3R Petroleum Oleo e Gas SA

BOVESPA:RRRP3

Earnings Call Transcript 2023-Q2

[Operator]

Good day, everyone. Welcome to 3R Petroleum Second Quarter 2023 Earnings Conference Call. The conference call and comments about the results will be presented by Matheus Dias, CEO of 3R; by the CFO and IRO, Rodrigo Pizarro; and by the Exploration and Production Officer, Mauricio Diniz.

We informed that the simultaneous translation tool is available on the platform. To access it, simply click the Interpretation button at the bottom of the screen and choose your preferred language. This conference is being recorded and will be available on the company's Investor Relations website, www.ri.3rpetroleum.com.br as well as the presentation that we will share.

[Operator Instructions]

Before proceeding, if we take this opportunity to stress that forward-looking statements are based on the beliefs and assumptions of 3R's management. And on current information available to the company, forward-looking statements may involve risks and uncertainties because they relate to future events and therefore, depend on circumstances that may or may not occur.

Investors, analysts and journalists should understand that events related to the macroeconomic environment, the industry and other factors may cause results to differ materially from those expressed in such forward-looking statements.

Now we will start the presentation with the company's CEO, Mr. Matheus Dias. Please, Mr. Dias, you may begin.

[Matheus Dias de Siqueira, executive]

Hello, everyone. Good afternoon. Welcome to the conference call of 3R Petroleum to discuss second quarter '23 earnings results. The presentation will start with me presenting the main highlights of the period by Mauricio Diniz, our Chief Operations Officer, who will share relevant operational aspect of the assets we have in our portfolio. And then by Rodrigo Pizarro, who will detail our financial results and performance metrics of the company as well as information on our capital structure, cash position, hedge and debt in general.

To start on Slide 3. We have an overview of the period. The first highlight of the period and of extreme relevance to the consolidation of 3R's portfolio as well as being an important milestone in this phase of total focus on the company's execution is the conclusion of the acquisition process of Potiguar cluster with closing on June 7 and start up operations by 34 on June 8.

In the E&P portion with Canto do Amaro, Estreito and Alto do Rodrigues fields, which started production at approximately 15,500 barrels of oil equivalent per day. And so far, with production increase within our expectations, we have reached an average production of around 17,000 barrels of oil equivalent daily. Another interesting element is the integration of assets in the Potiguar Basin, which provides the company with operating and commercial flexibility as well as greater control of copper parameters in a large quality production chain.

In this context, it is worth emphasizing the potential in several alternative scenarios of production of loading and logistics that this integration provides for 3R. Regarding the operational and production highlights of the quarter under review, the company reached an average of more than 28,000 barrels of oil equivalent per day, posting significant difference compared to the previous quarter, up around 37%.

This increase is significantly explained by the integration of the Potiguar cluster after the closing, but also by the operational evolution in all the company's other clusters. This can also be seen in the subsequent period. In July, the company already exceeded 40,000 barrels of oil equivalent daily in the average production for the math. It is worth emphasizing here the performance of Macau cluster, which has been gradually increasing its production by means of the gradual release of its pent-up capacity as well as by means of interventions carried out according to our 2023 plan.

While adjustments to its production infrastructure are still being made concomitantly. This has enabled a significant production increase of 65% when compared to January and quarter-on-quarter production increase has already exceeded 18%.

Regarding the financial metrics. I would like to highlight net revenues for the quarter of BRL 837 million with a consolidated EBITDA of BRL 200 million. Please note, revenue posted a positive variation of approximately 46% over Q1, again, due to the consolidation of our portfolio, the positive evolution of production and certainly, due to the start of refining and sale of oil products, EBITDA showed a more modest growth percentage-wise when compared to net revenues effect still attributed to transition costs incurred in the period to refining and selling activity of oil products and activity that is still very premature in the company and consequently with initial challenges, both commercial and physical challenges in the current structure and partly due to the fall in Brent prices seen in the months of the second quarter.

Lastly, still on the highlights, the company saw important progress in terms and conditions of sales contract all costs of the 3R portfolio, especially in the unit values of the gas molecule with a highlight going to Pescada clusters and oil conditions at Papa Terra assets of the Recôncavo Basin, not to mention the Potiguar intercompany transactions.

[Mauricio Diniz, executive]

This is Diniz. Thank you, Matheus. Let's move on to the operational information divided into the 4 areas where we operate today. Starting with the Northern most area, we have to put Potiguar complex. I would like to highlight that throughout this presentation, what we are calling the Potiguar Complex includes both the previous area, which we already had. And the current area that we closed in early June, which we are calling the Potiguar cluster.

We can see in the graph a very significant increase in production from Q1 2023 and Q2 2023. Part of this already comes from additional production since June from June 8 to June 30. And part of this is the increased effective production that already existed in the old cluster, which we are still -- which we are calling the old Potiguar cluster.

And in July, we see a much more significant production in the data that we disclosed yesterday of 25,200 barrels per day. I would like to highlight an observation in the bottom graph. Our production over the previous quarters referring to the old Potiguar cluster, so to speak.

So this cluster used to produce up to 8,100 barrels per day in the past. With those words that we were carrying out with increased production adaptation of the plans, there was this decline in production over time. And in these last 3 quarters, with the partial completion of these works and with increase in the number of rigs in the area, we have been increasing our production again, reaching 8,000 barrels per day in July, in line with that initial production that we had in the first quarter of 2022.

And for this production increase, we have 10 rigs at work. Today, we already have 10 rigs in operation in the area. And these rigs worked on 75 activities. Of these 46 workovers, 10 points, which is that removal and placement of equipment inside a well, reactivation of 11 wells and also important good news, we drilled 8 wells in the area.

In the production of these 8 wells is in keeping with what we expected based on our reservoir studies. We highlighted that in the second quarter of 2023 compared to the last release of results referring to Q1, we increased production by 2.5x and production in July increased 4x in relation to Q1 '23.

CapEx In this area. Investments were made both in the wells that I mentioned and in facilities. This works. And the continuation of those works that are still in progress and will be completed in the coming months. Our well drilling campaign was these 8 wells that I mentioned earlier.

Moving on to the second production area. The Recôncavo Complex. Here, we reached in Q2 2023 7,400 barrels per day. And in Q1, 7,000 barrels daily. In other words, in the last few quarters, in all the previous quarters, we have been increasing production continuously.

This is basically due this year to the placement and the work of 5 workover rigs that are working in the area. One more should arrive in 2023, still in 2023. And to date, we have made 38 interventions in the wells, 19 workovers, 14 pull-ins and 5 divisions.

With these interventions in these wells and some more facilities work, we reached $15 million of CapEx in by year. In addition, we are now forecasting for the next half year for the second half of 2023, the arrival of 2 rigs to be drilling in the area. As for Papa Terra, I wanted to start analyzing these graphs and explain to you comparing the one before the last and the last bars on this graph on the left. In the second last bar, we see the first quarter of 2023 with 10,100 barrels per day. And in the second quarter, 13,000 barrels per day. In other words, production at Papa Terra is also increasing over time. As we have said in previous meetings in previous earnings calls, the work at Papa Terra during this year is focused on improving operating efficiency and improving the integrity of the unit. And in the integrity of the unit, we have worked on some important systems.

And these main systems that we have already worked on are the generators our offloading system and also transfer pumps of the unit, and we have already achieved greater reliability in these systems. To be able to show this, we prepared this lower graph on the right side of the slide, where we show, in the last 12 months of operation of the platform last year before 3R took over the operation and efficiency of 22%. In the first 7 months of 2023, we see operating efficiency of 57%. And with this work that we are doing to improve reliability, we expect to achieve this year, by year-end, an operating efficiency between 60% and 80% according to our forecast in next year.

