Petro Rio SA

BOVESPA:PRIO3

Earnings Call Transcript 2022-Q2

[Jose Costa, executive]

Good afternoon, everyone, and welcome to PRIO's conference call. I'm Jose Gustavo, IR and Treasury Manager of PRIO, and I'll be the host for this event.

We also have an interpreter for simultaneous translation, please choose a sound channel icon on the bottom of your Zoom screen. The presentation and comments on the results will be presented by PRIO's CEO, Roberto Monteiro; the CFO, Milton Rangel; and COO, Francisco Francilmar. They will present the company's results and will then be available during the Q&A session.

[Operator Instructions] This event is being recorded and will be available on PRIO's Investor Relations website. 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 PRIO's management, also on information currently available to the company.

Forward-looking statements are no guarantee of performance as they involve risks, uncertainties and assumptions as they relate to future events and depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the results of the company and could lead to results that differ materially from those expressed in such forward-looking statements.

Now I would like to give the floor to Roberto Monteiro, our CEO. Roberto, please go ahead.

[Roberto Monteiro, executive]

Good afternoon, everyone, and thank you very much for joining us today for another PetroRio's earnings results call. We will talk a little bit about the second quarter of 2022, and I would like to start this call today by thanking the team of PetroRio that once again, with their drive and resilience, were able to deliver another very great quarter for the company.

So beginning with the highlights of the period. On the operating side, I think we had a very good quarter. And I mean operational in the very broader sense of the word. We posted record sales of 3.3 million barrels. We managed to keep our lifting costs very much under control. We reached an all-time high EBITDA level and the same as we said about our revenues. Operationally speaking, the company had everything under control. This was a very strong and good quarter, even though in June, our production was slightly lower due to the drilling of a well that we will refer to in a few moments. But all in all, it was a very good quarter in operational terms and everything is under control.

Now moving to the nonoperating aspects of the quarter, I would like to draw your attention, and I think that there were several nonoperating items or less related to the everyday operation. And the first of them being the signing of the agreement for Albacora Leste in April. And I think this was another transformational acquisition for the company.

We already paid the 15% down payment. We received CADE's approval and PetroRio transition has already begun. We also acquired a rig, the West Capricorn. This rig is currently located in Trinidad and Tobago. The plan, therefore, is to bring it to Brazil by the end of the year and to get it ready to operate throughout 2023, possibly to start up together with the Albacora field to perform the more simple tasks of recompletion and so on during the initial phase.

Moreover, we also managed to -- I mean not exactly in the quarter, but since our last call, we started up 2 wells in the Frade Field. And I think this was a major achievement in relation to the Frade field, given that its development had been suspended by Chevron in 2012. And then we resumed the development of the field. We drilled 2 wells and achieved higher-than-expected production, and costs were lower than what we anticipated, all of that with the highest levels of safety and so on. So this once again reinstates the success of our acquisition of the Frade Field, which has certainly produced very positive results.

Just as a reminder, the company has drilled wells in shallow waters, in Polvo, then within the tieback and subsea work with Polvo and Tubarão Martelo, and now we drilled wells in deep waters with gas lift. Therefore, the company has been mastering and also deploying solutions in many different areas of offshore drilling with a great degree of efficiency and safety.

Now I'll move on to our next slide, Slide 4. And here, I would also would like to draw your attention to 2 points, the first being the company's cash position. Our cash position at the end of the quarter, it was $1.250 billion. Therefore, we maintain a very solid cash position even after the payment of the 15% for Albacora Leste. Our cash generation outlook remains strong regarding this new ODP4 well. The price of the commodity remains high. And another thing that I would like to draw your attention to is that even though we are looking for further leverage, we are in the midst of a debenture issue and our leverage remains really low. In fact, we are net cash. We have more cash than debt. All in all, this shows that the company is in good health throughout the quarter. I would say it hasn't changed. I mean it has been improving quarter-on-quarter, and this is translated into greater soundness.

Well, I'll now turn the floor to Francilmar, and then I will come back to talk about our ESG initiatives in the quarter. We introduced some new things in the ESG space in the quarter and we are very proud of our accomplishments.

Francilmar, over to you.

[Francilmar Fernandes, executive]

Hello, everyone. Thank you, Roberto. We'll start on Slide #5 with the performance of the assets. In general, this quarter, there was a slight decline in production in our performance, but nothing very serious, but mostly attributed to some occasional production shutdowns in both assets. I will elaborate more on that, and I will also talk about costs. We were able to hold it well. It's not yet at the level we want, but we are continuously improving month by month.

Now moving to Slide 6. Lifting costs remains our major strategic tool to lead the company forward. With focus and discipline, we will control both costs and we'll be able to improve production, which leads to this descending curve, thus lowering the total amount. We still see prices at $11.1 in Q2. And with the entry of the new wells and the improvements in the Frade Field, we expect to advance into the 2-digit barrier in the coming months.

Moving on now to Slide 7. We will now refer to Frade Field, more specifically. This quarter, we had some production loss that was much more related to the commissioning or installation of the subsea system of the new producing well, ODP4. In June, we had to stop the well. In fact, not one, but in fact, 3 wells for a period of almost 20 days to do the new tiebacks and prepare the wells and condition them for production. This led to a one-off loss that impacted the production of the well as a whole. But the rest, like the vessel and the -- and everything else is operating very well, which allowed us, with the introduction of the new well, we are able now to improve performance. And today, we are producing a good amount, close to 35,000 barrels in the Frade Field alone.

Now moving to Slide 8. I would just like to give you a general overview on the revitalization of the Frade Field, the largest project of the company in 2022. The project was initiated at the end of April. With the arrival of the rig in the field, we started drilling the first producing well, ODP4. This illustration, which is well known to you already, shows, on the left-hand side, indicated by the red dot in the lower reservoir, we see the result of the drilling, both in terms of the completion and installation of the subsea systems. And everything was extremely successful, which allowed us to deliver the well way ahead of schedule and a much lower cost.

