HRT Participacoes Em Petroleo SA (OTC:HRTPY) Q3 2022 Results Conference Call November 1, 2022 2:00 PM ET
Company Participants
Jose Gustavo – IR Manager
Roberto Monteiro – CEO, IR Officer
Francisco Francilmar – COO
Milton Rangel – CFO
Conference Call Participants
Christian Audi – Santander
Gabriel Barra – Citi
Gustavo Sadka – Bradesco
Bruno Montanari – Morgan Stanley
Pedro Soares – BTG
Tasso Vasconcellos – UBS
Leonardo Marcondes – Bank of America
Regis Cardoso – Credit Suisse
Jose Gustavo
Good day, everyone. Welcome to Q3 2022 Earnings Conference Call of PRIO. I am Jose Gustavo, IR and Treasury Manager of PRIO. And I’ll be the host of this event.
Presentation and comments on the results will be presented by the CEO of PRIO, Roberto Monteiro; our CFO, Milton Rangel; and our COO, Francisco Francilmar. They will present the company’s results and will then be available during the Q&A. [Operator Instructions] This event is being recorded and will be available on PRIO’s Investor Relations website.
Before proceeding, let me mention that forward-looking statements that might be made during this conference call relative to the company’s business perspectives, projections and operating and financial goals are based on the beliefs and assumptions of PRIO’s management and on information currently available to the company. Forward-looking statements are not a guarantee of success. They involve risks, uncertainties and assumptions as they relate to future events and depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of PRIO and could cause results to differ materially from those expressed in such forward-looking statements.
I will give the floor to Roberto Monteiro, our CEO. Roberto, go ahead.
Roberto Monteiro
Good afternoon, everyone. Welcome to our earnings conference call to discuss Q3 ’22 results. I would like to start once again, as in all previous calls, by thanking our employees, PRIO’s employees because they are the main engine responsible for these results that we will be showing. This was yet again a strong quarter, a quarter with many achievements.
So let’s start with the highlights. The first one, as could be expected, has to do with our production volume, revenue, EBITDA and net income. And as regards revenue, volume and EBITDA, we posted once again record marks for PRIO. Of course, a lot of that is related with the first phase of the Frade campaign, which we will detail momentarily, and also the price of the commodity that remains high.
Another very relevant point for us, for PRIO, is the lifting cost. We posted $9.5 per barrel, the lowest lifting cost ever and for the first time, what we call here, a single-digit number. And I believe that this is great news, excellent news considering that part of our strategy is always to have the highest efficiency possible, projects with a low lifting cost, one which is very controlled.
Now moving to the operational side. We completed the first phase of the revitalization of Frade Field. It was very successful. We strongly increased production. And so we decided to bring forward the second phase of the campaign. And this is being done as we speak. Francilmar will be giving us more in-depth details regarding this second phase.
We also took advantage in the quarter to have another issuance of $370 million in the local market. This was an issuance in BRLs and it was swapped, as we call it, swapped from BRL to dollar. We acquired the Itaipu field, and we also completed the integration protocol and merger of Dommo. So 2 small M&A operations.
And actions related to ESG. Actually, the next 2 bullet points that are more related to ESG, and that makes us very proud were Reacao Offshore, which, together with Reacao Institute and Todos na Luta, we trained 240 people from the labor market, technical and nontechnical people. We sponsored this training, and we hired 80 people, 80 new employees out of this total of 240 who will be working at Petro Rio after the integration of Albacora Leste field. Many of them will go to our existing FPSOs, FPSO Bravo and Valente, so we can release staff to go to Albacora Leste field. So to us, this was a very interesting project, a social project that made us very proud.
Something else we are doing regarding ESG is starting the certification of our carbon footprint, as we call it, so that this will be the base in the future to produce a sustainability report. So these were the main highlights of the third quarter.
I will now move to Slide 4. And here — actually, the top part of the slide is something we’ve talked about. It’s about our lifting cost and production. But I would like to draw your attention to the bottom part of the slide. Currently, we have a cash position of BRL1.719 billion. Actually, today, our cash position is a little stronger than BRL1.719 billion. This was at the closing of the quarter. But we still had some offloads that were sold and were in accounts payable then and have now been converted into cash.
And on the bottom right, we have our net debt over adjusted EBITDA ratio, which remains net cash. And this is because of this high cash balance that we have. So this is just to show that we are 100% prepared for the closing of Albacora Leste. We will be speaking a little more about this in the next steps. But as you see, the company remains very solid. The business is moving forward really well, and we recorded another very strong quarter.
I will now give the floor to Francilmar, and he will speak a little more about our operations. And then Milton and I will be back to speak about ESG and the next steps. Thank you.
Francisco Francilmar
Hello, everyone. Thank you, Roberto. I will start on Slide 5 for the performance of the assets. Well, this quarter was indeed a very important quarter for the company, the best quarter ever in our history, resulting from the excellent work performed by the whole company and our partners.
We highlight, of course, the relevance of all the work that is being done at Frade Field. Quarter after quarter, we post significant numbers. We increased production more than 70% year-over-year. And in the quarterly comparison, this year, we practically doubled our production. Polvo and TBMT, I will be giving more detail later on, but we had a very stable production, which resulted in a much higher volume of production for the company this quarter. And as a result, also working on costs, we finally managed to reduce the lifting cost to a single-digit level as we have always worked for and dreamed about.
So I will give you a little more information now. Let’s move on to Slide 6, where we detail the lifting cost a little further. The top chart is a traditional one that we always present. We finally crossed the 2-digit barrier and ended the quarter at $9.5. This stems from the start of production at Frade Field. There is an interesting part related to cost reduction, accommodation of some items that were hurting us a little. This is an ongoing endeavor, and we will continue our pace to continue to lower the lifting cost.
This is a big commitment we have to our shareholders. There’s nothing more important from the operating standpoint of the company then to continue to lower the lifting cost to continue to be resilient, to lower the lifting cost to the lowest levels possible with integrity, safety and so on.