As has already been said in previous meetings, we should have a bout of flotel stopped next to the unit, where we will do more maintenance work. And then we should reach after this intervention and operating efficiency of 90% by 2024. As for Peroá, moving on to the next slide. In Peroá, we also had some progress. We also had an increase in production over the last quarters. And our working interest increased from 1,500 barrels per day to 3,200 barrels per day. The capacity of Peroá turning that into cubic meters daily, the capacity of Peroá is to produce 650,000 cubic meters per day.

And in Q2, we reached those 3,200 or 570,000 cubic meters per day. This production at Peroá basically depends on sale negotiation on the sale of Peroá Gas. And in the second quarter, we also signed a contract with Petrobras itself to treat our oil premiums to sell the gas to other players to any other customer, who wants to buy our gas.

So this also improved the commercial side, the sales of Peroá Gas. To summarize our production, we achieved along all quarters, an increase in production. This increased production, while in the second quarter of 2023, we reached 28,400 barrels daily. And in July, just now, in the production released yesterday, we were at 43,900 barrels per day and share that corresponds to 3R 70% of this production is oil, 30% gas in volume.

Looking only at the oil part, the 34.6, we have in the lower left graph, the production of all our assets are fields which we divided into these areas. I would like to highlight these 4.1 in 17, which are 2 values referring to our Potiguar cluster that was recently acquired. Then we ended the quarter, the month of July with 34,600 barrels per day. And in the average oil production, 20% plus 29%, that is 49% today comes from our Potiguar cluster. Let me give the floor back to Matheus to talk a little about the bid in downstream -- the mid and downstream.

[Matheus Dias de Siqueira, executive]

Thank you, Diniz. Let me start with a comprehensive overview of the start-up of our mid and downstream business unit, which is part of the perimeter of the Potiguar cluster deal. I'd like to start by listing some aspects of the structure comprised in the Guamaré industrial asset AIG. Firstly, this industrial complex carries within units and systems that are part of the production chain of the Potiguar cluster, providing interesting attributes to the company's maturity phase, such as greater control over direct production costs, commercial and logistics flexibility.

In this context, this complex has in the summarized fashion, primary oil and gas processing units, an affluent treatment unit, given the magnitude of the water portion in production, a refining unit with a nominal capacity of 40,000 barrels daily, a natural gas processing unit in GPU with nominal capacity of 1.8 million cubic meters per day.

And there is also a private use terminal with 2 mono-buoys systems. One for oil products and the other for crude products, together with the tankage park distributed in the primary processing, refining and terminal units, again, with a total capacity of 1.8 million barrels.

Now naturally, as with all efforts that we have taken over during this period of various acquisitions. So restrictions require preventive and corrective maintenance. This complex is not different. There will be a need for some scheduled shutdowns to repair to the preventive maintenance of systems and units within the refining complex within the NGPU and also to enable increase in tankage, which still remains restricted in the terminal.

As already mentioned, the integration promoted by the arrival of this asset and its processing and logistics units in 3R's portfolio creates an environment of independence and flexibility, which allows the company to have trade-offs between oil and oil products, which enhances our financial performance.

This can be clearly simplified. At times when the crack spread, which is the difference in the average reference price of oil products in relation to the brand. When the crack spread is at high levels, the company will certainly leverage the use of refining to produce oil products and the opposite is also true.

At the moment, when the crack spread is at low levels, the company will boost the sale of oil, either by exports or in the domestic market itself. Now on the right side of the page, we have a summary of the oil products traded in this 23-day period in the second quarter with the sale of approximately 110,000 cubic meters or just over 680,000 barrels.

So as features of the refining unit itself, we have a higher volume produced concentrated in the bunker, which was reported in full although the intention is to expand access to the domestic market in view of the premium that exists for selling in Brazil when compared to exports.

The mix of conditions that we highlighted oil and head consists mostly of a combination of mixture of crude products purchased from Petrobas at the time of closing, plus unspecified products originated by refining. As for the lighter oil products, we first have jet fuel as the only product 100% specified by the refining process of that is, which does not require any subsequent blending. In the cases of gasoline and diesel for both, it depends on the import process to supply the market of and its surrounding areas.

Gasoline so far is resold directly and low sulfur diesel is mixed with the diesel produced by the refinery to fit the final specification of the market. It should be noted that the refinery produces distillation naphtha, which after some facility adjustments that will occur during the month of August at the refinery may be incorporated into the gasoline blend and we sold to the local market.

Finally, still in June, the refining units were adapted for the production of MDO, which is low-sulfur marine diesel oil, still a little relevant, as you can see in the chart, but which is opening the market for this product through the Guamaré Waterway Terminal in addition to the delivery via the base of local distributors.

Finally, on this page, looking at the coming periods, I emphasize again the importance of the terminal and its tankage park for business opportunities and possible partnership with the potential to increase the flow of imports and exports of crude oil and oil products acting as an effective logistics hub for distributors and for trading operations.

On Page 11, we summarize the commercial conditions that I mentioned recently and the highlights of this period. It should be noted that the commercial efforts are continuous, and the company will constantly seek better ways to monetize its products within macro parameters as well as market demand conditions, logistics costs, among other variables.

First, in a summarized way, in the Potiguar Basin, the integration of assets brought a substantial improvement to the unit price of oil conditions, which can be used today vertically through the refining units or marketed directly with other customers. So to other customers directly using the private use terminal as a potential logistics gain.

In the Recôncavo Basin, especially on the sale of oil, we have in the second quarter an average unit price of $2.7 per barrel, which represents a substantial difference from past quarters. For the next quarter, we will have another reduction, given that the new commercial conditions of the contract size were in force starting at the middle of the second quarter.

Another highlight now at 34 offshore is the Papa Terra cluster, which since the beginning of operations under the company's management have had several adjustments since the first lot. Bill on pricing dictated by the SBA. The average unit price indicator has evolved greatly since then, reaching in the quarter, Brent minus $15.4 per barrel, which is I exemplified about in Recôncavo will still have a slight improvement for the next period, considering that the present contract was in force as of June only.

It is worth emphasizing that the constant effort to tanking capacity remains and is vital for the formation of lots with greater volume and consequently to attract more advantageous commercial additions. Still on 34 offshore in the Peroá asset. There's also a new commercial condition and contract structure, in which we start to market both treatment gas at NGPU at the entrance of the transport pipeline for 13.5% of the brand per million BTU.

In relation to the last contract where there was a condition of sale before processing and to have the same comparison basis. The approximate price that we got pre NGPU new contract is approximately 11.5% of the Brent per million BTU. Note that this new contract has a guaranteed volume of 4,000 cubic meters per day, which allows 3R to access the market and to work part of it in the spot market as well.

Now we will enter the financial metric session, and I turn the floor to our CFO, Rodrigo Pizarro.

[Rodrigo Lavalle da Silva, executive]

Thank you, Matheus. Good afternoon, everyone. Let's begin the Q2 2023 financial highlight session. On Slide 13, we present the company's net revenues with a great evolution compared to the previous quarter, as a consequence of the incorporation of the Potiguar cluster in our portfolio. The mid and downstream activity is already mentioned by Matheus and the increase in production highlighted by Diniz, which offset the reduction in Brent prices.

We started from a net revenue of BRL 574 million in the first quarter to BRL 837 million in the second quarter of 2023. As of this quarter, with the start of operation of the Potiguar cluster, we will also report revenues and EBITDA by segment. We had BRL 760 million of net revenues back to E&P considering the intra-group revenues and oil management revenues referring to the transfer of oil between the field of the Potiguar Basin for refining activity.

