Petroreconcavo SA

BOVESPA:RECV3

Earnings Call Analysis

Petroreconcavo Achieves Record Revenue Amid Cost Reductions

In the latest quarter, Petroreconcavo reported a record net revenue of BRL 826 million, an 11% increase from the previous quarter, buoyed by improved commodity prices. EBITDA surged to BRL 447 million, reflecting a 27% rise. The company successfully initiated drilling operations with its new PR14 rig, targeting deeper reservoirs. Additionally, lifting costs were reduced to $12.62 per barrel, down 5%. The firm declared dividends yielding 7% while aiming to balance investments and returning capital to shareholders. Looking ahead, management is optimistic about production increases as successful drilling and workover campaigns are expected to continue in the coming months.

Strong Revenue Growth Signals Health

In the recent earnings call, the company reported a remarkable increase in net revenue, reaching BRL 826 million. This signifies an 11% rise from the previous quarter, attributed primarily to the heightened commodity prices and favorable exchange rates, indicating a robust performance despite previous challenges from oil price fluctuations. The company noted that negative impacts on revenue from oil prices had diminished significantly, suggesting a stabilization as the pandemic-induced disruptions taper off.

Robust EBITDA Reflecting Cost Management

EBITDA for the quarter soared to a record BRL 447 million, reflecting a substantial 27% increase quarter-over-quarter and a 22% year-to-date increase. This performance was driven by revenue growth coupled with successful cost management strategies, including lifting cost reductions down to $12.62 per barrel, which is 5% lower compared to the previous quarter. This effective management of expenses showcases the company's efficient operational practices and commitment to profitability.

Positive Cash Generation and Attractive Dividends

The company achieved impressive cash production, generating BRL 556 million in cash during the quarter, with BRL 392 million coming after capital expenditures. This robust cash flow allowed for a dividend payment of BRL 1.46 per share, translating to a dividend yield of 7%. This strong cash generation indicates the company’s financial strength and its ability to reward shareholders.

Investment in Growth and Efficiency

Capital expenditures (CapEx) amounted to BRL 165 million, aimed at further developing reserve capacities and enhancing drilling efficiency. This includes a significant investment in the new PR14 drilling system, which is anticipated to bolster operational capabilities by allowing for deeper and more efficient drilling. The strategy is clearly directed at increasing production and improving overall cost efficiency as the company moves towards a more mature operational phase.

Debt Management Enhances Financial Stability

The company successfully completed its first debenture issuance of BRL 1.1 billion, resulting in a reduction of average debt costs from 9.94% to 7.05% per annum. With a leverage ratio of only 0.63x, this solid financial health positions the company favorably for future growth opportunities and potentially higher shareholder returns. They plan to maintain leverage well below 1.5x, providing both stability and capacity for new investments.

Operational Highlights and Future Expectations

Significant operational milestones were achieved, including the successful commissioning of the PR14 rig. This rig is poised to improve not only production capabilities but also the efficiency of reserve evaluations. Furthermore, the company expects increased production in the second half of the year, driven by ongoing drilling programs and enhanced operational workflows to maximize output from both existing and new wells.

Guidance and Strategic Perspectives

Moving forward, management expressed confidence in achieving consistent organic growth while maintaining a disciplined approach towards costs. The company aims to capture efficiencies through new operational strategies that include a balance of workover and drilling activities. Furthermore, discussions around potential mergers and acquisitions (M&A) and midstream opportunities suggest the board is proactively considering ways to expand the company’s market reach while optimizing existing operations.

Earnings Call Transcript 2024-Q2

[Marilia Nogueira, executive]

Let's wait for people to get in the participants. Good morning, everybody. Thank you so much for waiting. I am Marilia, Director of the company, and we're going to start our webinar on results second quarter 2024. Today's presentation will be CEO, Jose Firmo; and CFO, Rafael [ Procasi], followed by a Q&A session with all the Executive Board.

So this way, I'd like to ask you to send your question on P&R questions. We are not going to open up in this session. [Operator Instructions] The webcast will be broadcasted on the Internet and later on, it's going to be available on our website, RI.

Before starting up, I'd like to clarify that all the declaration during this video conference on the business perspective goals are based on beliefs and premises of this Board of Directors and also information available by the company. Future considerations are not guarantee of performance because they bring risks. This way, I'd like to pass the floor to Firmo.

[Jose de Mello Firmo, executive]

Thank you so much, Maria. Good morning, and thank you so much for your attendance in the results of the company quarter 2024. I'd like to thank [ Troy ] connected from Wyoming on vacation.