Now moving to Slide 7. I’m going to give you a little more information about the main focus of the company this year, i.e., the operation of Frade Field and mainly its revitalization. Overall, Frade in this quarter posted a great leap. You can see, we had a big increase in production, but we had a reduction in the general efficiency of the asset. We can see 84% general operating efficiency. And this is due for the following reasons. One, the start of the new well. We started the revitalization campaign in April. In the beginning of July, we had the first production well starting to produce, contributing with more than 15,000 barrels. Doubling production at the field was a great result, joy all around.
In August, we had an operating problem at the field. There was damage — we had equipment that damaged some lines in the operating system of the vessel. We had to stop and repair everything and had almost 10 days of downtime and then resumed production. That had a heavy impact on the operating efficiency, in August, crushing efficiency to around 64%. In the fourth quarter, 84% operating efficiency, but August had an impact. So we had some lessons learned and have to work to prevent that from happening again and to recover the operating efficiency in the coming months and quarters. So the result of the field was very good overall despite this hiccup.
Now to give you more detail on the revitalization campaign on Slide 8, please. Here, we can see that we had 2 different phases to revitalize. The first phase is complete. It is all marked in this schematic drawing of the Frade reservoir. We can see what was done in Phase I. Production wells are the green circles and injection wells are these light blue triangles. We had 2 production wells and 2 injectors. The injectors are not yet online because we are in a commissioning phase of the vessel’s injection system that was stopped for practically 10 years. We carried out a big retrofit, and we are now in the final adjustment phase to have the injectors online. Most likely by the end of this month, we’ll start injecting this reservoir, which will give us good energy support and improve the performance of this reservoir over time.
The second phase of the field consists of another 2 production wells. These are marked in red, 2 infill wells in reservoirs that are already in production. We don’t expect any fantastic production, but these are good reservoirs with a lot of oil available to be produced. And also, there will be one injector that will be drilled to provide support to this reservoir, where we have the ODP4 well. This first production well in the virgin reservoir. With that, we improve the performance of the reservoir, of the asset, and this will maintain pressure and thus reduce the decline rate.
Well, all of this will take the field to a whole new level of production. We’ll have a lot of information that is being captured in this revitalization phase, which will definitely provide input to our subsurface team and most likely will result in a revised plan for the future. This is what we’ll have in the coming months and in the quarters of next year.
I guess I should emphasize a little more our ability to execute on the first phase before schedule. We had very little time loss. We were able to be more efficient in drilling the wells, reducing time and cost. Around 30% to 40% overall in this ended up allowing this second phase, which was originally planned for the beginning of 2024, a little after the closing of Wahoo. But we were able to bring it forward and to include this, both in the budget and in schedule.
And we are beginning now. Actually, we have already started drilling these wells. The 2 producing wells have been drilled kind of in parallel. The injector will be drilled sequentially. The production wells should be online along the first quarter of 2020 and then the injection well to support production of the reservoir of ODP4. Well, a lot of what we gained here was in terms of time, savings, efficiency and also a very high efficiency in reusing wells and subsea structures, which enabled us to save a good amount of money of the project.
Well, with that, we highlight here the great action of the company along 2023, and we continue on this path. Frade shows that it still has a great potential to be unlocked, especially after we have the effects of water injection plus the study of the next steps for the field.
I will now move to Polvo and TBMT on Slide 9. Here, I give you a little more color on Polvo and TBMT. Q3 was, I should say, a quarter of stability. We focused a lot on operating efficiency. We were able to achieve a record mark at this cluster. Never had we had a 99% efficiency. Today, we can see that with the unified platform and FPSO Bravo, that happened. We didn’t have any operation to increase production. So we see a natural production decline at the field. It’s a natural decline. And the focus is cost reduction and stability of production until we can start a campaign. This should happen in the future.
Moving on to Slide 10. We can see the status of the Wahoo Field development. Well, overall, the progress we made while the company is very much focused on the part of acquisition of equipment and services. We signed all purchases. So now we’re starting to detail the engineering work, follow up of manufacturing and delivery of equipment. And along 2023, by midyear, we’ll start the execution process itself, allocation of rigs on site, drilling of wells. More towards the end of the year, we’ll start installing subsea equipment.
With that, I’ll move to Slide 11 to talk about Albacora Leste. Albacora Leste is at an advanced transition phase. We already have a big crew, more than 40 people on board the vessel in, what we call, a shadowing operation, following the operation up close, learning the details, planning the actions for when we start our operation. All is progressing well, and we believe that in the next 2 months or so, we’ll be taking over the operation of the field.
We already have a plan for the short term. Along 2023, we’ll invest a lot in improving operating efficiency; in other words, investing a lot in maintenance, recovering integrity, improving the performance of the large machinery. All that will improve efficiency and the average production of the field. So this is the main initial objective. There is some work focused on integrity and in putting some wells that are stocked that are already producing, but are kind of closed there throughout 2023.
After that, we enter a phase of bigger interventions. We will move to well drilling, well connections and all that, as we said before. Now the focus really is the beginning of transition. We’re very close to that. And after that, full focus on improving the integrity, maintenance, operational efficiency of the asset.
And with this, I close my part of the presentation and turn over to Milton.
Francisco Francilmar
Thank you, Francilmar. Good afternoon to everyone following our earnings conference call. Going on to financial performance, starting on Slide 12, we will look at the company’s financial statement. We see the numbers in a group net of the impact of IFRS 16 that we prefer to look at and then we see the year-to-date figures and the information, including IFRS 16. Remind you again that this report is in thousands of U.S. dollars. We changed the company’s functional currency in the beginning of the year and started to report our numbers directly in U.S. dollars that make more sense with the nature of our business.
Well, the total revenue of the third quarter of 2022, USD 378 million, an increase of 110% compared to the same quarter of ’21. And this is the result of much more expressive sales, 3.8 million barrels, increase in productivity, performance at ODP4 and so on, with a net selling price of around $94, $95. So this pulled our revenue to this level.
The highlight here also goes to the cost of goods sold with an increase of only 2% for a much higher sales base of production, and this is reflected by the reduction of the lifting cost as we saw. We are at a level already mentioned by Roberto and Francilmar of USD 9.5 per barrel, which we like to call single digit, a very expressive positive mark for the company. And this makes that we naturally have the results of our operations that is higher and EBITDA and operating margins and EBITDA margin also much higher when compared to previous results due to a reduction of lifting cost and the increase of the Brent price essentially.
