HRT Participações em Petróleo's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: HRT Participacoes (HRTPY)

Start Time: 10:03

End Time: 10:42

HRT Participações em Petróleo S.A. (OTC:HRTPY)

Q4 2013 Earnings Conference Call

March 31, 2014 10:00 AM ET

Executives

Milton Romeu Franke – Chief Executive Officer

Ricardo Bottas Dourado – Chief Financial Officer

Analysts

Andrew Reider – Credit Suisse Hedging-Griffo Asset Management SA

Gustavo Gattass – BTG Pactual CTVM SA

Operator

Good morning ladies and gentlemen. Welcome to the audio conference call for the Fourth Quarter 2013 Results for HRT. Thank you for 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 may be accessed through HRT’s Investor Relations website at www.hrt.com.br/ir by clicking on the banner webcast fourth quarter 2013. As a reminder, this conference will be held in Portugese with simultaneous interpreting into English it is being recorded and the respected presentations will be available for download shortly through HRT’s Investor Relations website.

Before proceedings let me mention that forward-looking statements regarding HRT’s business perspective, projections and financial and operating goals that maybe made during this conference call are based on the beliefs and assumptions of HRT’s management and on information currently available to the company. They involve risk, uncertainties and assumptions as they relate to future events and therefore depend on 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. This conference call is attended by Mr. Milton Franke, Mr. Ricardo Bottas, Mr. Eduardo Jácome, Mr. Jose Carlos Pedrosa and Mr. Nilo Azambuja.

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

Milton Romeau Franke

Ladies and gentlemen, good morning, and thanks for joining HRT’s fourth [ph] quarter 2013 earnings conference call. It is with great pleasure that on behalf of HRT, I am here with HRT officers to present the fourth [ph] quarter results and highlight the main achievements of the Company and the beginning of 2014, we will also present you consolidated numbers for the full-year 2013.

Please move to the next slide. This slide presents you a legal advice; it’s our disclaimer as mentioned by the operator saying that the object – it’s just to remind you that certain projections that are included in this presentation are strictly qualified in its entirety by this legal website.

On Slide 3, we summarize the fourth quarter 2013 highlights and subsequent period highlights, considering the beginning of 2014. We had in particular five important events in this period. Number one, the acquisition of Polvo, oil and gas production field in the Campos basin. The transparent assignments was approved by ANP in the beginning of January.

Secondly, still referring to Polvo, with this acquisition HRT is today a production operator, with around 20,000 cubic meters per day of natural gas, a gas which is used as energy in our operations in the fields as well as around a 10,000 barrels of oil per day 100% sales, considering both companies in the joint venture. We would like to mention that the first two oil shipments of the quarter added up to 630,000 barrels net to HRT.

Thirdly, HRT was able to pay the financing warrant signed with Credit Suisse. We are a debt free company now.

Fourthly, on March 19, 2013 HRT’s shareholders attending the General Shareholders Meeting elected the seven members that are on our new board therefore reducing board members from 11 to seven as well as the members of the Fiscal Council of the Company to conclude the term of office that ends in the end of April.

I would also like to mention that last week HRT’s Board of Directors approved two new officers who joined us; Mr. José Carlos Pedrosa, who will be our New Business Officer, and Eduardo Jácome, who will be our Organizational Management and IR Officer.

Finally, the fifth items – the set highlights last but not least, we would like to mention the signing of the Rosneft contract to formalize the sale of an additional 6% stake in Solimões as well as the sale of four Chinese rigs in the financing of up to $40 million of HRT’s activities in the Solimões basin, with this Rosneft will be the operator in Solimões after ANP’s approval.

Please go to the next slide. In this slide, we can do these strategic positioning for Solimões particularly regarding gas monetization and partnerships for exploration. In the Solimões basin, during this period, HRT’s fluctuated data base in the basin, so was to not only speed up our internal wells, but also to allow interested third parties to evaluate HRT natural gas discoveries as well as the potential of the basin in the farm-down process. During this period HRT presented to ANP six points for evaluation of the natural gas discoveries at PAD. And it’s important to highlight that this was an extremely important task that required assessments by the joint venture regarding how to proceed with this discovery on a case by case basis.

