Petro Rio SA
BOVESPA:PRIO3
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Petro Rio SA
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Good day, ladies and gentlemen. Welcome to Petro Rio's conference call to discuss first quarter 2021 results. Thank you for waiting. [Operator Instructions] This event is also being broadcast simultaneously over the Internet via webcast and may be accessed through Petro Rio's Investor Relations website at ir.petroriosa.com.br by locking on the banner first Q '21 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 perspective, projections and operating and financial goals, are based on the beliefs and assumptions of Petro Rio's management and on information currently available to the company. Forward-looking statements are not a guarantee of 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 in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Petro Rio 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. Roberto Monteiro, CEO; Mr. Milton Rangel, CFO; and Mr. Francilmar Fernandes, COO. Mr. Monteiro, please go ahead.
Good day. Thank you very much for joining us today. I would like to once again start thanking the Petro Rio team. We are living difficult and challenging moments. But we have been performing really well amidst all of the difficulties that we are all facing on a day-to-day basis. So I would like to start thanking my team for their perseverance and discipline.
Now moving to Slide 3. We have the highlights after period. The first highlight that I think it is important to underscore is our EBITDA. In the first quarter, our EBITDA totaled BRL 428 million, 12x higher than the first quarter of 2020. Of course, in 2020, we already felt the early COVID effects. The pandemic started in March 2020. So we have a little bit of an effect there.
As part of this EBITDA, we have to take into account 2 important things this year. First, a higher production, most likely, a record mark in the company's history. And a Brent oil price that is also higher. We took an average, and it was higher than $60 per barrel. It's been a while since we have seen this happen.
A second point about this first quarter that is important to highlight was our follow-on offer. We raised $370 million, approximately BRL 2 billion in January. We had a capital increase. We had a book that was more than 3x oversubscribed. Meaning we had 3x more orders than the size of the book. So it was very successful.
And here, I would like once again to thank both our new shareholders and the shareholders already in our base at the time. We always had a lot of support from all of them. This follow-on prepared the company for growth, either organic growth via investments in the fields that we already have or preparing for inorganic growth through acquisition of new fields.
We also had the approval by ANP, the regulatory agency of the 30% stake of Frade Field, that we had acquired from Petrobras in 2019. And this was finally approved in February of 2021. We also acquired the working interest belonging to Total in the Wahoo Field, 28.6%. As we mentioned in the past, we were interested in acquiring that, so we finalized that deal. And we also had a stratification of reserves and resources, adding 92 million barrels of 1C resources and reserves for the company. This was very interesting because we already included Wahoo field. We've already included the 64.3% working interest of Wahoo. so this gives us a pretty good idea of 1C reserves, which in the future can become 1P after the declaration of commerciality and so on and so forth.
Now moving to Slide 4, please. Here, I'm going to address some items in perhaps more detail, and then I'll turn the floor to Francilmar. Well, the first point on Slide 4 was a reduction of our lifting cost. We have here $14.3, reducing the lifting cost a bit quarter-over-quarter. It's still a little below what we would like. The main reason why it fell a little below our expectation was some downtime at Polvo, given a problem we had in the boiler of the FPSO operated by BW. This cost us a little bit, although the number is a little lower than in Q4 '20 at $14.3. So a very good lift in cost, we could have done even better.
The next item here is increased production. The main reason explaining this increase in production was the approval of the 30% stake belonging to Petrobras. We increased from an average production of 29,900 to 31,300. As we mentioned in the first quarter, we had the stoppage of the Polvo FPSO, a downtime of 10 days on account of the boiler and had a stoppage of 1 pump in the TBMT field, Tubarão Martelo. And here, it's important to differentiate the issues. Of course, the FPSO performance is something that we have to address, and this will be addressed. It is being addressed as we will keep this FPSO until July of this year.
Now the Pump, ESP, that's the day-to-day of an oil company. We'll continue to have pumps that fail. This is our day-to-day. Of course, it did catch us a little by surprise because this TBMT ESP requires a rig called Kingmaker that we acquired in the end of last year, but it is in the process of overhaul. So now we have just finished the overhaul process of this rig, and we will replace the electric submersible pump ESP. But these pumps are routine for the company. These things will continue to happen. It's not a surprise. But the FPSO, yes, that was a little surprising, and we are taking measures and addressing that topic.
Well, our cash position increased to BRL 3.370 million, almost $600 million in cash. So when I said that the company is prepared for what's coming in the future, that's what I meant. We have a lot of firepower, almost $600 million in cash. And this is reflected on our EBITDA -- our net debt over EBITDA ratio. That was 1.2x in the fourth quarter of 2020, which was already a good number and is now down to minus 0.95.
In other words, we used to be a net debt company and are now a net cash company. We used to have more debt than cash. And now we have more cash than debt. This is what this indicator means. And even if we were to eliminate the effect of the follow-on offer, we would still have seen an improvement in the company's leverage. So the company performed well, operationally speaking. In addition, the company also had the follow-on top of this good performance. That make the company completely prepared and ready for the next challenges. And for the next steps, we'll take to drive organic and inorganic growth.
