Petro Rio SA

BOVESPA:PRIO3

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to the audio conference call of PetroRio for the fourth quarter 2017 results. 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 www.petroriosa.com.br by clicking on the banner 4Q '17 earnings release.

Before proceeding, let me mention that forward-looking statements that are based on beliefs and assumptions of PetroRio's management and on information currently available to the company. 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 also understand that general economic conditions, industry conditions and other operating factors could also affect the future results of PetroRio and then could lead to results that differ materially from those expressed in such forward-looking statements.

I would now like to turn the call over to Mr. Blener Mayhew, Director of Finance, Investor Relations, M&A and Business Development. You may proceed, sir.

[Blener Mayhew, executive]

Good morning, everyone, and thank you very much for joining us today. We are here to discuss the results of the year of 2017 as well. And I would like to start by saying that we had an exceptional year for the company. Also, this has been a very challenging year vis-à-vis the oil prices. Now we see a slight recovery that occurred at the end of last year, but throughout the year, we still experienced a very challenging environment.

Now moving to Slide 1 now. We have the main highlights for 2017. We had record net revenues, higher by 34% reaching BRL 534 million. There was an increase in revenue that has been continuous on an annual basis, pretty much at the light of M&A. In 2015, if you recall, we only had 60% of Polvo, and we had revenues of BRL 253 million. In June 2016, we acquired the remaining 40% interest of Polvo, and then, we had BRL 387 million. And now in 2017, we reached revenues of BRL 534 million with 100% of Polvo and 10% of stake at Manati. Polvo had production. Despite that, we were able to increase revenues year-on-year.

Operational efficiency at Polvo was 97.4% in 2017, the highest in the field's history. And for 3 consecutive months, we had an operational efficiency of 100%. We -- in the past we operated at 80% with Maersk and [ LVP ]. And 97%, this is still very above average for the Campos Basin. We're very proud of this result, and this certainly demonstrates our operational efficiency to manage mature fields.

We also concluded the acquisition of Brasoil in March 2017. We announced that in December of 2016, the acquisition of the Goldman Sachs in 2016. In the first quarter of 2017, we started negotiating the acquisition of the other stake, and we finally concluded 100% of acquisition of Brasoil. We concluded both negotiations and the acquisition of the company itself. And so we had full control of the company on March 20. We were able to acquire 100% interest. And with that, we were able to deploy all of our measures and decisions in a very independent fashion. And why in the initial months this was -- really gave us an important financial result was the reduction of cost because we shut down the office, and we dismissed many or all Brasoil employees because there were many functions that overlapped. And that's why the G&A cost of $8 million a year was eliminated. So that $8 million yearly cost was put down to 0 and this brought about great economic benefit.

Our EBITDA was BRL 132 million and net income of BRL 51 million. It is important to highlight that despite the fact that every year we promote accounting adjustment in some lines that are noncash. Here, out of the BRL 132 million, only BRL 40 million are noncash effect. So in fact, the company generated BRL 90 million in its operations. So this is cash. It's EBITDA cash. So BRL 90 million in a very challenging environment as that of 2017 where the fields produced [ 70,500 ] barrels, this is an exceptional figure. And despite the entire backdrop of the industry in the [indiscernible], we're very pleased with this result.

Cash position was BRL 663 million, 10% higher vis-à-vis 2016.

Moving to the next slide. We see that oil price went from -- went to $66.87. It's nearing $70 in January, and it went back a bit now. It's around $63 to $65. But in fact, this is a very comfortable level for the company. Last year in 2017, oil was close to $42. So now with $65, that is a very relevant margin for the company.

Moving to Slide 3. 2017 was the first year where we sold oil by ourselves. Last year -- in past years, we had an agreement with a trading company, and the trading company did all the brokerage on our behalf. And then, we made a strategic decision to terminate that contract, and we hired experienced traders. And therefore, we are selling the oil ourselves. That was a very assertive strategy because we were able to have a 41% cost reduction in the discount, and we are selling our oil much better. Not only that, but we have more flexibility in terms of selling our entire load or doing some offtakes, the co-loaded when you get together with another operator to share the vessel -- to share the ship. So you can -- somebody else has 500,000 barrels and then we can come up with another 300,000, and then we split the cost and do a per ratio cost depending on the amount of oil that each one put in. So we are either selling alone by ourselves or through partners. And this has helped us bring costs down, and this had a direct impact in our revenue.