We continue to have discussions with Petrobras and other companies with respect to the monetization of the natural gas discoveries. Finally, HRT is proceeding with the farm-down process of its interest in the basin of Solimões.

Please go to the next slide. We are now on Slide Five. We talked about the Polvo project. This asset started a whole new phase for HRT. Now as a production operator after drilling 11 exploratory wells in the Solimões and 3 exploratory wells in deepwaters in Namibia. We are now an offshore production operator. In 2013, oil production in this field achieved 4.2 million barrels or an average of 11.7 thousand barrels per day, a 100% sales considered.

In 2014, HRT was able to offload two oil shipments as previously mentioned. The first with 233,000 barrels in the end of January and the second with 395,000 barrels in the beginning of March net to HRT i.e. 60%. The field continues its regular production under the leader of HRT since the beginning of January of this year.

Please go to the next slide now. Still with respect to Polvo, in the slide we submit some numbers of what we expect can be the future of the field as described in DeGolyer & MacNaughton report dated 31 December of 2013. Polvo 1P developed reserves in this field at 8 million barrels, while undeveloped reserves which require new wells to be drilled at additional 7 million barrels.

In addition there are net probable reserves to be the total 9.3 million barrels and possible reserves 3P of 6 million barrels of oil, 6.05 million barrels of oil considering the proven reserves. HRT plans to drill one production development well by the end of 2014.

Please go to the next slide. As for Namibia, it is a known fact that HRTs first exploratory wells in Namibia in the Walvis basin Wingat-1 for the sub-commercial oil discovery, this well drilled two thick shale source rocks provisions in the oil window. HRTs first target therefore in HRT America was to revisit the basin and Wingat discovery. They need to identify other prospects that could indicate the presence of thicker reservoir rocks. This activity is still underway, but we already have the fast new prospects identified.

Finally, I would like to mention that HRT continues to receive lab analysis from samples collected in the three wells drilled as always we are seeing interested companies that planned to join HRT in the exploration up in the medium assets.

With this I would like to give the floor to our CFO, Mr. Ricardo Bottas.

Ricardo Bottas Dourado

Thank you Milton, good morning everyone. On Slide Eight, we show the main set of results, quarter-on-quarter in 2012 and 2013. The main highlights of the fourth quarter of 2013 relate to a cut down on expenses due to fewer activities in Solimões and completion of the exploratory campaign of Namibia added to results from the strong cost production plant program started in the second quarter of 2013.

Operating expenses in the last quarter of 2013 were 51% lower than the third quarter of 2013 and 72% lower when compared to the same quarter of the previous year. Year-to-date in 2013 expenses were 14% lower than 2012.

At the end of 2013, our headcount totaled 197 employees, therefore 49% leaner than 2012. At this total number to include the team in charge of our operations in Solimões and it’s expected to be transferred to Rosneft from 60 to 70 people and also 32 people, who are in our IPEX lab. This analysis in operating expenses does not include expenses with write-off of impairment provision of dry hole which are in the lower chart on the left, which totaled R$2.3 billion in 2013.

In Solimões there were write-offs related to dry hole, basically in 2013 we had HRT number 11 and also wells with non-commercial volumes that are outside the scope of gas monetization studies. Additionally there were write-offs of subscription bonus of blocks 219 and 220 that were relinquished and also with provisions of blocks 148 and 149 totaling expenses of R$286 million to Solimões including write-offs and provision.

In Namibia write-off of drilling cost amounting to R$507 million and also impairment provision for prospects built in 2013, Wingat, Murombe, and Moosehead and provisions for all gas prospects only. The corresponding bonus for condensate and oil prospect had been maintained. All these analysis have been performed based on reports updated in January 2014 and issued by the D&M independent certified agency based on December 2013.

It is important to mention that expenses with impairment provisions related to subscription bonus in Namibia did not have a cash effect and the value of this assets stand from the integration of company UNX subsequently known as HRT Canada in April 2011. The performance of our financial results was directly related to the total cash balance.