With that, I will turn the floor to Francilmar to discuss our operations, and then Milton will speak about the financials, and I will be back at the end to talk about the next steps. Thank you very much. Francilmar?
Thank you, Roberto. Hello, everyone. Starting on Slide 5, we have the performance of our assets. The most relevant highlight in this quarter, given all the numbers that we know well in this table and that everyone monitors, the relevant point is in February. On February 5, we completed the deal with the remaining 30% stake of Frade Field. Now we own 100% of the field. And that has had a positive impact on the company's total production. So that's the Frade line item.
The other fields, Polvo and TBMT, posted a certain reduction in production. And I will explain later on what caused that. It wasn't a onetime off event. And here's the lifting cost. This is, indeed, the main indicator of the company's operations. And here, we see return to a better level than presented in the prior quarter when there was an upward push, and I will detail this on the next slide.
Please go to Slide 6. We see on the top left-hand corner, the traditional graph showing the evolution of the company's lifting cost. In Q4 '20, we had an increase in this number. But we worked to bring it back to more comfortable numbers, better numbers for the company. But, again, we had some complications, particularly linked to Polvo Field, where we had a problem with the FPSO at Polvo, which is chartered and is reaching the end of its contract life. I will detail this further on when I talk about the operating performance of Polvo.
We also had a problem with one well at TBMT field, where an ESP pump failed. I'll speak more about that when I speak about that specific asset. So we have one less well operational at TBMT. On the positive side, we had some impacts that helped our production and that kind of offset these issues. We integrated the final 30% volume that remained of Frade when the deal was finally recognized in February. And we had all of the measures that we adopted along the year.
Even holding back on some maintenance service, we are now able to do everything that we postponed before, and we are still controlling costs. Also, we had a little help from the foreign exchange with the BRL depreciating vis-à-vis the U.S. dollar, and that helped a little.
We are fully aware that the main indicator for the company in economic terms is the lifting cost. So a good deal of our effort is focused on that. We believe we are going to have one more difficult quarter while we finalize the tieback of Polvo and TBMT, still operating with the Polvo FPSO, and then we should expect a considerable improvement.
On Slide 7, we will speak in more detail about Frade. Operationally speaking, the Field had a good quarter, unfortunately, impacted by the performance of one well, MUP3, where we had hydrate formation that actually started in the previous quarter, a problem that had not been solved. As we can see, operating -- we can see operating efficiency considering our full production capacity versus actual production. So that had a negative impact on the operating efficiency of the Field as a whole. But the FPSO is performing well, and all of the metrics of the Field look good.
In the end of April, we started a scheduled maintenance that was actually scheduled for last year, but we postponed it on account of the pandemic. It's started now on April 28, and it stood last 8 days.
Now moving to Slide 8. Let's speak a little about Polvo. Polvo Field had another complicated quarter given the low performance of the FPSO Polvo, which is chartered for the field. And it's getting to the end of its contract. We expect the transition from FPSO Polvo to FPSO Bravo at TBMT by July. So in this final phase, we are running into some complications, low performance of some of the equipment. We had practically 10 days of downtime in the energy generation system, which is boiler based on that FPSO. And that impacted the process as well, that really hindered production and performance at Polvo.
On the other hand, we are sparing no efforts to continue with a good operation in this remaining period of the FPSO. Operating with safety, good numbers and hopefully, and as much as possible in good operating conditions until the end of the contract.
Also in this quarter, we were able to finally complete all the remaining geological and financial analysis to start drilling another well in the Eocene reservoir. This began in Q1 '21. And drilling of this well is unfolding well. We expect to finish it and put it into production in the coming weeks. And we'll keep the market informed about this.
Moving to Slide 10 (sic) [ Slide 9 ] to Tubarão Martelo Field, TBMT. Here, to be highlighted, is a problem we had in well 44, a problem linked to flow assurance. But our team was able to control it relatively fast, and the well is back to operating in normal conditions. In the beginning of March, the ESP pump failed in Well 8. The pump is responsible for pumping out the production of the well. It failed in the beginning of March, the well has been shut down since then, and we are waiting for the work over to replace this electric submersible pump, ESP. And here 2 observations are in order. The first is that TBMT field as well as Polvo, both produce heavy oil and requires submersible pumps, ESP, to ensure production at the field.
When these pumps fail or stop, we have to be ready to replace them immediately. We do this as a routine at Polvo and are now starting to do it at TBMT. The second observation is that we made the right decision last year when we acquired a specific rig to carry out workovers at TBMT, precisely to handle this type of situation. So we are working to prepare this rig. We are actually finalizing it. This pump failure caught us a little before we expected, but the rig is practically ready to start operating and to do the workover by the end of May or June. I believe that by July or August, that well will be online again.
FPSO Bravo showed good efficiency. It is very good equipment. That makes us very hopeful and strengthens our investment thesis because all of the complications and low efficiencies that we have at FPSO Polvo will be offset by this FPSO at Tubarão Martelo.
