Petro Rio SA

BOVESPA:PRIO3

Earnings Call Transcript 2020-Q2

[Operator]

Good day, ladies and gentlemen. Welcome to the conference call to discuss second quarter 2020 results of PetroRio. Thank you for standing by. [Operator Instructions] This event is also being broadcast simultaneously over the Internet via webcast and may be accessed through PetroRio's Investor Relations website at ir.petroriosa.com.br, by clicking on the banner Q2 '20 Earnings Release.

Before proceeding, let me mention that forward-looking statements that might be made during this conference call relative to the company's business perspectives, projections and operating and financial goals are based on the beliefs and assumptions of PetroRio's management and on information currently available to the company. Forward-looking statements are not a guarantee of success. They involve risks, uncertainties and assumptions as they are related to future events and, therefore, depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of PetroRio and could cause results to differ materially from those expressed in such forward-looking statements.

I would now like to turn the conference over to Mr. Roberto Monteiro, CEO, CFO and New Business Officer; Mr. Francilmar Fernandes, COO; and Mr. Emiliano Fernandes, Head of Legal Regulatory and Management. Mr. Monteiro, please go ahead.

[Roberto Monteiro, executive]

Hello, everyone. Good afternoon. I see here a large number of investors following the conference call. And among them, many investors who are PetroRio employees and who are also our shareholders. So thank you very much for joining us.

Before I move to the highlights of the second quarter 2020, I would like to mention a more encompassing and broad point regarding the culture of PetroRio and PetroRio team. I think that this was a very hard quarter from the global standpoint with the COVID-19 pandemic and all that. But I would also like to point out the PetroRio culture, a culture of efficiency results, low costs, teamwork, empowerment and so on and so forth. This culture led us to many achievements even in this very challenging outlook. So I think this shows the company's resilience and the resilience of our business model.

Now moving to the main highlights of the second quarter 2020. I would like to begin with our lifting cost. Here, for the sixth consecutive quarter, we saw a reduction in our lifting cost. It is now at $13.7 per barrel company-wide. We are reaching better and better lifting costs with still room for improvement. We will now integrate Tubarão Martelo, TBMT, and we will derive even more synergies. So a lot has been done, but there's still a lot more to do. So this is the #1 point, which I believe is very important in the quarter, also to support our cash generation, debt reduction and so on and so forth.

The second important highlight of the quarter is obviously the farm-in of Tubarão Martelo. It was approved by the regulatory agency, ANP, just yesterday. So as of today, we are officially responsible for Tubarão Martelo and its operation. TBMT is producing now 7,000 barrels a day or very close to 7,000 barrels a day. As we speak, we are connecting 1 well, TBMT 4. So perhaps in the next few weeks, production will increase. And we will be connecting and doing the tieback of Polvo and TBMT, and we'll be connecting yet another well, TBMT 10, but we will be giving you more detail on that later.

In addition, we completed the renegotiation of our debt with Chevron. We extended the payment schedule of our debt with Chevron. We had some strong and heavy payments to be made along the second half of the year. And we renegotiated with Chevron so as to have a little more time to service the debt, and this stretched our cash flow a little. This obviously brought some relief to the company's cash flow and was all around very interesting.

The other 2 important points that we show here are the reduction of the net debt over EBITDA ratio from 2.3x to 2.1x. Again, that shows the company's ability to generate cash even in such a challenging environment. And a final highlight, which is very relevant and which is linked to that, which is the reduction of our net debt. We reduced our net debt by almost $100 million along Q2. So that basically summarizes a good deal of what was done in this quarter. We were able to generate a lot of cash and reduce our net debt.

I will now move to Slide 4 and will address another highlight of the quarter, another very important point that needs to be mentioned. And of course, this has to do with the initiatives related to COVID-19 pandemic. All along the quarter, we maintained and continue to maintain total focus on safety and health and liquidity of the company.

The operation along Q2 unfolded most of the time, I would say, quite normally and sustainably, but we had one event that was concerning. We had to shut down the Polvo FPSO due to a small onboard coronavirus outbreak. So if I'm not mistaken, the FPSO was shut down for 7 days. We are now conducting a third-party review of the incident to verify the effectiveness of the service provider at the Polvo FPSO BW Offshore, of course, always aiming to implement measures to prevent that from happening again. Other than that, I would say that our operations were quite good and Francilmar will give you more on that in a minute.