On Slide Nine, we show the cash flow in 2013 highlighting that corporate expenses not earmarked to project, taxes and financial expenses went down 77%. There was a reduction with seismic data, a reduction of 38% compared to fiscal year 2012 and exploratory expenses have increased by 35% with drilling due to drilling efforts in 2013 of three offshore wells in Namibia and one well in early the same year in Solimões.

In 2012, only five onshore drilling efforts totally five. Of total inflow of R$394 million in 2013, R$174 million, our cash cost with our partners from Portugal of Namibia’s assets GALP Energia, $138 million our cash cost with our Russian partner in Solimões Rosneft and R$68 million from our divestment plan mainly due to the sale of Air Amazonia to Erickson Air-Crane and the sale of aircraft, which would not included with the transaction with Erickson.

At the end of 2013, HRT’s total cash position remain constant including those escrow account as collaterals amounting to R$428 million on slide 10. We are showing the performance of the company’s total cash breaking down the total amount between net funds and collaterals. By the end of 2013, HRT still had R$273 million blocked out of which R$51 million earmarked to the loan with Credit Suisse at the end of the fiscal year, which was fully used to anticipate the partial settlements and they were used to pay a part of the amortization that should happen only in February 2014.

The remaining R$22 million relate to the collateral for BP transaction in the acquisition of Polvo Field. We do not expect to close the fiscal year with these amounts blocked. However, ANP’s approval only occurred on December 18, 2013.

We were officially notified and transaction with BP was only settled on January 8. So, that are no records at the end of the fiscal year, funds return for liquidity at HRT. Not the cash position related to the assets acquired.

Consequently, the liquidity of R$155 million at the end of 2013 just with the conclusion of Polvo transaction and release of remaining collaterals increase the company’s liquidity at R$64 million bring it up R$219 million vis-à-vis R$200 million that we had posted as provision for the end of the fiscal year. Basically on Slide 10, on the right, we show the main item stemming from the completion of Polvo transaction, which increased the company’s liquidity.

Now I give the floor back to Dr. Franke for the next slide.

Milton Romeau Franke

Slide number 11 shows in a very simplified manner HRT’s organization chart. At the top we have our shareholders. On the left we have the Fiscal Board. We have a Fiscal Council with members Roberto Portella, Elias de Matos Brito and Gilberto Braga.

In the middle, the Board of Directors with seven members Helio Costa, Vinicius Carrasco, Elia Shikongo, Haroldo Lima, Pedro Grossi, Ronaldo Carvalho, William Steers.

On the right, we also show the three committees required by our bylaws. The audit committee and each one of these committees has a coordinator, we have three members the audit committee, the salary committee and compliance and risk committee.

At the bottom, we have those in charge of the decisions made at the board, the executive board with Milton Franke, CEO; Ricardo Bottas, CFO; Eduardo Jácome, Organizational Management and IR Officer; José Carlos Pedrosa, Business Development Officer; and Nilo Azambuja, CTO.

So the purpose of this slide is to highlight the importance of the company to have management and inspection bodies fully reset and engaged to develop HRT in the future.

Next slide, this is our last slide with the final remarks of this presentation. Just a couple of words on the new directions at HRT. It is an operational company with cash generation on Polvo Field, focusing oil and gas production, and also with a reduction in exploratory risk exposure. Diversified portfolio in several areas, reduced business risk, operatorship transfer of Solimões project to Rosneft, reduced administrative expenses and reduced production costs. We have an ongoing project on Polvo Field.

The focus is still on cash control. We also have an independent Board of Directors, fully dedicated to the company’s development. A new Fiscal Council and a new organizational structure focused on HRT’s consolidation and growth.

I would like to thank you all again. And now we will be at your service for the Q&A session. Thank you very much.

Question-and-Answer Session

Operator

Ladies and gentlemen we will now begin the question-and-answer session for analysts and investors. (Operator Instructions) Our first question comes from Andrew Reider, Credit Suisse.

Andrew Reider – Credit Suisse Hedging-Griffo Asset Management SA

Good morning Milton and Ricardo. I have some questions. The first is, could you just tell us what asset that you are still going to find out and talk about IPEX and tele company aircraft and rigs you still have, I know you still have some.