Moving to Slide 4, next slide. Here, we see the growth of operational efficiency. We have fourth quarter of 2016 and a comparison with 4Q '17. Now the operational efficiency and the average daily production is 99.1%, and that's why we are so proud of the figure. And we received several invitations to participate in seminars and congresses because they want us to explain how we move from 80% in 2014 -- in '13 to almost 100% now.

So for the second year in a row, we were awarded a prize in London for the best independent company in Latin America, and this really pays off all of the efforts we put into that, and we were able to deliver great figures. Every 1% in addition means that we are extracting more oil from the ground, more oil, so more revenues and better returns to our shareholders. In August, October and November, our operational efficiency reached 100%.

Now moving to Slide 5. Here, we have lifting costs at Polvo field. It was slightly up from $30.7 to $33.3. This is just natural because this is a decline in field. And even with fixed costs, et cetera, the field is declining. This equation raises the cost per barrel. And we believe that considering the size and the dimension of the operation, this is still a very attractive cost per barrel.

Looking on the left, the cost of barrel, we have absolute cost of $91 million, and 2017 was $95 million. Everything is denominated in U.S. dollars. And this small difference happens because part of the contract, especially for FPSO, had a variation that varies according to Brent. There was a valuation that occurred in 2015 where the supplier aiming at reducing the cost of FPSO and oil prices were down. And in that negotiation, the trader said, "Okay, I'll give you a discount. But once oil prices go up, I want an increment in the [ rent of ] FPSO." So starting at, I think, $55, whenever prices are above $55, there is a table that provides for price adjustment. So as there was an increase, there was a slight price adjustment.

Moving to Slide 6. We have Manati's production. Manati is an asset where we do not operate. Petrobras operates that asset. That's why there isn't much to say in terms of those assets. First, it's just like a highly lucrative profitable asset. We sell all the gas we produce to Petrobras, and Petrobras protects us for any market or demand fluctuations. So regardless of demand, so we always sell at the minimum level. And in 2017, we are very much in keeping with the minimum level setup in the contract. But we really favor this asset because it provides a natural hedge for the company. It's an agreement where it is directed by IGP-M and the revenues are in BRL. So it's a natural hedge that is according to the volatility. And when you look at the sales from Polvo, you have more volatility risk, both in terms of oil prices and also exchange variation.

Now moving to Slide 7. Here, we have our P&L. We can see that the revenue was 34% higher than in 2016. There was a natural decline from Polvo, a slight increase in oil prices, and we have 8 or 9 months of Manati's production. So this addition of BRL 397 million to BRL 333 million (sic) [ BRL 533 million ] is explained by the factors I just said. So from BRL 397 million to BRL 553 million (sic) [ BRL 533 ]. Therefore, our gross result is BRL 186 million (sic) [ BRL 136 million ], which is 3x higher than the figures from the year before.

Now G&A and G&G was BRL 95 million. We have other revenues and expenses of BRL 41 million, and EBITDA was BRL 131 million. We look smaller than last year, but in fact, it's higher because if you look at other revenues and expenses, these are the noncash effect items. These are accounting reversals. So that BRL 344 million number is noncash, and that BRL 41 million in 2017 is also noncash. So once you eliminate that BRL 344 million and BRL 41 million from the down below EBITDA, EBITDA is then much higher in 2017. It was -- we went from a negative EBITDA in 2016 to an EBITDA of BRL 90 million in 2017. EBITDA margin went to 24.7%. And we have depreciation and discounts of BRL 90 million. So the financial results BRL 6 million, income tax BRL 2 million, and then net income was BRL 240 million.

We are very pleased with that position. We are still a small company with many challenges ahead of us, challenges both from the industry and also from the country, especially when it comes to regulatory environmental measures. And we've been doing all we can to deliver good results and to grow the company and, in fact, get good returns to our shareholders. And I believe that this is also reflected in the price of our shares. And if you look at share price, I think according to [ Economatic ] survey, we are considered the third best investment in the stock exchange. We were just behind Magazine Luiza and another company. So if you think in terms of the company that back in 2013 didn't even have revenues and now in 2017 considered the third best investment according to BOVESPA, that really illustrates that we are doing a good job.

SG&A was 28% higher. This number also includes some nonrecurring events like lawyer fees. We also have some arbitrations underway since last year in previous management. That also includes payment of bonuses. And also, we still have some severance costs because of Brasoil. So we still have some recurring expenses that we hope that in 2018, this will be lower than BRL 95 million, but it should be higher than BRL 75 million because the company is growing a lot, and therefore, we are investing in our expansion. We are hiring people. And as the company grows, it's just natural for G&A to grow in the same proportion. But this BRL 95 million figure is certainly nonrecurrent, and we hope that this figure will not be repeated in 2018.