Other points that I would like to highlight. We continue to do rapid tests and preboarding screening. Along June and July, we gradually resumed our activities here in Rio de Janeiro.

And moving to Slide 5, I'd like to point out 2 numbers. We did more than 2,000 tests at the company considering preboarding testing of all personnel boarding our platforms and rapid testing done here in the Rio de Janeiro head office. We tested everyone working at the office. Twice a week, we test all of the employees here at the head office, all of us. And this has ensured gradual and safe return of our activities. With these 2,000 tests performed, we found 41 cases, which were then confirmed. And all protocols were followed so that we would not have COVID-19 disseminating, spreading at the company and as part of our operations. So I would say that the company's blocking actions have been working really well. We are more and more confident to resume our operations and activities.

With that, I will turn the floor to Francilmar to speak about our operations. After him, Emiliano will give us a regulatory update. And then I'll come back for the financials and closing remarks.

Thank you. Francilmar, over to you.

[Francilmar Fernandes, executive]

Thank you, Roberto. Hello, everyone. Let us move to the operating highlights on Slide 5. Starting with the most important highlight, the reduction of the company's lifting cost now at $13.5 (sic) [ $13.7 ] per barrel, as previously mentioned by Roberto, an almost 50% improvement year-on-year and 20% improvement quarter-on-quarter. Later on, I will detail all these figures so we can understand what happened and what's coming in the future. PetroRio's production was 23,500 barrels of oil equivalent in the quarter and that is excluding TBMT and the Petrobras' working interest of the 30% stake of Frade.

With the completion of the TBMT acquisition deal, we get to the final stage of this transition. And we'll start operating the field in the beginning of August, and we'll start the process of optimizing resources and capturing synergies. I will also give you an overview of how this is going to happen.

Frade's production was 20% higher than the declining curve expected for the field. We can still work and attenuate the natural decline of the field. We have the increased production of Polvo at 30% increase related to the start-up of the new well in the Eocene sandstone reservoir. And I would like to stress that in this case, we pay only 5% royalties as was approved.

And I would say that one of the most important highlights has to do with the maintenance of efficiency and production levels at the fields despite all complications related to COVID-19 pandemic. This stems from hard and intense work by all departments of the company, particularly EHS and the whole operating team in this critical moment.

On Slide 6, we see the performance of our assets. It is important to compare the production level. Even in these turbulent times, we were able to maintain and even increase production a little and always keeping our costs at an exceptionally low level.

Moving to Slide 7. Let's deep dive to understand the lifting cost. We at Petro he understand that there is no better strategy to protect from the price of the commodity than having an extremely efficient cost. This is key to us. For that, we have been acting on several fronts. One of them, one of the most important actions in recent times, has been the review of the scope of several projects and services at our units, decreasing costs whenever possible.

We also internalized a number of services so that the company's personnel can take over whenever possible so as to avoid having to hire third parties. We renegotiated the value of many contracts and postponed some nonessential services, those that do not compromise production or operating safety. So they were postponed so we can do them when better times come. And we see that this lifting cost reduction does not include the 30% working interest production of Frade nor the inclusion of TBMT. We will be working strongly in the coming months to capture synergies at TBMT and the extra Frade production, which will give us some comfort regarding the lifting cost with a possible further reduction. Work should be intense in the coming months for us to achieve these goals.

Please go to Slide 8 for a detailed explanation of Frade Field's operating performance in Q2. Despite all hurdles and challenges, we achieved one of the best operating efficiency rates of the field, 99.8%. We did not have any production holds or shutdown problems despite the reduction of people on board. We kept only the essential crew on board to handle production and maintenance at the unit with excellent results.

With that, as far as production goes, we were able to reduce production decline due to the natural decline of the field, and we are maintaining around 20% of what we expected in the beginning when we acquired the field. Obviously, we were not able to do some actions to increase production or to mitigate the field's natural decline given the current situation, but the plans are still on our radar and will be executed in the near future as soon as conditions improve.

Moving to Slide 9, covers operating performance. We see that there was production increase as a result of the drilling campaign. But unfortunately, we had a reduction in operating efficiency caused by a one-time event and lower performance of the Polvo leased FPSO. In addition to shutdowns due to equipment failure, unfortunately, we had a number of COVID-19 cases onboard that vessel, and we had to hold production to replace the crew and so on and so forth. So we had a 7-day shutdown until we were able to resume operations safely on that production unit. Well, we are back in business now, and we are now investigating the event to understand the root causes of the problem and to address the issue and prevent new occurrences, which are highly undesirable.

