HRT Participacoes' CEO Discusses Q1 2013 Results - Earnings Call Transcript

May.16.13 | About: HRT Participacoes (HRTPY)

HRT Participacoes Em Petroleo SA (OTC:HRTPY) Q1 2013 Results Earnings Call May 15, 2013 10:00 AM ET

Executives

John Anderson Willott - Chairman

Milton Franke - Chief Executive Officer

Carlos Tersandro - Chief Financial Officer

Wagner Peres - Chief Executive Officer, HRT America

Joe Paul - Head, HRT America

Nilo Azambuja - Chief Technology Officer, HRT O&G

Analysts

Bruno Varella - Bradesco BBI

Andre Sobreira - Credit Suisse

Luana Helsinger - GBM

Luiz Carvalho - HSBC

Caio Carvalhal - J.P. Morgan

Operator

Good morning, ladies and gentlemen. Welcome to the audio conference call for the First Quarter 2013 Results of HRT. Thank you for your standing by. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session for analysts and investors, and instructions to participate will be given at that time. (Operator Instructions)

This event is also being broadcasted simultaneously over the Internet and maybe accessed through HRT’s Investor Relations website at www.hrt.com.br/ir by clicking on the banner webcast First Quarter 2013. As a reminder, this conference is being recorded and the presentation will be available to download shortly also through HRT’s Investor Relations website.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of HRT management and on information currently available to the company. They involve risks, uncertainties, and assumptions because they relates to future events and therefore this kind of circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of HRT and could cause results to differ materially from those expressed in such forward-looking statements.

The teleconference is attended by Mr. John Anderson Willott; Milton Franke; Carlos Tersandro; Wagner Peres; Joe Paul; and Nilo Azambuja.

I would now like to turn the conference over to Mr. Milton Franke, CEO of HRT. Please go ahead, sir.

Milton Franke

Ladies and gentlemen, good morning. I thank you for joining HRT’s first quarter earnings conference call. And it is great pleasure that on behalf of HRT’s Board of officers I’m here to present the first quarter results and highlight the main achievements of the company in these three months of the year.

Before beginning the presentation, as previously announced, we have here with us John Willott, newly elected President of HRT’s Board of Director, and I would like to turn the call over to him for his remarks. John, please join us?

John Anderson Willott

Good morning, ladies and gentlemen. I’m John Willott, the Chairman of the Board of HRT. I want to thank you for joining us on this important call today. As you know, HRT’s Founder and CEO, Marcio Mello recently decided to resign from its position as CEO of HRT. He will remain as a member of HRT’s Board of Directors.

The Board and I want to thank Marcio for his tireless commitment, passion, and contribution in building HRT from an idea to the fourth largest oil and gas company in Brazil with world-class assets in Brazil and Namíbia.

Marcio assembled an outstanding staff and excellent acreage position and strong investor funding. He recently finalized the purchase of Polvo Field in offshore Brazil that transforms HRT from an exploration company to an exploration and production company.

He has also forged strategic relationships with key partners, including the government of Namíbia, the State of Amazonia, TNK-BP, Rosneft, Petrobras and the Brazilian government. The Board and I want to personally thank and congratulate Marcio on his vision, thought, and his commitment to HRT.

The Board moved quickly to appoint Milton Franke to the position of CEO of HRT. Milton joined HRT in 2009, and he has served on the Board of officers recently as CEO of HRT Oil and Gas.

Milton’s vast experience in the industry, his familiarity with HRT and respect he command will enable him to provide stability and leadership to the company during this important stage.

On behalf of the Board of Directors I want to congratulate Milton on his appointment to CEO and look forward to working closely with him to deliver HRT’s full potential. He will be speaking later on the call.

As you also know that, Wagner Peres, President of HRT America has chosen to leave HRT. Wagner and his staff, his technical team based in Houston have led the exploration effort in West Africa with a focus on Namíbia. They have developed the prospects, finalized the form out, design and executed the drilling program that we will comment on later in the call.

Wagner will also remain on the Board of Directors and the Board and I want to thank Wagner for his leadership and exploration skills that have strongly positioned HRT for the future.

HRT’s officers will appoint Joe Paul, Wagner’s second in command to lead HRT America. Joe has vast world-wide exploration and production experience principally in the South Atlantic sedimentary basins. There will be no impact or change in our drilling plans in Namíbia where we will drill at least two addition exploration wells and will continue to pursue additional drilling and form out opportunities. Joe Paul will also speak later in the call.

In summary, the Board, especially the Chairman of the Board committees, the company officers and I are committed and working very hard on a smooth and seamless transition given the recent changes. We will execute the programs that we have planned for 2013, including the drilling in Namíbia, the exploration in the Solimões Basin of Brazil, the continued production at Polvo Field and continued opportunity pursued and capture world-wide.