In the mid, down segment, we obtained BRL 265 million in revenues from refined products, LPG and services. The reconcile with total net revenues, we must exclude the oil management revenues. I mentioned and the intra-group revenues from 1 subsidiary to another. As an example, the sale of Macau oil to the Potiguar subsidiary.

On the following slide, we break down the net revenues of the upstream segment by cluster with the exception of the, which had a slight reduction compared to the first quarter. All other assets had an increase in net revenues due to the higher volumes produced and better commercial conditions that were partially offset by the lower value of Brent.

In just 23 days of operation in the quarter, the Potiguar cluster represents BRL 127 million of oil management revenues linked to the sub clusters Canto do Amaro and Alto do Rodrigues. By product type, oil revenues account for 83% and gas, 17%. On Slide 15, we present the evolution of the company's adjusted EBITDA in this quarter, reaching BRL 200 million with a consolidated margin of both segments and about 24%.

If we excluding the transition expenses related to the Potiguar cluster, we would have reached BRL 224 million. Breaking down the segments, the upstream management adjusted EBITDA was BRL 265 million, of the mid and downstream, BRL 4 million and considering corporate expenses and intercompany results, we reconciled with the group's adjusted EBITDA of BRL 200 million.

On the next slide, we present the company's lifting cost. Even with the start of operation in several assets over the last 12 months, we present a very controlled lifting cost of $23.6 per barrel of oil equivalent. And it is worth mentioning that in this calculation, we excluded the gas reinjected or used in the operation to have a more conservative lifting efficiency metric.

It is worth remembering that we have been operating Fazenda Belém and Peroá for about 1 year, Papa Terra only 8 months and Potiguar for 23 days in the quarter. And in all cases, we have expenses and costs to adjust the collection, processing and start facilities to more stable operating conditions and prepared to receive higher production volumes.

In a cluster analysis, it is worth mentioning that the lifting cost of Papa Terra at around USD 30 per barrel considers expenses and costs of maintenance activities to recover the integrity of the assets, as Diniz has already mentioned, which could and should have been carried out in previous years by the former operator.

The good news is that the hard work of recovering these systems is beginning to show signs of more stable production and an improvement in efficiency in recent months. As for the Potiguar cluster, the increase in production of the Macau and Fazenda Belém assets has not yet been sufficient to make up for the higher expenses of the start-up operation of the Potiguar cluster.

We also had, in the last 23 days of the quarter, the impact of a steam contract that was tied to the SPA of the Potiguar cluster, which significantly impacted lifting costs at the cluster. This contract, which represented about 60% of the volume of team's consumed by the cluster was not renewed. And from July onwards, the company no longer has this cost in its operating expenses and have begun to optimize the injection process with its own equipment. New systems are also in the process of being acquired. In Bahia this quarter, we had some nonrecurring operating costs to restore integrity and prepare the offloading pipeline that connects the Recôncavo cluster to the nearest local refinery, which is plus allowing a more efficient logistics and better commercial conditions for the sale of oil.

Starting in July, we also began to reduce certain fixed costs for truck transportation and some operating expenses. Finally, in Peroá, with a stable operation and a higher production sold in the quarter, we obtained an excellent lifting cost below $6 per barrel. On the following slide, we present the evolution of CapEx.

In the second quarter, we reached $42 million more relevant in the amount itself, with the company's preparation this quarter or the start of a more intensive activity and investment in the second half, especially in Potiguar and Papa Terra. Activities in wells in this quarter represent about 50% of the CapEx, 25% in surface installations and 25% in the acquisition of spare parts and materials.

On Slide 18, we present the cash generation for the quarter and the company's capital structure at the end of the second quarter. Analyzing cash generation, we started from $131 million at the end of the first quarter and concluded the second with about $200 million, with $29 million already provisioned in escrow account for the payment of interest and debt contracted for the Potiguar cluster.

Highlighting the period for positive operating cash generation of $44 million, the capital allocation of $187 million, the contracting of debt for the acquisition of the Potiguar cluster and the acquisition of the Potiguar cluster itself broken down into the asset and the inventory of spare parts acquired from Petrobras.

Our net debt position is approximately $1 billion, looking only at financial liabilities. And if we consider deferred obligations and the earn-outs related to asset purchases, we would add up just under $400 million already brought to present value.

On the next slide, Slide #19, we present a summary of our hedge position. Over the next 25 months, we have about 2.4 million contracts with an average price of $80 per barrel and about 5.7 million contracts in the color format with an average minimum of $54.6 per barrel and cap at $97.1 per barrel.

As we mentioned in the last earnings call, the hedge volumes were gradually increased to meet the obligations agreed after debt instruments. Finally, on the last slide, we highlight the company's priorities for the second half of 2023.

First, total focus on executing, increasing operational efficiency, dilution of fixed costs and recovery of the integrity of our key assets, including Papa Terra and Potiguar cluster in order to maintain a safe and resilient operation.

This half year, we are also closely monitoring the market to evaluate alternatives for optimizing short- and medium-term debt with the development plans already approved by the E&P. We can also consider the possibility of infrastructure debentures in some of our subsidiaries.

It is also worth mentioning that our management continues to evaluate portfolio optimization opportunities and that in the third quarter, we will release our first sustainability report to the market. And as a final message on behalf of our administration, I would like to thank everyone for your presence, especially those who supported us to reach the current level after such accelerated growth in all aspects over the last 4 years.

Just a brief memory from August 9, 2019, we had the first signing, which was a Macau cluster, an asset we took over with about 5,000 barrels of oil equivalent 9 months later. And now in July 2023, we are very proud to say that we have reached about 44,000 barrels of oil equivalent. Again, thank you very much.

[Operator]

[Operator Instructions]

Our first question comes from Mr. Luiz Carvalho with UBS.

[Luiz Carvalho, analyst]

Congratulations. On the turnaround of production, I'm happy to see the whole team together. I have 2 questions and you know whether it goes to Matheus or Pizarro. Despite the improvement in production, we recently saw and data released yesterday, we still see cash generation in Q2 relatively low. It was actually negative in this quarter and slightly positive in the previous quarter and also negative in the end of last year.

So perhaps my question is, when are we going to see cash generation more in keeping with the EBITDA of the company and now the closing of Potiguar is behind us, and we should not bear great transition or transfer costs or anticipated expenses. So what about your planning regarding investments to increase production, but at the same time, balancing the cash flow of the company.

My second question I think it has to do with one of the last comments made by Pizarro. You mentioned then very soon, you will be doing or are already doing an assessment of your portfolio. You know what you can tell us about this at this point. But if you can share what you're thinking? From the strategic standpoint with us, that would be interesting. Are you going to focus on onshore or onshore plus offshore maintaining the downstream assets? I know you're still at a very incipient movement. But if you can give us some more color on that, it would be interesting.

[Rodrigo Lavalle da Silva, executive]

Well, good day, everyone. Thank you, Luiz, for the question. As regards to the first question, cash generation, indeed, the detail is that in this last quarter, it is exactly what you mentioned. Net of the amount that we paid to Petrobras regarding oil inventory and inventory of refined products that were -- in the Guamaré Industrial asset, our cash generation would be positive by $44 million, and that's why we segregated that, that slide about the cash flow.

And still, we had in this quarter the fact of those transition expenses, not only in this quarter, where we had an effect of approximately $24 million in the previous quarter, $18 million. So this is what is making our cash generation not talk so much with the EBITDA. But as of the coming quarters, when those transition expenses in fact, will be mitigated with the detail of Piscada and, that remains in transition, but that effect will be a lot lower than in the previous quarters.

Looking forward, our expectation regarding working capital as a whole will end up being slightly positive. So in the future, when we assess the effect in Q3 -- in Q4, according to our internal modeling, we don't have an internal need of buying a lot of spare parts or a greater volume of inventory than what we already have.