This quarter has been challenging, but the positive aspect is our program of resilience with deliveries that are already very relevant. Financially speaking, the first -- this quarter brings interesting marks, the issuance of our first debenture, BRL 1.1 billion, reorganizing our capital structure, improving the cost of the debt, extending its term. This operation is going to be better detailed by Rafael.

Another main point is the payment of BRL 410 million in JCP as a result of cash generation in the first months of this year, representing with the dividends paid in May, a dividend yield of 7%. Our net revenue is BRL 826 million, 11% higher than the previous quarter and lifting costs reduced to $12.62 per barrel, 5% under the previous quarter.

EBITDA reached BRL 447 million, an increase of 27% quarter-on-quarter and 22% in the accrual year-to-date. We registered better performance in financial terms, stable production leveraged by revenue growth and improved the efficiency of the cost during the quarter.

The quarter profit of BRL 136 million represent an increase of 24% quarter-on-quarter impacted by without cash effect on market of our assets and liabilities in dollar BRL 188 million. Operationally speaking, the quarter was very important and big finalizing the commissioning starting up in July, the first drilling in [ PR14], and this is a landmark very relevant to our [indiscernible] and service and all the company.

[ PR14 ] is a pro with the operational capacity one of a kind in onshore in Brazil, drilling wells up to 5,000 meters with agility and safety, so we can access new frontiers of reservoirs in our concessions. We are going to detail more in a further slide.

Another relevant topic for the quarter was the success of sidetrack of the Tier 5. It's Tier 11 now, start producing in the beginning of July. Initial production that is robust is going to be detailed ahead. We received the permit to operate in [indiscernible] in the end of the month of June and the plant started in July.

Now we deliver natural gas in the delivery point of [ Bahia ] Gas, so we can have one more alternative and resilience to flow the production in [ Bahia]. And finally, establishing the level of execution of [indiscernible] in May with a relevant advance in the last months, reaching an increase of 87% in the volume of operations.

[Technical Difficulty]

The main challenges are still the increase of execution capacity even higher in order to address the backlog of almost 50 workovers not executed in the first months of the year and a good assessment of the tiers recently drilled to update and [indiscernible] allocation focus on the robustness of the return considering all the final results available on the work performed in the last months.

Our commitment with production growth is based and is aiming to reach reserve report curve without losing the discipline and the planning and the maximization of the equation.

Costs versus return. One of the highlights of the quarter was without any doubt, the success of sidetrack of the well T-5 originating the well T-11 starting in June.

After intensive work of reservoir team, a new modeling of the field in [ TA ] was concluded and the well program was defined directing the final objective to a new design of production jointly of the 2 parts, [ Aguarnde ] and [ Sergi]. In the past, TF5 produced just in [ Agua Grande ] with the average of 331 barrels of oil a day. In 2023, this well presented failures and different attempts of fishing were done without success.

After modeling, we have decided to go for sidetrack using the same opening of the well for a directional drilling, reaching the formations of [ Sergi ] and [ Tier ] in the same well. When we assess the profiles of the well, we decide to change the configuration, putting the well in the production just in [ Sergi], getting the success and reaching the average of 822 BOD in June, and the well is still stable also in July.

The data from this well is very important for a validation and correction of the models that are being developed by the reservoir team, enabling a better understanding of potential production in all the field [indiscernible]. In addition to that, today, we have a well with a robust production, lots of potential. We still have the alternative of open up one more zone in the future, if necessary.

Another operational landmark of the quarter was the onset of the operations [ PR14 ] opening up a new phase for the company. This probe has the capacity to operate in Brazilian onshore and is able for projects of wells with the depth up to 5,000 meters. So we can operate in new frontiers with technology for horizontal drilling in the reservoir that are deeper in the basins operated by the company.

The project started in March 2023. And after the refurbishment logistics for Brazil and commissioning with more than 1 year without accidents, we start the operational drilling now in July. The project was led and executed by the [ ASO ] team of the company with the support of a long list of suppliers and partners.

Here, I acknowledge and thank one more time for the excellent technique of the team, Petroreconcavo, started the drilling program in Campo [indiscernible] in the end of July in an injector well and through the integration of high-quality equipment and a selected team with the best ASO, we are confident that we will reach the efficient levels in the operations as a global benchmark that has never been reached in the Brazilian onshore.

In this slide, I'd like to highlight our advancement in the operational reliability program, reinforcing the commitment of [indiscernible] to update you of all the advances in our alternatives and impact mitigation process in our operation. As we mentioned before, and communicating to the market, San Jo is under operation within the parameters and expected conditions of the project, bringing an increase of capacity of processing Bahia and a new route of flow of part of the gas produced in the state, enabling a delivery directly to Bahia Gas and potential clients in the free markets that are connected to the grid.