So for example, our adjusted EBITDA in the quarter, which is that, EBITDA, where it’s net of noncash or nonrecurring events, amounts to $286 million in the quarter, up 174% when compared to the third quarter of ’21 at a margin of 76%. Year-to-date, $783 million. So this is a company that generates a lot of operational results, that generates a lot of cash. And with that, our quarter was very strong and very positive for the company. Net income, $153 million, and year-to-date, more than $520 million in the 9 months of 2022.
Moving on to Slide 13. We’ll talk about the funding activities for the quarter at PRIO. This was a very active quarter in terms of funding. We continued incurring on some bilateral debts with banks with a close relationship. And what’s interesting to highlight here is that most of these bilateral debts were acquired at a moment before the war in Ukraine. So that means we took debts of approximately 2-year duration at an average cost of 4.5%, 4.6% per year in dollars, which is an extremely good rate compared to our current perspectives.
And we also made a very important operation in the local market for the first time with the issue of local debentures. There were 2 tranches, 1 of 5 years, institutional in the amount of BRL 500 million; and a larger one in infrastructure of BRL 1.5 billion with a duration of 10 years. So in total, we raised BRL 2 billion. And what’s important to highlight here is that there was a swap operation carried out to convert this liability from BRL to dollars. So at the end of the day, all of this liability, that’s approximately USD 400 million, we’ll have a cost in dollars plus 6.80% per year.
And with that, the market provided such an operation due to interest rates aspect in Brazil and the United States and the foreign exchange rate, and we were able to do a very attractive swap despite the local interest rate being high. So we moved on with this operation. It made a lot of sense. And at the end of the day, we have a consolidated debt of these debentures of more than 5 years of duration at a cost of 6.80% per year, which is a great cost. It is very competitive issue with no real guarantees. And that make PRIO more comfortable to continue to invest and to grow at a very competitive cost.
And with that, we see those 2 charts on the left side of the slide, average duration of the debt of 3.37% consolidated, average cost of debt, 5.80% per year. Remembering that the treasury today of 3 years, for example, is being traded at 4.4%, 4.5% per year. So we have a debt portfolio that today costs us treasury plus 130 to 140 basis points.
As for the liquidity, on the right side of the slide, we have a cash position that is very robust. Of course, that a good portion of the cash will be used in the short term for the acquisition of Albacora Leste. But we still remain at a very comfortable position for the coming quarters. And as we can see, the amortization of the company’s debt position are very spaced out over the next coming years. Our perspective is of the strong cash generation for the coming years and to be able to honor these commitments quite comfortably.
Moving on to Slide 14. We see the evolution of net cash between the second quarter and the third quarter of ’22. We came from a position of $190 million with a very expressive generation of EBITDA at around $280 million — $286 million. There was some working capital consumption, which is nothing more than an increase in receivables of $30 million, most of it already received in the month of October. Advances made relating to the Wahoo development campaign. So we already started to pay a series of suppliers that are there in the time line to carry out this project well in the amount of $42 million and reduce the suppliers.
In addition, we had the acquisition of the West Capricorn rig in the amount of $35 million. We also had CapEx, another payment related to the relinquishment of the Sierra block, this Frade Field CapEx and the drilling campaign that we’re carrying out right now in the amount of $52 million, some smaller workover for TBMT and Polvo at $6 million and $10 million related to this relinquishment of Sierra. In addition, we had $13 million of financial results and taxes in the amount of $32 million, reaching net cash in the third quarter of $255 million.
Finally, from my side, we come to Slide 15 to talk about leverage. There were no major changes here. We remain at a net cash position, a very high cash position, a debt position in the amount of $1.4 billion. And with that, we come to net cash of $255 million, a negative leverage. And that’s why the indicator is negative. But I think the major point here is to show that the company is very well positioned to honor its commitments in the short term, especially the payment now of Albacora Leste and all of the CapEx that we’ve been doing in Frade Field, Wahoo and so on.
Our balance is quite light even with the acquisition of Albacora Leste. Our expectation is to have the net debt over EBITDA indicator at a very low level, below 1x, for example. So very comfortable and with a lot of liquidity for us to continue on our path of growth and investment.
With that, I turn the floor over to Roberto, who will talk a little bit about ESG and the next steps for the company. Thank you. Good afternoon.
Roberto Monteiro
Thank you, Milton. On the environmental aspect of ESG, I think an important progress that the company made was the beginning of certification of our carbon emissions. These certifications were mostly already done for the year 2021 and the year 2022 to date. They were certified by KPMG. And today, we are in the stage of developing a sustainability report that will be produced and published by the beginning of 2023. The idea here is to show our responsibility with the environment, and especially within this responsibility with the environment, to show our carbon footprint, which I think is one of the most important aspects in our segment.
In the social aspect, we had 2 interesting projects. The first one is Reacao Offshore, as I said in the beginning. We trained 240 people, hired 80 people, and this balance of people who are trained will be available to the market. We believe that the offshore market is a market that is in broad expansion. Other Brazilian companies, especially Petrobras, placing more and more FPSOs in the market. So it’s another contribution to the lives of these people and another contribution for them to be able to position themselves in this industry.
In addition to this Reacao Offshore project that we carried with Instituto Reacao and the Instituto Todos na Luta, we continue providing social support to many other projects, including Reacao and Todos na Luta. But beyond them, Casa Irma Dulce, the Orchestra Neojiba project, Favela Brass, Hospital Umberto Primo and so on. So social support and social inclusion are part of our DNA. It’s in our blood.
And finally, we have our health and wellbeing program inside Petro Rio, which is much more focused on our internal people, our employees, but we continue to offer different activities such as running, trekking, shiatsu, yoga, meditation. And this goes both for our offices here and for our offshore facilities. And then we also have our nutrition program, psychology and so on. So this is a summary of our ESG work in the quarter, and we’re very proud of what’s been done.
Moving on to next steps, Slide #17. These are the main points that we’re going to address somehow throughout the fourth quarter and in the beginning of next year. The first one is always is the continued focus on safety and health. The company, PRIO, is made of people. And without safety and health, there’s no PRIO. So we’ll start with this first point, always extremely important. And moving on to the side of operations, we will now focus in the fourth quarter on the second phase of the revitalization plan of the Frade Field that Francilmar already talked about.