So we followed the schedule. The well went straight to production, 15,000 barrels ODP4 well, and then we moved to the second producing well, which was the MUP3A. The name refers to the fact that this was the reutilization of a previous well called MUP3, which was a well that interrupted production last year for problems with hybrid and issues of lower production and high water content. So we reused part of the well. We abandoned the old well and this abandonment that was already part of our plans in the future, and it's something that we usually mention, abandonment of the well, now much more related to decommissioning. So we just used the initial part of the well and then built a new well. This reutilization of the initial part and mainly the use of the subsea system is what allowed us to conclude the well in such a short period of time and also at a much lower cost.

So at the end, we were able to deliver 2 wells at the cost of 1. So this is the general and overall result. In a way, this represents a break in paradigm. As we master the processes, this will obviously have a positive impact in our plans for Frade, Albacora, Albacora Leste and also the future plans of the company. So in fact, this is an execution that really helps the company to streamline its future plans and reinforces the confidence in the execution capacity of the team.

So now let's move to Slide 9. And here, I will talk a little bit about the performance of Polvo and TBMT wells. This quarter, in operating terms, we had new projects underway focusing on greater stability and higher operating efficiency, the highest possible. We had a few setbacks or problems during the quarter related to the energy generation system. We started using gas as the means to generate power earlier in the year, but we had a few issues with the turbines that led to production stoppages due to failures in the energy generation system. And so that with that -- with the interruptions, that impacted production. Now we have a task force in place to improve the generation system, and we hope things will be solved once and for all for the next coming months.

Moving now to the Wahoo field. Let me give you a general overview of the status today. This slide is almost the same one we showed last quarter. And what's new here is that after the first round of negotiations, after the feed, we are now in the face of accommodating the amounts in [ deadline ], which were a bit out of spec from what we expected and what would be ideal for us. We are approaching the final steps, and we hope that in the next few weeks, until the end of August, we will be able to conclude the acquisition. Some things are already concluded, and some others are still in the process in terms of equipment and [ mayday ] services, installations related to the subsea connection. And with that, we will be able to deliver according to our commitment to the market by the end of 2024 with the first oil produced in Wahoo.

And I would also like to take this opportunity to give you an update on Albacora Leste on Slide 11. We are in the middle of the transition that was formally initiated at the end of May with our first meetings with Petrobras when we exchange documents and information about the field. And then in early July, we started sending our teams, and we have leaders of 4 areas permanently on board of P50 platform, the producing people who work at Albacora Leste. Therefore, we have marine leaders, production leaders, maintenance and safety who are there to learn more about the asset and check on all of the opportunities for improvements in operating efficiency and production as well.

With that, we continue to work diligently mapping out all the issues to be ready to operate as soon as we take over the operation. which we hope could be as soon as possible. We believe that by the end of the year, we will be able to turn the key, as we already have everything in place. We have personnel. We already started relocating people and putting everything in place to turn the key in the field as soon as possible.

Well, this bottom part addresses what we are going to do as soon as we start operating the vessel. There is nothing new here. The plan remains the same as disclosed to the market before. We are going to have an initial investment focus on improving operating efficiency of the vessel, reliability and safety. There will be some initial gains focused on production, some earlier things that are easier, such as repair of the subsea system in one way or another. And then we get into the big development project, meaning drilling the new wells. There are 2 new wells in the pre-salt to be drilled, completed, the post-salt wells and the injection wells. The 3 wells that are closer to be connected will be started as soon as possible throughout the year 2023. But the most important thing here is that today, more and more, we are collecting information about the asset. Now that we are there, therefore, now the focus is in the optimization, general optimization of costs and deadlines. This process will feed back on itself. And our focus here is to achieve the best performance, the best efficiency and the execution of our projects. And this is how we'll move forward, hard and strong. And I'm sure we will be able to bring a general improvement in the overall scenario.

With that, I conclude my part and I turn the floor to Milton.

[Milton Rangel, executive]

Thank you, Francilmar. Good afternoon, everyone.

Now moving to Slide 12. Now we will talk about the financial performance of PetroRio this quarter and in the first quarter of 2022. My first comment is just to remind you all that as of January 1, 2022 of this year, we changed the functional currency of the company to U.S. dollars. So now we are converting all of our future presentations in that currency, and the figures for 2021 and those before that have been converted at the average quarterly exchange rate in the period so that we can have a good comparison between previous figures and those that are being disclosed in 2022.

So our revenue, $337 million in Q2 2022. This is the result of the sale of 3.4 million barrels in the quarter at an approximate price of $107 per barrel. We add a little to that related to the sales of Manati, which is marginal for us these days. And with that, we arrived at $377 million.

We reported EBITDA of almost $250 million with an EBITDA margin of 66%. This EBITDA was impacted by the slide item, other revenues and expenses. We had the recognition of expenses of around $20 million, which is mainly related to the relinquishment of the [ C-R-L ] block. If we consider both cash and noncash impacts, we are talking about $16 million related to this relinquishment. Net of this effect, on the lower part of the screen, we see adjusted EBITDA of almost $270 million in the quarter with a 71% adjusted EBITDA margin, which is quite a significant margin, and in the half year, almost $500 million with a 72% margin. This represents not only an improvement in the Brent price, but also a significant operating improvement, reduction of lifting cost and so on and so forth. And with that, we had another very strong and robust quarter for the company.

Now moving to Slide 13, we are going to talk about the company's funding. Well, if you look at the 2 charts on the left at the top, we see the average duration of the company's debt. And in the bottom part, we see the average cost of the consolidated debt. It's important to note that in the second quarter, we continued to raise some working capital loans with partnering banks. These loans are characterized by having a duration of around 2 to 3 years, give or take. So we reduced the duration of the company's debt downwards. But these are much cheaper loans. For example, our bond that was issued at a rate of 6.125%, because these are cheaper loans, at a cost of 4.6, just around that figure, our weighted average cost of debt also dropped, as we can see.