[ UPG and Miranga], we follow with the project PL2 in this final phase for the final decision on investment, and we expect to get in 2024. In [ Potiguar], it's been communicated with San [indiscernible] with 3R and the objective is to coordinate joint efforts to assess and share the infrastructure of gas natural flow in Bahia [indiscernible].

So we create a work group. We started already the analyze and technical feasibility of this possible partnership. For the electric reliability, we're advancing, estimating the onset of the operation of an excellence center to monitor our distribution park and consumption up to the end of fourth quarter 2024. And this points the onset of a pureannual plan of resilience and the electro transformation as a strategic input for the company.

Truckloading of volume in Ipanema finally is ready. And we concluded the construction and the commissioning of the project rock loading in Rio Grande [ do ] Norte. This is a logistic alternative that is fundamental for the company. Now we have the capacity of flowing 100% of Rio Grande do Norte production using highway. Now we have logistic plans and commercial plans short and midterm for the construction of flowing alternatives and export of the production from this new facility in Ipanema.

More about this plan, we are going to communicate as they materialize. I pass the floor to Rafael now, and I am back to conclude this presentation before the Q&A.

[Rafael da Cunha, executive]

Thank you so much, Firmo, and I greet you all. Our net revenue has a record of BRL 826 million, presenting an increase of 11% quarter-over-quarter, impacted by the high of commodity and dollar and the lower impact of derivative hedge.

As you can see, the negative impact of oil in the revenue of second quarter was about half of the impact of the previous quarter, reflecting that we are reaching near the end of the rollout during the pandemic, low prices, around $60 per barrel.

We still have a volume of NDF similar to the second quarter. And after that, they are over. We only have the newer agreements in zero cost collar, determining a floor and a ceiling. And considering that the oil is in the price range, these instruments do not generate relevant impact for the company's result.

Let's talk about costs and expenses. We had one more quarter with cost reduction as the evolution to the right direction. Lifting cost, the extraction cost highlight for the cost reduction with well repairs in the first quarter after first quarter that was challenging in this aspect. And the first capture of the initial effect of FX increase, 5% in the quarter.

Royalties, we captured reduction because of the benefits we get at A&P in the last quarters of the quota reduction on the incremental production approved with the extensions of concessions. Midstream costs benefit from small reductions in the penalties and costs with transport and flow. But still, they do not reflect any benefit coming from the [ UTG Shawkey ] that we started now in July.

We had a quarter EBITDA that was record BRL 447 million, led by a combination of growth of revenue and expense and cost reduction. In this slide, we have a graph showing up the EBITDA evolution quarter since 2023.

Comparing second quarter 2022 with the first one, we can see expressive growth of BRL 94 million, 27% of the EBITDA of the company, mainly because a positive contribution of net revenue, plus BRL 82 million, as explained previously, and cost reduction in total of BRL 12 million compared to the first quarter.

This way, we would like to close the first semester of the year with an EBITDA of BRL 81 million, representing an increase of 22% compared to the same period last year.

CapEx of the second quarter 2024 was BRL 165 million, a level so similar to the first quarter, observing one more time the highlight of the investments of the company, development of the reserves after the phase of investment, expanding the execution capacity that we experienced in 2023.

As the graph shows, in the second quarter, we invested BRL 156 million developing our reserves and projects of workover, facilities and drilling of new wells and more BRL 37 million in other lines of fixed assets, especially [indiscernible] payments of our probes and services, especially PR14 and the acquisition of software.

In addition to that, we kept our commitment in reducing our stocks in 2024 with the additional reduction of BRL 29 million this quarter, in total, BRL 53 million in the accrual of the year. This reduction reflects a revision work in the supply chain that part showing results expressively in the first quarter, showing a continuity in this quarter as well. On the right-hand graph, we present an opening of BRL 160 million applying into the development of reserves.

I would like to highlight the evolution on the investments when we returned the workover campaign in the second quarter. The value is BRL 94 million, representing an increase of BRL 34 million versus the invested value on the first quarter of the year, reaching levels close to the executed in the first semester 2023 with a fleet of probes in workover much higher back then.

Debt of the company. In June, we had the first debenture emission at [ Petro Ronco ] with the value is BRL 1.1 billion. And through this operation, the company now has available a new way of capturing resources in the capital market, to longer terms and interest rate lower according to the need and adjust the cash flow better.

The success of this reinforce the reliability of the investors, the solidity in the financial health of the company. Just to exemplify, although the company does not have a rating of credit, this first issuance has led longer midterms and a reduction of the debt in 9.94% a year in dollars first quarter '24 to 7.80% a year in the end of the second semester and the new debentures swapped to dollars reached the average cost of 7.05% a year in dollars.

