Petro Rio SA

BOVESPA:PRIO3

Earnings Call Transcript 2024-Q1

[Jose Costa, executive]

Good afternoon, everyone. Welcome to Prio's First Quarter '24 video conference call. I'm Jose Gustavo Costa, IR and Treasury Manager and I will be your host.

The presentation and comments on the results will be presented by our CEO, Roberto Monteiro, our CFO; Milton Rangel; and our COO, Francisco Francilmar. After the company's results, they will be available during the Q&A session. [Operator Instructions] This event is being recorded and will be available on our Investor Relations website.

This presentation contains information based on future estimates and forecasts based on assumptions adopted by the company, which can therefore, change and should not be considered facts or be used as the basis for financial projections beyond the plans expressed by the company.

I will turn the floor to Roberto Monteiro, our CEO.

[Roberto Monteiro, executive]

Good day, everyone, and welcome to our earnings conference call for the first quarter of 2024. As always, I'd like to start by thanking our employees for their hard work and resilience. It was not an easy quarter, as I will explain in a moment. But in the end, we relied on everyone's drive, discipline and resilience throughout these months.

Well, talking a little about the quarter itself, although we posted the second highest quarterly EBITDA in our history, and a controlled lifting cost of around $7.5 per barrel, Q1 was a quarter in which operationally speaking, we fell short of what we would have liked to have achieved at two important events, which Francilmar will detail a little later.

But one of them was related to the gas lift at Frade Field and the other was related to power generation at Albacora field. These two failures lasted throughout the month of February and a good part of March. Albacora, in particular, was only regularized in April. So in other words, they were long-lasting equipment failures that took long to be resolved, and that had an impact on our production. So I think these two are the two most important points on the operational side.

Another important item to be commented on during the quarter was the environmental license for the Wahoo project. Although we have already received the vast majority of the items for executing the project, all the equipment, practically -- I'd say, 80% of the equipment has already been received. So far, we haven't been able to obtain the environmental license due to the strike-like operation or the strike at IBAMA, the environmental agency that issues this license.

Anyway, this has delayed things a bit. It delayed Wahoo's first oil. But we already -- we continue to be prepared so that as soon as this is cleared, the project will get underway. But still, it's a delay that we had because of this pending item. I believe one positive item in the quarter -- there were actually quite a few that I'm going to talk about now. But one positive item was the IBV arbitration process, which came to an end. We were successful in this arbitration. The arbitration panel gave no merit to any, any of IBV's claims.

Throughout this month of May, we are still in a period of stabilization of the decision from the point of view of requests for clarification and so on. We don't think there's anything more to come, but it was a positive development. We are still under what we call exclusive operations regime under which we make 100% of the CapEx investment, and we're entitled to 100% of the oil produced. Of course, this will really be translated into the results once we have our environmental licensing completed and when we can effectively implement the project.

Moving on, there are 2 other items I'd like to comment on during the quarter. The first was the issuance of local debentures. We issued $600 million of local debentures. Of this $600 million, $400 went to the company's cash in the first quarter of 2024. This meant that we ended the quarter with a cash of $800 million and a second tranche with an inflow of $200 million in the second quarter. So although we posted cash totaling $800 million in Q1. Today, our cash is already a little over $1 billion.

And our debt has been falling. Net debt over EBITDA ratio, which is our level of indebtedness has been falling consistently. This net debt over EBITDA ratio now stands at 0.6x. I think these are the main points to present and comment on in the first quarter, which was a little more rocky operationally. We produced 88,000 barrels, an average of [ 88.3 ] and a lifting cost of $7.5 per barrel. So a little below our expectations.

The environmental licensing, which has already been widely publicized, the IBAMA issue and so on. On the positive end, we have the issuance of debentures, the reduction in our level of debt and the positive final decision in the arbitration with IBV.

Well, I will now give the floor to Francilmar, who will go into more detail on the operational side. Milton will then talk about the financials and I'll come back in the end to talk a little about sustainability and the next steps. Thank you. Francilmar?

[Francilmar Fernandes, executive]

Thank you, Roberto. Hello, everyone. Let's continue on Slide #5, about the performance of our assets. Well, this quarter was a little more challenging for us. We didn't have the startup of any new wells. The production development side is still working on planning and getting ready to execute while the production part faced a setback and some obstacles throughout this quarter, which ended up having a negative impact on production.

Overall, production was down 12%, very much affected by Frade. I'll explain it in more detail. Even so, we managed to reach a lifting cost of $7.5, showing the company's resilience and preparedness to keep costs in order, even when there is an impact in terms of production.

On Slide #6, we have our lifting costs and everyone must have heard of it in some way. I think it's the most important indicator for the company, combined with safety to maintain the company's growth in a sustainable, safe and resilient way. So $7.5 is a good number. We will make every effort to improve this even further. And with the startup of new wells, new wells coming online in the development campaign moving forward, we will improve this. The cost is within what was expected and planned. There are no scares, nothing to worry about.

Let's move on to Slide #7 and talk in more detail about the assets. Frade Field, as I said before, was the one that was most affected, that suffered the most due to two major factors. One was maintenance and problems related to plant efficiency. We had a downtime in the compression system. A compressor had a problem there. And then we ended up restricting the amount of gas used in the oil lifting process and this took a big bite out of the field's efficiency. The issue was resolved. We have redundancy, and we have the compression system up and running, so it was a one-off issue.

The other part was the decline of the wells. The new wells that came online last year starting in January, we began to notice a slightly greater decline both in some reservoirs due to pressure and in other reservoirs due to an increase in water content. So wells that were producing practically 100% oil are now producing 10%, 15%, 20% water, which is a natural process.