On the right-hand side of the slide, First, we see the cash position of the company, $1.2 billion. This is certainly one of the most comfortable liquidity positions in our history. I mean in addition to our cash position, we had a pleasant surprise in the Frade Field campaign, as we have been announcing to the market. We had an expectation of increased production, which was quite exceeded. Therefore, we believe that coupled with the current Brent prices, this is going to reinforce quite a lot of our cash position in the next quarter.

On the right-hand side of this cash position, we see our debt amortization schedule. We have a lot of comfort as we do not have any debt maturing this year and just a little -- just a fraction of the debt maturing in 2023. But I think the major impact, I should say, will be maturing in 2026, which is our bond. So there is a lot of room for cash generation and a lot of room for us to continue to grow and invest, in other words, to help the company grow.

And lastly, I would like to point out that we disclosed to the market a process of issuing local institutional and incentivized debentures expected to raise around BRL 2 billion or over -- or $380 million. We expect this process to be completed in August of this year. It is a debt with a weighted average duration of 5.5 years. In other words, we are extending the duration to our debt portfolio, which is excellent. So in the next few weeks, we will be announcing to the market the outcome of this process.

Moving now to Slide 14. We can see the net cash variation of PRIO. We had a very strong cash generation as reflected in our adjusted EBITDA of $270 million. This whole cash was practically consumed by our M&A obligations. As you can see, we paid the last tranche for the acquisition of Wahoo to BP of almost $40 million. And we had a payment of almost $300 million referring to the signing of Albacora Leste to Petrobras. So that obviously consumed a good part of our cash. But with the benefit of adding a relevant working interest in concessions, that will generate more cash in the future. Other than that, we had CapEx of around $68 million. This includes the Friday revitalization campaign, as already mentioned quite well in this presentation. The acquisition of materials for Frade is strategic inventory and also the beginning of disbursement for the development of Wahoo. After financial results and taxes, we get to a net cash balance at the end of this quarter of $190 million.

Now moving to speak about leverage on Slide 15. We, at PRIO, we followed this indicator up close, net debt over adjusted EBITDA ratio. This is also measured for the purpose of the financial covenants of the company. We can see that this ratio continues to be very stable. We are a net cash company. So this indicator is negative, which I believe that the take-home message here is to stress that we have a very light capital structure. PRIO is prepared to continue to grow. If necessary, we'll take on a little more debt to support growth, to support new investments and new acquisitions. So this only reinforces our financial soundness in a very good moment, a very positive moment for us to continue to invest, creating value.

With that, I will turn the floor back to Roberto, who will speak about our ESG agenda in the company's next steps. Thank you.

[Roberto Monteiro, executive]

Thank you, Milton. Well, as regard ESG, I will break this down into 2 fronts. The first 2 items on the slide are new. And the last 2 were things that we have been doing over many quarters now and constantly, which have been giving interesting results that make us proud.

The first of them, let's talk a little about the environment. Recently, we hired some specialized consulting firms to help PetroRio, I mean to help PRIO measure mainly its carbon footprint, its carbon emissions and some other items from the environmental standpoint. This will be certified -- I mean these measurements will be certified by KPMG. And we also made a decision to publish a sustainability report in 2023. So this entire project has started. So that the outcome of this whole work will be our sustainability report in the beginning of 2023, sometime along the first quarter.

Of course, this makes us very proud because our operating strategy, and I have said this many times before, is very much aligned with the environment, with reduction of our carbon footprint and so on and so forth. And obviously, now we'll have an opportunity to show that. And in the future, we'll have an opportunity to start bringing that to our corporate goals.

Another very interesting project is called Reação Offshore. This is a project designed to train technicians, technical and nontechnical staff, nontechnical staff being high school graduates, so that they can work at PetroRio to have them trained to work offshore. We have been supporting this project. There will be 190 slots, and we had 4,700 people registering. The project is unfolding really well. And it seems to be a very interesting project also from the social standpoint.

The other 2 projects I'll mention are more constant activities in PetroRio's day today. The first is our social support. We do seek social inclusion, mainly through sports, but we also try to sponsor projects related to health and such. So we maintained our project Reação Institute with Todos na Luta Institute, Irmã Dulce Home, Umberto Primo Hospital and others. But this is our DNA. This is our culture. And internally, we continue to offer health and well-being projects to our employees. This quarter, Q2, we had races, tracking activities in Rio de Janeiro, we had stretching sessions, shiatsu and yoga sessions, all of that offered to both our corporate staff and to our people offshore. So this is a project that aims to harness well-being. We fully believe that if the physical body is well taken care of, if the mind is taken care of, obviously, people will be more productive and will be happier. So these are projects that we support a lot.

Now I will move to the last slide of the presentation, Slide #17. Next steps. Well, as expected, always, our #1 priority is our continuous focus on the safety and health of our employees. That comes first. And some of the projects that we aim to develop in Q3. We are working strongly on the injection wells of the Frade revitalization campaign. We delivered 2 producers, and now we will work on 2 injectors. The first of them is already at the final stage, and we estimate that in the next 20 days, perhaps we will be able to have the first injector injecting water. After that, we'll be drilling the next injection well.

We've been working a lot on the development of Wahoo. We have been negotiating with suppliers. We have completed all of the engineering project and have started negotiations with our suppliers. We expect to start placing orders sometime in August for the Wahoo campaign. We are also very focused on Albacora Leste. As I have mentioned, we already got approval by CADE, the Brazilian antitrust entity. We also got a waiver from the other partner, which was the first condition precedent to be fulfilled, and this is done. And now we are working hard on the transition from Petrobras as well as on the process at ANP, the Brazilian regulatory agency, and it's all unfolding smoothly, and that is a primary focus for the company.