I'd like to highlight that the company has a strategy to put debt in dollar, considering the almost all the revenue is in dollar, seeking a risk reduction of mismatch of flow cash. As mentioned by Firmo in the opening session, although the dollar increase bringing a negative impact in short-term financial results because of the market.

Long term, dollar is getting stronger and is positive for the company. We finished the second quarter leverage 0.63x debt and EBITDA in the last 12 months, establishing our midterm extending our midterm of our debt 2.06 to 3.92 years.

And currently, we have a capital structure that is more optimizing the company. And finally, with the redesign of the capital structure and the cash flow generation, the choice was having the amortization in July of 2024 of a debt of $60 million.

In this slide, we can see cash flow generation in the last quarter. I'd like to hear your attention to the cash in the last quarter, BRL 556 million and cash generation after CapEx, BRL 392 million in the quarter. And in the total, BRL 623 million in the accrual of the year. And this cash generation enabled the payment of BRL 1.46 per stock to our stockholders in total, dividend yield of 7%. And we mentioned already the debentures as a reduction, finishing up the second quarter '24 with a cash position and financial application of BRL 1.6 billion.

In the second graph underneath, we can see the consolidation of a change phase of the company to a new level of free cash flow generation. This evolution reflects the advancement of the company in the execution of their strategy, passing from extensive investment in the expansion of the execution capacity, enabling a strong growth of production to a phase of higher free cash flow generation, balancing investments and payment of stockholders, opening up opportunities for capital allocation in the future. Now I pass the floor back to Firmo. Thank. Firmo you so much.

[Jose de Mello Firmo, executive]

Thank you, Rafael. I use this presentation and this opportunity to show the organizational chart with important changes in the RSO and the structure of VP Operations, ROIC. An important change that we have, now we have [ Denis Stampos ] coming in, a professional with 28 years of experience and lots of experience in drilling services and integrated services coming up next Monday to be part of Petroreconcavo team here in Salvador.

The company has evolved a lot in aerosol, and I believe it represents without any doubt, one of the biggest competitive differentials of Petroreconcavo. I acknowledge and thank you so much, Troy and [ Stenio ] for creating this differential and this independence in service provision, protecting Petroreconcavo from the seasonality of the services of oil and gas in Brazil. And I welcome Dennis. We truly believe he's going to raise our bar to higher levels of safety, efficiency and execution.

And then Daniel takes up a new Board of integrity of assets and the ob create something new, a competence that he proved already here at Petroreconcavo. And this new Board is going to develop a capacity of execution and maintenance and projects that are more efficient, more standardized with more harmony now in the big asset parts of the company, reporting directly to Troy, this structure will migrate the resources from integrity of assets and facilities inside this structure, inside of the production, optimizing the use of these resources with potential of material gain efficiency and reduction of lifting costs.

This way, the 4 managers of production hub, in [ Pochiguana ] and [ Chim Bahia ] now have the executive focus on safety and efficiency reporting directly to Troy, VP of Operations, removing the position of Production Director and [ Guilherme ] leaves the company. We have the chance to discuss this better, all these changes in person with the market.

In this quarter, I had the chance of visiting an inspiring project of Petroreconcavo here in Bahia, [ Sirranda Viva ] that was born from an initiative of 2 workers, Dona Costa Relo identifying an opportunity of developing a supporting project to the community near one of our stations in [ Casargo ] in [indiscernible].

And this year celebrated 10 years of existence, this project, [ Sirraa Viva]. It's a mature project today grew in sports, education and development of those people. Thank you so much, Andrea, Daniel. You made a difference and they make the difference.

And I pass the floor to [ Felipe ] so he can conclude this presentation and give you further details about [ Sirranda Viva ] and our report on sustainability.

[Unknown Executive]

Thank you so much, Firmo. Good morning, everybody, reinforcing Firmo's work. In the last 10 years, the project [ Sirraa Viva ] generated a positive impact, offering literacy and sports education for children and young people. supporting the social development in the regions is also a powerful tool to engage our collaborators.

In July, we published our sustainability report at Petroreconcavo, reassuring our commitment with the ESG agenda. And I'd like to highlight 2 points. This is our third report in a row that is getting more and more consistently presenting our ESG initiatives with the main stakeholders of the company.

We enlarged meaningfully the number of dedicators to GRI standards, introducing standards that are specific for the oil and gas industry. [indiscernible]. And this improvement raised our transparency levels, aligning us to the best practices of the market. And then in 2023, our social contribution had an expressive growth, number of people impacting increasing 1,000 for more than 10,000 in the last year, also expanding the reach of our programs in total 21 communities served, showing our commitment with the social development.