There's a transition after the initial production plateau and there's a natural supplement with a decline rate of around 8% to 10% a year. And in our forecast, we expect this to settle down a little from now on. So no news for Frade. It is now about managing the field to achieve the best possible stability, efficiency and safety in the field.

Moving on to Tubarão Martelo and Polvo TBMT. We've had a very stable month and quarter, with no major hiccups here in the asset. We reached 98% operating efficiency. We recently started a drilling campaign at Polvo. The aim here is to test a couple of reservoirs there and then depending on the economic feasibility, we'll put to producing wells, whatever works, whatever is best. There are no great expectations here. It's more to offset the production decline rate in the field. So the next quarter should bring some news.

Moving on to Slide 9. I'm going to give you a general update on Albacora Leste Field. It was also a challenging quarter in terms of maintenance and plant efficiency. We also had a problem related to the compression systems, some recurring compressor failures. And we have an entire compressor out doing major maintenance. Until it comes back online, we're a bit fragile, which is what we suffered this quarter.

The system is functional now. We won't be able to relax until the third compressor returns. It is undergoing a retrofit in a workshop on land. So until then, we are going to manage the field up close, so to speak, to have the most stability and best efficiency. So we believe that this quarter, we'll see better conditions and more stability at Albacora Leste.

Apart from that, along this quarter, we've recently started to carry out a maintenance campaign on the subsea system on the subsea installations, which was initially scheduled for the second half of the year. We're trying to bring it forward so that we can include and repair two wells that were stopped, two producers and two injectors. And then over the course of this month or next month, we can get these wells back into operation, which will improve and give us a better boost in Albacora Leste.

So these two actions, improving maintenance and getting these wells to produce and inject. This will give us an extra boost until we have an operational program for Albacora Leste ready so we can start operating.

Moving on to Slide 10, I'll give you a quick update on Wahoo. Here, the main issue today is obtaining the environmental license for both drilling and the pipeline operation. We've been closely following the challenge it's been to obtain this. The agency is kind of paralyzed, so it's very difficult for things to happen. But we are monitoring the process very closely.

In the meantime, we are receiving the materials. Practically, everything is ready in terms of the subsea equipment. Some things are still being done on the FPSO in line with what we need in terms of maintaining operating continuity integrity. Everything is on track to be operational when we get the green light to start drilling, mobilizing and installing the rigid pipeline that connects the fields.

In addition to the first vessel option, we are already in negotiations with other alternatives. If the time window we had before until September does not materialize, we already have alternatives, A, B and C for other boats that would serve us from September onwards. So we already have a plan B in place and we can rest easy today. We just haven't signed the contract yet, but the time window has already been negotiated.

We can't set a date for first oil yet at Wahoo. We were talking about August, but today, we know that we won't be able to make that deadline. But we are moving forward so that as soon as this environmental licensing issue is resolved, we can move on to implement the project on site.

Well, that concludes my participation. I'll turn the floor to Milton. Thank you.

[Milton Rangel, executive]

Thank you, Francilmar. Good afternoon, everyone. We'll now get into the company's financial performance starting on Slide 11, where we are now.

The first quarter of '24 total revenue was almost $640 million and equivalent FOB revenue re-onboard was almost $606 million. This translates into an amount sold of 7.5 million barrels of oil in this quarter. The benchmark Brent was around $85 per barrel. And our equivalent selling FOB price was around $79.82 for this quarter.

So this means an improvement when compared to the first quarter of 2023. Despite the Brent of the first quarter of '23 on average being at $84 closer to the first quarter of '24, we had an improvement in the commercial side, which is captured both in revenue and the result of trading.

And with that, we've reached an EBITDA of $467 million, a margin of 77%. This margin improvement is largely explained by the reduction in lifting costs when compared to the first quarter of 2023. Although it increased slightly compared to the end of last year, there was a relevant improvement when we compare to the first quarter of last year.

So improvement in lifting costs, improvement in commercial performance, although the Brent was stable, this helps us understand the improvement in this EBITDA margin. As a result, we also had an increase in the appreciation and amortization expenses, largely justified by the entry of Albacora Leste which in the first quarter of '23, did not cover the entire quarter. So we also had an increase in Frade's production, which also pulls this depreciation a little more towards the current result.

Throughout 2023, we had an update on Frade's production that was higher than expected. So with that, we reached a net income of $224 million in the first quarter of '24 million compared to $231 million in the first quarter of '23.

Now moving on to Slide #12. We're going to talk about funding. I think the main highlight here is regarding our liability management efforts. In March, we concluded our second issuance of infrastructure debentures totaling BRL 2 billion in April, which does not reflect in this result. But in April, we made a second, actually, a third issuance of infrastructure debentures of BRL 1.3 billion. So we took advantage of a great timing to do this type of issuance.

We raised these [ 3.3 billion ] at a rate of USD plus $6.14, an extremely competitive level to reinforce the company's cash and to manage liabilities in a very healthy way while also pushing the duration up. So these 2 debentures, these 2 issues that we recently made have a duration of around 6 years. And with that, we started to repay bilateral debt that we had. With relationship banks, we paid $136 million. We still have $150 million to pay in '24, $225 million in 2025 and that tower over there in 2026, which is our international bond, which we issued in 2021, it's a 5-year bond.

So today, the company's situation is very comfortable in terms of liquidity. We have plenty of room to continue our liability management exercise under the best possible conditions for Prio. And with that, we can see the 2 charts here on the left of duration and average cost of debt. What's good to note here is from the fourth quarter of '23 to the first quarter of '24, we virtually maintained the same cost at around 6% per year in dollars, and we greatly improved the duration of the company due to that second issue that we mentioned of BRL 2 billion. The impact of the third issuance that we made in April is not reflected here in this quarter yet, okay?