So this negative working capital effect will no longer exist. And as mentioned, in the next quarter, we intend to an order of magnitude of a total volume of $280 million to $290 million of CapEx for the full year. We already used $75 million of it in Q3 and Q4, that's when we have a growing volume because we'll be mobilizing practically all of the rigs that we have contracted along Q3 and in Q4 with the Papa Terra rigs, that's when we are going to have a much more relevant CapEx spending than what we saw in the last 2 quarters.

To fund this CapEx, we have EBITDA generation, which is very similar and above that amount of about $300 million. And we have some small ones, 1 that we have already captured in Q3 of about BRL 100 million captured in 3R offshore. And we continue to assess, as I mentioned in one of my last messages, some alternatives to roll over or increment that local debt that we have of BRL 900 million as of February of of next year, we can work on this debt, and we are assessing alternatives to perhaps increase the total amount and stretch the debt out after the payment of the term loan and the BTG debenture that we captured of $500 million.

With that we'll have a very robust capital structure coherent with the volume of interest, the volume of CapEx and the volume of taxes that we intend to pay until the end of the year even with more challenging brand scenarios. Fortunately, in the last weeks, we have been getting away from this scenario.

So in a nutshell, we see our capital structure very adequate with the information I just gave you. As regard to the second question, regarding the valuation of the portfolio. Of course, since we acquired Potiguar cluster, since we signed for the Potiguar cluster, we have assessing possibilities in the mid and downstream in terms of partnerships and partial sale of some assets that will not substantially impact our EBITDA.

This can some inflow of cash along the next 2 quarters. And a more comprehensive evaluation is in other assets, which are not 100% core assets for the company. I'll try to be more explicit. What is our core? It is our Rio Grande do Norte state production. And that's where we see a great potential to increase production, reducing the lifting cost and all the integration that we like to mention.

That's another message that I tried to convey in the end of the presentation. I.e., that it is very rare to have this kind of integration onshore. This is very and any other country. In Latin America, it's not to be found an oil-producing company that has a huge storage capacity with our own facilities to sell directly to a trading company and possibly even refine.

I know you can be asking questions about mid and downstream and Matheus is going to be talking more about that. So that kind of asset is very rare. Another core assets that we have is Papa Terra. Papa Terra is another asset where we see great potential when we see that evolution of operating efficiency. We're doing a lot better than the previous operator. But we're still very far from being from having an ideal efficiency, which is great news.

We can get to much more competitive lifting costs at Papa Terra including fixed cost. I'd like to remind you that not all assets that we bought over all of the assets that we bought from the previous operator require integrity repair work, maintenance, recovery sometimes is so intense that is characterized as CapEx. When it's inspection of maintenance that was not done or performed in the last 2 years, that ends up impacting our OpEx. All of that along the whole year, this needs to be excluded and this has an immediate effect on lifting costs. You had that production increase. And in 2024, we can start seeing an evolution of the lifting cost.

In a nutshell, regarding the portfolio, we continue to evaluate it. In mid and downstream, there are objective possibilities of partial sales of smaller assets. And there's also the possibility of partnerships in the short to midterm. In smaller assets, Fazenda Belém and in Bahia, all these things are under review, but there is no final decision by the management or by our Board. Thank you, Luiz.

[Luiz Carvalho, analyst]

If I may I'd like to have a follow-up question. You presented your hedge strategy. Perhaps you could link the strategy looking forward, linking to cash generation, which was my first question. That would be helpful. How are you thinking about this in the future?

[Rodrigo Lavalle da Silva, executive]

That's another great question. When we look at everything we've hedged, looking forward, in the app, we have about 10% to 12%. And actually 12% to 13% in Q1, 10% to 11% in Q4, considering total oil volume and when we'll look at NDF, it's about 26%, 27% and looking forward between 20% and 23% in in the color format.

First is in the color. In this total, we have about 35%, if we get a weighted average of the first and fourth quarter already hedged at great levels, and this is a big highlight. While the oil curve was -- at a higher level, we privileged India. In other words, mark the price at around $80 in the future curve oil. When the Brent prices started dropping, our priority was to do it via collar format. So the variations in that interval from $55 to about $100 would have no real effect for the company.

In our view, this was the right decision to make. Looking forward, if the Brent hopefully not, if the Brend drops to $60, for example, we have at least 10% to 12% marked up with $80 and also the effect of 20% to 25% that will be hedged in this level between $55 and $60. And this is what I mentioned. If the Brent price drops substantially, of course, we'll try to step on the brakes of our CapEx. That's the advantage actually of having a well-balanced portfolio with a lot of onshore assets.

So we can postpone the CapEx a bit. And we can have a final cash generation, inflows and outflows, debt and payment of interest and principal in taxes still the result will be positive without any cash burning. And that's the detail. When we look forward, let's remind you what we've mentioned before. Our obligation to our 2 big creditors, term loan, syndicate and the BTG is that we'll look at the PDP curve, proven and developed into always hedge proportional to 50% of the PDP curve excluding the assets of 3R offshore.

In other words, Potiguar and Recôncavo Basin, so 55%. And in the second year, 40%. So every month, every quarter, actually, you will see that we will be rolling over this position certainly increasing our position little by little because our PDP tends to increase more and more, but we'll be increasing production improved and developed will grow proportionally.

[Operator]

Our next question comes from Ms. Milene Carvalho with JPMorgan.

[Milene Carvalho, analyst]

Firstly, I'd like to congratulate you on excellent in July results. They exceeded our expectations. Perhaps you could comment a little more on your field ramp-up expectations in the past quarter. We have talked and the expectation was to get close to 50,000 barrels per day by the end of 2023. But with the Potiguar contribution, about 17,000 barrels Macau resuming a better level of productivity. What is your expectation? And what is the associated CapEx? You spoke about $280 million to $290 million for 2023. What about for 2024? What is your expectation?

And the second question, if I may. In this quarter, we saw a contribution of revenue from oil products of about BRL 255 million. If you can give us some more detail on how this revenue is broken down and the expectation of contributions of mid and downstream to the management?

[Rodrigo Lavalle da Silva, executive]

Milene, thank you for the questions. I will just say one thing before I turn the floor to Diniz. In terms of CapEx volume, as I mentioned, order of magnitude, 280 million to 290 million for this year, 75 million have been invested. The difference is what we intend to use in Q3 and Q4. For 2021, our business plan is about $400 million. So there's a certain increment year-on-year. And I'd like to remind you that we'll be starting 2024 with all rigs mobilized.

I'll turn the floor to Diniz and he'll speak about production expectation, always giving you an order of magnitude and then Matheus will comment on the mid and downstream.

[Mauricio Diniz, executive]

Thank you, Pizarro. Well, our production has been growing in recent quarters. Let's start July. In July, we had 52,000. That was our global production that we are operating of these 52,000 44,000 corresponds to our stake. The 44,000 will be broken down into 2 parts: oil, 30,000, 9,000 gas. We should not be seeing a great increase in the production of gas in the coming months until the end of the year. But our oil production is expected to grow around 4,000, 5,000 barrels at Papa Terra with the interventions to work off is under rigs that would be mobilized in the second half.

At Macau and Potiguar. Potiguar Is all about 3,000, Macau would that change with the rigs plus recovery and continuity of the works about 3,000 more barrels and in about 1,000 to 2,000 more. So 44,000, that would be 35,000 and 9,000. For the 35,000, our expectation is that we'll get to about 45,000 corresponding to our stake by year-end with the increment of the rigs that we are working with in all of the areas. We are working with many workover rigs performing a lot of toolings.

We're exchanging the pumps at the wells. We are drilling new wells and also the offshore rigs and the continuity of the works that's what we're expecting in Matheus. Over to you.