With that, I’d like to turn the call back over to Milton.

Milton Franke

Thank you, John. If we continue with same slide number three, give us the highlights of our call today. We will start with the corporate information then we’ll go over Solimões Basin, the Namíbian Basin, the Polvo and we end up with the financials of the first quarter.

If I start again with the same slide with the corporate. The biggest achievement during this first quarter was the acquisition or the signing of the PSA with BP with respect to the Polvo oilfield in the Campos Basin. This and the confirmation by ANP of HRT being a Class A Operator, two key milestones in our implementation of strategy to diversify our portfolio beyond exploration assets.

In line with this strategy to concentrate our efforts on the company core business, we have signed a binding Term Sheet with Erickson Air-Crane regarding the sale of Air Amazonia. The transaction involves the sale of our 14 helicopters for $65 million, and we have the understanding that Erickson Air-Crane due to its experience will provide aerial services to our HRT operations in the Solimões in a very efficient way.

The issues regarding Solimões and Namíbia operations will be focused further developed on the presentation by Nilo Azambuja and Wagner Peres. If I progress with slide number four please.

We have here the name of our present Board members and on the last annual shareholders meeting held on April 29th the new Board of Directors was elected for two years period and I would like this time congratulate the new Chairman and Vice Chairman of the Board of Director, Mr. John Anderson Willott, former Vice President of Exploration for North and South America and Vice President of Worldwide Production Geoscience for Exxon Mobil that was elected as Chairman of the Board.

And in addition, Oscar Alfredo Prieto, current CEO of Pan American Energy was elected as Vice Chairman of our Board. On behalf of HRT’s management I would like to welcome the 11 members elected and to emphasize our commitment to keep focusing on areas of corporate governance and compliance to ensure that HRT can grow and continue to reflect international best business practices.

In addition to the changes in the Board, HRT has introduced its Fiscal Council. And with regard to slide five, we have the names of the three full members, Jaime Luiz Kalsing, Marcelo Joaquim Pacheco, Edmundo Falcão Koblitz, and three alternate, Fábio Renato dos Santos Gameleira, Murici dos Santos and Arnaldo José Vollet. I also extend a warm welcome to these six professionals who have HRT Fiscal Council. The first meeting of this council will be today in afternoon.

With this said, I now pass over to Nilo Azambuja for the presentation of the Solimões project, our achievements over the period.

Nilo Azambuja

Thank you, Milton. Good morning, ladies and gentlemen. I’d like to start the main highlights. We have selected five main highlights, ANP approvals, seismic acquisition, result of HRT camp, mobilization of HRT-11 and one gas monetization project.

Let’s go to slide number eight. Regarding regulatory issues, HRT has two important achievements in the quarter, a four-year extension of 10 blocks in the eastern and southern concession and a qualification as Operator A allowing the company to operate all areas of the country onshore and offshore.

Moving to slide number nine, seismic acquisition in Block 194 and 195, in the figure you can see the achievements HRT last quarter we have demonstrated the importance of seismic study and the results have obtained for the drilling wells.

In this quarter we conclude the first study based on new parameters, approximately 460 kilometers of seismic were acquired in Block 194 and 195 with 15 meters of drilling charge that confirm the improvement data quality. Thanks to this new seismic data quality, it will be possible to enhance the making of several prospects in the mentioned Block that maybe objective of future drilling.

We conclude the tender for the new seismic and close the first agreement for the acquisition of 1,600 kilometer of size in the eastern portion of the Basin. The next step will these two contracts seismic acquisition in the west and southwest portion of our concession extending the exploratory frontier southward on the existing discoveries.

Please slide number 10. HRT-10 well results confirm the expansion of the hydrocarbon frontier to the Solimões. In the Block 192 HRT-10 well found natural gas in two intervals, with good reservoir productivity, which extends southward the hydrocarbon potential of the Solimões Basin. The implication of the presence of residual oil absorbed in core reservoir that produce gas in DST are being analyzed.

This combined with identification of several (inaudible) in the region with the existing seismic has shown already in the map has reinforced HRT’s strategy to proceed with the acquisition of medium-sized in this frontier blocks.

Slide number 11, please. Regarding HRT-11 well was drilled in less than 60 days. It has reached its final depth to seismic 402 meters in that 10 blocks and the well is currently under evaluation, final results should be announced soon.

Slide number 12, gas monetization, deliverable and timeline, project management, final monetization report and recommendations to the Steering Committee done. The surface group, the resource and production profile report has already done, engineering, options, screening and basin design also done.

Environmental and health and environmental studies have done. Cost estimates completed final report due to July 2013. Regarding the market, draft reports on regulatory regime and markets is done, draft conclusions and monetization options, delivery of the final report and executive summary. Regarding economics, draft economics model and inputs are ready and final model is being done.