So the entire fourth quarter at the Frade Field we’ll be much focused on that, in the beginning of next year as well. Wahoo, as Francilmar said, we’re at a very advanced stage of contracting equipment and services. Now our next step is to get the approval of our development plan that was filed almost 1 year ago so that we can move forward with the environmental licensing and everything to be able to do this installation in the beginning — or starting by mid-2023.
In addition, the Albacora Leste operation. Today, we’re in the transition process, quite advanced. I would say that we’re ready to take over operation of the field, waiting, obviously, for the approval of ANP and IBAMA. But today, from the technical viewpoint, from the operational viewpoint, I would say that we are 100% prepared and ready to initiate operations at Albacora Leste. And we expect that this can start already now in the fourth quarter.
We will also work on the integration of Dommo. As you know, there was an extraordinary general meeting and this meeting already authorized the transaction. We are fulfilling some more legal points, and we estimate that the integration may take place by the end of the year. If not by the end of the year, I will say that very early in 2023.
Finally, and also as we always include, we will continue with a very strong focus on inorganic growth through M&As. As I say, this is also something that is in our DNA. We continue looking at opportunities. We will continue to look at opportunities in the market and so on.
With that, I would like to thank you all once again and thank all of our employees and everyone who somehow contributed to PRIO’s results. And I would like to open for questions. Thank you.
Question-and-Answer Session
A – Jose Gustavo
All right. We will now begin the question-and-answer session for analysts and investors. [Operator Instructions] We’ll start with a question by Christian Audi with Santander.
Christian Audi
Hello? Guys, can you hear me? I would like to start by congratulating all of you because it’s really incredible the results that you have been recording both financially and operationally. So congratulations to the whole management, the whole team.
Roberto I would like to start with 3 — well, I have 3 questions. The first one is looking forward, operationally speaking, either in Frade Field, Wahoo, what excites you the most with regards to the projects unfolding better than expected? Have you seen any initial results that were better than expected? So looking forward, what makes you more enthusiast operationally speaking?
And then regarding the lifting cost at Frade — in Frade, I’d like to understand, should we expect that the lifting cost will remain as a single digit? This reduction in operating efficiency at Frade that Francilmar mentioned, it dropped to 84%. Do you think it can quickly return to the higher level as before?
And my third and last question, Roberto. In terms of capital allocation and M&A deals, do you think that the M&A scenario now that the elections are over, do you think that this will improve or this will not impact the conversations? I mean perhaps the elections did not impact the market because the companies might have a long-term view.
Roberto Monteiro
Well, Christian, I will try to answer all of the questions. If I leave anything behind, please let me know. The first question has to do with what makes us more excited and enthusiastic. I think one interesting thing that happened this year was exactly Frade Field with ODP4. Of course, that was the main point that left everyone joyful, not only because of the initial production volume was more than double what we had estimated at ODP4, but what makes me really encouraged is the level of understanding of the field that our operating team seems to have, particularly the geology, the reservoir team, the physical team and the engineering team that ended up deploying the project with savings of money and time. So these 2 things.
You see it’s not just about the result, but the way we got to the result made me very pleased. And the reason I say this is that it gave us some encouragement to bring forward the second phase of Frade. And we should have the first oil of these 2 additional producing wells that are being drilled between end of December and beginning of January at very competitive costs .
And it gives us joy regarding Albacora because Albacora is a field that is similar to Frade. It’s a neighbor of Frade. The reservoirs are kind of the same. The plays are kind of the same. And so I tend to extrapolate the level of knowledge that our people have had at Albacora so that we can confirm what we thought and designed for Albacora. So this is what really encouraged us. And what gives us a lot of encouragement is indeed the technical assertiveness of our technical team, Francilmar’s team.
Regarding the lifting cost, $9.5 per barrel had an impact of low efficiency — low operating efficiency in August. That’s when we had a downtime of 9 days at Frade. And so our operating efficiency, which had an annual average close to 97% dropped to close to 94%. So this was basically due to that 9-day downtime that negatively impacted the lifting cost. The fourth quarter look at it with the usual efficiencies.
And to answer your last question, we are already back to our usual efficiency that Frade was a onetime issue. Then we started producing again. And at Frade, operating efficiency should be at 97%, 98% as it normally does. So it’s returned to normal. So if we get the whole quarter, the lifting cost would be even better than $9.5. I don’t want to risk saying a number, but I believe that our lifting cost would be the same, if not a little better than $9.5. That’s one important thing to be highlighted. I’m giving you this number for the current operations.
Albacora Leste does not have a lifting cost of $9. If we include Albacora Leste before end of the year, most likely, the lifting cost will increase a little because Albacora Leste will be integrated with a slightly higher cost. Albacora Leste is estimated to have a lifting cost close to $12 or a little bit higher than $12. So there will be a blend in the business. And then the lifting cost will start dropping along the next year with Albacora campaign, Wahoo. And we’ll get to a single digit again.
But this is the initial step of Albacora. If we consolidate Albacora Leste by year-end, the lifting cost will decrease — will increase a little bit. But we’ll try to break down the effects of the field then. Was there anything else?
Christian Audi
It’s perfect. It’s super clear. The last question was about M&As, and if you see the market different. I know that everything happened just now. It’s kind of hard to say. But now that the elections are over, any changes in the market?
Roberto Monteiro
Our strategy was always one of not counting on a selling market as a source. Since 2015, this has been our strategy. The only big deal with Petrobras was Albacora. So I believe that Petrobras will go through a moment of re-definition of strategies for the long term. It doesn’t have anything to do with us, though. But we are prepared to continue on our M&A journey thinking about our assets, about the other major players.
And I believe that as the other major players, just like us, well, they have a long-term view. They’ll all work for their own company, for their own divestment program regardless of one administration or another. Companies are government agnostic. So I don’t think that we’ll have any problem, any impact. But again, like I said, I believe that Petrobras will find its way. It has its own strategy that we have to respect. And it’s over. I mean, there’s nothing we can do and think about. So the other major players will continue with their divestment programs.