[Matheus Dias de Siqueira, executive]

Milene. Thank you for the questions. Also thank you for the compliment to 3R. Milene, regarding mid and downstream, although this is still very recent at least in a quarter where we are evaluating just 23 days of operation and an operation, which we took over in an exchange without any contract without a TSA, for example, to just took this over without any operational discontinuity, and this is a very relevant point.

But still, we had only 23 days just 1 more month of operation, but we can already prepare some scenarios for the mid and downstream. Just looking at the revenue that you mentioned of BRL 265 million in the quarter. We had a division there. In the division also because of their remaining inventory of about 60 - a little over 60% of crude products and the rest of oil products, the oil products, the products given the characteristic of the refinery. A good part of those are now 100% specified with the exception of jet fuel to the product that has a very high spread, which is 100% produced. But a good part of them. We just blend them particularly with gasoline, we should start blending in September.

Today, we only import and do the internal sale operation within the state under the area of operation of Clara Camarão refinery. Now looking at the whole asset and the whole process that we took over, a good part of our initial effort and here, it's not different, has to do with project structuring in addition to preventive and corrective maintenance.

So that we can have a foundation to have a better operation so that we can have future increments in production. So we have a challenge, particularly in the tankage park today approximately particularly at the terminal. We have a tankage park that is very robust. It is a tankage park that is very helpful, and it gives us flexibility, not only for oil products, but also for oil as well.

It is a tankage park for which we already have a maintenance project because today, we have almost 70% of it in operation. Our primary focus in mid and downstream is that it will add to $3 per barrel in our consolidated numbers, considering the whole operation and talking specifically about the EBITDA. For that, our plan is to address firstly, and with a lot of focus, the part regarding integration and doing preventive and corrective maintenance, which is necessary and this will take some quarters. And always with partial deliveries, particularly in tankage and in some systems of the refining unit so that we can increment capacity.

Now one observation to be highlighted here, Milene is that just like Pizarro mentioned, the integration of this asset in addition to the fact that we have an operation where we have a control over basically the whole production chain. When we look at the term and all that, we derive great logistics flexibility. I even mentioned this in the presentation.

In moments where the crack spread is advantageous for us the difference between the price of oil products sold in the market and versus the Brent reference price. In moments where the crack spread is advantageous, we intensify refining activities. And this is why we will follow a routine of maintenance so that we can have 100% nominal capacity of our refining unit.

On the other hand, if the opposite happens, if the spread or market situations pushed the spread down not only our crack spread, but our spread when we have to blend because we import a lot of product. So in oil products, our spread might not reflect 100% the crack spread because we have a balance of mass after things that we think we can intensify sale of oil and detriment of the refinery.

With a lot of agility, we can reduce the refinery production and increase sales of oil either through exports or in the internal market, domestic market where we have a lot of refineries that can absorb the oil from Potiguar. And lastly, I don't want to speak too much. Another plan that Pizarro just touched on is that partnerships can be forged to intensify the work at the terminal partnerships with distributors or trading companies.

So as a business unit, our purpose is to create an environment of partnerships and intensify this logistics system in operation that will enable us to both sell oil and oil products depending on market conditions.

[Rodrigo Lavalle da Silva, executive]

And Milene, let me just add to what Matheus said. The trade-off between selling oil directly in the international market all through Cabotage to other local refineries and maintaining the supply of the state, importing or bringing from other Brazilian refineries, diesel, oil and gasoline versus getting the whole oil that we produce from other players in the Potiguar basin in refining the whole production. This is a base we will be evaluating, I would say, quickly.

But in a strategic fashion, we'll look at this every quarter. I always looking forward, trying to identify where we can get the best margin. As Matheus mentioned, our target here our purpose is to always be adding $2, $3, $4, $5 per barrel. This does not happen only with the sale of refined products. It happens with service provision.

Here, we have tankage, the part that relates to tankage, the big pipelines of the base in the PGN, it's all ours. The AMG PU, it's all ours. So we have the possibility of providing services to trading companies or to distributors, and we can even leave aside the risk of mid and downstream despite providing this kind of service. It's something that we discuss a lot.

We are evaluating possible partnerships, and it's something that we all understand should be considered it as something that adds value to E&P to upstream. But this is not a focus of the company to be thinking strategically to increment refining capacity. That's not part of our business plan yet.

[Operator]

next question, Bruno Montanari, Morgan Stanley.

[Bruno Montanari, analyst]

I have a follow-up on 2 questions. And this question about the margin of midstream just for me to understand, is $2 to $3, would it be restricted to the barriers that you process or sell to refinery system or the entire company's production yield have an increase in margin of $2 to $3 per barrel.

So my first question, I'd like to talk about Macau a little bit. If you can give us more color about the of the oil water separation plant if everything is already running 100%, if the measurement aspects in June is already 100% machine due to the control in Potiguar, there as some of the Macau production being recognized in the other assets. Just for us to be able to correctly separate production. And the second question, if you can talk a little bit about the evolution of the equipment contracting environment and personnel contracting, if there's more inflation, more or less inflation pressure, delivery time, how is the sourcing of people and equipment now?

[Rodrigo Lavalle da Silva, executive]

Excellent, Bruno. I'll start answering. First about how much that volume $2, $3, $4, $5 per barrel adds to our production. When we talk about that, it's our production in Rio Grande do Norte. So it's the production in Canto do Amaro, Estreito, Alto do Rodrigues and the Potiguar cluster. It includes Macau, and a little bit of the condensate we produce in. So all of our production in the state of Rio Grande do Norte. As for your second question, whether there's an expect, I understand you're seeking that concept of the breakdown effective to have any Macau oil volume that's still being classified as Potiguar and vice versa. No. So from the moment we started physical metering in Macau, we start to account the volumes that are precisely produced in Macau, where we still see an effect of this division in the camps that are part of the Potiguar cluster, excluding the largest 1 with Canto do Amaro, Estreito, Alto do Rodrigues and other small fields as, which are smaller fields in the Potiguar cluster that do have some of the effect. But the difference is minimal.

And it's something that, for us in management times, we keep track of it, of course. But for the market, it's very small, and it doesn't make a difference. The fact is that the increase in production in Macau is indeed a result of the production increase from the drilling campaign from the solution of those facility issues that we're finally seeing. Matheus is going to add to the detail of the separation plan as well as the effect of the contracting and the sourcing that we're under strong diligence, but everything is already contracted and well organized to execute our CapEx.

[Matheus Dias de Siqueira, executive]

Bruno, thank you for your question. Specifically about or taking part of Pizarro's answer about the separation plant. This was a project that was remodeled as of February of this year, where we had some options with the interrupt production, 100% to solve the problem in 60 to 70 days or to create some landmarks where we would start to release the built-up production, including the increase of the pipeline pressure, tank installation adjustment of water injection system, et cetera.

This project has already allowed the execution of some specific landmarks that or mild rather that allowed us to release about 700 barrels per day of production that was building up. So as a target to conclude the project to 100% to release another 500 barrels per day of built production is for October or November at the latest. So now our physical progress is tied to our plan.

We've already adjusted the tanks internal, the CNG stations to to install the second tank and make the adjustments as well, water injection systems being advanced and there's the installation of 2 smaller floaters. And we're very close to releasing 100% of the plant within the strategy that we followed that once we have a slower pace of growth, so to take, but that is stable, and we don't need to interrupt Macau's production. That's one of the points.

And then taking from Pizarro was saying, talking a little bit about Macau, I believe we've reached a level of maturity in the point of systematization and processes in Macau that is much better compared to previous quarters. And this is reflected not only in the executing of this project in the separation plant that was a big issue here in the company.

