[Unknown Executive]

Well, I guess that we've answered the question about the debt, short-term debt versus long-term debt. In a nutshell, our main effort has been to roll over the Prisma debt according to the contract and according to our expectations from the beginning. And eventually, the U.S. bond market will open. We don't know exactly when, but it will eventually open. So we'll probably refinance our debt in that market.

As regards to the second question, indeed, our lifting cost will be under $15. So if you think about the company consolidated numbers, then we need to do the math in terms of price per barrel. But I would say that we have the lifting costs. Let's start with the Brent oil price, an average Brent of $45. So an average Brent price of $45. So let's suppose we sell considering Frade and Polvo. Let's suppose we sell at a discount of $5 I guess against the Brent, perhaps a little less. But right now, let's consider this: Polvo a little more, Frade a little less discount. But let's suppose we'll sell with an average discount of $5. This involves the quality of the oil and logistics. So we would be selling for $40 per barrel. We would pay 10% royalties, and this has been reduced to under 10%. As Emiliano mentioned, we pay 10% royalties on everything which is not Eocene production. And after Eocene production and all of the incremental production coming from Polvo, we'll pay 5% royalties. So that's about $40 per barrel, and let's suppose we'll pay around 8% royalties. So that would be at $36 to $37, $3 discounted due to royalties, just to round this calculation. So we would be at $37 net of quality and logistics discounts and royalties discount. So with $37, we have to deduct our lifting cost, which would be $15. With that $37 minus $15, we would end up with $22 per barrel. This would be what we call netback of the company, $22 per barrel.

And here, from this, we have to deduct the fixed G&A of the company. It's hard to do the math per barrel because you end up getting fixed cost and dividing. Well, let's say for a minute that we have $2 per barrel worth of G&A. So we had $22 minus $2, $20. So cash generation with the [ brand ] of $45 will be $20 per barrel of cash generation for the company. So this is the math. Now the calculation can improve now with TBMT because the lifting cost at the company tends to fall a little under $15. The average lifting cost for the company will drop because we'll start enjoying some synergies, et cetera. But this is a starting point for you.

[Operator]

[Operator Instructions] Next question sent by [ Rodrigo Sequeira ]. What is the strategy to pay the 30% of working interest to Petrobras? Any date when you would make payment?

[Unknown Executive]

Well again, Rodrigo, as regards trading, payment will happen when we get the field transferred to us. We rely primarily on the regulatory agency, ANP, but the process of approval is unfolding. This approval process is a little different than Tubarão Martelo. It entails a discussion on amounts for abandonment -- provision for abandonment and not only guarantees. But it will happen normally. ANP has been working throughout this pandemic period. Our relationship with ANP and with Petrobras is excellent. So we imagine that this will happen sometime along the second half of the year. And since the closing -- actually, since we signed, we have an effective date for that field. This effective date for the field, if I'm not mistaken, was July of last year. So the whole economic benefit of the field and Frade does generate value and generates cash. Now the economic benefit of the field is already sent to the company by a price reduction. So the longer it takes to approve it, the lower will this value be. This is a very complicated calculation, so I don't want to give you any guidance on values because this involves Petrobras as well. But what I can tell you is that this value is reduced over time.

If you remember the case of [ impact ], the 18% stake of Frade that we acquired. This was not because of ANP approval, but for other reasons, it's almost 2 years between signing and the closing. And in the end, what we had to pay was 0. So this is the mechanism. The mechanism with Petrobras is similar. Since mid of last year, the economics of the field is ours. So this is it. So we imagine that this will be happening more towards the second half of the year, more towards the end of the second half.

[Operator]

We are now closing the Q&A session. I'd like to invite Mr. Roberto Monteiro to proceed with the closing remarks.

[Roberto Monteiro, executive]

Well, thank you very much. Here, I would like to thank all of you for participating in this call, for your questions and for the very constructive relationship we have with all of you. I would like to thank all of our employees and associates for their great work. I'd like to thank the Board of Directors. And in particular, I'd like to thank Nelson for the opportunity that I was given. I would like to say that PetroRio is 100% prepared to sail through this moment. It is not an easy moment from the personnel standpoint. It's not an easy moment to anyone. But this will be behind us eventually. We shall overcome, and the company is 100% prepared to weather the storm. And we'll leave this moment a lot stronger than when we started. Moments like this make companies reflect on processes, on simplifying processes, making processes more efficient and so on and so forth. So even amidst this whole mess, we believe that there are lessons to be learned when we look at things from that angle. Thank you very much, and I hope to see you on next quarter's call.

[Operator]

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

[Statements in English on this transcript were spoken by an interpreter present on the live call.]