Moving to Slide 10. I would like to give you an update on the behavior of the well in the Eocene reservoir, which started production in March. We can see this map of Polvo Field from the top. Part of POL-L, this green part is the Eocene sandstone. So we see on the bottom left-hand corner, that pressure has been maintained practically stable in this period. We've had 5 months of production. And considering other important data such as production, BS&W and other characteristics of the reservoir, that gives us a lot of confidence in a robust analysis for us to continue with new wells in the same reservoir.

The reservoir and geology team is still carrying out some studies, but very soon, we should have a final position of what to do in the Eocene reservoirs present at Polvo Field. And then we'll start evaluating possibilities at Tubarão Martelo field.

Moving to Slide 11. We will speak about Tubarão Martelo Field, TBMT. With the transfer of rights process of the field approved, we are entering the final phase of transition that allows us to start the process of sharing resources and optimizing all resources linked to logistics, operation and maintenance, technical and operational support. This should be accelerated in the coming months. The PEI, the individual emergency program, has already been approved by IBAMA, Brazil's environmental agency. And that authorizes us to start reducing the number of vessels and helicopters and to optimize our logistics space. The next steps are to deepen our understanding of the asset to understand both the operation of the FPSO as well as the geology reservoir and production pieces of the puzzle so as to extract the best out of the field and to accelerate the capturing of synergies.

Please go to Slide 12 for an update of the tieback project. In other words, the connection between Polvo and Tubarão Martelo fields. We got a green light to resume and accelerate this project. So the whole process of acquisition of flexible and umbilical lines and all the necessary subsea equipment as well as the top side piece have been resumed. And we would like to accelerate this to complete the tieback as soon as possible.

Lastly, I would like to thank all of our front-line workers, both our own and third-party personnel. Despite all difficulties and obstacles during the pandemic, they were able to prove the company's resilience. We remained firm and strong throughout this period.

I'll now turn the floor to my friend, Emiliano.

[Emiliano Lourenço Gomes, executive]

Thank you, Francilmar. Well, I'm going to start my part, giving you a regulatory update focused particularly on the transfer of rights of TBMT and Frade assets. These are the most relevant topics today.

Well, as you know and as disclosed yesterday in the material fact, we signed the amendment to the transfer of rights contractor. So we completed the process to increase our working interest of Tubarão Martelo. This process is complete, the process unfolded fast, and we were able to impose a good pace in our dealings with the ANP despite the coronavirus issue that is getting in everyone's way.

But anyway, the process is complete, and we are now moving towards the closing of the operation. There are no more objections by the agency regarding the closing of the deal. So on ANP's side, the whole issue is resolved. Now we just have to go through the legal formalities and contract formalities to complete the operation. This should happen very soon. As Francilmar mentioned, on the technical side, we are 100% able to start operating the asset. Regarding human resources, we are very anxious to get started. Our people are ready, prepared and standing by so that we can quickly start operating this very important asset.

Now moving to Frade Field. As you know, the first half of the year was very much impacted by the coronavirus crisis, remote working, et cetera. But we took this moment to reevaluate the value of the abandonment provision. Our team carried out a number of studies on that topic, and we have started this discussion with the agency. This will be, I should say, the central point in the process of transfer of rights in the coming months. We will focus on defining the abandonment provision and then on the guarantee. After the guarantee, the natural result will be the transfer of rights itself, which we believe will happen by year-end, being optimistic, possibly stretching to the beginning of 2021 but hopefully happening by year-end.

And lastly, speaking a little about our people and the coronavirus crisis. We are now this week entering Phase 2 of our returning-to-work plan. We'll have around 60% of the onshore people back in their offices. Of course, some people will continue to work remotely, but we are moving ahead very cautiously using international benchmarking barriers not only what is required by the Ministry of Health and the national benchmark but also international benchmarking measures. We have adopted a number of safeguard measures to improve safety of the building such as decontamination booth, very intense cleaning, hospital-standard air conditioning filters, rapid testing twice a week for 100% of the people coming to work at the head office. Even if somebody not part of our team comes through a meeting, for example, they are also tested.

And these barriers have shown to be effective. We identified a few cases of people who are ill or are ill or immunized and positive and suspected cases were sent home for quarantine. This is proof that these barriers are effective.

This week, a great number of our associates are here at the office, physically present. And we are very happy to inform that this is being done carefully and safely. We're very happy to count on these people and also on those who are still working remotely.