So moving on to Slide #13. We're going to talk about cash flow or variation in Prio's net debt in the quarter. We started with $1.45 billion which is the balance at the end of the fourth quarter of '23. We posted an EBITDA of $467 million, which basically paid for all of those commitments that we had throughout the quarter. Even exceeded these commitments a little bit, reducing this net debt at the end of the first quarter to $975 million. What was relevant here was the expenditures with working capital that is reduction of receivables, increase in inventory, payment of suppliers, the normal day to day of the company. We paid the earn out of Albacora Leste. Because of the average price of oil that closed in 2023, we had this commitment, and we paid it at the beginning of this year. So that's the amount disbursed.

We bought back some shares. We continue with our CapEx. Very relevant, everybody knows. We have an important CapEx, especially for the Wahoo Field, but there were still some expenses related to Albacora Leste and Frade, $21 million in financial results and $39 million in taxes of cash disbursement mainly referring to last year. So with this, we reached those $975 million of net debt.

Here, we talk a little bit more about leverage on Slide 14. We can clearly see the trajectory of leverage reduction, basically explained by the company's strong operating cash generation, which can address the CapEx, all of the investments we have. And with that, it's been decreasing.

Even with a large CapEx campaign, we have been able to reduce leverage every quarter. So it now stands at 0.6x, which shows a company that is streamlined, prepared if there is a need to take on more debt in order to take advantage of an interesting investment opportunity. We have a very comfortable position in terms of indebtedness.

So with that, I turn the floor to Roberto to continue our presentation.

[Roberto Monteiro, executive]

Thank you, Milton. Well, I'm going to talk a little bit about the environment and society. One of the flagships here is our emissions index, our carbon footprint. We closed the quarter at 24 kilograms of CO2 per barrel of oil produced. That's an improvement over last year. However, there was a slight worsening compared to the fourth quarter of last year.

And that's exactly the same thing as with the lifting cost. We had our absolute emissions in absolute terms, our carbon emissions was more or less constant. And we had a smaller production base, which meant that we had a slightly higher carbon rate per barrel CO2 equivalent per barrel equivalent.

So it's the same thing with the lifting cost. We closed at $7.5 per barrel because the costs were more or less constant and a lower production. And here, the carbon emissions were more or less constant in a slightly lower production.

As for health and well-being, we maintained all of the programs that we have been doing here at Prio and in the first quarter, we took the opportunity to do very strong work with respect to safety, operational discipline and creating a culture and improving, creating a culture of safe work. So that was the main focus.

Safe work was a major focus here in our first quarter. And I think it's part of the company, but it must always be said and must always be fostered. We also continue with our line of sponsorships with incentivized projects in this quarter with the Prio Humor Award, the support to the Vini Jr Institute, Mundo Zira and so on.

Moving on to the next slide. Let's talk a little bit about the next steps. The first next step here, I think perhaps the most important one of them is Wahoo's environmental licensing. That's one thing that's important to the company. We are going to add 40,000 barrels a day here as soon as we can move forward with the project, and we have the approval by IBAMA to move forward.

And in the end, it's also going to be an important contribution to society. It's more royalties. In the first year alone, the first 12 months, we're talking about BRL 400 million to BRL 500 million in royalties to be collected by the federal government. And this is in addition to income tax, in addition to more incentivized projects, in addition to projects that will also be approved as conditions of the environmental licensing and so on. So it's a project that's good for the company and it's also going to bring its returns, let's say it like that, for society. And this, I think, is the main point of attention here at the company in the coming months.

After that, a second important point is Albacora Leste. We listed two points here, operational efficiency, which is first to be able to consolidate these gains that we had over the past year and to no longer have those issues that we had with generators and so on. So this is very much a matter of culture, preventive maintenance, predictive maintenance of not losing track of this.

We're also trying -- well, not trying, we are anticipating, as Francilmar said, some wells that we were going to work on in Albacora Leste. They are not new wells, they were wells that were producing, but they were closed due to pipeline problems, Christmas tree problems, various issues that since we took on the field, we're there. So we're going to put at least 2 wells into production, and they were not producing.

And with that, we hope to bring our production to out -- there's also the Polvo campaign that's going on. And here, too, the Polvo wells are wells that come in with a lower production of around 1,000 barrels, 1,500 barrels, sometimes two, one for one. But anyway, combining all of this, our expectation is to move from the current 93,000 barrels per day, which is more or less where we're running at to get close to 95,000, maybe exceed a little bit these 95,000 barrels per day so that we can try to maintain this level of production until Wahoo is a reality.

Finally, the next steps that are also on our agenda are prospection for new M&A opportunities, new M&As and so on. We continue to work hard on a series of opportunities that have been coming up. Nothing to disclose at this point. But anyway, that's the company's DNA. We've been preparing in terms of cash, right? We now have a cash position of more than $1 billion. We are preparing more and more for these new M&A opportunities, which we believe have a great chance of coming up in the future.

Well, I'll end here. I thank you all for attending. I thank our employees, once again, society, our investors who are always so great with us. And with that, we open up to questions. Thank you.

[Operator]

Hello, everyone and welcome to the Q&A session of our quarterly earnings call. I will now begin the question-and-answer session with a question by Milene Carvalho with JPMorgan.