Lastly, the final point that we always talk about is a great focus we have on inorganic growth and new M&A opportunities, and this will continue to be part of our agenda. Thank you very much. And I would like now to open the floor for questions.

[Operator]

[Operator Instructions] We'll start with a question by Guilherme Levy with Morgan Stanley.

[Guilherme Levy, analyst]

I have 2 questions regarding Wahoo. The first, I would like to understand if there was any news regarding the arbitration process with the Indian partners. And you spoke about negotiations with suppliers. I would like to understand. How is the process unfolding versus what we mentioned in the beginning? Because in the last year, we've had a strong inflation rate in the market. So I would like to understand what kind of challenges did the company have to perhaps continue with the same expected return a year ago. What kind of initiatives have you adopted to mitigate operation in a short market?

[Roberto Monteiro, executive]

Well, thank you, Guilherme. As regards Wahoo and partner, IBV, the only update we can give is that the arbitration panel has been formed. The arbitration panel has 3 judges. Each company chooses 1 judge and the 2 judges choose a third one. The 3 judges have been selected. And now everyone's expectation is that the decision will take place along 2023. I believe that it will be completed by Q3 2023. Other than that, we don't have a lot of novelties. The company continues to develop Wahoo. ANP continues to evaluate the development plan. So everything is unfolding. Everything is moving forward. No great hiccups here. Now the decision will need to be made. I mean the arbitration will probably be complete by Q3 of 2023. But that doesn't prevent us from doing anything. It's very much in line with what we have been saying.

As regards suppliers, Guilherme, our intent is to maintain the values disclosed to the market. We always talked about a total project of about $800 million for 100% of the project. Now what is going to happen? Is there a change between the lines? Certainly, you remember the numbers, but I think we had $370 million for subsea, [ every well ] for $70 million. That was the ballpark figure. Francilmar's challenge that he has now is how to reaccommodate that so that we can get to the $800 million. As you could see, Francilmar and his operational team were able to do a brilliant job regarding Frade campaign in the first well and in the second well. I think that this shows that we are mastering this part, i.e. drilling and connection of the wells. And this is going to be done most likely at a cheaper price than we imagined with the equipment will cost [ well more ]. So that is $800 million will be maintained.

[Operator]

Our next question is by Leonardo Marcondes with Bank of America.

[Leonardo Marcondes, analyst]

My first question is about possible new acquisitions. We saw it in recent years, PetroRio generated a lot of value to shareholders, particularly through inorganic growth. Other than that, we've seen that your idea is not to pay dividends, at least not for now. So I would like to understand, how are you coping with new acquisitions internally? Why do I ask that? I would like to understand if there are internal goals for inorganic growth in the company or whether everything that was done so far will be more opportunistic given the amount of assets that were available, given different situations of companies in Brazil, the situation of Dommo, Petrobras' divestment program in the IOCs focusing more on the pre-salt. So that is my first question.

My second question, still on acquisitions regarding Catua. For a while, Petrobras has released the teaser for this field, and the field is close to Frade and Wahoo cluster. So I would like to understand how do you see this opportunity.

[Roberto Monteiro, executive]

As regards acquisitions, obviously, we have a guidance for acquisitions. But this acquisition guidance doesn't really have a target, we have to buy an X amount of volume. It's nothing like that. We have a guidance, we have the wish to allocate capital. And this is our business, allocate capital with 20% to 30% return of unleveraged dollars. This is what we do. This is what we pursue. And the mergers and acquisitions, these deals are a way to get to this capital allocation. But in our mind, this is about capital allocation. We never set a target of we have to buy a certain number of oil barrels. We don't want to fall in the pitfall of making acquisitions just to grow our empire. Our mindset is to have the right capital allocation. So we just closed Albacora Leste. We've just signed it with a return that we see is slightly over 20%. Wahoo had a much higher return. So we look at all of these opportunities and will continue to do so, but this is the main driver that we have also to analyze companies to analyze business opportunities regarding fields and so on and so forth.

Today, we still have a negotiation and open conversation with Petrobras. And this is public information regarding Albacora Field. We internally call it Albacora Oeste or Albacora West to set it apart from Albacora Leste or Albacora East. But we are still waiting for Petrobras to get reorganized after all of the changes they've had. But this is still the best driver. If that happens, I believe it will take a little longer for PetroRio to adopt a next new project. If it doesn't go through, we'll look for other opportunities outside Petrobras.

Albacora Leste and Oeste are the first fields that we are acquiring from Petrobras. Our life was to grow around Petrobras and we will continue to do so.

Your second question, I don't remember it. Oh, Catua it was about Catua. Okay. As regards Catua, we mentioned this in the previous call. It didn't go forward. Catua didn't go forward. Francilmar's team considered it, the reservoir team looked at it. It is a possible tieback, but it is a relatively long tieback, not long in length, but it means that we have to deploy a large amount of cash for a reservoir that we are not so sure about from no mistake. That was a carbonate, carbonetic reservoir, and carbonetic reservoirs are characterized by not being so well behaved. Sometimes they're good, sometimes you're not good. And we cannot really tell. Normally, in a sandstone reservoir tends it to be more homogeneous. So it's kind of easier to know beforehand. So the risk/return equation was not reasonable to us. So Catua is a project that we are not going to take forward.

[Operator]

Our next question comes from Gabriel Barra from Citi.

[Gabriel Coelho Barra, analyst]

Well, I'll start with 2 questions. There might be a third one. I think the first point, and something that really drew my attention was whether this flow from ODP4, and Milton even mentioned that this is a cash flow that maybe the market was not expecting to see. But -- so looking at that, I would like to try to understand 2 things. First of all, how confident you are in terms of the maintenance of that productivity from ODP4? And how can we see that productivity going forward? This is point number one. And in this context of larger productivity from Frade and a larger cash position, what changes in terms of investment pace or your capital position? Do you see any significant change in that?