With that, I turn the call back to Roberto. Thank you very much.

[Roberto Monteiro, executive]

Thank you, Emiliano. I will now address our financial highlights. The first highlight, as could be expected, is our EBITDA of BRL 300 million with hedges included. Hedging results in the second quarter. Actually, this hedging led us to have an oil price equivalent to $51 (sic) [ $53.1 ] per barrel along the second quarter of the year, a lot higher than what really happened, considering the coronavirus pandemic and so on and so forth.

Another very important highlight in the quarter is our cash position in the end of June at $113 million. In addition to this cash position, which is quite robust, we ended the quarter with $76 million in oil inventory or the equivalent to $76 million in oil inventory. And we postponed oil offtakes deliberately. We postponed these offtakes exactly to seek better oil discount conditions and to avoid selling in this very complicated and difficult moment. And this proved to be a very wise decision, as today, oil prices are a lot higher than they were in Q2.

Another important financial highlight, which I kind of mentioned in the beginning of the call, is the renegotiation of our debt with Chevron. That improved the company's liquidity quite a lot for the second half of the year and 2021. We reduced our net debt by almost $100 million and reduced our net debt over EBITDA ratio to 2.1x from 2.3x.

Please go to the next slide, Slide 13. Here, what I'd like to show you is our adjusted EBITDA. We had an EBITDA margin of almost 70% in Q2 and an adjusted EBITDA of almost BRL 306 million when we include the hedging results. And in our results for the second quarter, I'm looking at the ex-IFRS results. Considering the negative financial result of BRL 190 million, we have more than BRL 100 million related to exchange rate variation. As we know, the exchange rate dropped from 5.14, if I'm not mistaken, to 5.04 or something close to that. So the exchange variation corrected our dollar-denominated debt in our abandonment numbers or better yet our abandonment provision. And that whole impact is seen in our bottom line. But again, this impact is merely an accounting one.

At the end of the day, the company's revenue is packed to the dollar. It is dollarized because we sell oil. So we have, I should say, a natural hedging to protect us from this kind of impact. This impact is not concerning to us. It is actually quite healthy to have a good deal of our debt denominated in the same currency as our revenue.

Well, I'm now moving to Slide 14 to speak a little about funding. What I actually mean to show you is how our funding and loans are better distributed. If we look at the upper right-hand corner graph, we see a better debt amortization schedule for the coming years. We can see in rounded numbers for the next 12 months, BRL 800 million plus BRL 900 million in the second year and BRL 300 million in the third year, on the back of the renegotiation of our vendor finance with Chevron.

Another important funding is the Prisma loan, $100 million. In June, we postponed payment of this loan to the end of July. And now in the end of July, we extended the loan for another 60 days, aiming to convert this short-term funding into a longer-term debt. So this is moving ahead. And I believe that this was the last extension of this funding. We are very close to turning this into a long-term debt.

Moving to the next slide. Slide 15, please. We show you our leverage. Leverage is totally under control. The ratio dropped from 2.3x to 2.1x, and it is the same comment I made in the previous quarter call. One does well to remember that this ratio of 2.1x net debt over EBITDA includes the whole debt that we took on for the farm-in of Tubarão Martelo, $100 million. However, it does not include 1 single real from the corresponding EBITDA.

Starting today, we will begin adding EBITDA from Tubarão Martelo. And then we'll have a better correspondence. So better matching in terms of debt versus EBITDA. By matching, I mean including the same things or more or less the same things. So leverage is very healthy. No yellow flags here. And as we have mentioned in previous earnings conference calls, our focus is to extend the debt, but there's no concern regarding the size of the debt.

Moving to the next slide. I will speak about the next steps. The financial part is over. But regarding the next steps, I believe that the company did quite well in the second quarter of this year. Our business model proved itself, proved to be extremely resilient. The company proved to be extremely robust, supported by our culture, our people, our methodologies and everything we have in place.

And now looking forward, what I think is important to highlight is our continuous focus on our employees' health and safety. This is obvious but never losing sight of the company's liquidity. We will continue to rationalize and improve our costs as has been our habit, as we have always done. And some interesting things looking forward are that now with Tubarão Martelo, we are starting, I'd say that we'll be connecting another well, well #4, and this is already in progress.