Let’s go to slide 13. The highlights of the gas monetization can be summarize, the natural gas monetization project is ongoing as expected and our (inaudible) conclude, we conclude the engineering study for the construction of project infrastructure, including collection systems, production facilities and export pipeline.

Downstream technology of processing gas and its transformation into chemicals, alcohol, (inaudible) such as (inaudible) including cost estimates for each option, several units in United States were visited during this stage. The market study for Solimões gas is being finished and economic environment for each option is still ongoing.

Slide 14 please. In conclusion, the first quarter of 2013 offered very important information for Solimões exploration. The seismic acquired with new formula demonstrates the improvements of the data quality, which will result in better definition of prospects and better future results.

We have managed HRT-10 well results conclude that the west and south blocks have important exploratory potential and should explore the objectives of new seismic studies and new drilling. The drilling process of HRT-11 was concluded and the well is under assessment. The results will be released soon.

The natural gas monetization project (inaudible) year-by-year in terms of scale, these engineering studies virtually concluded including the [basic] to production units in United States.

I’d like to thank you for your attention. Now I will turn the word to Milton.

Milton Franke

Thank you, Nilo. We have completed the Solimões. I call Wagner Peres for the Namíbian activities. Wagner you have the word.

Operator

Ladies and gentlemen, please wait while we reconnect the speakers. Thank you. Ladies and gentlemen, please wait while we reconnect the speakers. Thank you.

Milton Franke

Gentlemen and ladies, we have the connection program with our office of HRT America in Houston, we’ll proceed with the Polvo Field description and later we’ll come back with the Namíbian information.

Wagner Peres

Milton we are back. I am sorry. We are back.

Milton Franke

Okay, Wagner, go ahead.

Wagner Peres

Ladies and gentlemen, we apologize for the miss happen, but basically my role is going to be very short. I just would like to introduce, Joe Paul. Joe Paul is in the transition period here to our new management in HRT America. He will be taking the role as soon as the transition period is completed. So I will pass to Joe Paul for him to go through the results and highlights in Namíbia operation. Thank you very much.

Joe Paul

Thank you, Wagner. Hello, everyone. Good morning. Wingat-1 well drilling update, the image you see here is a 3D view of the main objective at the Wingat well location. This is the first prospect to be drilled in offshore Namíbia by HRT and the spud occurred on March 25th.

We are targeting all these carbonate reservoirs in combination structural and stratigraphic trap with approximately 380 square kilometers of area. And this prospect has the capacity to hold over 350 million barrels of oil equivalent of recoverable reserve. Our current drilling and evaluation activities will be completed by next week.

Slide 17 is the summary of the Wingat well results. First, we’re looking at a seismic image of the Wingat prospect and if you notice the small map in the upper left-hand portion of the slide, this is an amplitude extraction of the Wingat prospect.

This seismic line is located as a small line with A to A prime, indicating the orientation of the image. The top of the carbonate platform is the blue dashed line on this image. The well has drilled to 3D of 5,000 meters and we’re currently evaluating the well information.

Page 18, the planned Murombe well, again we’re looking at a seismic image of the Murombe prospect. You see the Murombe-1 well proposed location as blue line on this seismic image. If you look at the map in the upper left-hand corner of this slide, you see an image of an amplitude extraction on the Murombe prospect. Line C C prime illustrates the location of the seismic image. In the lower right-hand corner of this image you see the scale of 5 kilometers.

The opportunities that will be penetrated with the Murombe-1 well include the Walvis prospect shown shallow or in the top of the seismic image. Then we see the location of an intervening source rock interval. Next we see another source rock interval deeper below that and then you see the top of the Murombe sand complex which will be penetrated with this well.

Finally, we’ll continue to well down through the Sivaradi complex which also has adjacent source rock. That’s all the information we’ll provide on HRT Africa’s ongoing operations at this time. Well results will be forthcoming.

Now, I’d like to turn the presentation back over to Milton Franke.

Milton Franke

Thanks, Joe Paul. Well done. I will go over now on Polvo presentation.

Please slide 19. On this slide, you see a nice picture of the Polvo platform and the drilling rig.

Please go to slide 20. Slide 20, we have general information about the Polvo Field. I will stress a few points of this slide. Number one, the construction, the declaration of commerciality of this field occurred in July 2005. If we look a little bit down on the platform and FPSO, we see that this is a platform with a 24-slot platform and storage moved FPSO.

When you look to the wells, [dry drift], we have sill now introduce on one water injector that means that we still have several slots available on the platform. If you look the production, you see that the first production started in 2007.