Moving to Slide 9. We have our cash flow for 2017. We started with BRL 570 million; oil and gas sale BRL 544 million in sale; operating costs SG&A, minus BRL 432 million; minus BRL 48 million in royalties; financial result and funding, BRL 99 million; M&A and CapEx, minus BRL 111 million. M&A, because we acquired Brasoil, there were 3 assets as part of Brasoil. There was an exploratory field in Amazon as well. So in addition to that, we have CapEx and Polvo maintenance. That's BRL 111 million. And at year-end, our cash balance was BRL 702 million, considering account receivables and oil prices. It's a very sound balance sheet. Our cash position is what we still have in [indiscernible] and for the M&A. And once we are ready and with a signed contract, we will have BRL 700 million, about $200 million, to use to conclude the M&A without having to resort to any additional funding.

What is the outlook for 2018 now? We hope and we wish to drill in Polvo. We did a workover in 2016, when we had a 25% production increase. And based on the results from this workover and also based on all of the geological material collected during the workovers, we believe that we have a very big project to give a next step in Polvo for new wells, exploratory wells, but still within the range at Polvo. This is a process we would like to start drilling in 2018, but we still depend on 2 negotiations with public authorities. One is with ANP, where we are claiming for royalty reduction from 10% to 5% in exchange for new investments, mainly because of the peculiarity of the field, which is a mature field that would have been abandoned if it were not for our efforts because it was supposed to be abandoned in 2016, and so that's why we can now have a return from the regulatory agencies. And the other aspect is that even if ANP agrees with the reduction in royalties, we still have to negotiate with IBAMA.

When we are diligently working with IBAMA both in Brasilia so that we can go on with the drilling in Polvo, but unfortunately, this has been a very lengthy and hard process. It is not an easy task. And we are facing several hurdles. And I think the industry as a whole is also finding it difficult to negotiate with IBAMA. But we believe that after some time diligently working with that, we may be able to see some light at the end of the tunnel maybe by the end of April. We hope that with this environmental license, all that is left is to finalize the royalty discussions. And then maybe we will be willing -- we will be ready to drill the wells in the first half of the year.

Now oil prices stabilized between $60 to $65 range, and we believe that this will be the range for 2018. And this puts us in a very comfortable position for Polvo as well.

In terms of cash generation, there was an improvement in Manati. Manati production usually follows the economic growth. We came from 2- or 3-year period of recession, and now we are seeing not a total rebound, but I can tell you that there was a gradual improvement in the economy. And with that in 2018, industries like [indiscernible] and in the surrounding areas of [indiscernible], they will produce more. They will demand more gas. And as they demand more gas, we will be able to sell more. 2017, we were within the specs of the contract. So maybe in 2018, we may be above the contract levels due to the growing demand stemming from the economic growth.

Now still talking -- now talking about M&A, which is something very important for the company and for the company's growth. And certainly, this will interest all of our investors. We've been working diligently since 2017. These are oftentimes competitive and lengthy processes. These processes involve also headquarters from international companies where all decisions have to be made both in Brazil and abroad at the same time. And therefore, these are decisions that take some time. But we are very optimistic.

I would say that we are very close to -- through planting or to planting the seeds or reaping the benefits of seeds planted in 2017. There are many things happening. However, when it comes to acquiring oilfields, you know that you have to wait until everything is signed, until you are very certain that the business has been concluded. Nothing is said and done until the contract is signed, but we are very optimistic.

And if we're referring to M&A, we have a very aggressive goal because we have a big dream to -- by the end of 2017, we would be able to produce some 100,000 barrels. This hasn't happened yet. And that was mostly due to delays in the field assets of Petrobras. And when we put that goal before us, it was not a firm goal. It was just a dream at that time, but we were looking at the assets that would allow us to reach the landmark of 1,000 (sic) [ 100,000 ] barrels. But in 2016, Petrobras canceled all of the asset divestments that they had in the pipeline. But now in 2017, they now reviewed that process, and we're participating in some of those.

I would say, however, that it's not that we left that goal on the side. The only thing is that it is now delayed, but we're still pursuing this goal as one of our targets. We want to acquire assets from Petrobras, there are fields that produce 40,000 barrels, some others 17,000, others 50,000 and some others 25,000 barrels.