And also looking forward, another interesting point is that we are resuming some investments. Among them, the tieback of Tubarão Martelo and Polvo -- or better yet, the tieback of Polvo with Tubarão Martelo as well as the connection of well #10. I want to stress that these 2 investments are already underway, and we are now starting to look at some mergers and acquisitions opportunities. We do see some opportunities popping up in our radar screen. So things are going back to normal little by little. The company continues to grow. The company continues to do well, continues to be resilient. So this is my take-home message for you.

I would like to thank all of you for joining us today, and we'll start the Q&A session. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Mr. Christian Audi with Santander.

[Christian Audi, analyst]

Roberto, congratulations on the result. I know that this was a difficult quarter, but the resilience you mentioned is translated into your results. So congratulations to you and your team.

I have 3 questions that I would like to ask. The first, going back to funding. Regarding the Prisma loan, do you think that in the next 60 days, you will have the chance of turning that debt into a long-term debt? Did I understand you correctly? And whether you are considering other funding options? How is this process unfolding?

My second question has to do with the usage of the company's cash. Could you give us an update on potential drilling campaign at Frade? How do you see the dynamics there regarding timing given that, as you say, the margin is normalizing a little more and this gives you more visibility in the future?

And my third question is also related to using cash in M&A opportunities. We have heard news about Papa-Terra, and I would like to understand if you envision more accelerated moves in the Brazilian market that could perhaps open the door for you to do what you have been doing really well, which is buying assets.

[Roberto Monteiro, executive]

Christian, thank you for the questions. Let me try to address all 3 questions you raised. For starters -- well, actually, I think all 3 points are kind of interconnected. For starters, talking about funding and talking about the Prisma loan. Yes. Within 60 days, we should be able to turn this loan into a long-term funding. No problems there, the process is quite advanced. We haven't done that yet because in the middle of this process of converting the debt to long term, we have the pandemic and everything that it brought along. So things are taking a little longer, but there are no great concerns or stress here.

Something else that we are doing regarding Prisma, Christian, and regarding funding is the bond issuance. We have a firm intention of issuing bonds in the United States, 144 A bonds. We already have the book runners here and Santander is one of them, and things are unfolding well. We are working now on updating the prospectus with our second quarter earnings. And with that, we have a window of a couple of months to issue that debt. It is in our radar to do this along the third quarter. And I should say that this will not happen only in case the market closes for whatever reason, in case the market conditions are worsened. But this is not what we're seeing. We see the opposite. We see a gradual and steady improvement in the market. So I should say that it is very likely that we will have this bond issuance.

And we would use the proceeds to extend all of our liabilities, not only the Prisma loan but all of the debts of the company, initially extend 5 years. And this, in and of itself, will release a lot of cash. And this cash flow would be used for the Frade drilling campaign and also for possible M&A opportunities. So this is what we're thinking right now.

Now whatever we do now, Christian, regarding CapEx and all, I can tell you that with the current oil prices and the way the company is structured, we have a green light to proceed with the tieback of Polvo and Tubarão Martelo and the connection of well #10 at TBMT. This CapEx will happen regardless of the bond issuance or not, this CapEx. These investments are already happening. We have everything in place for it to happen. Broadly depends on the bond issuance.

And M&As? Well, it depends on the size, on the size of the opportunity. And it depends on the bond issuance and the possibility of a capital increase with a follow-on or something like that.

We see M&A activity coming back. You mentioned Papa-Terra. There are others in our radar. So things are coming back. Some major oil companies have some write-offs in their balance sheets just like Petrobras and all oil companies. Some of them have major write-offs in their balance sheets and now they are resuming M&A activities, and we see this very positively.

[Christian Audi, analyst]

Perfect. Very clear. And one follow-on question regarding the drilling campaigns, Roberto. Could you comment -- of course, you were highly successful in all the improvements made at Polvo. As we move towards a drilling campaign at Frade Field, could you comment on differences comparing the fields? What can be harder to improve, Frade compared to Polvo? Are they very different? Is Frade more complex versus Polvo or not? Could you comment on possible differences? We just want to get a sense of whether the successful results of Polvo can be replicated at Frade.

[Roberto Monteiro, executive]

Well, Christian, I think that this is an excellent point. Well, the first thing we need to consider here is the size of CapEx for each one of the wells compared to the expected production increase. At Polvo, we talk about $15 million to $20 million per well. And if we are successful, we're considering extra 2,000 to 3,000 barrels a day. In the Eocene reservoir, we had a good result. So that's kind of what we can expect.