Moving now to Slide 11 (sic) [ Slide 10 ], and let me give you a general update on the Polvo and TBMT tieback. The project is advancing full steam, and the physical progress is over 60%. The financial part is also according to plan. So far, everything is on plan, on budget, despite all the difficulties imposed by the pandemic and all. So our crews are able to deal with all that. As for manufacturing of lines and delivery of equipment, it is all going according to plan to be finalized by July.
Well #10 at TBMT should come into play more or less in parallel. As soon as we finish the work over to replace the pump at Well 8, the teams will come in with a rig to complete Well #10 to finish by September. On the right, we see an illustration of one of the coils that is part of the production flexible line.
Please go to Slide 12 (sic) [ Slide 11 ], where I give you an update on the Wahoo block. We acquired the 28.6% stake that belonged to Total. With that, Petro Rio owns 64.3% of the block. What matters is that we were already the operator of the part acquired from BP, 35.7%. With that, we started preliminary engineering work to fine-tune the knowledge and see what kind of solutions we can use to improve financial costs and how we can bring forward the start-up of operations. In other words, to improve all conditions. We'll prepare the development plan, DP, in the coming months. And we believe that by the end of the second half, we should be coming to an agreement with the rest of the consortium and submitting the development plan to the agency for approval. So excellent news.
On Slide 13 (sic) [ Slide 12 ], we see the company's certification of reserves and resources. In this quarter, we updated the numbers already, including Wahoo block and showing a significant increase in all scenarios. I'd like to draw your attention to this part on the right, where we see an increase in reserve levels. We practically doubled 1P and 1P plus 1C from 2020 to 2021. And here, we can see 2 representative figures: one, BRL 87 million additional from Wahoo related to Petro Rio's share of 64.3%, also representing the figure of the Field and the potential to help us grow the company.
And another important number is the evolution of 1P reserves of the assets that we already have in production, TBMT, Polvo and Frade, from 113 to 118. And this already considering what was produced along 2020. This reflects an increase of over 10 million barrels and more than 10% of what we have in 1 year with production at full steam. All the other reserves, 2P plus 2C and 3P plus 3C have had considerable increases.
Another important point for us to consider is the extension of Frade Fields lifespan. Once we form another cluster, Frade plus Wahoo, we extend production that was expected to end 2034 to 2054, proving once again that the company chose the right strategy to extend the life span of fields and increase recovery factors.
With that, I end my presentation, and I turn the floor to Milton. Thank you.
Thank you, Francilmar. Good afternoon, everyone. To continue our presentation on Slide 14 (sic) [ Slide 13 ], we present the company's financial performance in the quarter.
Considering the columns, excluding the impact of IFRS 16, our revenue totaled BRL 655 million, resulting from the sale of approximately 1 million barrels of Frade and about 900,000 barrels considering Polvo and TBMT. Plus the revenue from Manati of about BRL 27 million.
Considering cost of goods sold, royalties, G&A and other operating revenues and expenses, our EBITDA was BRL 407 million in the quarter, 62% EBITDA margin. Another highlight is our financial result, BRL 320 million negative. Very much influenced by foreign exchange variation to be explained in the next slide. With that, we reported a loss in Q1 '20 of almost BRL 40 million. And if we consider the effects of IFRS 16, this loss reached BRL 65 million.
The last highlight on this slide is our adjusted EBITDA, a strong EBITDA of BRL 427 million. I'd like to remind you that this adjusted EBITDA excludes nonrecurring items and nonoperational items. In other words, it better reflects the company's ability to generate cash. And we also reached an EBITDA margin of 65% in the quarter, a higher-margin compared with all quarters in 2020.
Given the recovery in oil prices as well as synergies captured by the company and cost reduction initiatives. So we were able to deliver a very high profitability margin. As IFRS 16 results, adjusted EBITDA was close to BRL 470 million in the quarter with a 72% EBITDA margin.
To continue moving on to Slide 15 (sic) [ Slide 14 ], let's speak about the financial results of the company in more detail. We have 2 columns here. One, excluding and one including IFRS 16 results. And the main point that I would like to highlight has to do with this line item, a loss of BRL 211 million in our financial result regarding foreign exchange variation on intercompany loans.
So what's happening here? We had some Brazilian companies in our Petro Rio Group. That we're taking on intercompany loans from foreign companies in our group, particularly in Luxembourg. So these Brazilian companies borrowed money in dollars. And our real depreciated in the quarter with a dollar-real ratio of around 1:5.80 depending on the moment along the quarter. And with that, we recognized this loss linked to the exchange variation, impacting these loans.
Due to accounting rules, we are not able to deduct these losses from the gains that Luxembourg companies had with the same loans. And this happens because Luxembourg companies already reporting dollars and this foreign exchange gain, given that they are creditors, is adjusted directly via shareholders' equity. So the result shows this distortion, what stands out, is the loss of the borrowing Brazilian companies. However, the counterpart is not observed in the result because it is booked directly in the shareholder equity through the CTA.
So this is just a little bit of information to explain why we have this kind of pollution in our financial result. In addition, we highlight that variation does not have a direct impact on the financial health of Petro Rio because the majority of the cash is invested mainly in foreign currency, mainly dollars. In our revenues, the company's EBITDA is very much exposed to foreign currency, given that we sell oil, and oil is priced in dollars. So a good part of our variation, a good part of our cash generation is also dollarized.