Christian Audi
Perfect. And just to end, Milton, you said that after the payment of Albacora last year, the leverage of the company shot under 1x net over EBITDA.
Milton Rangel
It is what we expect. And after we pay for Albacora Leste and Dommo, we expect to get close to 0.6, 0.7, under 1.
Christian Audi
Congratulations again, Roberto and the whole team.
Jose Gustavo
Our next question comes from Gabriel Barra with Citi.
Gabriel Barra
Hello? Can you guys hear me?
Jose Gustavo
Yes.
Gabriel Barra
Congratulations on the results. Very strong numbers. The first point that I would like to address perhaps building on the point on leverage, as Milton mentioned, it seems that the financial situation of the company is very comfortable considering payments of Albacora Leste and such. So thinking about a 1, 2-year window when considering M&A scenarios, what should we think about buyback and dividends because we see a cash generation and with Albacora production being included next year. If there is no acquisition process for next year, could we think about a stronger buyback or perhaps dividend payment? So that’s my first question, thinking about capital allocation.
And my second point regarding Albacora. Last year, we saw a very strong production. Now in September, perhaps a little above what we were expecting. We had the start of one well that took the production of Albacora Leste to greater than 45,000 barrels a day. Was this expected by you? Or was this just one more good piece of news? And how should we think about next year? Should we maintain this expectation of around 40,000 barrels for 2023?
And if I may, one last question about Albacora Leste and the development plan. In the region of [Arapuca], there’s a unitization process. Could you tell us how we should think about the time line regarding the unitization? And how is this going to be done? That could be very helpful for us to think about average production in the region of Arapuca .
Roberto Monteiro
Gabriel, I will answer the first and the last. Then Francilmar will speak a little about Albacora’s production. Your first question regarding capital allocation. Of course, the company is in a very comfortable position in terms of capital structure with a strong cash generation. And our play has always been allocating the company and deleverage the company. This is what we think, and it’s what we’re going to continue to do.
M&A deals are more opportunistic. If we run into M&A opportunities in the coming months or years, we will probably prioritize mergers and acquisitions. It’s not all the time that we find large opportunities with adequate returns. So we’ll continue to prioritize M&A.
Now if we don’t have any M&A possibilities or opportunities, then, yes, we’ll either move to perhaps a more aggressive buyback to reduce our indebtedness or perhaps dividend payment. Anything we can do in terms of capital return. And by capital return, I mean, not necessarily capital be returned to shareholders. It could be capital returned to creditors as well. It really depends on where we find a 20% return. And this is what we will continue to pursue.
So it’s a lot more conceptual today than a firm answer. Like I told you before, for this to happen, we have to be sure that we don’t have any M&A opportunities ahead of us considering the landscape of opportunities and conditions.
And your last question was regarding [Arapuca]. We’ve had some meetings with the consortium. Arapuca unitizes with the Roncador Consortium. And as part of the Roncador Consortium, the partners are Petrobras and Equinor. And this unitization process is already happening. We’ve had some technical discussions. And I believe that this is something to be consolidated — completed by the first half of next year, if not first quarter of next year. This is what we’re thinking also because we would like to have Arapuca producing as quickly as possible, if possible, next year, sometime next year. And that’s regarding Arapuca .
Now I’ll turn the floor to Francilmar to speak about Albacora, the 40,000 barrels and how we see this production looking forward. I should say that Albacora also had some days of downtime. I know you all follow that, but we had a scheduled downtime at Albacora a few days.
Milton Rangel
Well, Gabriel, to give you a little bit more color on this. Indeed, we had the new wells starting production at the field, and they were in our plan. Petrobras had committed to drill them. It was a matter of connecting them. They were stopped, were connected, started producing. And we had a pleasant surprise. This is a reservoir in a further away area. The reservoir is producing a lot more than expected, a little over 40,000.
Since this is a reservoir that is producing with a slightly low pressure, production should decline a little. And looking at the future, we see this business — this production at around 30,000 barrels. Along 2023, we’ll work to have other offline wells into production.
So what we’re expecting is that along 2023, we can improve production. Who knows? Maybe we’ll have some more pleasant surprises. And Gabriel, in our plan, when we evaluated Albacora, we were expecting average production of 30,000 barrels in 2023, of which 90%, 27,000, would be net for PRIO. And now we’re thinking at least about 35,000 barrels. That would be the basic production. Then we’ll have added wells. But I think the production today is a little higher.
Jose Gustavo
Our next question is from Gustavo Sadka from Bradesco.
Gustavo Sadka
Hello? Can you hear me? My first question is for Francilmar and Roberto. The reserve certificate in Albacora last year, the distance on the curve — on 1P, 2P, 3P. Is the depletion not the projects that will be developed in Albacora last year, right? So when we do the math of the current production and these increases that may come from the drilling, it seems more feasible that the company will get to a production of 90 million barrels. That’s in line with 2P. But the base scenario that you released is closer to 1P, a maximum production of 60 million barrels or slightly over that. So it seems to be very conservative. With the depletion there on the plan, why are you being conservative like that? And when do you think you will be able to be more confident believing you can deliver more closer to 2P?
My second question to Roberto and Milton. The payment for [Petrobras] at the closing of Albacora last year will be that value, won’t be the 150? Or will there be cash adjustments that may bring this value down?
Roberto Monteiro
I’ll start answering the first about the production at Albacora. And that has always been our methodology. We always look and evaluate. We don’t evaluate on probabilities the reserve. That’s not how we assess it. It’s a deterministic approach. There’s some subtleties that makes it a little different. But I believe that our base assessment is always very close to what is 1P in the reserve certification. And the reason behind it is that when we do the evaluation, we only consider what we believe has a high probability, a very high probability of occurring. So that’s what we really include in this calculation.
Normally, when you look at 2P, 3P, you have probabilities of occurrence. But there’s not — it’s not near certainty. So that’s why we leave these probabilities out of our calculations. We tend to use what you called more conservative assumptions. And what’s going to make it change is precisely what happened in Frade. We had ODP4 inside ODP4. Frade Field is an example, but this is the concept. So we drilled ODP4. And when we had initial ODP4, every time you drill a well, there are some things you consider, for example, viscosity of the oil, size of the reservoir, if they’re ceiling cracks or not, porosity, permeability. And for each one of them, there’s a probability of that being what you think it is. It can be better or worse. But on ODP4, everything was better. So we had that probability event. The end, end, end.