If we go now to slide number 21, we have regional map of the Campos Basin oil and gas fields, mostly oil fields and you see that the Polvo Field location, regional location with respect to other fields, you see that it really lies on the producing trend of the Campos Basin in shallow water. It is a very small field compared to many other fields in Campos, but it is a field, is not an exception. It’s the field in the oil trend.

If we go to the slide number 22, we have some information about the Polvo Field infrastructure. We see that this field has a set of very interesting and important facilities available and I will highlight only a few of such facilities.

Number one is the production and drilling rig platform and this is a very nice platform still in good condition and the same happens with this drilling rig.

Number two, I -- 10 active producing wells and one injection well, and the main facilities are production and test manifold multiphase pumps, flare systems, chemical injections skid and drilling facilities. So this is a fully prepared production platform.

Can we go now to slide number 23? This ship is the Polvo FPSO that is outsourced to third-party that offers it under contract to BP. It has people onboard of 70 people, 70 persons. It’s third anchored FPSO. It has oil storage capacity of [450 million] barrels of oil. It has power generation capacity. It has production capacity and it has water injection capacity, all the processing facilities of the Polvo Field on this FPSO.

If we go to slide number 24, I couldn’t pass without giving you map. a geological map of the Polvo ring fence. You see in yellow the outline of the Polvo ring fence. You see that there is some area outside the producing assets and this shows the right away that there are some upsides in this ring fence, some important upsides. This map also shows a classification of the outlines in proved where we have proved these wells, where we have probable reserves and possible reserves.

And even where we have some high risk contingent resources mapped in this ring fence. Certainly, thus, you can imagine that these assets offer risks but it is very important to stress that we have tremendous upsides in this ring fence. With HRT knowledge, we are sure that we can make use of such upsides.

If we go to slide number 25, here we have some additional information about the Polvo deals and while we outlined only a few points of this deal. We are acquiring 60% of the interest of the Polvo Field. There is a second party that owns the 40% that compliments the 60%. The properties of the deals include reserves proven and developed, probable possible and discoveries and appraisal.

There will be a transfer of operatorship. HRT will become the operator of this field. We have met with teams, the BP teams and the teams are fully dedicated to the assets and they will be transferred to HRT. And last but not least, the closing of this deal is still subject to certain conditions and one of such conditions is the final approval by ANP.

If we pass to slide number 26, this is a very important slide and we would like to have your attention for a few points. Number one is that HRT has a long history with Polvo Field. HRT America staff came from Devon and they worked with Polvo for sometime, several years.

They have maps. They have done reservoir simulations and they are very keen to come back and work with us on the Polvo Field. Then, if we remember HRT IPEX or HRT petroleum, we were a service provider to BP and to Devon. And again, we have some activities related to the Polvo Field and we are well acquainted with this field.

Second, I want to stress HRT strategies with the Polvo Field. Number one, we were very impressed with presentations made by BP about their work over the last two years to maintain a safe and compliance operations in Polvo. And we understand and we have visited the units in the field, and we have seen that they have given priority to people to the HRT practices.

They have described and trained the personnel on a list of strategies that will be very important for the future of our operations. And we have made this work that is being presently done by BP as the first of our strategies. We want to maintain the same procedures with respect to safety and compliance operations.

Number two, we have already discussed about how we can sustain the established oil production and to introduce some measures and initiatives for production increase. You heard when the production of Polvo started. It’s not so long ago but production is in decline. And we want to introduce measures to sustain the production and to make this field have a longer life than it has today.

Number three, we want to work on Polvo re-exploration. Our group with experience we have in HRT America, if needed we will acquire a new seismic data. We will drill new exploration wells and we will drill new development wells as we go.

Number four, we really have debated this internally in HRT, and we identified that new production alternatives in mature fields in Campos Basin and even elsewhere are on our list. We will try to enlarge our portfolio with activities of like that.

To end, number five, it’s important for us to have the cash flow from the Polvo Field from the proved reserves in the short-term and from cash flow from the upsides on the middle term. We think that this will be very important for HRT.

If we go to slide number 27, there are some additional points about the Polvo deal mainly the next steps. We already signed the PSA on May 6th. We agreed on the conditions precedents and transition period, and we are working now to see if we proceed in the process. We have taken as our first priority to work on people and we are trying to get a very smooth transition when the deal is completed.

We continue in the next steps, the normal course of operations under BPs operatorship. And we plan in the next two to three months, work on the transition in a way that when ANP approval comes, HRT will be able to be the operator of this field.

Having said this, I pass the word to Carlos Tersandro our CFO and he will give a presentation on the quarter financials. Tesandro, you have the word.

Carlos Tersandro

Thank you Milton. Good morning, everyone. During today’s presentation, I will give you the highlights on the first quarter of ‘13 financial results.