Now moving to Slide 16 (sic) [ Slide 15 ]. Let's speak a little about funding. The first graph on the left shows the evolution of the cost of the company's working capital or indebtedness cost. Given the very successful follow-on and improved liquidity of the company as well as improved loan profile overall for the company, we have been getting loan facilities for working capital at more and more attractive costs, [ while ] happened working with world-class banks, both Brazilian and foreign banks. And we have been replacing more expensive debt that we carried in our balance sheet by cheaper loans.
So well, another very important piece of information related to this is that we have been able to replace expensive debt by cheaper debt. But despite of our lower cost, we have been able to increase the duration of loans for working capital. We still have loans payable in 6 or 9 months. But now all of these new loan facilities have a duration of 1 year. So not only were we able to improve the cost profile, but also the duration profile of our debt simultaneously.
On the right, we see the amortization schedule. As I explained, we had a very successful follow-on raising more than BRL 2 billion. This provided an important reinforcement for our cash, giving the company a very comfortable liquidity to serve the obligations that we have, both in the short term, less than 12 months and to serve our commitments in the second or third year, and generally speaking, a better situation for the company. I'd like to remind you that we've been very successful in rolling over a good part of our debt, which gives us even more peace of mind regarding our financial position.
Lastly, please go to Slide 17 (sic) [ Slide 16 ] for more details regarding the company's leverage. An indicator that we like to follow-up close is net debt over adjusted EBITDA ratio. I'd like to remind you that adjusted EBITDA excludes nonrecurring and nonoperational effects. Thus, it better depicts the company's cash generation. As regards to the recent past, the first quarter of the year, because of the follow-on, we are now a net cash company. So this ratio is now negative. It is now at minus 0.9x approximately with a net cash of more than BRL 1 billion.
Another important point that I would like to highlight is that even if we were to exclude the effect of the follow-on on Petro Rio's cash, this ratio would have been 0.6x of leverage. Now in Q1, when we compare this with 1.2x in December 2020, also without the follow-on effect because the follow-on happened in February, this shows that the company has a strong ability to generate operating cash. Regardless of the follow-on, we would have been able to post a significant reduction in the company's leverage quarter-on-quarter.
And now I turn the floor back to Roberto, who will talk about the next steps, and then we will have the Q&A. Thank you very much.
Thank you, Milton. Well, I will go over the next steps before we open up the floor to questions. The first, as expected, is our focus on safety and health. So that we can continue to perform as we have done in recent quarters, even in the middle of this whole confusion, the COVID pandemic, et cetera.
Now getting into more detail about our operating projects. We now have some very important projects going on. The first, as Francilmar mentioned, is the tieback project between Polvo and TBMT, which we expect for the first half of July of this year. The project is unfolding well, and it is a very important project for the company. Because in addition to increasing a lot the efficiency of both fields, it also reduces both our lifting costs and CO2 emissions. So it is a project that optimizes everything. It is a very interesting project that is about to finish.
Then we have here 2 wells. One at Polvo, as we decided to drill the Eocene reservoir at Polvo, and we expect to have it operational soon. And then we have the TBMT well to be drilled in Q3 of 2021. So 2 wells that should start production in the coming months. In addition to that, we have to prepare to begin the drilling campaign at Frade. Our goal would be to start drilling at Frade Field this year.
Now let's speak about things that are not set operational in nature that have more to do with regulatory and M&As. The approval of Wahoo by A&P. It is very important to have that so that we can declare commerciality of the field and start preparing for the tieback project between Wahoo and Frade.
And lastly, a strong focus on inorganic growth through acquisitions, M&A opportunities as this has been our DNA in recent quarters and years. So these are the next steps that we have ahead of us.
And with that, I'd like to open the floor to questions. Here with me, we have Francilmar, COO; Milton, CFO; and Emiliano, our Legal, Administrative and Regulatory officer. Thank you very much. And let's have the questions now, please.
[Operator Instructions] Our first question comes from Christian Audi with Santander.
To start, congratulations on the results. Very positive results across the board, production, volume costs and the financials. So congratulations.
I had 3 questions. One of them is more strategic. The first question, Roberto and Francilmar, I think you gave us a lot of details on the problems that occurred at Frade, Polvo, TBMT. I just want to understand. Could you give us a big picture of what was expected in what was a surprise? What were you more considering these issues? Francilmar, gave us a lot of details. But I just want to understand what's left in terms of issues that was not resolved when we consider MUP3 at Frade, the Polvo problems, the boiler and then Well 44 at TBMT?
My second question is, looking forward, Brent discounts. What do you expect -- what do you expect in terms of Brent price discounts, perhaps for the next quarter?
And finally, Roberto, on the strategic side, could you tell us about the Albacora process, have you felt any change given all of these changes that are happening at Petrobras regarding the Albacora process? And what would be the next steps? And also on the strategic side with Wahoo after the success with BP and Total, what about BP's interest in acquiring your stake at Wahoo?
Thank you, Christian. Thank you for the questions. I will answer all 3. And Francilmar is here with me. So if Francilmar wants to add to the first question, no problem.