[Milene Carvalho, analyst]

I think that although the company had an operational -- operationally challenging quarter, we had some very positive surprises with the results disclosed yesterday. So I'd like you to elaborate on trading. As Milton showed in detail, the discounts vis-a-vis the Brent improved. You have been talking about autonomy, liquidity and trading flexibility so -- or flexibility for the offtakes. And I'd like to understand this better. How is this evolving? What is the expected margin? What are the expectations for this segment?

And the second question, I'd like to know in more detail about Albacora. You had a problem with the generator now in the beginning of the year. There were some workovers scheduled. But if I'm not mistaken, the maintenance downtime was pushed forward to May. Perhaps you can help me with that. So what is your expectation regarding a timing for stabilization. And what is the expected level after the maintenance downtime? Because what we have seen is a lot of fluctuation, [ 30,000 ], sometimes more than that, sometimes a lot less than that. So what are your expectations?

[Roberto Monteiro, executive]

Thank you Milene. Regarding trading, it's exactly what we said in the prior quarter call. You have to look at the line item that reads equivalent revenue FOB. If you divide that by the number of barrels produced and sold actually, we're going to get close to $80 per barrel. So this is the actual realized price. And this is the number that we compare with Brent. Trading is doing good. I'm pleased with the result. Today, we are running at a level of $4 per barrel of discount considering commercial discount and logistics to get to the equivalent FOB. And the reason we use FOB, because it is equivalent to the whole offtake coming out of the FPSO.

So the good part of the trading is that we can sell 3 million barrels a month or close to it. Of course, this quarter, we didn't sell that, but we have the ability to sell this volume of 3 million barrels a month or a lot more than that without being tapered to 2 or 3 trading companies.

So when we were a smaller company, the big point was we had 2 or 3 buyers. Although the oil would go to a number of refineries. We have the middleman, the traders, and these are a few. And with that, of course, we lose a lot of bargaining power when you have to sell 3x, the 3 offtakes. and then to sell -- [ deploying ] a vessel in a month. What the trading did for us was open the door to us, that possibility.

I do not think that we're going to dramatically improve our trading. There are some optimizations that we are implementing, particularly used to -- or linked to VLCCs. So we are kind of running with 4 kind of that. We're trying to reduce that. We might perhaps gain sx1, $0.50 of $1, something in that order of magnitude. But to me, the big advantage, the big benefit of the trading brought is this ability to put all of this volume in the market without being penalized in our selling price.

As regards Albacora, what we see there are those failures in the FPSO. The easy way to see this is that we have an operating efficiency of 80%. We have that in the quarter. So the FPSO was up and running 80% of the time. When it's working 100% of the time, we see those numbers you mentioned, 30,000 or more than 30,000 barrels produced.

Sometimes there's a trip, it stops for 2, 3 hours in a day, and that's when you see lower numbers. It has nothing to do with the reservoir. It has something to do with the top side. Our expectation is to increase these 80% to 90%. Last December, it was 94. So our expectation is to have an operating efficiency between 90% and 95%. 95% operating efficiency is great, 90% is good. So that's our expectation, but we still have a journey ahead of us. We thought we were doing better last year and we are not.

The production level of our Albacora before we actually performed the work of action, it's not a workover before we begin the drilling campaign. Like I said, we can consider 35,000 to 40,000 barrels, but not more than that. These numbers will substantially increase when we get the drilling license for Albacora, which is the next step for Frade, and then we'll start drilling new wells, and we'll get close to 60,000, 65,000 barrels, we'll reach our ultimate goal. So that's it.

I just want to add something about the downtime. The downtime was scheduled for May. And when we stop the vessel, this big maintenance items are tackled then. So we had enough of all the materials. So we postponed it to July.

After the downtime, we can expect an improvement because a number of pieces of equipment will be replaced. And we can only perform maintenance when the field is starved. We have a lot of equipment arriving, and we believe that after July, we are going to increase the level of production.

Thank you for the question, Milene.

[Operator]

Next question from Bruno Montanari with Morgan Stanley.

[Bruno Montanari, analyst]

I have a couple of questions for Wahoo and then one for Frade. In Wahoo, if you could give us more color regarding those alternative plans for the vessels? What would be the alternative plan B that Francilmar mentioned, an option that will give more flexibility for the company? And is there any penalty if you don't use the original time window with McDermott? More objectively, your base case, is it still to have first oil flowing in 2024? Or is there a risk that this will slip to the beginning of 2025?

For Frade, it seems that production has resumed after the challenges in Q1, but at a level of 40,000 or less compared to production levels, which were above 50,000 barrels daily previously. So I'd like to know what to expect about Frade? What do you expect from Frade in the coming months?

[Milton Rangel, executive]

Thank you, Bruno. I'll start with Frade. No, Frade is not a 40,000 low. We are producing at 47,000, 48,000 barrels daily and that's the number. It's 40 highs. We believe we can increase it a little more. Our reservoir team decided to reduce production a little bit.

Perhaps they were a bit conservative. In this moment, as Francilmar mentioned, when we started seeing more water content in the wells, so we wanted to be more conservative. But that's the production at Frade, 47,000, 48,000 barrels a day.

You might have seen one specific day when we had a stoppage. Last week, we were doing some tests. That was a test, that's a test to measure production at the wells. That's an official test that we are obliged to make every now and then. And that restricts the production of some wells a bit when it goes to the test separator, but it's nothing out of the ordinary.

As for McDermott, I mentioned Sapura, that's not it. As regards to McDermott, there is a point to be addressed. I don't want to get into details now because that's part of the contract. It's the contract framework that is being evaluated, reviewed, revisited and discussed. But yes, we have another vessel, and that belongs to Sapura. I already said the name. It's another vessel that can [ relay ] the pipe in the second half of this year. I don't want to give you a date and say, if it's this year or the next.