If you go to slide 29, in relation to the partner’s transaction, on January 2013 the farm-out agreement transactions with the company Galp Energia signed a 40% interest in exploratory rights over three Petroleum explorations license specifically PEL 23, 24, and 28 was approved by the Namíbian’s ministry of mining and energy.

On March 25, HRT deployed its first of four wells in it exploratory campaign and on April 2 received its first cash flow from that partner. In the divestment programming, the next slide, on March 2013, the company signed a binding term sheet with the U.S. company, Erickson Air-Crane Inc. for the sale of its air logistics business.

The transaction comprised of one of its wholly owned subsidiaries, Air Amazonia and its entire rotary-wing fleet, composed by 14 helicopters of which seven equipment F6-1, five (inaudible) and two AS 350. That’s during the first quarter of 2013, the transaction value was allocated under assets held for sale in the amount of R$109.2 million. In relation to the Polvo Fields, although this event has not affect our first quarter ‘13 financials, due to the relevance of their view, we’ll disclose it.

HRT has signed on May 6 a purchase and sale agreement with BP Energy do Brasil Ltd. and BP UK to buy a 6% stake in the oilfield as well as 100% of BP Energy Americas. (Inaudible) that corresponds the platform and the drilling rig and operation for the amount of $135 million. For that, HRT committed to pay to BP UK and deposit in an escrow account to guarantee the (inaudible).

To conclude the deal, HRT as guarantor and its wholly owned subsidiary HRT oil and gas has entered in a loan agreement with Credit Suisse Brazil through a financial instrument called Federal of Cedula de Credito Bancario for the amount of $75 million. The loan has a term of two years and will be repaid in five quarterly installments after 12 months grace period. It’s important to mention that the transaction has a condition precedent including ANP approval. When concluded, the deal will be retracted to January 1 2013 and the results from the fields since then will be used to adjust the purchase price.

Going to the financial results on the next slide, then net results presented in the first quarter 2013 represents an improvement when compared with 4Q ‘12 if we consider only the recurring expenses and stable if we include the right off of the well HRT-7. The expenses continues to present a declining line since G&A expenses decreased an additional 73% in the first Q compared to 4Q 2012.

On the other hand, third-party service has increased related to legal expenses. Also, HRT board has approved the performance bonus in December 2012. The forecasted payment of cash for the employees as well as cash and our stock options for some of the strategic employees in a proportion of 25% in cash and 75% in shares with a discount price of 60%.

The cash payment in the amount of R$14.8 million has been effective in January ‘13 and recognized as 4Q ‘12. In the first period 2013, the company recognized and experienced an expense of R$21 million related to the difference between fair market value and stock price for stock options as requested by IFRS rules.

The next slide we present the cash position of the company. The company ended the first quarter with a consolidated cash balance of R$829 million represented a decrease of 21% over the balance of 4Q ‘12 due to disbursements for the exploratory campaign in the Solimões and Namíbian projects.

This chart also presents the liquidity of the company consolidated cash by maturity and cash collateral given as guaranteed to chart of the rate and drilling related services to be used in the Namíbia exploratory campaign. In addition, it can be observed at the breakdown by financial institutions where HRT group’s funds are invested.

In this slide, we present a chart with the evolution of disbursement by group of expenses and its impacts on HRT’s consolidated cash position on 1Q ‘13 compared with the previous quarter.

In the next slide, we show expenses incurred with the exploratory campaign amounting R$174 million. And refer to disbursement on drilling activity, logistics, (inaudible) as well as expense for personal third-party service and insurance. Expenses with seismic in the amount of R$34 million are related to the acquisition of seismic service in data processing and interpretation in both fronts.

G&A, tax, and financial expenses totaling R$25 million refer to corporate expenses with personnel, administrative expenses and corporate insurance which were not allocated directly to the exploratory campaign activities.

Around R$10 million is related to tax, withholding tax from financial revenues and exchange rates variations. The headcount reduction during 2012 also contributes to this item to present a decrease of around 22% when compared with 1Q ‘12.

Next chart, next slide, these charts presents the variation of the average daily cash burn rate in 1Q ‘13, where it can be noticed a slight increase in the 1Q ‘13 versus the previous quarter as well as the comparison between the forecasted CBR versus actual.

The increase in CBR in this quarter is expanded mainly due to the performance bond paid to (inaudible) in January ‘13 and by exchange rate variations. Not considering the non-recurring events above, the CBR should be in accordance with the forecast in the 1Q ‘13. As such, we are confident that we’ve accomplished the forecast to reach CBR for the entire year at an average of R$1.9 million per day.

In this last slide, I like just to make an update on both the potential upsides that have been presented in the previous presentations. On March 13th, the company signed a binding Term Sheet with Erickson Air-Crane remaining only precedent condition to be fulfilled. And Galp Energia starts to contribute to the (inaudible), the PEL 23 (inaudible).