Considering regional impact, 2 indicators are relevant. 90% of our employees are in the Northeast region and 68% of services and materials are acquired from local suppliers, the capillarity of our operations onshore made a stake richness and wealth in the interior of Brazil, where we have our camps and stations. I'd like to pass the floor to Marilia.

[Marilia Nogueira, executive]

Thank you, Felipe, Firmo and Rafael. I will start the Q&A session and reinforce that the question should be written on the P&R. And we are not going to open microphones today. The first question is Bank of America. Can you explain the dynamic of prices of gas in this quarter?

[Unknown Executive]

I would like to understand the drop of prices quarter after quarter. I pass this one to [indiscernible] ão directly because he's an expert trading gas. Thank you so much.

[Unknown Executive]

We had some effects. The first one, reflecting on both quarters, the increase of the proportion of Bahia gas in our headquarter. We had an agreement that reached its peak in 2024 and the prices are fixed agreed in the past. So I believe this has brought this effect in 2 quarters. And we also have a late effect of the benefit of [ brand ] these agreements, normally, they bring brand from the previous quarter.

So all the benefits associated to [ Brent ] increase, they are going to be captured as this is stable. But in general, we are still supplying according to fixed agreements to establish prices in case of Bahia Gas connected to a fixed price structure and the other agreements, long-term agreements that we have connect to the Brent price. So the expectation is to follow using a reason of prices aligned to what we communicate to the market the last quarters.

[Marilia Nogueira, executive]

Perfect. Next question is UBS gathering with BTG questions. They are about the topic. I'm going to collect them together. After some quarters with press results, we have a more normalized levels, first quarter and also second quarter of free cash flow generation. Can we say that this is the new normal of the company?

And in the same topic, this cash generation, solid balance, low leverage open up room for a new capital allocation. Is the head of the company is more for dividends payment, policy alteration and if there is a predictability of dividend payment for the next years?

[Rafael da Cunha, executive]

As we showed 2 quarters in a row, connected to our reserve certification, we do believe that we are in a phase of free cash flow generation, very robust and is still ongoing with the CapEx reinvestment floating around 40%, 50% of the cash flow, the operation generating possibilities of free cash flow, so we can decide the best capital allocation. I see a potential of very strong distribution. But Firmo, please, we had a recent event. We discussed this topic a lot, and we are thinking about a methodology to define this capital allocation in a frequent way.

[Jose de Mello Firmo, executive]

Rafael, thank you. We had lots of interactions since I started in the company talking about dividends because it was anticipated that the company would change from a moment of investment to a moment of free cash flow moment as we can see now, and we do believe it's going to continue this way for the following quarters.

And fundamentally, the idea of a dividend policy, it seemed that it was an important discussion, but discussion that would impact a higher assessment. What I see for onshore in Brazil, external moment and also strategic moment of Petroreconcavo, lots of options, higher opportunities of Petroreconcavo to be with all the choices at the table all the time in order to use and enjoy bringing impact to the future of the alternatives, and they are none.

So the discussion with the Board now is a structure of gates and assessment every quarter about all these alternatives in a very open way. The company has currently tools, capacity and is developing more and more opportunities to accelerate the development of the reserves. And the company can take this decision in a very fast way. Once we have the structure of new models, new pieces of equipment like PR14 in our hands.

So it's very important for the company to be fast in the decision-making of a possible alternative, accelerating drilling or accelerating some reserves as the information becomes material. Another clear alternative is the company now start operation midstream, a company that has midstream activity, [indiscernible] and a more impact in midstream through the investments in [ Miranda], our investments in [indiscernible].

This is an alternative that is being built as time goes by, they are going to make more material, and we have to be able to use these opportunities very fast.

Another one is the option of M&A. It is a constant option. Petroreconcavo is going to be called to discuss all the choices of M&A here on the Brazilian onshore and it's known and accept the position of the company with the best operational capacity and lowering costs and be efficient developing reserves onshore and M&A options are very important to have visibility and be ready to do them when they come.

In the prices and in the model of Petroreconcavo, the subsurface and above assessing the potential of these assets geologically and production and of course, assessing as well the synergies that we might have with the operation of Petroreconcavo. And the other choices that are farmings and choices that we can have, not an M&A level, but project level on the fields and a possible payment of dividends. Instead of having a specific discussion about events, dividends we established with the Board is an alternative, long lasting throughout the year.

So we list all the choices, we list all these alternatives, and we take the timely decisions based on what Petrorecocanvo has the visibility currently in the future. This will bring more dynamic level and maximizing Petroreconcavo in their choices, making a differential -- competitive differential here in onshore.