And when you combine all of these things, this was better and this was better and this was better, the result is much better. But when we’re doing the evaluation, we don’t put all that into the calculation. We include all the more conservative assumptions. And as they realize, we make adjustments. It’s what’s happening in our reserve report for Frade Field that may be a small favorable update. Precisely, it’s not going to be that small, but we’re going to have a favorable update, especially — precisely because of ODP4 that was surprising. And we will be able to integrate those assumptions because we know they are a certainty.
As for Albacora — the payment of Albacora, there will be some adjustment. And conceptually, we would have 1.650 billion or something close to that, the remaining payment that we would have for Albacora. And this will be adjusted by the cash generated by the asset as of October 1. So now finalizing the month of October, Bruno, the Head of our M&A department, will work with Petrobras to identify what the field’s result was in the month of October. And this already comes in — of course, if the field gave positive results — of course, it seems to have been the case — but this already goes into the calculation, reducing that total amount. So that 1.650 billion is the high point. And from there, we will pay less depending on how long it takes for this closing.
Jose Gustavo
Our next question, Bruno Montanari, Morgan Stanley.
Bruno Montanari
A few questions. We talked a lot about lifting costs already, but thinking more about the preparation for Albacora. The G&A that would be required to operate the field is already in place? Or should we expect G&A increase in the fourth quarter and starting 2023?
Moving to Frade Field. In addition to the reduction of lifting cost, with you operating at 98%, 99% efficiency, may there be surprises in the level of production as well? Or do you think it’s reached the peak with the result of the new well?
And the third and final question. As you integrate Dommo now at the end of the year, beginning of next year, how fast after that is the process to start using the tax credits that are there?
Roberto Monteiro
So the first question was about the G&A for Albacora, right? There will be some increase. I’d say it’s not going to be anything out of this world. Within our results, they start having some costs that we call transition costs. We’re allocating there in that line in the results. So this will continue to happen, but it’s not going to be anything extraordinary. The cost of the field is in the OpEx. So the crew — the 80 people on board that we’re going to work — 80, 90 that we’re going to work with, plus the backing people, all of that will be in OpEx.
And a lot of the operational on the field will also enter OpEx. The operations people who are here, but allocated to the field will enter the OpEx as well. So it will be on those 90 million. So there will be adjustment, but we won’t see anything out of this world, to be honest.
The second point was about the production in Frade Field, right?
Bruno Montanari
Correct.
Roberto Monteiro
The Frade Field production, of course, there will be operating efficiency that will be better, or we expect to have slightly better operating efficiency in the fourth quarter. But there is that decline that starts to occur in the field of Frade, TBMT and Polvo Fields. I don’t know. Maybe we will have a slightly stronger number due to that 9 days downtime, but it’s not going to be any big surprise. Our production level is there.
Today, we have one well downtime. In the last production release, we mentioned that the MUP3A was on downtime because of a failure in an equipment for completion that we used, and we’re only going to solve that during the month of November. And this well produced 3,000-some barrels per day. So we’re slightly below our maximum. Our maximum was 52,000 barrels. Today, we’re just under 50. So I think more or less maybe we’ll be slightly better. But it’s not going to be anything out of this world, being quite honest.
There was another — a last question that you asked.
Bruno Montanari
The tax credits of Dommo.
Roberto Monteiro
Well, Dommo has a life of its own. When it’s approved here, when it’s integrated — the credit is already used at Dommo’s day-to-day. Today, you have the 5% they get from Polvo and TBMT. And the contract with the companies, that already is written off the credit. So all the results that will happen inside Dommo already joins this regime. That’s a feature that is part of Dommo, the company. And we are integrating the shares. So there’s no time line or anything specific. It’s simply the moment the company comes in. But this is already the company’s normal, usual operation.
Bruno Montanari
Very clear.
Roberto Monteiro
Just to add about Frade, we’re talking on the very short term, the month before the end of the year. But the beginning of next year, we’re setting new wells. We’ll join production. We’ll enter production. So we will then see an increase in the first quarter.
Jose Gustavo
Our next question is by Pedro Soares with BTG.
I don’t think Pedro is with us. Pedro, you’re there. Go ahead.
Pedro Soares
Can you hear me now?
Jose Gustavo
Yes, all good.
Pedro Soares
I believe that most of my questions have been addressed. I just want to get a little more detail on the lifting cost. I think it became very clear why in unit terms the operational leverage has been dropping over the quarters. What drew my attention is that in nominal terms, even looking at the absolute value versus second quarter, the number continues to drop despite the production increase. I believe that there is an exchange effect given the depreciation that happened compared with the second quarter.
But looking line by line and looking at the cash cost excluding depreciation, we know that in the line of other costs, the amount decreased a lot. So perhaps you could explain this? Or Francilmar can tell us what this represents so that we can understand — so we can understand and we can explain these improvements that are happening. I think that this is important for us to understand the level of recurrence.
Roberto Monteiro
This is an excellent observation, actually. In practice, what happens is, when we are going to start a drilling campaign — in this case, we’re talking about Frade. In the second quarter, it’s almost like we overstaffed the company. We rent some more boats, some other things, more helicopters, more helicopter hours. And these things, we normally wouldn’t do them if we weren’t going to start a drilling campaign.
So in the second quarter, that was a little bit exaggerated. And now with the start of the drilling campaign, we don’t have to have that anymore. And that explains the cost of well drilling. So normally, when we have a drilling campaign, there are 2 moments: a pre-campaign moment when the operation is a little bit more swollen, and then — and I’m talking — it goes beyond the exchange. So the company becomes a little swollen. And when we start production, we start allocating the vessel, the boat and et cetera to our campaign.
So I think this is the reason. And what we had against us this quarter was that we had a little bit more chemicals because of ODP4 that started producing. So it’s normally that we spend a little more on chemicals. And there was also the 9-day downtime when we had to do some work at the FPSO. All that was considered expenses.
Pedro Soares
Very clear now.