With this, let me hand back to Milton for the final remarks.

Milton Franke

Thanks Tersandro. Ladies and gentlemen, to conclude this call, I want to say a few words about Marcio, our leader over the past three years. He did not leave us because he will still be with us as a board member and I’m sure that he will use his brains to generate new ideas in the benefits of HRT as before.

During these years, what really impressed me with respect to Marcio was his availability, his energy and his care for people. He was available almost 20 hours a day, seven days a week and with no holidays over the last three years. And I understand that HRT needs all of these three elements over the next days, weeks and months for all of its employees.

We have to do even more than what we did over the last three years, now that Marcio has left us. Following Marcio’s words, I would like to call all of our fans to believe in HRT and offer us constructive suggestions on how to proceed. Thanks Marcio. Thanks all of you to believe in HRT. I conclude this call and open for Q&A. Thank you very much.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mr. Bruno Varella with Bradesco BBI. Please you may proceed.

Bruno Varella - Bradesco BBI

Good morning everyone. I have got couple of questions here. Starting with Polvo, I’d like to know what is the break-even production on Polvo and if there is any clients (inaudible) platform vis-à-vis large added capacity at the FPSO?

Second question regarding the CapEx and taxes, just a quick follow-up to understand that almost R$700 million is maintained for 2013. And what is the expectation of cash by year-end? And last one, regarding the monetization of the project, the monetization of gas. Is there any idea at this point of how much gas could be consumed in this (inaudible) project?

Milton Franke

Bruno, with respect to Polvo break-even, this information is still not available at this stage to HRT. And we have some ideas but this is not disclosed above. We cannot disclose this. With respect to the monetization project, could you repeat the question?

Bruno Varella - Bradesco BBI

Yeah. If there is any idea of how much gas could be consumed in this project or in other words how much gas (inaudible) supplied to this project?

Milton Franke

Yeah. We are now working with two hypothesis that really have numbers with the existing wells drilled. But this is, let say, a very conservative view and it ranges between 5 million cubic meters and 7 million cubic meters per day. There are two scenarios of growth in this order of magnitude. We think that this will increase with time as we drill new wells and as we develop the fields that we already have discovered.

Bruno Varella - Bradesco BBI

Okay. And the third one, regarding the CapEx and OpEx?

Milton Franke

Talking about CapEx and OpEx, with respect to what?

Bruno Varella - Bradesco BBI

Yeah. If the previous guidance is maintained to R$700 million for the year?

Milton Franke

Yeah. It’s the same.

Bruno Varella - Bradesco BBI

And expectation of cash by year end is the same?

Milton Franke

Yeah. About the same.

Bruno Varella - Bradesco BBI

Okay. Thanks.

Milton Franke

Thank you, Bruno.

Operator

Our next question comes from Mr. Andre Sobreira from Credit Suisse. Please, you may proceed.

Andre Sobreira - Credit Suisse

Hi. Good morning everyone. I have few questions. First one, follow-up on the previous question on the cash drag. If I take the current cash drag on the quarter, your cash balances won’t decrease. It would get close to (inaudible) Q1 2014. So I would just like to understand that how you have managed the drag through the year to reduce that?

Second question, more strategically, I want to understand how the board is thinking -- is thinking about -- about M&A and monetization of the company’s assets in general because the shares are not given any credit for the assets outside of the cash run on the balance sheet. So I want to see how the board is thinking about it?

The third one on Polvo, who in HRT will manage that asset? Will any one from the HRT Americas who has worked with the BP before? Do you manage in that field or is it going to be someone else. And you also mentioned that you had (inaudible) increased production in the longevity of the field. I would like to understand what you think you can do? And thirdly, any monetization (inaudible).

Milton Franke

Andre, starting with the third question about Polvo, who will manage it. We are building our group and it is based on that present that today manage the field, so all the operations people, they will be transferred if the deal is -- when that deal is completed to HRT. But inside HRT, the asset belongs to HRT oil and gas. It will be responsible for the project -- for the Polvo project. And we have -- we are discussing this in-house. For example, HRT America has a group that is very well prepared for the technical studies and challenges reservoir and to support all the studies, how to advance with respect to the upsides, new wells and so on.

Our financial group, the same persons that are responsible for the financial control, for the cash cost, billing, for the other projects, we’ll work on Polvo. And then there are issues with safety. We have few persons that had long-term offshore experience with safety matters, environmental matters. We have been pulling these persons together in a group that will be inside oil and gas and it will take care of this asset.

But today, we are still in the beginning of the deals of the measures. And our main -- our main task today is people. We have to really work on to get to gather our best. We have to manage this asset and to make sure that the best BP has managing today will come to us and work with us in the future.