[Marilia Nogueira, executive]

That's perfect, Firmo and Rafael. Next question is [Safra]. What is the operation in Sao Paulo? Is it according to expected?

[Unknown Executive]

We started in July. It's a process of commissioning something new to us, aligning the gas. We had the chance to have natural gas. The plant is operating within the parameters expected, a better plan, working the traction. So we retain all the liquids and specify the gas to be delivered.

It's a gas specification philosophy as we explained the market. So we can use the liquids in the oil flow. It's working very well. All the flow produced by the 4 concessions in Bahia that was expected, they are operating in UTG and delivering directly to in, enabling also an increase of the available capacity to increase production, increasing the expectations in [ Miranta ] that delivered to [ Petrobras].

In the next month, we are going to be following according to the expectations of increased flow specific to that field, the performance -- but the execution of capital, this project was well -- and the performance is exactly as we expected in the project structure that we designed for that plant.

[Marilia Nogueira, executive]

Perfect. Next question, [ Safras]. When are you going to receive drilling probes back? Is there a program for them?

[Unknown Executive]

We have a predefined program for the second semester, and we discussed today the needs and the efficiencies in these probes. They are gradually to operate outside Petroreconcavo. We took this decision, and I believe it was a correct decision. We had a chance of participating in these projects and understand these projects better and also a process of maturation that is very important to [ ASO ].

Today, we have something that it seems to be hard in the beginning of the year, but we have 3 drilling probes under operation, 2 with partners. And this window of drilling second semester is going to be concluded, focusing on PR14 since the beginning, commissioning and drilling of PR14 was the focus, but now absorbs more other wells absorbing other probes as well.

The final program is going to be defined jointly with the partners to do what is correct, an agenda of drilling, meeting 100% our needs and maximizing the use of the piece of equipment, making it available to the partners. So we are going to have a change in the second semester with more internal drilling demanding the return of some of these products to our own drilling [indiscernible].

[Marilia Nogueira, executive]

How can we think about storage elements next quarter?

[Unknown Executive]

Consumables, yes, there are consumable items in our stock. We described and communicated the objective of reducing our stock, BRL 70 million this year, acquired the reduction of BRL 50 million. And as we accelerate the program workover and drilling, the consumption of this stock is together. So we have a plan to keep on. Rafael mentioned correctly.

We are in the right direction. We see results already. and the integration of supply chain since the purchase to storage and logistics in a more strategic way, assuring that we plan well, fulfilling in the planning window, maximizing the use of the stock.

This stock, of course, by the end -- by the mid of the year, we see this development, and we have to keep on going this process in the second semester. I don't know, maybe something saying that the plan is broader. It starts with the planning that is more detailed and controlled of the execution of workover programs, drilling offset led by and then there is this planning execution to the supply chain team purchase and material consumables. This is a broader planning. It's not only limited to the supply chain.

[Marilia Nogueira, executive]

Next question is BTG. Can you talk about the expectations of production trend for the second semester? The curve is the best proxy for the year. The acceleration and drillings of workover seems that, but I'd like to hear from you if there is a chance of upside exit rate for the year.

[Unknown Executive]

The question on production has the answer of production. The curve of reserve published is still the proxy that we follow. We know that this beginning of the year has the domino effect, everything that we discussed before. So we had a first semester that was very challenging. But what we saw in the acceleration of the execution, what we could do. But now the drilling process in the second semester, we have the expectation of a return, bringing us closer as possible to this curve that was published in the reserve report.

There are upsides and downsides as any other drilling program. And that's why we prevent from putting a fee. And this was a year very challenging in the first semester. So yes, it's the best proxy. We are searching and reaching this curve from today up to the end of the year. We have upside in our program. But of course, this is a project of AIP considering risks of drilling and risks of workover.

What we saw, what we did, especially in the last quarter, started creating a platform that is necessary so we can have this level of reliability in the second semester. We established the foundations and now the company can reach and seek a production increase that is expressive for the second semester.

[Marilia Nogueira, executive]

Next question is [ Ps]. Can you update infrastructure of [ OG ] and 3? What are the conditions that are important for Petroreconcavo?

[Unknown Executive]

Excellent question. Maybe João answer. Let me first talk about the first part, and I pass the floor to [indiscernible]. This sharing of infrastructure is not here in Brazilian onshore, especially in [ Potiguar], as something that must be done this way. Everybody says it makes sense that the 2 companies find a long-term methodology to maximize the efficiency using that infrastructure.

Most of the gas flowing that infrastructure is ours, but we need to keep on investing in the production growth in [indiscernible] to have a level of protection, a resilience level to flow gas. So we can rely on it. This is one of the first discussions we had because of the crisis on the fourth quarter last year.