Therefore, there are still strong possibilities because we have necessary capital, and I believe that our cash position plus leverage, we may not even have to do any follow-up, follow-on, or raise any additional capital. We will be able to acquire assets amounting to up to $1 billion using what we have in our cash and plus another $800,000 in leverage or debt. We will be acquiring a producing asset. And with the cash flow, you can use part of your cash flow from a target to leverage the purchase. So we have $300 million, and with that, we'll be able to buy assets amounting to $1 billion.

And we also have partners and investment funds, both in Brazil and abroad. We also have the support from trading companies, and we -- if we use all of our resources in order to acquire an important asset, we can also resort to the capital markets. But at first, we believe that with $1 billion, we will be able to acquire a new asset.

So let's see. I think in 2018, we will be able to give you good news. And we are seeing now that Petrobras is advancing in that area. They have made some very -- they have given clearer steps towards that end. The market is clearly seeing that. And we believe that by August or September of this year, almost all processes where we are engaged in should be concluded. These are competitive processes, and you know that the best price will win. We will work hard to have a win.

And as the last item here, we are interested in PRIO3. And with all the appreciation and the industry, the market is recognizing our efforts. We had an increase in the daily volume of shares. Sometimes we have 10 million, 15 million, 20 million of shares daily trading volume. But more importantly, we have our shareholder base. We constantly have new shareholders coming in, institutional shareholders, asset manage -- management funds, international funds, Canadian funds, U.S. funds.

Certainly, you will see now that we have more professional investors. They're analyzing the numbers, and they are realizing the PRIO3 is a good investment, and therefore, they are acquiring shares. And we are very proud of that fact because not only we are delivering good results year-on-year, quarter-on-quarter, but also we know that our investors believe in our promising future.

I would like to thank you all very much. And I am now concluding the presentation, and we are ready to take your questions. Thank you very much.

[Operator]

[Operator Instructions] Our first question is from [ Gustavo ] [indiscernible].

[Unknown Analyst]

Do you have any forecast for proceeds?

[Blener Mayhew, executive]

Could you ask again?

[Unknown Analyst]

Do you have any forecast for proceeds or dividends or anything like that?

[Blener Mayhew, executive]

Well, no, not at first. Our M&A pipeline is quite interesting, and we believe that the money could be best used if we reinvest it in our business.

[Operator]

[Operator Instructions] Next question from [ Gustavo ] [indiscernible], shareholder.

[Unknown Shareholder]

How much do you estimate in terms of investments for the revitalization of the Polvo field in case you get the approval?

[Blener Mayhew, executive]

Well, we are looking at an investment of around USD 50 million to USD 60 million. $60 million is in the case of success. In case we have a commercial discovery, and then, we will spend $50 million. In case there is no commercial discovery or in case we are not successful, then the cost would go down to $25 million. It's pretty much like that. You drill and you drill and if you find oil, you will then put the well to work. And if you only drill, it's $25 million to drill and to make it productible, you add $35 million more.

[Operator]

[Operator Instructions] We now conclude the Q&A session. I would like to give the floor to Mr. Blener Mayhew for his final remarks. You may proceed, sir.

[Blener Mayhew, executive]

Well, once again, I would like to thank you all for joining us today. And I would like to stress that 2017 was a very good year, very sound year, for the company, and we are very optimistic for 2018.

The company is growing. We've been growing the company since 2015 when the new management took over. We went through a very difficult time when we had a turnaround at the company even at the current oil prices. And when oil prices reached $40, it was even more difficult. But we were able to increase revenue to reduce cost, to increase operational efficiency, to increase our cash position.

And at the same time, we won several awards. We attracted good talent. And so we are very excited. We think that we find ourselves in a very comfortable position despite the fact that the company certainly has to grow. And I think that today, we have a very good growth platform. And if we are able to replicate what we did in Polvo, in other fields, we will certainly produce exceptional results.

I think that the year 2018 will be a year with many good promises from well drilling and here 2 new acquisitions: acquisition from Petrobras assets and also acquisitions coming from the private sector, acquisitions also in Brazil, in the Gulf of Mexico on the U.S. side, and also, we are looking at other prospects in Northern Africa. So there are so many good things coming, and it will be a transformational year, I'm sure it may be the last chance for investors to buy shares at the current level today. I would like to thank you very much. All the best, and have a nice weekend

[Operator]

PetroRio's conference call is now concluded. I would like to thank you for participating, and have a good day.