I will pass now to Tersandro to respond about the cash drag in the quarter and eventually we can come back on the monetization of Solimões gas.

Carlos Tersandro

Andre, if you compare the first quarter with the first quarter, you’ll see that there is an increase in R$0.3 per month. As I mentioned in the presentation, this is mainly due to the premium of performance bonds for the employees of the company. If you can split this, it’s something around R$1.8 of this R$0.3, it’s related to this. And we have some exchange rate variation due to the investments that we have abroad. If you’ll remember, we have around $150 million of funds placed abroad and we have some investment in HRT Canada, HRT Africa and HRT Americas.

And these circles with the exchange rate. If you have a look, in December, we have around a dollar variations from 31st of December to 31st of March around R$0.3 (inaudible). So if you can decide this, I would say that’s around (inaudible) related to the performance and R$0.12 related to this exchange rate variation. As I mentioned, we are confidence that we can reach the forecast of our cash burn rate since these are not recurring issues. And in this exchange violation, we can be in the negative and the positive rate that’s how we exchange rates (inaudible).

We think that these are not recurring expenses and then we can easily come back to the forecast for the whole year to have more -- less than R$2 million in cash burn rates for the whole year.

And then, if I advance something on your third question about (inaudible) related to monetization of gas in Solimões. I could say that we are presently with a set of companies consulting firms international and local, working on all the alternatives for the monetization of Solimões gas. We are modeling this to come up with, which are the best alternatives with respect to the feasibility.

And we are trying to find or to identify who could be our potential partners with respect to some of this or each of these alternatives. We are not working by ourselves. We are signed this MoU with Petrobras and TNK-BP. TNK-BP was acquired by Rosneft today. HRT, Petrobras and Rosneft are working on this project. The first phase will be concluded now in July and we are discussing and trying to work out how to proceed. Does this respond to your questions?

Andre Sobreira - Credit Suisse

Yeah, it does. I was thinking more about M&A in general, not necessarily related to the monetization of the gas but that’s fine.

Milton Franke

Okay. Thank you.

Operator

Our next question comes from Ms. Luana Helsinger with GBM. Please, you may proceed.

Luana Helsinger - GBM

Good morning, everyone. Thank you for the call. I have a quick question about this bulk rates contain in Solimões. I wonder if there is a position on the HRT-12, if you guys are planning to drill this year or will it be postponed? Thank you.

Milton Franke

We will ask Nilo Azambuja to answer this question.

Nilo Azambuja

The plan for HRT-12, we have finalized the acquisition of the seismic covered some prospects in Blocks 194 and 195 as we mentioned. The results of the acquisition, in the first half we will take (inaudible) to mature the prospect and to decide at each location, we are going to take the rig.

Milton Franke

So, Luana, is this, the response, did this answer to your question?

Luana Helsinger - GBM

Yeah. I just wanted to know, if do you think this year could be a possibility?

Nilo Azambuja

Yeah. We still think that well number 12 can be drilled this year.

Luana Helsinger - GBM

Okay. Thank you very much.

Nilo Azambuja

You are welcome.

Operator

Our next question comes from Mr. Luiz Carvalho with HSBC. Please, you may proceed.

Luiz Carvalho - HSBC

Good afternoon, all. Thank you for the call. I have basically two questions. First of all, it’s a follow-up on the Polvo Field. I would like to ask two questions. The first one is with regard to the contract of the unit. The FPSO, its BW property and I think that the contract will expire in next year.

Is there any conversation to renew that and/or any plan b in case they need to grow in a level that I mean profitability of the project are really affected? And second question about Polvo. If you can give us a bit of color with regard to the other prospects that you see there and during the acquisition process. And the third question just a follow-up with regards to Solimões and HRT-11. Are you using LWD in that well? Thank you.

John Willott

Milton, give us that?

Milton Franke

Luiz, yeah, we are using LWD in Solimões since HRT-10 with very good results.

Luiz Carvalho - HSBC

So you already achieved the reserve, right? Is there any indication of oil or any hydrocarbons in the area because you have to file at ANP and I haven’t seen anything? So, could you please give us an update on that?

Milton Franke

This information, Luiz will come out pretty soon. I have the help of Ricardo Bottas to tell you a little bit about the Polvo Field FPSO contract.

Ricardo Bottas

About the FPSO contracts, during this transition period, we still have together with BP talked with the suppliers and the contractors of the field to renegotiate all the material agreements. So during the transition period, we still have to talk with the suppliers. So for the FPSO, it’s same of the other contracts.

Milton Franke

And Luiz, you have a third question in Polvo. I think it was with respect to other prospects?

Luiz Carvalho - HSBC

Yeah. Exactly.

Milton Franke

Wagner, are you still online?

Wagner Peres

Yeah, yeah. We are.

Milton Franke

Could you answer this question?