The conditions of outline, we need to find out a technical and economic equation to align the investments to develop more gas in the Northeast in [indiscernible] ôIuar, aligning the level of protection that we need to flow the production. This alignment of 2 ends are the outlining conditions.

The mathematical number is very simple. Build [indiscernible] has a cost and a benefit. Sharing that infrastructure has a cost and a benefit. Finding a commercial way that this number is harmonic and sign is our objective. I was asked many times why can't we do it without looking back to the past. But looking ahead, we see the outline conditions now currently, so we can reach the decision. And I believe that we are not going to get the end of the year without a decision, Petroreconcavo must take a decision. Having a contingency work to flow [ Portgar ].

[Unknown Executive]

You have defined very well the premises we have been working with a reality of ensuring resilience of structures that our production flows. That's the premise. We have a potential vision in the midstream, but the philosophy is to ensure continuity, stability and [ Potgalar's ] production has a potential of gas and is going to increase.

Considering the structure of partnership, we signed the MOU before the recent changes. We rely on this process. We have a big alignment with the new management, people that are leading this process. As we understand the outlining conditions and establishing the comparison and build up our own infrastructure, migrating to use the current structure in association and thinking about a different solution is something that you want to build. As we have 3 Oil as a partner, we have this possibility.

[Marilia Nogueira, executive]

Perfect, [ Jo]. Next question in Rio Grande do Norte, Goldman Sachs about [ shading ] in Rio Grande do Norte. What is the percentage of production in Rio Grande do Norte can be moved in this mean? And what is the destination of the trucks leaving that point?

[Unknown Executive]

The percentage is easy. The construction is 100%. So we do not close one more field because of the flowing possibilities of oil. This is the design of engineering of facilities, so we can move 100% of the production. The definition of terrestrial condition is our next step. We were not waiting, but we have been developing jointly. We also had a workshop very interesting in Rio de Janeiro, observing all the alternatives.

The second answer is there is no definition today on a single place that we have decided that is going to leave 100% of the production. The best alternative today to Petroreconcavo is what we have. We do not have just one exit of oil. We established this. This is the most relevant to me.

Now commercially speaking, it's hard to have a logistic solution using trucks to be more competitive than a solution using oil pipeline, a balance between the 2 of them. So you can have the logistic ready to receive 100% if necessary. But it's not the primary alternative. It seems to be the best alternative, having the oil -- the oil pipeline as the primary and the highway as the secondary option.

[ Jo ] has been developing this with the team in the following months to close the terrestrial logistics to be beneficial to Petroreconcavo. But the fundamental change, a critical change that we achieved the technical capacity of doing that. This was not possible in the past, but 100% of production today could be transported using trucks.

[Marilia Nogueira, executive]

Next question is [ Bradesco]. What about the operation of PR14? Adding other questions that are relevant. What can we expect from production increase for the second semester? And gathering another question, Santander about workover, work in July, if they were executed and how they are going to be executed, the impact on the production for the following months, if it's something more to stabilize and fight the decline or increase the production?

[Unknown Executive]

Let me get that. PR14 we started the drilling process, finished the commissioning and is performing well. The objective that we have an injection well and the objective is debug a probe that has just passed a refurbishment and international logistics, all the probe in this situation, the first well must be more focused in reaching the technical objectives of drilling, ensuring that the safety operational is well revised.

It's not a well that you get maximum efficiency. But today, we have a performance in the first days that is robust. nothing new unless the small details on the end of commissioning. We are so pleased to the performance of PR14 in the first well. Of course, the first and the second wells are very important to establish this performance. And remember, this probe has a full team, a new team operating for the first time.

We use the exceptional capacity of Petroreconcavo using other probes to select a mix of people with the experience with this equipment here in Brazil and abroad as well, together with the Petroreconcavo team that understand the philosophy of work and safety and all. It's a challenge and a great opportunity as well.

Very important for Petroreconcavo to reach what is not simply having a probe, having a probe, having a piece of equipment is an important part, but definitely, it's not this that makes the difference, being able to operate this prob with the level of efficiency that it operates, for example, in the American onshore.

This will transform our capacity of developing reserves on onshore that was not developed because this efficiency was not available the same way as Petroreconcavo could be unbeatable in their cost of reserve development in the past, PR14 is an important component for the future.

This is the answer about PR14. Workover and drilling workover alone does its best. It's maximum in some fields, brings additional production, additional potential in other fields is fundamental for maintenance of production, especially in the fight against decline.

So it is a mix of incremental production and fight to decline. But we all know that in a mature field, the way of growing production, materially speaking, is a combination of workover and drilling. So the projects of secondary recovery, the projects of water flooding depend on these 2 aspects, and this brings robustness to the future of Petroreconcavo.