In terms of operating complexity -- now I'm going to speak about operating complexity. In the case of Frade, we're talking about a cost of $50 million to $70 million. I'm giving you a wider range because with COVID and everything else, we have to redo the pricing, et cetera, but pre-COVID-19, this was close to $70 million. Today, I think it is closer to $50 million per well at Frade. So these wells are a lot more expensive. They cost triple the price of Polvo. But these wells produce 3x as much, close to 6,000 barrels a day, around that. So it's a game with bigger numbers, bigger CapEx but also greater production.

What I can tell you is that at Frade, I think that the drilling campaign is low risk because one of the Frade wells has been drilled already, and we have discovered the reservoir. So this is a low-risk well. The other wells, some of them involve water injection. And we've tested water injection at Frade with positive results. So it seems to me that although the numbers are bigger, the risk profile is quite interesting when we take everything into account.

In terms of operating complexity, I would say that Polvo is even more complex because in the case of Polvo -- this sounds a little weird, but in the case of Polvo, the one doing the whole integration of the work, the drilling and all, is PetroRio. Most of the drilling team is PetroRio's. We [ didn't ] hire a drilling rig to drill.

In the case of Frade, we'll hire a drilling rig. So although these are different contracts, a good part of the CapEx involves the drilling rig but we will hire the service. So if we have a problem with the drilling rig at Polvo, PetroRio is in charge of dealing with that. The downtime is on PetroRio. Maintenance of the drilling rig is on PetroRio. And Francilmar came from that. So I would say that in the case of Frade, we do have the challenge of having deep wells. But on the other hand, in terms of hiring those services, contracting those services, it seems a little simpler.

[Operator]

Our next question comes from [ Marcelo Costa ] with XP Investimentos.

Next question from the web by Mr. [ Rodrigo Sequeira ]. It has to do with the integration of Tubarão Martelo. What will be the economics of the asset since the farm-in? Can you give us estimate of amounts in the inventory that will be integrated to PetroRio? And the Dommo campaign at Tubarão Martelo, there's only Tubarão Martelo for HP. And the expectation that Tubarão Martelo will achieve 100,000 barrels per day is maintained. What about the continuation of the current campaign and the CapEx of the current campaign to be paid by PetroRio? And the tieback date is still March 2021. Any possibility that this will be brought forward? The tieback CapEx is still estimated at $50 million. What is the production volume expectation of TBMT-10H that will be interconnected together with the tieback?

[Roberto Monteiro, executive]

Rodrigo, thank you for the questions. I'll start with the economics of the asset. We're integrating TBMT with expected 7,000 barrels a day. In the beginning until the tieback, we'll have 80% of that oil produced. And the production cost, the OpEx of this cluster -- because now we look at this as a cluster, as a production cluster. So in economic terms, it makes sense to talk about a production cluster. So the 7,000 barrels of Tubarão Martelo will have 80% of that plus these 210,500 barrels from Polvo. And the OpEx will be $120 million per year until the tieback.

So this is the economics we have in mind. Very soon, at Tubarão Martelo, we'll interconnect well #4. It will take a few weeks. The drilling rig is there. It is working, maybe done even earlier. So TBMT should increase from 7,000 to close to 10,000, between 9,000 and 10,000, perhaps more towards 10,000 when we connect well #4. And if we look at the track record of Tubarão Martelo, we can have a positive surprise. But we want to be a little more conservative. And then we're going to have this production cluster until we have the tieback.

When the tieback happens, the economics change a little. PetroRio will have 95% of Tubarão Martelo production. OpEx will be all PetroRio. And we will interconnect to Tubarão Martelo-10H-RJS. For Tubarão Martelo 10H-RJS, we could imagine it will be similar to #4, close to 3,000 barrels, between 2,500 to 3,000 barrels. Again, we're being conservative here, and that will be the increase in production.

And regarding costs, we should bring the OpEx of the field to close to $70 million and $80 million per year. Why? Because we will return the Polvo FPSO. The tieback cost dropped. Francilmar and his team did good work during the pandemic. And now we are close to $40 million to $45 million to be expanded for the tieback. And Tubarão Martelo-10, the connection will cost about $20 million. So this is the economics of the field.

Regarding March of 2021, that would be the deadline, right? Actually, the FPSO is expected to be returned in July. Our case base is to -- our base case is to work with it until July. We are considering returning it in the end of June, beginning of July. But this is our base case because our contract with BW ends every July, mid-July to be more precise. So imagine we'll end the chartering contract of the FPSO at this time of the year. And this is it. Thank you very much for the questions.