Regarding operating problems, if we can call them that, let's start with Frade. We had MUP3 that had a hydrate formation last year. We were able to open the field for 15 days or a little more than that, if I'm not mistaken, that was in February. But then the well started presenting problems again. So we decided to shut it down again to try to resume production sometime in the coming days or months. This well has now producing -- we try to have the well producing through another path, but it didn't work as we wanted. These wells have redundancy. So we try to use the redundancy, but it didn't work out as we expected.
So now we still are trying to open the well using its original path. And that's why it's taking a little longer. So regarding Frade, this is one point, and it's out of the ordinary.
Regarding Polvo. What is out of the ordinary is the BW FPSO. It is underperforming because of the boiler problem. We had a 10-day downtime because of that boiler. And candidly, we've been struggling to have BW performance expected, both in terms of production and in terms of maintenance of the FPSO. We don't see a problem regarding that from the safety standpoint. But we -- it's kind of a dispute. We want to bring the FPSO at the level of excellence that we are used to having. That's what we are pursuing. So that's something that we have to address. How do we address it? With a tieback.
Regarding Tubarão Martelo. We have 1 well that is down, Well #8, Tubarão Martelo 8. This well have been producing from the very beginning of the field and the pump failed. It produced for 7 years and then it finally failed. And now we need to carry out a workover. However, the workover requires that rig that we acquired last year. And that rig has gone through an overhaul. And that caught us a little by surprise. But MUP3 and Well #8 at TBMT, these are routine for us. These are operational and expected things. We like to report it because we want to be transparent with the market. But this is our day-to-day.
What is kind of a now wire is the performance of the FPSO at Polvo. Polvo is performing sometimes under 90% in some months. And that is too low. And I would say that this is a point to be treated, FPSO at Polvo, because we know we're going to have the FPSO for another 60 days. And then we'll start using the FPSO at TBMT, which is showing excellent performance since we acquired the FPSO.
Regarding Brent oil price, today, we are operating Frade at a discount of $1.5 to $2 for Frade. And for Polvo and TBMT, we are running at levels of $3.5 or $3 discount, around that range. We might have one offload of 500,000 barrels before July and it should be -- should have a greater discount because that oil had a little bit more water. The maximum acceptable is 1%, and this one has a 3% to 4% water content. So the discount will be a little higher. We've been using this oil. We've been using this oil of blend for the offtake.
So we always sell the oil with 1% water content. But now with the transfer of the FPSO, we might have to sell it all at once, and there will be a greater discount, but still a 1-digit discount. Nothing out of the ordinary, but a little higher. So this is what we expect in terms of Brent oil discount. So things are unfolding well. They are normalized. And we are almost back to IMO '20 and pre-COVID times. So I think that we are at good discount levels.
Regarding Albacora, so far, we haven't seen and we haven't identified any change when -- with Petrobras. We know the bid will happen in July. Today -- it is expected to happen in the first half of July. Now we don't know whether this is going to be pushed forward or not. That's not under our control. But I would say that it is expected to happen in July, perhaps in the first 15 days of July. We haven't noticed any change in Petrobras attitude regarding this process. So we still -- we don't have anything to report.
And regarding BP, we submitted a proposal to them a binding proposal for the acquisition of the field. And they are now in their decision-making processes. Things are a little slower. Sometimes, it's a little frustrating. But the truth is our proposal for strategic reasons had a longer -- a longer -- our proposal had a longer term, so they have more time to make an internal decision. It's not really BP's IBV's decision. It's the decision of the partners of IBV, some Indian companies. So this is where we stand. I can't really predict what they're thinking. But yes, they do have a proposal from us. And if they are interested, they'll sell.
Our next question comes from Pedro Soares with BTG Pactual.
I have 3 questions on my end. The first regarding the new drilling in the [indiscernible] . If you can comment on the decision-making process, of course, it includes a number of things. But I would also like to know regarding price evolution, whether it makes you comfortable to proceed with this new drilling. Perhaps, you can give us an expectation of the oil production from that well and the CapEx involved that would be quite helpful? If you can give us some color whether it makes sense with all of the macro conditions. If it makes sense to perhaps expect more such drilling along this year?
The second question is regarding offtakes. You explained in the release why you had a reduction in the fourth quarter. In the second quarter, looking forward, should we expect a more gradual evolution, perhaps not increasing too much in the second quarter or perhaps to increase in the second quarter to enjoy more favorable prices. Perhaps if you could give us some color on that?
And the third as a follow-up question regarding the lifting cost and everything that impacted TBMT and Polvo. I believe that TBMT will still feel some of these effects for a while. What can we expect regarding the company's lifting cost in Q2 or until you complete the Polvo and Tubarão Martelo tie back? Should we expect the lifting cost to remain at this level or perhaps with the Frade additional production, it could be closer to the third quarter of last year? Now could you give us some color on what you would expect?
[Technical Difficulty]
[Operator Instructions]
Pedro, I'm sorry. Can you hear me?
Yes, we can hear you.
Pedro, I apologize, but you were asking about the offtakes and how many offtakes we would have in the second quarter?