But also carrying out the plan for interventions and billing. And looking at the quarter alone and looking at the half year total, we are exactly at 100% mobilizing more rigs. I don't know if everyone remembers, but we had a rig plan, and we decided to increase it to intensify and get closer to our planning curve.

So today, we're right next to our planning curve in terms of interventions. We've already had 8 billings in the Macau cluster that funded very well. On the campaign -- of a broad campaign of interventions as well, but we've executed 100% of the plan for the entire half year and the quarter to date as well.

As for the second question about the equipment, the contracting -- to give you an idea, and that's also based on what I will say in. We decided to contract series of additional rigs, especially for workover and drilling because in the first quarter, we were falling behind in our campaign to meet our plan for 2023.

So in this context, look at offshore, that's simpler in terms of number. We have 2 contracted rigs; 1 GP rig that is the designed rig that will be used for 2 workovers on the subsea wells planned for the fourth quarter to begin with 2 and 1 probably carries into the third quarter of '24 and 1 additional SBA rig that's a little simpler next to the PLWP platform for a walkover and a dry completion well that was producing well 17 and went down next last quarter.

So offshore is already contracted, expected to engage the 2 drills by October this year. As for the rigs here onshore, as I said, we've extended the numbers. So we contracted 26 rigs of which we already have 19, engaged 7 underway, and many of most of them contemplated between August and September. And between those, among those 19 already mobilized, we have 1 drilling rig rather one pull-in rig in Bahia, 3 drilling rigs at this time at the Potiguar Basin and 15 workover rigs, 5 of them in Bahia and 10 of them in Potiguar Basin. The remaining equipment and this already covers a lot of the CapEx, a lot of our interventions are volume.

In addition, looking at offshore, where the risk due to lead time is slightly higher, all contracting is being followed and monitored there for evolved or more design involved the all the different types of equipment, we've been very diligent in the national and international factories. And of course, there's always a risk of delays in terms of long lead times considering that these are highly engineered machines, highly designed, but this diligence helps to mitigate the risk, and we remain with the workovers as planned for the last quarter.

So a lot of the equipment for onshore and offshore are being diligently monitored. And we understand that there are no risks to migrate from one quarter to the other due to any delays in lead time of equipment. And the rigs 100% contracted with extremely low risk of delay. I was also talking about team. We have our own team completely contracted. There's a couple of professionals that we hired, but it's part of the company's normal growth.

So there's no issue there in terms of people hiring as well, either our own or third party.

[Operator]

Next question, Vicente Falanga, Bradesco BBI.

[Vicente Falanga Neto, analyst]

I had a couple of questions as well. First, congratulations on the tone and the production month by month. We already see very good improvement. And I think the challenge, at least in our mind, is that it's still those 44,000 on the average of production of 2P production for next year, I think it's 65,000. But I'd like to go back at some of those milestones that we should monitor over the next 6 to 9 months to be confident you can get there. You talked about and we wrote down the rigs in Papa Terra and fourth quarter this year, first next year, 3 drill rigs, 19 plus 7 rigs already mobilized by the end of September. Anything else? I mean and time for well drilling in Papa Terra, any environmental license or facility, anything important that we should monitor?

And my second question is an update in the steam sourcing in Potiguar, what are the checkpoints there that we should keep track of to monitor that.

[Rodrigo Lavalle da Silva, executive]

Thank you, Falanga. About those big milestones that we would keep track of, as we mentioned, this CapEx plan, of course, we need to keep up with the standard volume, but the execution and mobilization of the rigs themselves. A lot of this volume more than 50% is backed to the drilling rigs and workover activity. And of course, this increase in production that is very relevant in Papa Terra.

So once we have, as Matheus has been saying, that's highly monitored and diligent not only on our side but also on your side, of course, that we have the tools we need to increase production relevantly over the next quarter. What I'd like to point is that, of course, we're always keeping track of the reserve certifications as a target in terms of production.

We have our internal controls and over the quarters, we had delays, for example, in Potiguar that works not 3R responsibilities, but we had delays in Papa Terra in the past. But indeed, when we look forward with the integrated portfolio, we intend to get close to the 2P curve in 2024 for 100% of the production of the assets. We already have a very slight difference in terms of our compared to our plan and the projection.

These are the main checkpoints that we can keep track of. And Diniz mentioned already that we also -- and we have that in that slide where we show Papa Terra. And the increase of efficiency in production there, we came from a previous year below 30%, we can already lead it to a level higher than 50%. We've been making a series of interventions and improvements in the systems of power generation, gas compression, boilers that generate heat to the entire unit at SPO and all of that has been improving.

So we're increasing our operating efficiency in Papa Terra. But when will we start having efficiency to the points that we consider close to ideal or even excellent. That is precisely when we moved the flotel in Papa Terra, it's planned for March 2024, where we have short production stoppages for 2 weeks in 2 events; one, when the flotel is mobilized and another right before it's demobilized. So during the first half of 2024, we will have production losses associated to the for an average of 3 days in these situations that I mentioned.

But on the other hand, from that point on, we will have a much higher operating efficacy for that asset. What I usually mention as well talking but with some truth to it, we bought a very modern car from great manufacturers, everything top of the line when we talk about the equipment, they're all by Siemens, Halliburton, the major suppliers in the domestic industry, different from other FSPOs built more recently, but they didn't go through the maintenance required.

The reviews that the other operator or the older operator should have done, they didn't do. And today, this carries into our efficiency. So we've been like replacing 1 wheel at a time as the car moves. But of course, we are doing the generalized improvements when we have this movement focused on maintenance. This is also crucial for us to get this increase in production even more relevantly in the second half when the FSPO in terms of maintenance, it's already much more advanced with all rigs at Papa Terra already engaged and when we start to have the drilling of the first offshore wells in Papa Terra. I'd also like to remind you that the first well that we intend to drill in Papa Terra is a mirror of a well that was already producing for Petrobras. And when they stopped, it produced around 5,000 barrels. Our reservoir people and geology, geophysics, have been working to enhance this well, but that's the minimum get to be expected in terms of production for this well.

So all of that helps corroborate this plan of more than 60,000 barrels on average for oil and gas production or oil and gas equivalent for the average for 2024, thinking about 100% of the assets, okay? Just to add that we talked about 3 rigs in Papa Terra, but there's actually 2, 1 for wet business tree and the other hydraulic rig to work on 3 or 2. And this what rig is what will drill the first well, yes. And there was something about this team as well.

[Matheus Dias de Siqueira, executive]

So about your question of steam generation in 2 fields, Potiguar, Estreito and Alto do Rodrigues, we have 2 parts here. But the part of the company's balance. This is something we can have 100% of the gas here for steam veneration. So that's not a current risk for the company either through the gas produced by a sports with partners.

The second point, and actually, we had high contact them with. This contract was not renewed. Commercially, the company couldn't agree in commercial terms, so it was not renewed. Even with that, the company was already developing a plan before the closing way ahead, knowing that there was a risk of not getting a renewal. There was no intention to renew even the other party didn't, we tried commercially, but we weren't able to conclude it. And faced with that risk in the past, we were already working on a project that involves 2 parts. First, reallocation of the generators we already have on the field, the geographic reallocation to more optimized points that are able to increase efficiency a little from the 40% we have with reallocation, we are able to take it up to just above 50%.

And the second part is the acquisition of 3 new generators, 50 million Btu with a lead time of about 100 or 120 days. So it's not that offensive, and we've been working in the contracting of these generators. We already have been working with a partner to work on the specifications and reallocation of those assets. So we imagine that for the current production, and for the increase of the first 6 months of '24. With this park of generators combining those 3 new generators and the relocation of the few existing generators will be able to supply 100% of our steam generation needs. So that's our strategy. And if we, by any chance, I didn't even at, but if there's any possible loss of production will be residual. So it's not -- it doesn't even impact our plan of 50,000 barrels at the end of the year.