And if you allow me a third question, but there is another issue I would like some clarification about. I think Albacora Leste is a very important acquisition for the company. And as far as I understand, the closing should take place after we know what the new government will be. So as part of that, what's in the contract that can protect the company in the event of a change of plans? Is there any risk involved in relation to the acquisition of Albacora Leste? What kind of protections are there? Just assuming a worst-case scenario, what kind of defenses you would have. These are my 3 points.

[Roberto Monteiro, executive]

Thank you, Gabriel. I will ask Francilmar to talk about production, and then I will come back and I'll talk about possible changes in the capital and the issue related to Albacora Leste.

[Francilmar Fernandes, executive]

Okay, Gabriel. In terms of the production of ODP4, it is more related to the fact that we do have a policy at PRIO whereby we always prepare ourselves for a more conservative scenario. All of our operating schedule, everything, we try to protect ourselves on a more conservative side. And what comes next is just for the better. We had a foreseen volume in a reservoir that had the greatest possibility of being tied back. And then the quality of the reservoir, we did some initial evaluations. And after all, the reservoir was much better in terms of permeability, et cetera. And so we initiated production.

When compared to other wells at Frade, there was a possibility of a good production, but we were pleasantly surprised, and possibly it's among the 3 best wells in the field. The performance has been very well in terms of pressure. And this is a good sign that the volume is higher than we anticipated. The total reservoir is much larger, 3, 4x larger than what we considered to be our basic scenario. So this is something that every day we collect more information, and maybe some 2 months from now, we will run a more encompassing analysis about the total volume of ODP4. And maybe in the future, we will evaluate it again and we may arrive at the conclusion that we can add more wells to that reservoir.

And the reason why we consider an area that is just 1/4 of the total reservoir, because in the -- in what regards seismic information, we weren't sure whether there was a [ ceiling ] crack that would separate that business or not. So we decided to use the most conservative approach -- to adopt the most conservative approach. And so that was the main change. The reservoir is a bit better, the oil is a bit lighter. But the main change that occurred was that binary flaw. I mean if it existed the way it was predicted in the first evaluation, our production would be closer to 6,000 barrels a day. And if it did not exist, production would be much larger. And this is exactly what is happening. And this is the reason why. But then you say, well, the company is being extremely conservative. That's not bad. We just use some assumptions in this, in particular, with something a little bit binary, I would say. I mean, that's why there was such a big variation.

[Roberto Monteiro, executive]

Now in terms of capital allocation, Gabriel, what changed,

I mean at first, was the MUP3A. It has a lower production, about 3,500 barrels a day, but it's also very cheap. It's $22 million, that well, and that will be paid off in less than 60 days. And if you do the math, it pays off really quickly. Therefore, this immediately changed because we figured that we could anticipate the well when we can start production immediately. And then we will go to the injections -- injectors.

This changed a little bit. Something else that is happening now is that we are drilling the 2 injectors, and this should be the sequence we have to drill 2 injectors because later on, we will drill more producing wells in those reservoirs that we receive the energy from the injectors. So we will start with the injection, and then we will go with the production. It's just 1.6 months in terms of difference. But anyway, this is a good difference that improves water injection. What will then happen is that we might anticipate the second phase of the Frade field. As we are expediting our work, we are being more efficient operating at a lower cost and with the same performance levels, be it operating performance, efficiency and everything. Maybe it makes sense for us to anticipate the second Frade campaign. And then we will get into the Wahoo development so as to maintain the first oil from Wahoo in early 2024, but on the other hand, we would do the wells in the second phase or part of the second phase of Frade before.

Because if you look at the CapEx that you deploy, a project vis-a-vis the beginning of the production is lower. I mean even though Wahoo involves a major and large project, Frade also has a very large rate of return. And the same thing goes for Wahoo because you invest ODP4, it can be paid out -- paid off in 40 or 50 days. I cannot recall the exact number. And the same thing goes for MUP3. So maybe we will [ tap ] the line without jeopardizing the first Wahoo oil because we are able to work faster.

Now in terms of Albacora Leste. The contract has been signed. So now this PSA, once it leaves Petrobras, it lands at ANP. And so our discussion today is with ANP. Of course, Petrobras is part of that because there is a transition and all of that. But then it's something much more related to the fact that PetroRio should demonstrate their operating capacity to ANP, but there is no other condition precedent that would lead the contract to be canceled.

I mean unless PetroRio cannot demonstrate to the agency that they are capable of operating the asset. But this is the only thing on the table. Therefore, I think that we find ourselves in a very comfortable situation. In regards to that, even if there is any change in the government, I mean the management at the National Agency will still be there. And we are very well positioned, and this was a field that was available for sale. Maybe this is not a very clear concept in terms of Albacora, but Albacora Leste was there.

So I see 0 probability of any kind of hiccups. And we are also working to receive approval from ANP by the end of the year. This is our focus. This is what we are pursuing right now, and everything we do has that in mind. So putting everything together, I can say that the negotiation is on the right track.

[Operator]

Our next question is from Pedro Soares from BTG.

[Pedro Soares, analyst]

I think part of my questions have been previously answered, but I only have a few follow-ups regarding cost and CapEx. On the cost side, being very direct, can you comment a bit more about what do you expect in terms of that line once you get Albacora Leste? Do you think that the starting lifting cost at the beginning shouldn't be too far from the current portfolio of PRIO? And secondly, regarding CapEx, especially regarding the investments in drilling, the rates are better than what we imagined before. Didn't you think it would make sense for us to think about a drilling cost lower than what the market was working with for the remaining of the drilling, especially considering Wahoo and Albacora Leste, in particular.