Roberto Monteiro
But you see, net of a drilling campaign, we can adapt the operation. There will be boats that are no longer need and helicopters that are no longer needed. And we have to look at the number that remains consistent. I don’t think that there is any problem there.
Jose Gustavo
Our next question comes from Tasso Vasconcellos with UBS.
Tasso Vasconcellos
My first question perhaps related to this whole discussion we’ve seen regarding possible tax increases for the industry. Will there be the creation of an export rate for oil? What is your view regarding that possibility? Have you been having any discussions with the government? Any chance that this will go forward? And have you done any studies regarding possible impacts on the company? Anything you can share with us? And are there any alternatives to minimize possible impacts that wouldn’t make sense to consider sales to the domestic market, for example?
And a second question, thinking about the company’s M&A inclination. Given the other part of W-50 at Albacora Leste, the company is still below 180,000 barrels a day of production of nominal capacity. Is there any asset that would make sense to evaluate or optimize? Would it make sense to optimize operations with neighboring assets to better use the capacity of the unit, perhaps in line with what you did with Frade and Polvo?
Roberto Monteiro
Regarding export duties, this has been on the table for a while now. This has been analyzed by the Senate House. This process lost momentum. It didn’t go forward. And since then, we haven’t heard them talk about it. Of course, whenever there is a possibility of taxes, the company participates in the discussions. We talk with IBP, ANP and some other entities that we are members of. But today, there’s nothing on the table. It seems that they chose a different path.
As regards to the ANP reference price, I’ve heard that there are some studies being performed. Although we know about these studies, so far, we haven’t had any precise information in one direction or another. We always try to contribute — to have a contribution and to think what is right. And it’s not about being right for my own benefit. What’s right because it’s right.
And as [regards to] import in Brazil or bringing oil to Brazil, there’s a big difficulty, which is the kind of oil that we produce, it’s heavy oil. And it’s not the oil that Brazilian refineries are prepared to refine and need. So it’s not that we don’t want to import oil. Of course, there is that possibility. But the question is — what the experts call the refinery diet; in other words, the kind of oil that refineries here need.
So that is the main reason why we export our oil. Our oil is heavy, sour as most of the oil from the Campos Basin. And this is the main reason why we export instead of refining it here. And it’s not about the price that would make us sell oil for domestic consumption. But depending on the developments ahead of us, PRIO will always be pragmatic in our decisions.
And there was one last question. What was it?
Tasso Vasconcellos
It was about the capacity of Albacora last year. If it would make sense considering another asset in line with the strategy of the company.
Roberto Monteiro
Well, there is an idle capacity indeed, but we have a lot of plans for that region. In addition to 180,000, there is also the water part of the equation, which is very important, and it’s close to the limit. In the coming years, we don’t think we have a lot of capacity for relocation outside of Albacora Leste field. There’s a lot to do there. 180. Well, when the field matures — the 180 as nominal capacity starts losing relevance. We start looking at something else with the ability of total fluid oil plus water. When the field matures, becomes too mature, it produces a lot of water. So that’s the limiting factor. So there are no projects related to Albacora Leste other than the redevelopment of the field.
Jose Gustavo
Our next question, Leonardo Marcondes, Bank of America.
Leonardo Marcondes
Can you hear me well? My first question, I’d like to understand a little bit more about the potential inorganic growth of the company? Because I get the impression that whenever we discuss that, the market always talks a lot about the possibility of the Peregrino, [Parkedaconcias]. So I’d like to know from you, what do you see as an addressable market for M&A? If you see a large market for that in Brazil still? If you also see opportunities inside Petrobras considering it still has some fields for sale in the Campos Basin. And how much of your time is focused on M&A? That will be my first question.
My second question is about the development plan for Albacora Leste, more to understand the time line of events here. For the development plan to be submitted to ANP, the unitization process must be concluded, right? Just to understand the time line. And then you would be able to start a drilling program only after ANP approves the development plan, correct?
Roberto Monteiro
Okay. So Leonardo, we always — we’ve always been vocal about fields that makes sense. Of course, [Parkedaconcias] is interesting. We like it. Peregrino, we like it too. And any other opportunity that comes up, especially in the area of the Campos Basin. We like to operate in that area because we have a lot of knowledge about it. We have operational synergies that are also great. And I think that anything available in the Campos Basin that comes to the market at some point, the companies that are interested, of course, the company will analyze. The addressable market is large.
I think that in the coming years, Petropras maybe — it’s a large holder of fields in the Campos Basin. I don’t know if they’ll be interested in continuing the divestment plan or not. But this doesn’t concern us as much. But I think if they are interested in resuming at some point of its life their divestment, we will look at it. We’ll participate. But honestly, I think there’s a lot of work for us to do in the coming years. We have Albacora. We have Frade Field. We have Wahoo. We have some of these potential M&As. So I would not be too worried about the size of the addressable market or this type of issue.
There’s no agenda of — our schedule of operations is fully booked basically pretty much till the end of 2025. So I think today, we’re more focused on production itself, development and so on.
With that said, I spend 1/3 of my time thinking about M&A. And I’ll continue doing that. I’ve always done that: 1/3 of my time thinking about M&A, thinking about strategies, fields, holding meetings to develop relationships and so on. That’s our life. I’ve always spent about 1/3 of my time with that, and I continue to do so because it’s part of our business. M&A is not only opportunistic. It’s part of our business. And we don’t participate in explorations. We don’t buy block for exploration. The company’s entryway is through M&As. So I continue to spend a lot of time with that.
There was another question about — Albacora Leste, there’s 2 things. One thing is Albacora Leste, the development plan will be approved in the session. It’s not a development plan that we would want with all the wells we would like to put there. It would be — what we have is a slimmer development plan, so to speak, but it’s a development plan that Petrobras filed with ANP in the beginning of the year and we decided to maintain that development plan because it already gives us the necessary subsidies for us to begin the revitalization process.
Moving forward, I believe at some point of next year or later, we will adjust the development plan. Our knowledge of the field will increase and we’ll have more wells for Albacora. [Arapuca], when we have the session, the development plan will already be approved together with the session. And this development plan will be the base of our revitalization plan. We won’t have to develop a new plan. We will only need IBAMA’s license basically. One of the things IBAMA looks at is whether or not ANP approved the development plan. And it’s already approved.