[Operator]

Next question from the web by [ Bruce Barbosa ]. Congratulations on the excellent results. Could you comment on the issuance of bonds in the United States, please?

[Roberto Monteiro, executive]

Bruce, yes. The issuance of the bond, I mentioned a little bit this in Christian's questions. But this process is being analyzed. We are updating the offering memorandum, which is the document required for the issuance. And we're updating it with Q2 earnings. And it's all ready. Practically, everything is ready. We are at an advanced stage. Now it's just a matter of finding the right opportunity, the right opportunity to issue the bond. The market is improving gradually, little by little. So we have to follow market conditions and proceed with the issuance. The issuance will be practically 100% to refinance our liabilities. So all that short-term debt will disappear.

And this is it. What I can tell you is that the process is under control. It's well outlined. And we made the decision together with the banks to not do the issuance now but mainly because of market conditions. And so we updated our results now so that we can quickly update the prospectus of the memorandum and so that we can proceed with the issuance. So it's all unfolding well as expected.

[Operator]

Next question from [ Rodrigo Sequeira ] regarding the Polvo campaign. When do you expect it to resume drilling? When you mentioned that the new discovery in the Eocene open frontiers for infill drilling, does this mean production in the same reservoir? And if we drill other wells in the same Eocene sandstone, if we use a more powerful pump, can production be greater than 2,500 of POL-L? And would you be able to drill faster?

[Roberto Monteiro, executive]

Thank you for the question, Rodrigo. Again, giving you more color on the Eocene reservoir, firstly regarding the drilling. The drilling team is anxious to resume work, but we are waiting for the right timing and the right conditions. As regards to the Eocene reservoir, I showed you a chart on the presentation. This reservoir has been showing excellent conditions in terms of volume and quality.

When we talk about infill drilling, it means drilling in the same reservoir. When we said that we have a new horizon at Polvo Field, it means that with this level of reservoir in this geological age, it's the first time that we have production. And this is breaking down the paradigm because up until recently, we did not assign any value to this reservoir. But now we are proving the productivity of this reservoir, and this opens up a whole new range of opportunities.

So the next steps are if we confirm everything, when we complete some technical studies, we'll move ahead with the drilling of some new wells in the same reservoir. And then we will evaluate the existence of similar reservoirs with good conditions. And this will be a new chapter to be explored.

Regarding how long it would take, the engineering team of PetroRio is devoted to designing a project with cheaper wells and over. We handle the drilling, and that gives us more flexibility. We have some new ideas in-house. And if they work, we'll have to -- we'll be able to drill cheaper wells in well under 60 days. Thank you for the questions.

[Operator]

Next question by Tiago Noel.

[Tiago Noel, analyst]

Congratulations on the results. What is your expectation for initial production of well #4 of Tubarão Martelo? When is the timing for production? And the additional CapEx for the campaign is 100% in the hands of Dommo, right? If the deal of Frade happens until year-end, I believe that -- I'd like to know more on the deal of Frade, please.

[Francilmar Fernandes, executive]

Tiago, let me try to answer the operational question. Regarding well #4 of Tubarão Martelo, we are at a final stage. Although Dommo is executing, the CapEx and the operating expenses are in the hands of Dommo. This operation is expected to end in the short term, in the next 2 weeks, maybe even earlier. And PetroRio is obviously in the operation up close because we'll take over afterwards.

Now I'll turn the floor to Roberto.

[Roberto Monteiro, executive]

Regarding Frade -- Tiago, thank you for the question. Regarding Frade, the next offtake by Petrobras will happen in September or close to that. So this is all a cash cost. So soon after this offtake by Petrobras that will happen in around September, we imagine that with the price adjustment, it will be close to $35 million, $40 million as soon as we have the closing. And this amount will remain at that level for a while because we won't have any offtakes from the field until January or February. And then when we have another offtake, the price will drop. So it drops, and then it increases a little because of the cost, then it drops again and so on and so forth. And this is what I can tell you about Frade.

[Operator]

Next question from the web by Mr. [ Bruce Barbosa ]. PetroRio has just gone through a huge challenge, but we can see that the company is already deleveraged with plans to change the profile of the debt. Do you see new opportunities arising, new mature fields to be acquired? Or is the company focusing only on developing the fields that are already in the company's portfolio?