We haven't got the environmental licensing. I've spoken about the license so many times before, and we never get it right. In terms of the date, I believe that if IBAMA resumes work, we'll need IBAMA to work for some months to issue the license. The moment we obtain the license, we'll need about 3 months, 60 to 90 days after issuance of the license to have first oil flowing and considering that we have to use the vessels and make it all match.

So I guess it's likely that we'll have first oil flowing still this year, but I don't want to tell you that it's going to be in October or September or November. Because there is an unknown in our hands and an unknown element, which is the license. It is unfortunate, but I don't want to give anybody a date.

And if I may add something, so we can all be on the same page. The contract we had with the first pipelines for the well, so we had the time line until September. We mentioned that over and over. When we saw the license taking longer, we started looking for alternatives. We found some alternatives in the market, there are two, and we are moving forward with one of them. And one of the options that is from today that is on the table gives us a very good operational window from September to the start of next year. So the strategy of the company is to be ready so that as soon as we get the green light, we'll proceed, and we'll spare no efforts to move ahead as we've always done.

And there's another point, McDermott, that we have this window until September. Therefore, for whatever reasons, they are delayed in the project that they are delivering in the Gulf of Mexico, so there is another contract clause of them with us. That's why I don't want to get into the nitty gritty of the contract yet, but we are working on it. We already have a vessel available in September onwards. So the vessel, which was a big concern for us a couple of months ago, well, I wouldn't say it's sorted out, but it's on the way of being sorted out. I think it's just a matter of getting the environmental license as soon as possible.

[Bruno Montanari, analyst]

Very clear, if I may ask a follow-on question regarding the license, perhaps you could explain to us what is the mechanic of the type of license you still need to obtain? You mentioned a couple of months for the license to be issued. Is it something that requires a lot of work, a lot of analysis by IBAMA? Or these months would be needed because of the agency backlog?

[Unknown Executive]

I guess it's a mix of the two. I know that our drilling license is more advanced in terms of IBAMA's internal analysis. And I know that even with IBAMA being on strike and so on, I know that IBAMA still is moving ahead with their analysis. They are not issuing any licenses, but they continue to do their analysis work.

Some time ago, I said, I believe we have 3 months to get it. The drilling license is really close to be ready, to be given. Now the installation license some months ago, we spoke about 2 to 3 months to obtain that license. But this number is shrinking over time because, like I said, it's not that IBAMA is 100% paralyzed. They are not issuing environmental licenses, but the information that we have is that they continue to do their analysis work. They continue to do everything that needs to be done.

So I guess that this time will be reduced. But it's hard to say how long it will take after IBAMA resumes 100% of their work. I guess that there will be some backlog at IBAMA. Things are building up at all levels. We see other companies with drilling rigs idle -- I had news of at least the 3 drilling rigs that are idle in Brazil just waiting for the environmental license. I know that there are some other drilling rigs that are arriving this week.

So there will be some effect. What we are trying or will always try is to follow the order, order of arrival, so that the order of arrival will be respected. We'll need to see how this will unfold. I know it's a moment of little certainty, but believe me, to us, it's as frustrating as it is for you or more.

[Operator]

Our next question, Monique Greco from Itau.

[Monique Greco, analyst]

I have 2 here on my side. One is a follow-up on Milene's question about trading. Thinking a little bit forward when Wahoo started production, how do you expect this activity, this trading activity and this trajectory of lower discounts, better conditions will be impacted by Wahoo's entry? It's a lighter oil from the current portfolio. So how that -- will that impact trading? Is it going to be positive or negative? Or are there synergies?

The other question is that Petrobras has a decommissioning plan for the next 5 years, a major decommissioning plan, especially for the strategic commissioning, those direct 13 platforms, 6 of them being floating platforms. Is there any possibility for Prio to acquire these platforms if Wahoo proves to be better than expected?

[Unknown Executive]

Well, Monique, regarding the trading of oil, if you look at the Wahoo oil, specifically alone on its own, it would be better if Frade trades a 3-something and our average is 4. Wahoo should trade at 2-something, 2-point something.

In reality, what we're going to see is not one oil being traded at 2 and the other for 3. It's a blend being traded, because all of the oil will be treated. It's going to be mixed in the tank. So the Frade current of oil will change a little bit the characteristics into a slightly lighter oil. So it will be a little bit more similar to Wahoo's oil. So you can do the proportional math. Frade produces close to 50, Wahoo is going to produce 40, so we're going to have 50 of an oil that sells for 33-something and 40 of an oil that should be traded at around 2.

It's not such a clear, linear math, okay? But the trend is for it to improve. Of course, sometimes things happen in the market that we don't foresee. I mean, a country that produces heavy oil -- producing heavy oil, there's a sanction or something, automatically heavy oil acquires more value than light oil.

So Wahoo today is more towards light oil. It's a medium grade towards a lighter oil. So that's it. And there will be an impact. I think it's going to be a positive -- marginal positive impact, but it is positive. As for Petrobras' decommissioning, Monique, I don't think so. I don't see our Wahoo plan. I mean there's room for growth. We are working on the Wahoo project with two oil production lines and a potential third water injection line. And these two oil lines are precisely there for the eventuality where we want to increase the Wahoo project. So we would never have the history of bringing another unit and changing the architecture. I believe we've maintained the same architecture we already have and have more wells in the Wahoo area like satellites and integrate them.