[Roberto Monteiro, executive]

Well, Pedro, let's start with drilling cost. Yes, it does make sense. That's what we are pursuing. It is precisely that, that we are pursuing. That's what Francilmar's team is doing. This is also one of the reasons why we acquired West Capricorn. That rig, I may even talk a little bit about it. But at the beginning of the operation, this rig will be able to do just simpler things, but the rig itself is a better rig when compared to the one that we have, the [ 9 6 ]. It's a better generation rig. It's a more advanced rig. So the operating cost for the company when you have such a rig, it's close to half of the cost of the one we currently have. What I could add to that is that our mission in terms of operation or production development is to reduce all the time. So the guidance we give refers to the market cap to make it easier for you to make comparisons. But we want to optimize things. This rig is much more efficient. It's a last generation rig, which allows us to work faster.

And another major point is that this is a rig that we will operate for a fraction of the cost that the market is operating with therefore, so we are [ 9 6 ] in the market has a daily rate of about $350, $400 a day, and this could jeopardize our future projects. So we will reduce it further, and at the same time, have efficiency gains. I think that today, Pedro, our guidance remains something close to $70 million. But I think that there is a good chance of that come down to 55 -- Francilmar doesn't like me to say that -- $55 million and $65 million. But we set a big chance to see that happening.

In terms of Albacora's cost, Albacora Leste, it is totally feasible to think that this field -- I mean our perception on [ D zero ] in the turnkey just because we are adding that to our cost structure and the fact that we are operating it with our helicopters, our vessels with our oil spill vessels, et cetera, mean operating it the way we do, I think that this field should come operating with something like $12 a barrel of lifting cost. And very quickly, this will come down to below $10 a barrel. This $12 talked to a conversion close to 30 for 100% of the field. And our plan, as you saw, is that during year 1, we want to tie back those 3 wells that were drilled. We were a bit more conservative in that regard because the idea was to do the tieback a little further on, but we are now doing the transition of the asset, we are learning a bit more and analyzing things in more depth, and we are also looking at our rig schedules.

We are being more efficient. And by the same token, we are gaining expertise. Therefore, I believe that all of these 3 tiebacks will occur in the first year of operations. Therefore, the lifting costs will come down to below $10. My estimate is that this will happen throughout 2023 and by the end of 2023.

[Pedro Soares, analyst]

Okay. If you allow me another follow-up question about an update on the hedge side. I think you said that you were reducing the purchases due to the higher volatility of oil. Could you tell us about volatility? What is your feeling about that? And now after the signing of Albacora Leste, whether it would make sense to protect something related to your cash position.

[Roberto Monteiro, executive]

Pedro, our hedge policy remains the same, to buy put or at the money or 10% below at the money, but always put/calls very simple without covenants or anything else. Milton and myself, we are very reluctant in terms of call margins. So we certainly will not get into that. Having said that, we can only put when volatility is low, but it has been very high for some time. There was a slight sign that there will be a decline. But usually, we can buy a put at interesting prices when it arrives at something around 30 and 33, but it still remains at 50. And it started to show signs of a decline like 45, 43. So we started to get excited. But then it was short-lived and today is totally unhedged. There is no ongoing put, but we will remain alert.

Well, spot is also dropping. But we look the long term when you're hedging because when you talk about at demand, you look at the long run, even though spot prices went down 15% in this past week, I don't know, something close to that. The long term didn't move as much, and that's what we look at.

Now we look at the next 6 months. But today, I don't see any possibilities of buying anything. So we remain unhedged. If we have anything, any other delays with Albacora Leste, that, on the one hand, this new well that we introduced and so on. This reduces a lot or even it might even eliminate the need for any capital increase in case you do another transaction. I think this eliminates any requirement for additional capital. However, the entire capital structure of the company is a little bit tighter. So in this particular case, together with the transaction, we would think about doing something a little bit longer in terms of hedge. We had some conversations with a few banks to do some color. But without the margin, like we will buy a put, sell a call, and that call sale, in terms of credit, you were long in the [ physic ] in short in paper.

Some banks understood, and so did we, that we do not have any major credit problems. And that's why they offered us the removal of that margin. If we are to move forward in that Albacora project, and this will probably demand a bit more stress, so maybe it would make sense for us to go back and revisit that. But so far, our hedge strategy remains intact. Low volatility, so there is no hedge.

[Operator]

Next question by Luiz Carvalho with UBS.

[Luiz Carvalho, analyst]

Roberto, could you elaborate more about Albacora Oeste. You mentioned you were in waiting mode, if we can say so, waiting for Petrobras to get reorganized. We had some meetings with the company. And the perception we got was a little different. Of course, they had an initial value, and this was revised when they discovered the new reservoir of Forno. And they said that the company was waiting for PetroRio regarding a new amount that was put on the table for them to decide whether to go forward or not. So I just want to be on the same page. Are -- is the ball in Petrobras' court or in PRIO's court? And what is your limit, not in terms of the size of the bid, but the minimum return that you would accept to gain that asset?

My second question, I'm not sure it's for Milton or Francilmar. Milton, I think that recently, you said in a specialized media, something regarding the realization price that historically, you got a discount of $2 for the brand. And looking at this quarter, particularly with the conflict in Ukraine, you got a premium of almost $2. So I would like to understand, what is this dynamic like? Is this structural? How long do you think that this will last?

And if I may, a third question regarding the arbitration. Roberto, you mentioned that you're expecting a completion by second half of 2023, but the trend is that you will continue to invest. So I want to understand, what if you -- if there is a penalty for IBV, should this have a bearing for them in the negotiation? Could this clause impact the area that you continue to invest in?