[Roberto Monteiro, executive]

Bruce, yes. We've just gone through a challenge. And we've sailed quite well through these challenging times. And yes, we are now seeing new opportunities in the market, its most common opportunities, divestments by Petrobras and so on and so forth. And also, we see other assets from other major oil companies.

And so there are opportunities in the market. I think that things are picking up again. Now with this oil price at $40, $45 a barrel, I mean it's not the price we would like to have, but it's a price in which the company can start thinking about acquisitions. So yes, M&A activity is picking up again. And I would say that we are considering the possibilities that are appearing for us.

[Operator]

Next question from [ Lucas Chavez ] with Eleven.

[Unknown Analyst]

To start, congratulations on the results. The lifting cost of $13.7, is it close to the bottom line? If so, now with new integrations tieback and greater volume, can the lifting cost drop even further?

[Roberto Monteiro, executive]

Lucas, thank you for the question. Regarding lifting cost of $13.7 per barrel, well, I think it reflects the past. When we think about future expectations for the company, when we think about to Tubarão Martelo well 4 and then the connection of well 10, with the synergies in the tieback, we perhaps, in the summary, can expect this number to continue to drop in the coming quarters on the back of Tubarão Martelo acquisition and the capturing of synergies that will continue to happen from now until next year.

And next year, we are going to have a major reduction when we have the tieback. But until then, we will see the lifting cost falling a little more. We haven't gotten a second wave of reduction, but we're going to have the Frade drilling campaign. There will be some reduction in the lifting cost. And then we are going to have the Eocene drilling campaign. So we have a lot of room here to reduce our lifting cost even further.

[Operator]

[Operator Instructions] Next question from Mr. [ Arthur Martins ].

[Unknown Analyst]

Congratulations on the results. I would like to have more color on the net loss of approximately BRL 99 million. In your opinion, what led to this negative result?

[Roberto Monteiro, executive]

Arthur, what led to this result was basically the exchange variation. If you look at the dollar rate, it increased from 5.14 to 5.40. Most of our liabilities are packed to the dollar, both debt and abandonment provision. And I'm talking about ex-IFRS numbers. So these liabilities followed the exchange rate and the exchange rate variation was almost -- amounted to almost BRL 110 million. When we include IFRS, this noncash amount increases even more so that we can get to this loss of BRL 99 million.

So in a nutshell, as part of the BRL 99 million, we have more than BRL 130 million related to noncash factors. When we talk about noncash, here's what we can tell you about noncash. Our EBITDA was not adjusted by the dollar price in the end of the period. It was adjusted according to an average dollar price. On the other hand, the whole liabilities are adjusted according to the dollar in the end of the period. So there are some exchange variations in these effects. And the same goes if the real appreciates, it would be the opposite.

So the fact that this is a noncash effect, well, it means that the company remains solid and healthy. This is merely an accounting effect more than anything else. And if the exchange rate tends to invert and if we tend to have an appreciation of the real, we'll deliver a positive result, and this will be a natural accounting effect.

[Operator]

[Operator Instructions] Next question from [ Victor ].

[Unknown Analyst]

Are there other plans to invest in new wells to be drilled in TBMT and Polvo after the tieback?

[Roberto Monteiro, executive]

Yes. We do plan to drill more wells. Soon after the tieback, we'll connect Tubarão Martelo #10, which is drilled and with completion already installed. And after that, and I cannot really precise when that's going to be soon after or perhaps we'll do a little before, we are going to drill at Polvo Field particularly in the Eocene sandstone. This region, that strata producing is quite promising. Francilmar showed the pressure graph for that well. It's something we normally don't show, but in this specific case, we wanted to prove that point.

And it's a big reservoir. We've been producing for several months and pressure remained constant. It actually increased a little. There was an initial reduction, but then the well recovered the pressure. So this seems to be a very promising area. And so to answer your question, I think yes, we are going to have more drilling particularly in the Eocene sandstone.

[Operator]

This concludes today's question-and-answer session. I would like to invite Mr. Roberto Monteiro to proceed with the closing statements. Please go ahead, sir.

[Roberto Monteiro, executive]

Well, I would just like to thank all of you for your participation. I'd like to thank all of you for joining us in Q2 earnings conference call. And I would like to especially thank the whole PetroRio team. A good part of our team is participating in the call, listening to our results as partners and as investors of the company. So I would like to thank all of you for your determination, for your efforts along this past quarter.

And again, thank you all for participating in this call. Thank you very much, and I hope to see you onboard in the next conference call.

[Operator]

That does conclude PetroRio'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.]