And we expect today, we have the right pieces of equipment, the right people, the right processes and the workover program back to their potential, so we can reach maximum during this year, the reserve curve on the reserve report. That's what we can expect.

[Marilia Nogueira, executive]

Okay. Next question. Any piece of commentary from your side? Would you like to comment? Go ahead.

[Unknown Executive]

[Foreign Language].

[Marilia Nogueira, executive]

We can have one more question. The next question, Goldman Sachs. What is the level of leverage that the company is going to use to base the dividend payment?

[Jose de Mello Firmo, executive]

The company has an internal policy of keeping the leverage under 1.5x. We are so far away from that. The mindset, there is no mathematic formula. What we are thinking is keeping the leverage of the company near this level, 0.5, 0.75, I would say, except from M&A and big projects midstream, this would be the planning.

I do not see a big structure, a big change to leverage the company for the next quarters. And this will enable the cash flow generated is available for the opportunities or payment of dividends. I would say something on top of that. I see the leverage of Petroreconcavo as an advantage to keep in order to be very efficient in a possible need of cash flow or leverage for an M&A or farming that is very important and relevant that the company is going to do in the future.

[Marilia Nogueira, executive]

Perfect, Firmo. And to conclude, if you could detail more the electric reliability project.

[Unknown Executive]

Fundamentally, what we did in the last month was observing the electricity, electron in a different way, not only as an input, but a strategic input. What does it mean? It needs its own structure a group of people observing it in a special way, not only with short and midterm solutions, but also long-term solutions, and it needs data and information.

We have lots of understanding of [ Eletro ] and Petroreconcavo, but it was not harmonized in a single structure. The first thing that we did and the focus of the first month was the creation of an excellent center that is basically what we see in a distributor. Petroreconcavo has more than 500 kilometers of distribution lines, substations, infrastructure of distribution. They operate themselves.

So we already have in the company activities of distribution, and we create an excellent center to integrate it all as the distributors do in association with distributors to understand the best way of doing it and generate information, data and also event lower capacity of knowing about each and every electric event that we have in the cost and the consequences.

So we can have a robust program and address not only purchase of electricity and possible changes long term in the electricity generation, also integration with partners to generate and distribute. We are going to transform [ Electroina ] to electricity in a strategic top and the company has a long-term point of view.

This year is excellence center, data event lobby, so we keep on evolving. But on short term, we are doing things. We have 21 projects already registered to improve technical improvement to get the company ready for the rain period next year.

So we have some sites with generators in order to bring more electric resilience in some wheels and wells and some clusters, we are doing it. But I thought this was not enough. That's why we created a broader project that is ongoing. Short term, the list of projects seeking the acceleration of resilience for next year is something more impactful and strategic for long term. That's the model that we are operating.

We expect to have the center of excellence next month and start generating data and information in the level of transparency for the company, so we can have a more ambitious program on how to treat electro that is a critical input and relevant cost-wise and operational resilience wise.

[Marilia Nogueira, executive]

Firmo, there is one more question. I will ask you, so we can conclude M.organ Stanley. The first question is about lifting cost. Can you tell me -- tell us the perspective for next quarters to understand if it's doable that range $11, $12 per barrel that was discussed months ago?

[Jose de Mello Firmo, executive]

The objective of lifting cost is the correct direction. There is nothing I can tell you that we have to do. Petroreconcavo is efficient has always been. There is no low-hanging fruit that I would say next month or 3 months from now, we are going to have radical change in lifting costs, but there is a need of searching efficiency and reestablishing some efficiencies that Petroreconcavo had in the past, and we can still have is the decline of lifting cost reaching for efficiency.

I have named an impact that we believe is going to be good for the company, considering the harmonization and standardization that is the creation of this structure for the integrity of assets and facility projects. And this brings impact that is positive of improvement on efficiency.

And in addition to that, other types of actions that we have been doing to increase visibility of costs, understanding and creating platforms of improvement and optimizing costs. I do not have a number or a figure we are going to bringing down the lifting cost. The best efficient way for the lifting case is increase production.

Second semester, we see capacity to increase production, keeping the fixed cost as fixed as possible. We are having better improvement in lifting cost in the next days. But the big factor is efficiency and production increase. These 2 topics, these 2 foundations, we can keep the lifting cost in the direct correction.

[Marilia Nogueira, executive]

I believe we conclude our webcast on the results of second quarter. All the following questions, my team here and if necessary, some of our executive directors return to you.

I thank you so much. We are going to access this recorded webcast on our IR site. Thank you so much. Have you all a good day. Bye-bye.

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