My second question regarding the Polvo cash flow for 2014, do you expect it to be similar to that of 2013?

And my third question regarding the Rosneft transaction that’s a 96 million. How much of that is related to the amount of cash cost that they still had outstanding and that they still owed to HRT?

And my final question, you mentioned a dispute deal with Geoquasar, could you give us a little bit more detail on that is that significant. How much the company believes it will have to pay or perhaps not? Thank you.

Milton Romeu Franke

Andrew, thank you for your question. They are all very important. I’ll give you some initial detail and my answers will be complemented by Ricardo and Pedrosa right here with me. The assets that we still have in our farm-down project, well, we have to start with a Solimões block, and the Namibia sales, we continue to look for partner. They can work together with us in the future investments. We still have I believe 4 big helicopter in Solimões and one midsize helicopter, and we’re expecting to sell those, one of them is actually leased now to a local company.

We still have two out of our three Embraer aircraft, while actually it is one Embraer aircraft and one small and medium plane. And I believe this is all at the moment, and we are selling new assets regarding IPEX and we are waiting for local condition to improve or perhaps waiting for a different decision by HRT.

At proposal since this is a feel where they are declining a curve, the cash flow of 2013 will be different than that of 2013, but I will let Ricardo give you more detail on that because on the side of operating cost, we’ll also have a substantial difference, I believe we’ll have a market decline in operating costs this year in Polvo.

And finally regarding the roadmap transactions, the cash costs represented R$95 million of the R$96 million in total, and the dispute with the Geoquasar. Geoquasar is a company that worked with us from the very beginning of our activities in Solimões in the acquisition of seismic data. And we have a number of contracts with them, the last contracts we decided to prematurely end and terminate this contract.

And this is an arbitration process filed by Geoquasar and I’ll not give you – I won’t give you more detail, because this is being – this is going to arbitration, but again Geoquasar is a Brazilian seismic data acquisition company that has worked with HRT for many years and they filed for arbitration against the decision to terminate the contracts early.

Ricardo Bottas Dourado

Thank you for your questions on Andrew, the complement regarding the investment plans, I believe Milton has talked about the assets and the efforts to divest from fixed assets at IPEX, we put a lot of efforts in the third and fourth quarters of 2013, but we decided now to revisit IPEX. We are now in a process to reassess IPEX began to spend that it only makes sense.

It is a transaction that works for HRT, because this is a top-tier first line laboratory and we have to make the interested parties to realize the value of this asset considering all of its characteristics. So we are revisiting IPEX now, but it is being evaluated. As for the cash flow, I cannot give you any guidance, I mean no actual guidance and Milton mentioned that there is a natural production decline and that’s why HRT has a strategy to asses as possible, develop the 1P undeveloped reserves.

This should bring production up again, which is positive. The price guidance that was disclosed in our release. As for the average of the first two shipments that we offloaded, we had a 10% discount over the brand. On the other hand, we expect improved results, compared to 2014, because there will be a cost reduction that we expect, one is natural just by replacing the old operator by HRT. The old operator carries higher corporate and structured cost than we do.

In that position, we are now paying attention to our OpEx to see where we can bring additional cost reductions regarding our overhead in the field, because as we said before, this is an upside, because an OpEx reduction, particularly, fixed costs can extend the user life of the field. So, I guess as far as the guidance goes, that’s what we can mention for now regarding our drivers for cash flow expectations for Polvo.

As for Rosneft, Milton mentioned the cash call. The outstanding cash calls amounted to R$54 million base October 2013. But it is important to understand that this transaction with Rosneft was a deal amounted to R$96 million to address all of these issues simultaneously. So you have to assess the set of assets, we believe that this breakdown by asset is not so relevant in this field.

And as for deal closer, just to add to what Milton said, indeed, they filed for arbitration, but we are confident that on our side, the client, we fulfilled all of our obligation. All of the amounts payable, and the contract had been duly recognized in our financial statement and while this arbitration wasn’t filed by us, but we will respond to defend our position and our interest. Thank you very much.