Wagner Peres

Milton, could you rephrase it for me just to be sure that I got it?

Luiz Carvalho - HSBC

Yeah. With regards to the Polvo acquisition, that’s somewhat related on what the company saw and prospects apart from the production field.

Wagner Peres

Okay. Luiz, during the time that our team is still working with Devon, we had already a portfolio of prospects to be tested in the ring fence. And also in this transition time where we are receiving all the information, all the data from Polvo, we are going to reevaluate all the data because we know that BP will process the data, the seismic data that were in EIA and we need to have -- we are going to have access to all this new information for us to run the data or rebuild all the ring fences and EIA study for the new prospects that we had already in mind there.

We are optimistic that there are prospects to be drilled, but these prospects -- they need to be revisited with the new data. As we also mentioned in the beginning, we are also considering the possibility. If necessary, we will shoot a high-resolution 3D over the area for not only to better understand all the reserves that we have in Polvo, but also to interpret the prospects for better postioning the wells that are in plans to be drilled there. So in that sense, Luiz, we are expecting a lot of work ahead of us and drilling in the area, it would happen sometime in ‘14. So that’s the way that we are looking at it right now.

Luiz Carvalho - HSBC

That’s clear. Thank you very much.

Operator

Your next question comes from Mr. Caio Carvalhal from J.P. Morgan. Please, you may proceed.

Caio Carvalhal - J.P. Morgan

Thank you. Hi, good morning, Milton. Good morning, everybody. I have a couple of questions and I will try to be brief. One of them is related to the gas monetization project. You mentioned the range of 5 million to 7 million cubic meters per day as far as the day -- the basis for this project. Do you have an estimate of how long this could last and of course I want to ask that, whether you can get volume that you believe you have already under the discovery of digs alone, so I want to know pretty much how many years do you believe you can sustain this productivity between five and seven?

In relation to the media itself, further kind of a quick function. How dependent the Murombe well should be on the reserve of the Wingat? I mean, I know that they are independent wells, but in geological terms, the indications that we are going to get from Wingat, we could further support a good result or a bad result on the Murombe

And on Polvo Field, I think many questions were asked on that, I’m not sure how much you can share. But could you tell us just a little bit about the economics of the FPSO? Where is the leading break? Or I apologize if you already said that this is something you cannot disclose as of now and that’s it.

Milton Franke

Caio, welcome to our call. Thank you very much for the questions. With respect to the gas monetization timeframe, these volumes are expecting to be a plateau of 20 years. With respect to Polvo, the question about FPSO and economics, we still cannot release any information. We are in a transition period. We are really learning about the field. We will have our own calculations, but we have fully confidential reasoning with BP. We cannot open any public -- any private information to public. I will call Wagner and maybe Joe Paul to tell a little bit about this question about Wingat and Murombe. Can you help us, Wagner and Joe Paul?

Wagner Peres

Yeah, Milton. Caio, as from the beginning of the process, HRT put together a three to four wells drilling campaign and each one of the prospects that are going to be drilled is totally independent from the other wells. So, Murombe is very independent from Wingat. But logically, with whatever we are finding in gas, can make us feel better or worse about Murombe. But at this stage, we are going to Murombe with a lot of optimism and the prospect is totally independent from the results of Wingat.

Caio Carvalhal - J.P. Morgan

Okay. Thank you very much.

Milton Franke

Thank you, Caio.

Operator

Our next question comes from Mr. [Daniel Azarini] from (inaudible). Please, Mr. Daniel, you may proceed.

Unidentified Analyst

Good morning, everyone. Could you please tell us more color about the deal with GALP? Because in the release of the first quarter, you mentioned that you have received R$51 million before the first spud-in Wingat?

Milton Franke

I will ask Carlos Tersandro to answer you, Daniel. Thank you for your question.

Carlos Tersandro

Yeah, Daniel, it is true. We did receive our first cash call from GALP in the amount of R$25.5 million and this is for the first period. I did not understand exactly what you asked us?

Unidentified Analyst

To another’s (inaudible) and you can receive the stream of amount or this is not back of the due.

Carlos Tersandro

No. Not necessarily the same amount. Anyway, we are going to receive -- we are going to derive the cash call of GALP, but not necessarily for the same amount.

Unidentified Analyst

Yeah. Okay. Thanks.

Carlos Tersandro

Okay. Thank you.

Operator

This concludes today’s question and answer session. I would like to invite Mr. Marcio Rocha Mello to proceed with the closing remarks. Please go ahead, sir.

Milton Franke

Thank you very much. It’s Milton talking. I thank all of you to participating in this call and I welcome you for the next calls or to visit HRT. Thank you very much.

Operator

That does conclude the HRT audio conference for today. Thank you very much for your participation and have a good day.

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