Yes. I asked about the evolution of offtakes. If it would make sense to imagine something more gradual towards the end of the year or if you expect higher volumes? And finally, related to the first question regarding TBMT Polvo issues. Imagining that TBMT will still have some problems for a while until the rig arrives on-site to carry out the workovers. Does it make sense for us to expect lifting costs close to what we've seen in the last 2 quarters. Or perhaps with the 30% stake of Frade, there might be an upside and perhaps a stronger reduction in lifting costs even before the workover is carried out and the tieback is completed?
All right. Regards the decision-making of Polvo and Frade.
Hello?
I can hear you. Oh, okay. Sorry, the phone was ringing. Well, of course, it takes into account the price, the fact that the Brent oil price is at a more constructive level worldwide now. But we have to remember that this well costs $13 million -- $14 million, even less than $13 million. Even today, we were considering something around $10 million to $11 million. And it is a well that can add production, 2,000 to 3,000 more barrels a day. So when you do the math, the well is repaid very quickly. The return on investment is very fast. And that is why we take this into account Francilmar and his team in the last few months, have been evaluating the reservoir.
They did the geological reservoir. Our reservoir engineering team worked on that to decide on this infill drilling. We are drilling on the [ infills ] reservoir. So it's almost an infill drilling, but it's a new region of the same reservoir, that hasn't been drained yet. And all of that gives us a lot of comfort regarding that well.
Now looking forward, our goal is to have that well operational. And then we'll handle the workover of Tubarão Martelo Well #8, the one that had a fail in the ESP. Then we'll have Tubarão Martelo Well #10 operational again. That one that has been operating for a while. And then we should start with Frade.
We're still in doubt whether we should drill another such well before Frade's campaign, but we haven't decided on that yet. The reservoir people will look into that in more detail. But it is possible that we'll drill another similar well before Frade. But we want to see how this well that we're drilling will behave.
Regarding the offtakes, we imagine that for the second quarter between 3 million to 4 million barrels sold. That's what we expect. And it's going to be more than the first quarter. So that's the second part of your question. The company is effectively producing more. So we are going to have more offtakes.
In this first quarter, in particular, we had 2 million. Also because we wanted to replenish our inventories. Because last year, our inventory went down. As it happens in all months of December, the fourth quarter is always very strong. So we'll resume the offtakes and selling between 3 to 4 million barrels.
As regards to lifting cost, we expect a reduction, starting in the second half of the year. Of course, now we have our lifting cost of Tubarão Martelo, TBMT. We have a scheduled downtime of the FPSO at Frade. We have to certify some vessels cleaning tha we need to carry out. So the FPSO is going to be shut down for approximately 8 days. That's happening as we speak.
So in this quarter, we'll still have that stoppage. Although we probably will have some production from the well that is being drilled. So as of the third quarter, we should see a reduction because of the tieback, $50 million a year, that will leave our OpEx. So we should see a reduction in our lifting cost.
Our next question comes from Andre with Itaú.
I have 2 questions. One has to do with the Polvo tieback. It is expected to be finished by July. Can you tell us about the process, how it is evolving, if it is going as planned and what are you learning with this tieback project that can be applied to the Frade tieback? Can give us some information on that, but I'd like to understand what the process is like and if it's according to plan and what do you expect looking forward?
My second question is regarding M&A. You have the follow-on offer. You have a lot more firepower today. But when we look at Albacora, the news are indicating more losses than expected originally. So could you give us an idea of what you would expect in terms of the M&A market, there are new entrants and perhaps market players being a little more aggressive. What can you expect?
Thank you, Andre. Francilmar will speak a little about the TBMT tieback, and then I'll speak about M&As.
Andre, this first tieback project is indeed being all -- it's bringing us a lot of lessons learned. We are trying as much as possible to optimize resources. I have to remember that when we talk about tie back, people talk about 24 months to execute. And since the beginning, we tested the market, and we wanted to do it in a lot less, 12 to 14 months. And the results so far, overall, has been very good. We've delivered to the plan and had some positive surprises.
The suppliers are performing well, and that will help us with flexibility with our suppliers for the Wahoo tieback. We are an advanced conversation stage with some suppliers, and that will give us even more comfortable for the Wahoo project. So things are unfolding really, really well.
I'd even say that the project has been easier than we imagined. Francilmar will never let me say that. But the project is being executed according to plan on schedule. So the process is well under control.
As regards to M&A's, we had a follow-on. We are financially sound, for sure. And what I think is we didn't do the follow-on only for Albacora. We had a follow-on because we have a market of mature fields out there that is a very relevant market. Albacora is not our only target. It's not our only everything or nothing. What we have seen, generally speaking, is that there are many companies that are capitalized. However, they are still very much focused on Petrobras processes.
Our goal is to have bilateral projects that perhaps don't include necessarily Petrobras. From that standpoint, the market for us remains intact. We have a lot of investment possibilities, and we are working on them. Wahoo, for example. In the past, I used to say, I want to buy 100% of Wahoo. Well, this is what we are pursuing and this is a totally bilateral process. It's capital intensive, not only for the acquisition, but for the investments that come next. And there are some other investments. I cannot give you a lot of detail on that. But we are very positive. It's a positive moment for the company and for all of us.