Monique, just to give you a better view, I'll add this. Wahoo was designed to support. In addition to the field itself, other connections, other tiebacks that was already in the early concept. The risk that we have is to get to FPSO, Frade's nominal 100,000 barrels. We have an advanced study internally to see how far we can go, the two tests that we can follow and then one takes a little longer, and there's a CapEx associated to this. So if it happened that there's a surprise where we exceed that, and then we'll evaluate. We've studied reallocation of platforms. It's not something trivial. And when the platform is being decommissioned, usually their physical condition is complicated. So it's very unlikely, but we're always monitoring.

[Operator]

Next question, Gabriel Barra from Citi.

[Gabriel Coelho Barra, analyst]

Two quick follow-ups and a question about capital allocation and M&A. The first point about Wahoo and the Plan B, Plan C that you've been studying for some time, I remember we discussed possible engineering adjustments given the change of vessel and how that would fit into additional investments. I don't know if you could give us more details about that, whether there would require a big engineering adjustment and how much it would cost for the company to make that adjustment.

Second point about maintenance in Albacora, but there's also an important maintenance at Frade to be done this year that I believe will be along with the tieback. I don't know how you're seeing this in terms of timing for this maintenance since it's a topic with such an accurate visibility in terms of the tieback and the environmental license. So if you can tell us about your expectation about this maintenance, that would be helpful.

About M&A, we've been asking you for quite some time, I think Roberto was very clear about this at the beginning of the presentation. But the point that I wanted to try to understand a little bit more is about the environment within Brazil today. This movement of consolidation in the industry was already expected. We've been seeing some moves and we've been discussing this with you for some time. The process of looking at assets outside of Brazil and thinking to internationalize the company.

And what I'd like to try and understand from you is if this process to go international, if it would mean an exhaustion of assets in Brazil for M&A or whether it's a process that's going to be parallel and how you see that in the medium to long term as -- PetroRio's position and the size you imagine for a further future for the company. If you can help me with those.

[Unknown Executive]

I'll let Francilmar talk about the operational side.

[Francilmar Fernandes, executive]

Okay, so two questions there. First, about the project -- yes, Wahoo. Wahoo was designed for two production lines, one line with more equipment. It was designed to be installed with the McDermott vessel that has a specific mode of pipe lay. And then the other one is a flat line without any major pieces of equipment. That's for more common vessels.

So what we're going to do is to, first -- for Plan B, there's no adaptation required. The second line is ready. It's here already. It's simply a matter of laying the pipes, and the engineers are already working on that plan. The other line, the condition we have today for the future after all this confusion with the vessel, we may use the same line without adaptation. But if we need to adapt it, it will depend on the vessel to do it, and it's nothing major.

It's the time there for them to adapt the points and how to lay the pipes and maybe minor adjustments. It's more a matter of how to lay them on the sea, but it's just a few million that we would have to invest if it is necessary. So nothing that's going to hurt the project.

The other question about the adjustment of the upside and the maintenance in Frade, there are the maintenance point, but part of the scope is tied to the adjustments for Wahoo oil and control. It was planned for April. We delayed and that's how we see it today. We're going to keep monitoring it. It's a major stoppage. So we're going to calibrate and adjust it for when we're closed. Until we get to the maintenance, we'll keep running things as possible and then later, we'll decide to do the stoppage.

Gabriel, now talking about M&A, the matter of going international or not. It's the only industry, the only place that interests us to have a look and potentially go outside of Brazil is the Gulf of Mexico. We did start to have a look at some opportunities, but these are things that are run in parallel. I don't think there will be -- the Brazilian market will be saturated or exhausted.

But what happens is very simple, the size of our company, we have a market cap of about $8 billion more or less, close to that. So we look at M&A in the company, we look at through two main sites: one, how much complexity do we add; and how much of synergy or value that new deal brings, the absolute value. It makes no sense for us to buy an oil field that also has an FPSO and it's going to be confusing, and it's only going to add $100 million. Because then you're wasting the company's operating capacity into a deal that's not really going to change the size of the business.

So these oil fields often produce little, but the difficulty of getting them to work, it's so big as a platform, it's a high complexity. So don't think it's a few that produces only a little bit, it's easy. It's not. It may actually be more difficult. So that's what we look at.

We think that there are some opportunities in Brazil still, but we're also starting to look at the Gulf of Mexico because we're starting to see opportunities that are in that negotiation window and on transactions that we'd like to look at, something like [ $750 ] and $1 billion, $1.2 billion something around those numbers. It's something that we seek. It can be slightly more or less. But that's the type of transaction that we seek, the ticket we seek. And that means it would be worth it for us to allocate Francilmar's time to be able to turn around and run those assets.

So those two axles, those two lines started to make more sense for us to look outside as well, where there's a good pipeline that's active, deals around those values that I said, and that's why we're looking there. But it's not that it's either here or there. It's things that we're going to look at, at the same time in parallel, okay? That's it.

[Operator]

Next question from Luiz Carvalho with UBS.

[Luiz Carvalho, analyst]

I have perhaps two questions, and if there's time, I'll ask a third one. Well, built on what you have just said, Roberto, about M&A. So [ Sinochem ], in a recent call abroad announced that they would be leaving the oil industry to focus on petrochemicals. And they are partners of Peregrino. So I'd like to understand, are you considering this? Are they putting this stake for sale? And in that case, how would you consider working or being part of a field where you would not have the operator ship in that approach of holding 20% -- of having 20% return in dollars? How would you analyze this, given that you would have the right to purchase if Equinor decides to leave the business in the future? I just would like to explore this a little bit more.

Second, if we could speak about aligning goals and compensation, perhaps you could tell us about your production target, EBITDA target for the management in 2024. Given that we have this roadblock of Wahoo that is delaying first oil, so I'd like to know how this relates with the targets for the management of the company.