[Roberto Monteiro, executive]

Well, Luiz, let's start with Albacora. I don't think that we are seeing different things here. We understand that the ball is in Petrobras' court. We did review our bid. It was close to when they changed the CEO of Petrobras. So we reviewed our proposal and we did not have a clear return from them. So when I said that we were waiting for Petrobras to get reorganized, I think we're talking about the same thing here. Normally, in this kind of process, there are people in Petrobras that are in favor of this, others that are against it. There is a group that was always in favor of the divestment program. And this has happened in recent years. They were all in favor of divesting. But recently, the divestment lost a little of sponsorship. I'm just waiting to see whether they'll get the sponsorship for divestment back or not. Our goal, of course, is to have a return of 20% in deleveraged dollars, real terms. It is what we pursue.

If there is one key point in our DNA, that's discipline. We've always talked about it. And this is what matters. We look at the base case with an oil price of close to $60 per barrel. So this is for the long run. That's okay. And for an okay long term, we would have a 20% return on the asset. And we have no problem whatsoever in doing more as conditions improve. So our bid takes into account this concept. If the oil price remains at that level, we'll have a 20% return. And that fits the nature of the business. If conditions improve, we won't have no problem in adding our notes. As we have done before, if oil prices increase, we'll pay more. If the reservoir has a greater production, no problem. We'll have an earnout based on the reservoir and so on and so forth. Of course, the return never drops. It's at 20%. And the gains will be shared with Petrobras. Things performed better than expected. This IRR increase will be felt at a lower pace than what the internal rate of return would be without the earnouts. But it's fine with us.

This is the basics of our proposal, of our bid. But at Petrobras, you know them better than I do. There are people in favor, people that are against this approach. It is a huge organization. It -- Petrobras has a life of its own. And it's just about waiting for us. We'll have to wait for the changes that might happen at Petrobras in the coming weeks. And we'll see whether we can reengage with a negotiation. The latest move was by PetroRio. We reviewed a bid. We included the earnouts. I mean we try to be closer to them, we try always to address all of Petrobras' points. We've always done that and we'll continue to do it. But we have to have a minimum return to go through with the business, with the deal, and this is our discipline.

As regards to sale of oil, let me explain. This whole Ukraine war confusion, what was in the media is not exactly the reality. It's not that the PetroRio is producing more or less because of Ukraine, we're selling more because we are producing more, but the truth is our oil is a heavy sour oil and it had a Brent discount, about $3, $2 for Frade and $4.50 for TBMT Polvo. So an average discount of around $3. Now with the Ukraine war, in the oil market, the market started to have a need, a greater need for heavy sour oil, and this is our oil. And so that made the differentials improve for our oil, and then we started selling Frade oil with a slight gain, $2 differential; and TBMT, practically 0.

Now I can't really tell you how structural this is, Luiz. It's something that is happening now today, but I cannot really say how long this will last. Normal conditions were a discount of $2 and $4.50. And now we are selling on average with a premium compared to the Brent price. But I cannot really say how long the situation will last. And there was another question.

[Luiz Carvalho, analyst]

Yes, regarding arbitration. Your expectation about having the arbitration completed by 2023 and continuing to invest.

[Roberto Monteiro, executive]

Well, what can happen in the arbitration? I think you can say, well, first, they try to hold us back from developing the field, and we did develop it. They tried it, they tried to hold us back at the lower courts of Brazil, they lost and they started an arbitration, and we are developing the field. What can I be asked for in demonstration? They can ask to return to the field. But the thing is, by contract, they have a back-end penalty of 10x. And I think that this is going to be the heart of the discussion. To return paying 10x, you don't really need an arbitration. So I guess they're going to be asking something different. That's how PetroRio lost the arbitration.

So how is IBV coming back to the project? Now suppose we lose everything. So IBV will return to CapEx plus some capital costs, and that is very easy to calculate. We see where we can calculate the price of the equity and so on and so forth. So if PetroRio loses everything, they will have that approach or the cost of capital plus the back-end penalty that is provided for in the contract. So this is exactly what is going to be decided in the arbitration process. Worst-case scenario, it's neutral for us.

[Operator]

Next question by Marcelo Gumiero with Credit Suisse.

[Marcelo Gumiero, analyst]

Congrats on the results for the whole PetroRio team. I have perhaps a follow-up to previous questions regarding M&A and capital allocation. You mentioned that depending on Albacora West, Albacora Oeste, the next step might be sooner or later. So I'd like to understand, what could this next step be? Would it be a Peregrino-like asset or something else you're considering in terms of capital allocation for M&A deals?

[Roberto Monteiro, executive]

Well, thank you, Marcelo. We were always very vocal regarding Peregrino. We always said we like Peregrino, but everyone has to be willing to do an operation, right? What I believe in overall -- I'm not talking about Equinor in particular. But what I'm saying is that the major players in Brazil, Equinor among them, Shell is among them, they will start developing the bigger pre-salt assets. And they will continuing their divestment program for legacy assets. And we'll look at the legacy assets of these major players and we'll pursue them. Peregrino is obviously one option. We have Shell also with their assets. But it really, really depends on them. Of course, we are always talking with them. We try to be provocative or we try to submit proposals. There is some interaction.

But I think that we shouldn't focus on the asset itself, we should focus on the movement. There is one big move happening in the world related to ESG: major oil companies trying to optimize production with the lowest possible carbon footprint. And this is going to happen in the newer fields because the older fields, these legacy assets, they don't tend to optimize as much. We see that clearly in their cost structure. And there is another trend happening, which is in Brazil, there are still interesting offshore fields to be put into production. The world overall has been investing less in oil, but Brazil still has some projects that make sense to be put into production by the major players, and they might be divesting from the existing assets.

[Operator]

Our next question comes from Vicente Falanga from Bradesco.

[Vicente Falanga Neto, analyst]

About the Frade injection wells, what is the expected effect when the wells begin operation? Could they give some push in terms of short-term field production? Is that some sort of fine-tuning that you have to do, not to harm the future refining?