And Roberto, you mentioned buying outside the scope of Petrobras. What about your partnership agenda? You don't have a lot of partners, and you want to remain as operator. So what do you think in terms of partnerships for new assets with existing players in Brazil or new entrants in the market?
We don't have any problems regarding partnerships. We actually like partnerships. What I think is important is that the partnership to be with people with players and partners who think like Petro Rio. In the case of Albacora, we have a partnership forged with a Spanish group. This is public information. So we signed a partnership with them, in which we would have 50% stake and be the operators. And the partner would have the remaining 50%. So we like this kind of idea of partnerships. We are open to partnerships.
But in some situations, as is the case of Wahoo and Frade, it made more sense for Petro Rio to acquire 100% of the assets to handle the turnaround. And the same applies to Tubarão Martelo. But in the future, we might have partners in these fields and even in large processes like Albacora, no problem with that. We don't refuse partnerships at all. But we need partners that think alike.
Our next question comes from [indiscernible] with Crédit Suisse.
Perhaps I have follow-up questions on topics that were addressed before. Perhaps the answers will be shorter because of that. First, we always discuss cash position, net debt, the company still has some commitments if you want to acquire the remaining stake of Wahoo or to handle drilling campaigns. So my question is, how do you see, today, the firepower for powering your balance sheet?
You mentioned $1 billion, perhaps $1.5 billion, how much would Petro Rio have for new acquisitions to have all the M&A strategy? Another topic has to do with the timing of projects. Which one of these projects share resources, particularly rigs? I just want to have a sense of what needs to be done in parallel -- what can be done in parallel? What needs to be done sequentially? Perhaps you can use the same rig for Frade and for tieback between Polvo and Tubarão Martelo? That would be my second question.
And the third follow-up question is regarding TBMT tieback, the risk of delays. Any chance that the delay will extend beyond the end of the contract with BW FPSO. And if that happens, what is the alternative? And also, if you have other players, that were initially focused on offshore and are now turning to onshore. Are you thinking of going the other direction, in the inverse direction? Or do you prefer to embrace even bigger projects in ultra-deep waters, similar to major oil company projects with larger projects?
Well, from the standpoint of cash, firepower, M&As, today, we have a capital structure of $370 million, $360 million, but this is a short-term debt. So let's imagine that we get this debt and turn it into long-term debt, which is a discussion we are having as we speak, whether it makes sense to issue a bond of $400 million to $500 million because that would be a more structured 5-year term debt. With that, we would have money available because it's hard. When you have 12 months alone, it's cheap loan, but you can't fully count on that because the banks may end those loan facilities.
So let's imagine we issue bonds, and we have that kind of money, then I believe the company would have firepower to invest $1 billion. We are now already very well prepared. And if we want to make adjustments to our capital structure. And if we want to push our debt more to the long term. So it's a possibility we are considering. Then we're talking about the firepower, greater than $1 billion or more than that. And that will take us to a whole new league for big fields to be acquired, important fields to be acquired. And I'd like to remind you, in the case of Albacora, our goal is to have a partner. We are not resistant to have partners. And as for synergies, it's very different when you talk about shallow waters and deepwaters.
Shallow waters in the case of TBMT and Polvo. For shallow waters, we have a rig, but that rig only handles the workovers in TBMT and the fixed rig handles workovers at Polvo, and it is the same team that operates both rigs. So here, we cannot have the same time. We can -- cannot complete a well at TBMT and another one at Polvo at the same time, we can't do it at the same time, at least that's not we are thinking right now. We will need to increase our crews and give more muscle to our crews. We still believe it's better to do it sequentially for now.
And in deepwaters, that's a whole new game. That's more in line with Frade and Wahoo. The same rig that'll handle the drilling campaign at Frade will handle the drilling campaign at Wahoo. It's a sequence. We'll drill first at Frade and then Wahoo. We could do both in parallel. Frade, the deepwater cluster together with the shallowwater cluster, that would not be a problem. We are not doing it right now because of the focus. It is our first-time handling such a big project. So in the case of Polvo, Tubarão Martelo tieback and the workovers, we need to handle that first and then Frade later, we didn't want to do them both.
It would be easier to do something in parallel in shallowwaters and in deepwaters, but it was not our decision. We will continue to work in shallowwaters until the end of the third quarter. And then in the end of the third quarter, most likely in the fourth quarter, we will start the campaign at Frade in deepwaters. And then we'll start drilling at Frade and then move on to Wahoo and so on and so forth.
You asked about delays, delays in the tieback project. Yes. Today, what do we have to do? All of the materials have been commissioned. They're all being built. We even included a photo of the assembly line being built, the studies are ready. So what they can tell you is that today, it is very hard that there will be delay in delivery of materials and equipment. Things have been done. COVID around the world is going away. There are things being manufactured in the U.K., in Portugal. COVID seems to be a little more under control. We are not seeing any plants stopping because of COVID. So it seems that everything is pointing to on time deliveries.