[Operator]

Our next question comes from Mr. Pedro Soares with BTG Pactual.

[Pedro Soares, analyst]

I think most of the questions have been answered, but one that hasn't been talked about has to do with the expected increase in production for the second half of the year and the lifting cost. When do you expect to achieve the production targets you've missioned to pull down the lifting cost of $23 in terms of cost dilution? And the second question, if you could remind us of the existence or not of your debt covenants and how they fit in the current leverage level of the company?

[Rodrigo Lavalle da Silva, executive]

Thank you, Pedro. Great questions. As regards the lifting cost on 2023, we have an expectation of managing fixed cost dilution in some assets. But in other assets, we'll have an intensification of those maintenance activities that I always mentioned, the punch list that we get when we take over from the old operator. For 2023, we expect a slight decrease of the lifting cost that we reported in Q4. We have got visibility of the next quarter whether we'll achieve that dilution of fixed costs for Q4, yes, we expect a dilution of fixed costs, thinking of the portfolio as a whole.

Now for 2024, particularly in the second half, when we will have implemented most of these key maintenance activities that came from the old operator. And at the same time, we'll have a leap an increment in production. That's a moment when we'll go back to having very relevant efficiency in the lifting cost of the company. I'd say that today, we have 10% to 15% lifting cost in Q2 coming from these maintenance activities, and these no longer happen in Q4. And after that, we'll focus on diluting fixed costs as some other companies here in Brazil have managed to do efficiently. But over 4 to 5 years. And here, we always want to do things very quickly. Obviously, with a lot of care and thought, but we are proud to say that although we've been in this process of putting together a portfolio for only 4 years. We are now at a level of bringing about improvement.

This is not a bad level to be in. So that's the news. We started with level that was not bad, and we are moving to a path that will lead us to an improvement in lifting cost so we can get to a lifting cost of around $14 to $16. It will continue to dilute fixed costs along 2025. To your question regarding the covenants, we have 3 main things to follow on. One, it's obvious, the minimum cash we need for our operations. And again, I'd like to remind you of that slide where I talked about the cash flow. We ended the quarter with $199 million. These are $170 million, which are 100% free cash and about $29 million to $30 million, we drive interest already provisioned for, which is one of our debt obligations.

We have to start provisioning for our debt interest rates. In one case, 6 months and another case, 12 months. In total, until the end of the year, we should have about $50 million provisioned for the payment of debt. So this is cash. When we assess net debt, we also use this cash to deduct from the gross debt.

The other obligation, and that's a typical covenant is net debt over EBITDA ratio. No, of course. At this point, we have to calculate the pro forma EBITDA because we've just taken over the Potiguar operation. So we look not only at EBITDA along 2023, but we also calculate. That's the way we read the content. We have to calculate in good faith. What our last 12 months EBITDA would be? And we think that this EBITDA calculated in that way would be close to $480 million to $520 million.

With this net debt calculated around BRL 1.4 billion, BRL 1 billion of financial debt and another $400 million of obligations for the portfolio as a whole, brought present value. We are below 3x net debt over EBITDA and the current limit is 3.5x. Starting in Q1 2024, right? Yes. After Q1 '24, that's a limit on the 3.5x limit will come down to 3x. And then we'll have more restriction.

But by then, our EBITDA will have grown more significantly. And there is another covenant that is also important that we need to monitor, which is our debt service cover ratio. We always need to look at the last 12 months and see our actual cash generation of the last 12 months and always compare with the interest of the debt and eventually the principal that were paid in the last 12 months, too.

That comparison needs to be above 1.15 in the beginning, right? And then 1.5%. So the first time that we start checking the covenant will be in 2024 -- in Q2 '24. I just was bring the answers to me. In Q2 '24, that's when we'll start looking firstly at 1.15 and then 1.5. With this capital injection we've had, we were able to improve this covenant. This covenant used to be more restrictive. It is something that we haven't disclosed or talked about with the market, but this was intense negotiation with all of our creditors, including BTG and Morgan Stanley. If all of the banks that make up our group of creditors, and this is something that was addressed by our Board of Directors, particularly by our financial committee. So it's a propacation. If we can to bring BRL 900 million for the company, we need to be able to negotiate something better.

It was a fierce negotiation, but it gives us some peace of mind now that that service is good, is fine with our current capital structure. Another aspect, Pedro, that we've been working on that improves the debt service even further would be to roll over this $900 million debt. Again, like I said before, nothing is decided, nothing is signed, but it is something that we are considering both in the domestic market and in international market.

But in this case, more the domestic market, we would consider an infrastructure at the venture. It would be a good fit. It is a debt that one pays over 8, 9 years, and it has lower effective cost and the current cost that we have. Today, the cost that we have, if we prefix is about 10% to 11%, and we look at the total debt of the company.

And we can possibly get a better cost and a debt that is more stretched out. And then the debt service cover ratio, which is among the covenants, so more somewhat more restrictive. We'll have more peace of mind. And we've had other questions in prior calls, and we felt that investors are worried about our cash position and our covenant. Of course, we followed this quarter after quarter.

We always have to have a very optimized capital structure. I'd like to remind you that our finance committee has great names of the industry, all very seasoned professionals in the financial area. And we have been monitoring this of close.

And today, we have peace of mind to say that we have a very adequate structure for the portfolio that we acquired, considering these 3 aspects cash, net debt over EBITDA ratio and the debt service cover ratio.

[Operator]

Next question from Mr. Leonardo Marcondes, Bank of America.

[Leonardo Marcondes, analyst]

I believe most of them have been answered, but I have a few follow-ups. My first follow-up is about the mid downstream question. If you can give us some more color on how the operation is working with Petrobras practicing prices that are below parity and if that has impacted somehow your operations.

My second question is about the Recôncavo cluster. It's an asset that has been performing underperforming compared to other assets. So I'd like to understand whether -- or how you evaluate the assets performance in acquisition. And from what I understood, it's not a core asset for the company. So I'd like to understand more is -- if there's no divestment here, if we should continue to see this asset underperforming from the others?

Or will there be a resumption of focus? And a final follow-up about Papa Terra. Diniz talked a lot, and there were some questions about it. But I think my point here is that when you reach operating efficiency of 90% of the platform, I'd like to understand how this translates into production. And once this ramp-up is concluded, I'd like to understand if there's any OpEx reduction on the field.

[Matheus Dias de Siqueira, executive]

Thank you. Leonardo, thank you for your questions. I'll address your first one. Pizarro will address the second and the third will be Diniz talking about Papa Terra. So referring to the beginning of our operations here in mid-downstream specifically about the prices practiced by Petrobras. On the side of the light product, where that pricing from Petrobras in gasoline and diesel, our access has not been 100% impacted, which makes us go to the trade-off of the distributors, to logistics costs. We have other collection points at Cabedelo. And where we have this spot, the stain of Clara Camarão, we were not 100% impacted. And that leads us to continue importing gasoline and diesel.

The beginning of our gasoline operation or whether our operation and the refinery and the ATI in total 100% of the gasoline we imported was resold in the market. We did that not to cut the supply of the state. And because in our area, of operation, we were able to step into a part of the difference that you we put into the market from what we imported and what we added.

And about the preventative maintenance that I mentioned at the beginning, part of the NAFTA that's direct installation from September onwards, it will be blended with the gasoline we import, and we'll be able to get a spread in this operation that will be greater than what we have today. Today, we simply have a spread of the different on the custom price of the cargo that we import, diesel on the light oil product is still a little different. We produce diesel with a high level of sulfur in the refinery, and we specified 2 products from it. One, we blend with diesel imported diesel that we also put into our area of operation. We also have an AF500 diesel. And due to this blend, we don't capture the flex spread from the market, but we have a positive spread around $3 to $4 increasing our production in the refinery capacity, we can get a better -- greater blending operation, which increases the spread.