[Unknown Executive]

Well, the main objective of the injection wells is that in order to -- the well is not injecting water since 2012. And as you did not replenish, the pressure begins to fall. So we have to resume injection, and this is a long-term investment. We are not focused on the very short term. So we look at the production in the next 10, 15 years of the production of that field. Eventually, there might be some improvement after a few months. We may see some results in terms of increased pressure, and that will lead to increased production. But this is not our main focus. In fact, we are now deploying the first producing wells.

There are 2 other producing wells that we will drill later on, that they are located in the currently producing reservoirs. This is -- the value of this reservoir is below 10%. We cannot produce more because of this energy that has been depleted, we have to replenish that. Once the injection is in place, then the production will be resumed, the pressure level will be better. So this is both preventive and corrective so that we can make adjustments. But in our case, we are not focusing on increased production. We just want to have a better control of the balance of production in the field.

[Operator]

Our next question comes from Monique from Itau BBA.

[Monique Greco, analyst]

My question is about the expected production increase in the Frade field with the introduction of the new wells. Do you think that in addition to gaining in efficiencies because of lifting costs, which will lead to scale gains, whether we can also have some gains in the commercialization of the field in terms of the trading of the lots or whether you anticipate better conditions due to the additional volume from the field. The idea here is that I want to understand not only things related to logistics, uploading and operating efficiencies, but what do you expect to gain, commercially speaking.

[Roberto Monteiro, executive]

Monique, the commercial conditions, I mean the Frade discount should be close to what it is. The oil that we are producing at ODP4 is a bit older, but MUP3, it's a bit heavier. I mean it doesn't balance because one produces more than the other.

I think that we shouldn't expect anything major in terms of oil characteristics. I think that it would be very marginal if it occurs. In terms of the lots, what it improves is the company's working capital because if you produce more, you can have a better flow. I mean the waiting period is shorter for you to conduct your sales. But we continue to sell batches of 1 million barrels.

For the buyer, it is very transparent. You will just have to buy more lots or batches, but it's 1 million barrels. We already had substantial efficiency gains in the past when we went from 600,000 barrels to 1 million. We used to sell Panamax and now we are selling Suez in [ Afra ]. That was a major gain, but now this should go on. So I don't see any large differences in terms of commercialization.

We had all the live questions. And I would like to talk about 2 points that several people asked about in the written questions, 2 topics that we haven't talked about yet: first, Manati; the second, Itaipu.

All right. Manati and Itaipu. For Manati, we signed it in 2018 or '19, I can't even recall. We signed a sales contract for a company called Gas Bridge. Unfortunately, the contract didn't go forward. I'm not sure whether it's fortunately or unfortunately because the gas price increased a lot more since then and the field appreciated quite a lot. So we had signed an SPA, a sales purchase agreement, and the company did not fulfill the conditions precedent. We called it a long stop date. They didn't fulfill the conditions precedent. So the contract was canceled. It disappeared. It finished. There is no obligation by neither of the parts.

Today, it is a field which lost relevance in our structure. It provides little revenue and little contribution to our EBITDA. It might make sense to divest from it in the future. No problems there. But it is a field that is just sitting there. It is like clockwork, that field. We are not in a hurry. We don't need to do anything about that field. It's just clockwork. So that's for Manati.

The situation of Itaipu. We are starting to think -- we're starting to study to look into this, to look into Itaipu field, Itaipu reservoir because we understand that there is a possibility, that is a probability that this reservoir might be possibly connected to other neighboring fields. And this is what we are starting to study. But this is still a long shot. I don't have anything to disclose to the market in the short term. But this has always been our mindset regarding Itaipu. We are the operators of Itaipu. So we are responsible for carrying out this kind of analysis, in-depth analysis, and we are starting to do it.

And what we have is an earnout of the field with BP, provided that we have some kind of unitization or such. We don't know clearly if this is going to happen. And if this does not happen, we don't know whether it would make sense to have a tieback with Wahoo, but if anything, I think we would focus on the unitization more than production at PetroRio. But there's a whole lot of water to go down that bridge. So we still have to wait.

[Milton Rangel, executive]

And one more point that was raised here that is worth mentioning. What about financing leverage after our announcement of debentures in the new cash generation with ODP4 and MUP3A. Well, the issue of debentures, we'll be announcing more information to the market. But this is an opportunistic deal. We had an opportunity to bring in good money, almost $400 million at a very interesting rate. And this is going to harness our cash. As Roberto mentioned, we are going to wait and see how the next deals will happen and when.

What matters is, initially, there's no change in the leverage because we bring in cash, but we also add more debt. But this is opportunistic, cheap money also with a long duration, and this is great for us. And we will invest that in the best way possible according to the opportunities, M&A activities and CapEx.

We see a leverage level of 0.6 -- 5.6% after Albacora Leste. And the net debt over EBITDA reduced if we are successful at Albacora. So it's all leverage, I mean, is all under control.

[Roberto Monteiro, executive]

This money, as Milton said, is opportunistic money. Well, this is very technical, but there is the arbitration vis-a-vis what we are negotiating abroad considering bonds, et cetera. So it seems to make sense. We're talking about a duration -- a maximum duration of 10 years for this debenture, but we don't talk about 10 years because we do have amortization along the way. So we talk about duration, which is the weighted average duration of 5.5 years and the weighted cost with the different tranches. And it is a cost that we expect to be at 6.8% or something, something around that. So it has a longer duration than our bond. It is a better cost than our bond. It's similar to a bond we issued way back when. It seems to make a lot of sense to us.

[Operator]

Well with that, we are going to end the Q&A session. I would like to turn the floor to Robert for his final statements.

[Roberto Monteiro, executive]

Thank you, Zack. Thank you, everyone. We saw that we had great attendance of our earnings conference call. So again, I'd like to thank the whole PetroRio team and all of you investors who support us, who have always supported us, and I'll see you again in 3 months. Thank you very much.

[Operator]

This ends PetroRio's call.

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