We'll receive our flexible lines in the end of May and there's one of the photos in the release that coil with a flexible line around it. That is one of the most important items, umbilical lines. So we'll get that in the end of May. We have to clear it in customs and install them. We have the vessel, the Sapura vessel, and it is contracted, and it is recovering lines that we have there. In that deal with Dommo, we kept some lines, and some lines have to be recovered at Tubarão Martelo. And we're removing these lines with this vessel.
So the vessel is in-house. So we just need to receive the whole equipment and install all the flexible lines. So the possibility of delay is unlikely. Having said that, our contingency plan would be to see to negotiate a tariff with BW. If we come to the conclusion that we need to spend more time with the FPSO approval, we'll negotiate a tariff with BW, that is compatible with the situation. We don't expect it to be $100,000 a day as we pay today. But yes, there's this possibility. Having said that, again, I stress, a delay is very unlikely.
As regards moving to onshore, no, we don't have that in our radar. That is not in our radar. I believe that onshore can be profitable, can be interesting, but it is a different type of company. It's a different mindset. Francilmar and I have had that kind of conversation over and over. It's a different type of operation. And this is a sing and acting operation. While offshore is more of a planing, reservoir engineering operation. These are 2 very different things. And we believe here, at Petro Rio, we still have a lot of room to grow in offshore. At the moment, it doesn't make sense to look at onshore.
At the moment, we see some companies rehearsing to move from onshore to offshore. That's something they should look into very thoroughly and carefully because we are talking about 2 different beasts here. We are not thinking about going onshore. Petrobras is divesting in that area. We know a little bit about it, but we didn't get excited about that because we believe that it is a totally different type of operation. It requires a totally different skill.
And as regards ultra-deep waters, we're already operating deepwaters. We operate in mature fields. So we might have a mature field in deepwaters or in shallow waters. As time goes by, mature fields will be in ultra-deepwaters. Now today, ultra-deepwaters are in immature fields, and that's why they are not part of our scope of action. But our goal is to operate in mature fields. When we find mature fields in ultra-deepwaters, we'll look into those.
Now giving up return to do more business, I don't see that happening at Petro Rio. It's not our idea. Our idea is to maintain return on investment. And that's why we focus on mature fields. We don't tackle exploration and nothing different than the operation of mature fields. So this is what we know what to do. It's a one trade pony. That's what we do. We operate mature fields, and we'll continue to do that with the level of return that we have today. This is our mindset.
Thank you. Very clear. Very well explained, and I think that the risk of delays is mitigated.
Our next question comes from the webcast by Felipe. At the beginning of the presentation, Roberto mentioned that the lifting cost fell below the company's expectation. However, a simple calculation of OpEx suggests an annualized cost of around $160 million versus an expectation of $180 million, $190 million expectation. In addition to foreign exchange, what other factors explain this performance?
Hello, Felipe, thank you for the question. Good point here. Today our running rate and if you multiply it by 12 or by 4 quarters, we would get close to $160 million. But we've been guiding the market, guiding people to something close to $170 million. This $10 million difference from $160 million to $170 million. Well, $180 million and $190 million, that would include contingencies. But the number we are pursuing is $170 million. In this delta, $10 million delta relates to shutdowns. We're going to have a shutdown at Frade Field, as I mentioned some time ago, and it is happening now. And the shutdown costs $5 million. So it is on top of the $160 million, and we're going to have another shutdown at TBMT because of the tieback. It will not cost $5 million, but there will be another shutdown. So it will be between $160 million and $170 million naturally.
Of course, there is the foreign exchange effect that helped us a little. But this is what we're thinking pursuing running costs of $170 million. Actually, we won't end the year at $170 million. Because in the middle of the year, we'll eliminate the Polvo FPSO. So we'll have to make adjustments. But the running rate would be around $170 million. And after that, we would have to exclude the second half of the year, of the chartering of FPSO Polvo. So the cost for the whole year should be $170 million, minus this [ $35 million ] around that. And for next year, something between $110 million and $120 million. That would be the OpEx running rate for next year.
Francilmar is laughing, he's sitting next to me. But that's the number that we have in mind.
Next question comes from the webcast by Mr. [indiscernible]. Are you considering to the possibility to issue a new bond?
Yes. We are considering to issue -- not a new bond, but 1 bond, never issued any bonds. We have $370 million in debt considered in the very short term. And yes, we have considered the possibility of issuing a 5-year bond. This is the follow-on. We've been thinking about this. We've been analyzing this. We've talked with many banks, I guess it started in February, from February to present. We have spoken with more than 30 players. Getting their feedback, understanding the rates, the costs, the fees. And we are looking at the possibility of issuing a bond. And we're considering it.
There's a possibility of an education of the market regarding Petro Rio. And it's all maturing, more and more. We expect to be able to do this in the coming months.
So this concludes today's question-and-answer session. I would like to invite the executives to proceed for their closing statements.
Well, I would like to thank all of you for joining us. I want to apologize for the technical glitch we had in the middle of the call. But technical glitches do happen. Thank you very much for joining us, and I hope to see you in the next quarter. Thank you very much.
That concludes Petro Rio's conference call for today. Thank you very much for your participation, and have a good day.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]