Other light products like jet fuel has zero impact, 100% produced at the refinery with a spread of almost $30, so it's excellent, and it's not such a relevant production at the refinery is a little under 10%. So we've been able to specify another product at the end of June that was not being sold before, that's MDO that Maritime diesel. That also has an interesting spread of around 20% to $20 per barrel, and as for the heavy food products, just to expand on your question, as I mentioned, the company is challenged considering it's a refinery unit that specifies the bunker is to increase our range in the domestic market, and that's also taking from Pizarro's word. That's why we've been expanding partnerships so that we can have a broader scope in the logistics and aspect for the entire domestic scenario. But that's more or less what we've been operating in our day-to-day. And I'd like to stress another point before I forget, especially for the light products that really communicates to what we've said, a more difficult time, we're able to invert things to reduce refining a little bit and sell oil, pieces that if at any point the market or the prices practice affects our area of action maybe for taking greater market share, we don't have the need to bring gasoline to put in the market.

But of course, we're not going to operate by burning cash. That is definitely not going to happen. And on the diesel side, we will always bring a little because it helps the specification of the bunker to fit it into the market specifications as well as RAT that's an atmospheric residue from the tower that also requires the addition of diesel to classify a tanker. Well, I think I've addressed the main point, Leonardo. Thank you again.

[Rodrigo Lavalle da Silva, executive]

So Leonardo about the Recôncavo cluster. We have a strategic plan of intervention activities were both pulling and workover, but where we see a more relevant increase in production is when we bring 2 drilling rigs that will happen in the third and fourth quarter this year. And that's when we start to see a recovery of production, of course, certainly, your comparison is a little bit in terms of the reserve certification.

That's the asset that we are a little further that we make up for this delta by the end of the year, at least partially offset it. Of course, we can't offset everything quickly. But once we -- when we talk about the company priorities in terms of operations, as I said, Potiguar and Papa Terra have maximum relevance. Their top priority internally. Bahia is also a relevant asset at local core.

And then we have other smaller assets that may be even in the Potiguar Basin or the Recôncavo Basin that are smaller field that may be closer to other operators, and we could consider possibly a part of sale or a negotiation as long as it brings value to our investors. It must be an equity transaction as we say. It has to add value to the investor. Otherwise, they're excellent assets that are in our portfolio and all of them overall generate value. Individually, they're good assets. Of course, each one has their own peer, but that's why we'll optimize and allocate our CapEx more strategically to bring the best returns combined with the occasional restrictions that we may have and cash availability to execute the CapEx.

In Papa Terra, I'll turn to Diniz. But before just a brief comment, today, when we look at the capacity of production at Papa Terra with the wells that are connected to the unit today. We have about 21,000 barrels that may be producing in good days, those days that have no operating restrictions and all wells are producing at capacity. But we have that suboptimum efficiency. And after we carry out the 2 workover activities, we add 5,000 barrels that we're producing with a decline will get to 2021 and another 5,000 barrels, our level goes up to potentially 25 26 with a better efficiency. And when we bring the new well, this potential level gets as high as 27,000, 28,000 barrels, of course, always multiplied by the field operating efficiency.

So it's a combination of facility that must be operational with high efficiency and at the same time, the CapEx activities that will bring capacity. Capacity and efficiency will lead to our production. So with these 2 metrics, is how we increase production diluting fixed costs. But what happens starting on the second half of 2024, we'll also remove that tracker from suppliers that are going up to the platform for corrective maintenance that our previous operator didn't do. So that also removed an absolute value of that OpEx of that maintenance. But today, we have because of the punch list of the previous operator. So that's the overview of how to dilute fixed costs.

We'll reduce a little bit of the absolute value, but the majority will come from this combination of greater efficiency and greater production capacity.

[Mauricio Diniz, executive]

Now talking a little bit, going back to the Recôncavo cluster, we'll talk about the cost side. Of course, we're working on the renegotiation of operation and maintenance contracts in the area as well as the reduction of perks and other works that are being done to reduce OpEx in the Recôncavo cluster area as well as the commercial side of the oil sales.

So Pizarro mentioned an increase in production, impact to this cost reduction that we intend to implement there. We're working on it, improving the lifting cost at the Recôncavo cluster. As for Papa Terra, these are the 3 main phases of operation that we're going to go through over the coming months. This phase until the end of the year, and we're working as much as possible with the number of people we have today. The limit of offshore is the number of people.

We're working on the increase of tankage. We saw the first important movement to increase the offloading time from 1 week to 2 weeks and the operation part that Pizarro mentioned, the work that was done this year. And this major work that will be carried out for the end of the first quarter of next year, the flotel that pace for Papa Terra will be very important. And the next phase for the second half of the year, where we have this well, where we're planning this higher efficiency.

So combining all of that, we'll be able to reach the numbers that Pizarro mentioned by the end of next year, and we'll have a much better performance from Papa Terra keeping up and increasing the efficiency enhancement that we saw and that charge that we expect to in the second half of next year.

[Unknown Executive]

Small detail sitting next to Diniz, just mentioned, this is the Manager of the Papa Terra asset. And so we have daily follow-up weekly monitoring of all activities, all operations. is very experienced in offshore. He is the asset manager of many assets, including Albacora in recent years. So is the mastermind -- operational mastermind of Papa Terra and is working with us.

[Operator]

The Q&A session has ended. I now turn the floor to Rodrigo Pizarro and Mauricio Diniz for his final statement.

[Rodrigo Lavalle da Silva, executive]

Well, I ended up making the final comments on the presentation. I'd like to remind you that today exactly, it's been 4 years since we signed Macau Cluster. And 9 months after that, we took over Macau cluster with a modest production vis-a-vis what we have today. But we are not happy new. That's something we make clear in our management -- the message from the management is that there's a lot of room for improvement. We got this far, and it makes us very proud to have 40,000 barrels in several meetings. And in several aspects, 40,000 barrels is relevant for equity investors and for bond creditors as well and even for rating agencies.

That's an important level. But off of that, all of these achievements make us very proud. And also, it's a lot of responsibility considering all of the possible improvements we can bring about, as Matheus always mentioned. So we are a lot more systematized now a little more structured Today, we have the whole team on board.

In other words, all of our professionals hired the rigs, the big equipment, it's all contracted. It's all been acquired or it's all in-house. So looking forward, we have a full array of possibilities and improvements to have. I'll turn the floor to Matheus and then to Diniz.

[Matheus Dias de Siqueira, executive]

Very well. I would like to thank all of you for joining us today for your questions and for all the support you have given us all this time. This kind of support is always very important to us. It's very constructive. I'd like to take an opportunity to congratulate the whole 3R team, at least all of you who are in this room, so you can cascade down my comments to the whole team.

From January onwards, we changed the company a lot. We always talk about being systems-driven project-driven internal improvements. And we can see that this has been bringing material results for the company a little bit little sales department in the maintenance, in the operation departments.

And that is very encouraging for us. So I'd like to thank the whole 3R team. And I'd like to thank all of you for attending this call and for all your questions.

[Mauricio Diniz, executive]

My special thank you for all of you who have always supported us from the state of our activities. For your patents, sometimes when we have problems, but today, we are reaping excellent results. And especially, I would like to thank the whole 3R team because today, they have been creating a very positive and cool environment to work and delivering interesting results to our shareholders. We will continue to work to achieve our goals to thinking about the safety of our facilities and always respecting people in the environment. Thank you very much.

[Operator]

This conference call has ended. We would like to thank all of you for attending, and have a great rest of day.