Arapuca is a different thing. It’s another development plan, separate. And this development plan needs to be submitted to ANP. And that’s what I said that we’ll probably submit this in the first half of next year, if all goes well, in the first quarter of ’23. This development plan for Arapuca specifically, the previous step before it is unitization. So there’s a discussion about it. It’s going to converge. And after that, we’ll submit the development plan. It’s a relatively simple development plan because it’s not a whole oil field. It’s a specific reservoir, the Arapuca reservoir. So it’s simpler, but it does depend on unitization. The rest of Albacora has nothing to do with that. The development plan that we will have is the development plan that we need to work.
Jose Gustavo
Our next question, Regis Cardoso, Credit Suisse.
Regis Cardoso
We talked a lot about different things here. I have little follow-ups, if you allow me. One of them is about the realization price for the quarter. It surprised our expectations. I don’t know if it’s the reference weighted price or if you have been noticing these smaller points. Another question about the unitization of [Arapuca], if there’s a short-term upside in terms of production due to this unitization, if it makes with any existing production.
Itaipu as well, I’d like to understand the upside of transaction if there’s unitization with the [Parkadesbalais]. And in this case, if whether or not there is an upside of short-term production with unitization. I’ll stop now. And then I have 2 other follow-ups to add.
Roberto Monteiro
Okay. So let’s start, Regis. The first about the realization price. In the third quarter, we still had the price with the discounts that was lower than the discounts we were seeing in the past. I would say it was a stronger quarter because of that. The fourth quarter, we’re already seeing a slightly worse market. I think we’re already going back to those original prices. We are already feeling what the Americans call tightness of the market. So we do see a slight difference or some difference in terms of the actual prices.
But the main difference that happened in the third quarter was still this tight market with the prices with lower discounts than the average. But I would say the fourth quarter, this trend is changing. We’re getting discounts closer to our historical average. In some cases, slightly worse than our historical average. The fourth quarter so far has been slightly harder specifically in this regard.
The other question that you asked, Regis, can someone…
Regis Cardoso
It was about unitizations…
Roberto Monteiro
And upside, yes. [Arapuca] is not in production anywhere. So unitization there only makes us — allows us to start with the rules of engagement determined. There will be no adjustment in any way coming from the unitization of Arapuca .
Now Itaipu, our idea there is to do some degree of analysis and studies because we believe — I don’t want to call it an expectation at this point, but we have an idea that maybe this business can be close to [Parkadesbalais] and so on. But there’s still a lot of road to cover. We have to run some level of a deeper study. It’s too soon to talk about any of it. But if I pull — one of the possibilities is to really be connected with Parkadesbalais at some level. And maybe we need to have this conversation going forward, but it’s still nothing. This is very early to say.
Regis Cardoso
Great. Understood. And if I may, 2 other follow-up points. One about the tax credits at Dommo. A discussion that I imagined here, we understood that maybe you could accelerate the realization of these credits with the taxable results of PRIO today. I’d like to understand whether this is a possibility? Or if you don’t know yet? Or if we know it is not a possibility?
Roberto Monteiro
I’m sorry. Go ahead.
Regis Cardoso
And if I can just add. If there’s any updates about IBV, and the issues with Wahoo?
Roberto Monteiro
Okay. Let’s talk about the credits. The credits have a life of their own inside Dommo. So the concessions that are inside Dommo will be submitted to the tax rules that Dommo follows. Today, the concession was there. It’s 5% [BOVO] and 5% BMT. But nothing stops us to maybe doing some M&A operations in the future and so on through Dommo. And then, of course, it will follow the tax rules that Dommo follows.
As for IBV, we don’t have anything new, no news. The arbitration process continues. We believe that there’s a high probability of a decision in the second half of next year. Our arguments are the same. The development of the field is continuing. We already anticipated more than $40 million for purchases on the field, lines, equipment and so on. We’re closing service contracts. So the development is happening normally with no issues. But IBV remains exactly as it was.
Regis Cardoso
I would imagine that you’d have a solution before you have a more material disimbursement with the implications. But is there any update in the time line for Wahoo? When do these bigger disbursements begin? And are you feeling the inflation compared to the original CapEx plan?
Roberto Monteiro
Well, the tax is already started. We, in the third quarter, had $40 million in taxes. In the fourth quarter, we have another some, and it started. Of course, there’s no major lump sum disimbursement. What we have is a payment time line until delivery. And since the delivery of all of it starts to happen in the second half of next year, we will have a disimbursement time line for the end of next year, until the second half of next year.
And because it’s material and because it’s services and vessels and helicopters, there will be a time line of payments that will occur as it’s consumed. But it’s going to be in the second half of next year, the half of the second half, the end of the second quarter to first oil at Wahoo.
We do notice the inflation. Our initial plan was to spend $800 million to put the 4 wells in operation with the 2 injectors. Within this $800 million, Francilmar and I had placed $130 million as contingency. So our cost was $670 million, and we added $130 million for contingency. And the cost today is $800 million.
Considering that until first oil, we’re talking about close to $600 million. And then there’s the water injection phase that will cost about $200 million after the second oil. So today, the contingency has been entirely consumed. Of course, we had nothing to talk about in terms of cost increase because we had the contingency in place. It was consumed. And there wasn’t the difference that we made. When we presented the project in the past, we were thinking about one production line and one water injection line, 2 lines in total.
And we’ll be able to make with these $800 million and maybe $820 million, something very close to $800 million to do a second production line as a backup. And I think this is a huge lesson learned that we had in recent years. And we decided to start with the original project, the initial project, considering a second line as a backup for any eventuality. So that was the only thing that we added. And we remain strong in the $800 million, even if the inflation that we’re seeing.
Regis Cardoso
Congratulations.
Jose Gustavo
Well, given that we’ve been in the Q&A for a while, we’re going to end the question-and-answer session. And we’ll be available to answer any further questions you may have through our Investor Relations team. Roberto, your closing remarks.
Roberto Monteiro
Again, thank you very much for joining us. This was a very good quarter for the company, and it is a huge pleasure to be able to share these results with you. Thank you very much.
Jose Gustavo
This conference call has ended. Thank you very much.
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