[Unknown Executive]

Thank you, Luiz. Regarding Sinochem, I had already made some comments. And I had this interpretation that Sinochem would leave EP -- the EP industry to focus exclusively on petrochemicals. But I didn't know about this call. This is -- however, this is not new to me. It's not a surprise to me. Well, we'll consider that business. Of course, it's our duty to understand what the project is. But it's a field that is not operated by us, so it's more difficult for us. We cannot consider a lot of synergies because we are not going to be the operators.

Well, the player purchasing is an non-opt to purchaser, so they are the non-opt purchaser or buyer. We know how to handle trading and so on and so forth. But we'll have to see what the business can bring us. Our whole business, our whole franchise was conceived based on return, and this is the most important thing for us. We are not going to change our return expectation. It's not about Brazil or elsewhere. It's just that this industry requires a somewhat higher return. We'll always pursue a good return on the investment. So it's harder to justify.

We look at things from two perspectives: one perspective is how much more complexity this will bring in this case, not a lot; and how much more value will the business bring us. Synergies, absolute valuation. So those are the perspectives. Now in this case, there's no extra complexity. But likewise, the value created will only materialize depending on the negotiation and so on and so forth. I mean I cannot talk a lot about this because it's not something that is right there on the table. But when it's a non-opt partner, that's more challenging.

There was another question. I answered that one. What was the other one?

[Luiz Carvalho, analyst]

The compensation targets for the management considering a possible delay, because you disclosed the targets for 2023, general targets and by role. So I just would like to understand what's happening now, because this is -- the delay is not under the control of the company.

[Unknown Executive]

Well, our compensation works in this way. We have a target that we set in December of last year. It's a free cash flow target, it's what we call cash generation, but it's very close to the free cash of the company. And we have to beat that target.

We have some positives happening. For example, we have oil price slightly more expensive than what we budgeted. There's also the IBV -- the IBV theme. In the beginning, it's kind of negative because we have the whole CapEx, but there's also the IBV story, and this is quite transparent.

And there's also Wahoo. But our compensation is, if we meet our cash generation goal, great, we got the bonus and all. And if we don't, if we don't meet the target, we don't get it. This is what is the agreement. And then we have also fatal accident rates, which are 0 and accidents with an environmental impact, 0.

If these 3 things are not met, there's no variable compensation. In some moments of the company -- actually, in one moment in the history of the company, during more catastrophic time of the COVID-19 pandemic, in the end of the year, we kind of revisited. We dealt with COVID. And in June, July, when we had kind of more visibility of what was happening in the world, we revisited the budget and fine-tuned a few things with the approval of our Board of Directors.

So whatever happens, if we consider this as an event like COVID, this decision will be made more in the future. It's not in my hands. Today, what we have is -- our goal is cash generation. We have to meet cash generation of fatal accidents and environmental accidents. If all of that was realized, thus we have variable pay. If not, we don't. And that's all I can say for now.

Of course, we have to look at what's going to happen until the end of the year, how we are going to operate. Our Q1 was not so good. So I don't have a lot of merit here to say. And because we didn't do so well in Q1, let's revisit the target. No, that's not the reality. We still have a good game ahead of us. We are counting on a slightly higher oil price, and we have to give it time to see how the environmental licensing process will unfold. It depends on IBAMA. It's a little too early to think about it. Today, what we have are these 3 pillars that need to be met.

[Luiz Carvalho, analyst]

Okay. If I may ask a quick question to Francilmar. Francilmar, question about Frade that support vessel Genesis. It had come to help replace one of the gas valves of one of the wells at Frade, which until the date of the prior call had not returned. Can you give us more detail on that? Was this replacement concluded? Because if it's yet to do, if it didn't impact Q1, there could be a production delta to be gained at Frade to get close to [ 55,000 ] in December. Is this feasible? Is it a fair statement?

[Milton Rangel, executive]

Okay, Luiz. Well, the valve has been repaired. There was against lift valve control in the Christmas tree. If we don't have any other well coming online, there's nothing in the short term to increase the production at Frade. With this, we have to increase the production at Frade responsibly. Our commitment at Frade and all fields is to maximize the recovery factor. The company always focuses on the long run.

We can push, but the cost would increase. So we want to stabilize production and ensure the best recovery factor. So Genesis is already part of the fleet. It's a subsea intervention vessel, so we have the Albacora Leste front, there should be an increase in production with the two wells. And then we'll come in to do other things as we feed our portfolio.

[Operator]

Next question from Pedro Soares with BTG.

[Pedro Soares, analyst]

My first question is kind of an accounting one about CapEx. Perhaps this question goes to Milton. I just want to clarify because in your presentation, when you talked about net debt, there's a CapEx of about $153 million. But in another document, the CapEx is about $137 million to $140 million excluding M&A in the earn-out of Albacora Leste. I believe that part of this difference is due to classification of a part of the investment that would go to working capital maybe related to equipment purchase. I just want to understand if this is it or if there's anything that we're missing here.

And perhaps you could clarify about the early acquisition of equipment for Albacora Leste and even Wahoo that you mentioned in the release. How should we think about these acquisitions, these purchases throughout the year? Is most of it done already? Or is there anything else to be brought forward regarding the CapEx and for the revitalization of the fields?

And the second question to Francilmar. A follow-up on Albacora Leste and those wells that also Roberto talked about. They were off-line and they might be put back in production to boost production. I just want to confirm, are these two producers two producing wells? Or is one of them an injector? Do you need to mobilize the Hunter Queen? Mobilize something on site? Or is it possible to do it without the rig? Those are my questions.

[Unknown Executive]

Pedro, well, regarding CapEx, due to our system, it's a matter of standardization. When you look at CapEx in the income statement, a part of it is going straight to PP&E and part of it is kind of in a transition from inventory to PP&E depending on when it's being used, when it's been -- when its being used. So when we include in the cash flow, we are already having a direct allocation. So for Frade, ABL, Genesis, Wahoo, et cetera.

So you asked also about the perspective of what is the planned versus actual CapEx. Particularly for the Wahoo project, we are on budget. Of course, obviously, with the IBAMA issue, we have an expectation of a slight postponement, particularly regarding the drilling CapEx in subsea installation, services basically. The equipment will continue in the normal flow on schedule. No great changes there.

[Unknown Executive]

And to answer my part of the question, the ABL system has 4 wells, 2 producers and 2 injectors. Today, we already have the ability of the company, both with the installation vessels and the rig to do almost everything in-house. We just don't have the rigid pipe or vessel. That needs to be hired.

So regarding the equipment, we decided strategically to have a pool of things in-house so that we can be more agile and enjoy the opportunities. For Wahoo, we have received more than 80% of the equipment. The budget for Wahoo is almost [ $500 million ] just for subsea. A good part of that is materials. And service accounts for a smaller part.

So about Albacora Leste ABL, the 2 injectors have been connected during the phase of commissioning to start operating. And the producers, we are working on one now. This should be completed in a matter of a week, about that. And the other producer will take about 2 weeks. But this is just subsea service. It's just a subsea intervention vessel, relocation, repair of equipment and so on and so forth. And a few things in the FPSO for the commissioning and to start production.

[Operator]

Our next question, Vicente Falanga, Bradesco.

[Vicente Falanga Neto, analyst]

I'd like to go back to the bit about the two older wells in Albacora Leste that you're planning to reopen. What month do you think that this could happen? You said about the total production of 92,000, 93,000 barrels per day, raising that to 95,000 pre Wahoo. So until then, is there going to be a decline? Or I'd like to understand if we could interpret that those wells in Albacora Leste are each going to produce 1,000, 2,000 barrels per day. I'd like to understand if I'm interpreting this right.

And my second question is about Wahoo, those -- the vessels on the Plan B, Plan C, you mentioned Sapura. Are they pipe layers? Have they laid pipes before? And how reliable will the performance of those vessels be?

[Unknown Executive]

I wouldn't say that each well is going to produce 1,500 barrels. It can be a little bit more and then go slightly down. I'm thinking about the company's production overall. Let's imagine it's going to get to 95,000. Maybe we'll go over that. But on average, maybe we can get to 95,000 until the entry of Wahoo. So maybe going slightly over 95,000 once we have the wells in production and then dropping. There's also the drilling at Polvo.

But at some point, we're going to get results, and so it goes. I mean, I'm thinking about this. Instead of saying this well produces this much, the other well will produce that much. But it's -- what has to be clear is that those wells will not produce 5,000 barrels. It's not going to happen. It's going to be a smaller production.

Helping to cover that decrease, Albacora, we are figuring maybe end of May or early June. But I'd say that by mid-June, we should have those 2 wells in Albacora already connected. And there's another 2 injection -- injector wells that we already put in commissioning, and they're running. But injector wells today, Albacora plant is fine in that sense. So it's more like a backup that we have for an eventuality rather than a need to increase production today at this time.

And you had another question about the vessels. They are pipe laying vessels, they're pipe layers. And this vessel has just finished -- the one that's in Malaysia has just finished a job, and it went well, had a very good predicted time and they're vessels made for that. They have a long history, even longer than Amazon that we had from McDermott.

[Operator]

Next question, Leonardo Marcondes with Bank of America.

[Leonardo Marcondes, analyst]

Actually, most of my questions have been answered, but I have a doubt here about IBV still. From what I understood, IBV -- if from what I understood, IBV has not left the field, right? It's simply outside of the current development plan that are the power producer wells and 2 injectors, right, on the field? So my first point is to understand or to know if my understanding is correct and also to check with you if my understanding is correct, of course, if there's still an intention of buying their stake, maybe at a much lower valuation now.

[Unknown Executive]

Yes. To summarize greatly, that's it. Today, we are in the exclusive operation regime. Exclusive operation regime is basically that. We built a development plan for that specific area of Wahoo. And for that, we are developing according to plan that we got approved by ANP and we're going to develop 100% of it.

If by chance in the future, we conclude that there's something else or another reservoir, anything else to drill in that field, they're going to be our partner in that share. And we're going to have to present it to them and they'll make a decision again whether or not they want to participate, contribute. Exactly the same thing.

As for buying, we're always open. We've been open to this -- when did we buy it? 2021. So when we made the first offer to them, the last offer we made was one week before the arbitration. So we're always open. We're going to remain open. We've always been very commercial and will remain so. But it's going to depend a little bit on their mindset.

For this deposit, let's say, for this reservoir, the decision is being crystallized now, as I said. I mean, this period of any questions that may come up or request for clarification -- I can't say question, it's a request for clarification. So basically, the process is concluded. It will be formally concluded on May 15, and that's that.

[Jose Costa, executive]

I think that with this, we are going to end this earnings video conference call. Thank you very much for your participation. I'll turn the floor back to Roberto for his final statements.

[Roberto Monteiro, executive]

Thank you very much. It's been a pleasure to hold another video conference call with you. I hope to have you onboard next quarter. And I'd like to thank once again our employees and society that supports us a lot. Thank you.

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