Operator

Our next question comes from Gustavo Gattass, BTG Pactual.

Gustavo Gattass – BTG Pactual CTVM SA

Good morning. I have two questions. One of them, I would like to discuss Polvo and focus on the reserve. I would like to hear from you of the proven undeveloped reserves. We are going to develop those with just this first well or will you need more wells for these reserves.

In addition, could you tell us about what the D&M mentioned as a growth driver for probable reserves, in other words, what will make this company capture those probable reserves? And on the other side of the equation, I’d like to have a flavor from you regarding cash generation in the company in an aggregated fashion, when we look at the first quarter, you’re signaling an operation that would be costing about R$34 million, R$67 million proposal. If it is considered in full and I know there is a decline, but I guess what would cover this is [indiscernible] from you?

Milton Romeu Franke

Interesting math is it generating cash or is it burning cash still within the reduced pay.

Gustavo Gattass – BTG Pactual CTVM SA

Thank you.

Milton Romeu Franke

Gustavo, thank you for the question. I will ask Ricardo answer the second – your last remarks regarding how we see cash from Polvo. Okay, I pass this to Ricardo.

Ricardo Bottas Dourado

Good morning, thank you for your question. As for the cash generation, we will begin a communication to the market for the first quarter. As I had mentioned in our IPEX meeting last year Polvo does not intend to be the financing – the financing field considering the cash that we get from Polvo to pay for our expenses, exploratory expenses in Namibia. However, we’re in a favorable position because we still have Solimões carbonating. We are probably going to resume Solimões activities only after we finish assigning the operations to Rosneft and an approval by ANP. And in Namibia we completed the most important disbursement which was exploratory campaign. Now we are basically working with our own funds particularly from our Houston team to re-access our Namibia data.

So what I can tell you is that, risk the results that we are having in the first quarter and with reducing or reduce the corporate cost, we are very close to a break-even point, but I’d like to remind you we do not intend to use the cash generation from Polvo to finance Namibia operation in addition to that, as for a guidance, the guidance that was a little relevant to disclose right now, is the guidance that we have disclosed already regarding production and afterwards with the price guidance. We are not informing any OpEx guidance now because we’re in the process of re-accessing the whole situation. And we have plans to be inform our D&M report and there will be some OpEx guidance in that report, it will be a starting point. But we expect that with the results for the first quarter 2013 we’ll be able to explain the cost OpEx for the first quarter and with that we’ll be able to give you a guidance for the full year.

Gustavo, as for proven undeveloped reserves that was one of your question. We do not intend to have dozens of wells we include – we are considering just two wells for these proven undeveloped reserves, for this year we intend to drill the first of these two wells, but this is not a gigantic volume.

However, it’s still substantial around 7 million barrel, but we will not let’s say well a high number of wells. As for a probable and possible reserves these areas have been previously mapped first with a higher risk than the 1P reserve. We are currently in the process of revisiting the methane done by BP, but we are not ready to give you detail regarding how much of this volume is in carbonate and how much is in each one of the centum, and we would need to have that to give you a more precise answer.

Gustavo Gattass – BTG Pactual CTVM SA

Thank you very much and Milton just a follow-up question please. You have an integrated drilling platform, could you give us an idea of the costs involved in the wells we drilled, I mentioned it will be lower in the regular costs.

Milton Romeu Franke

Definitely it’s good of you to bring up this point. We believe that this platform – the sixth platform that we haven’t been accessed for that field, it is quite helpful, because the completion of the wells are dry completion – dry completion in general make operations easier with reentries in these wells. We are currently performing an intervention to restore the production of one given well, and I believe that our performance is being quite exceptional in terms of time and number of days necessary for this kind of operation to be conducted.

The platform obviously has a top drive rig, and this is a rig that drills the wells, all of the wells in the field. And we have an [indiscernible] of our cost involved. We have to update and review and service all of the rig equipment and so that we won’t to need to having stoppage during the drilling process.

The wells that we intent to drill can be drilled with this rig. Our initial estimate is that each well will cost around R$35 million, total cost of 100% to be divided by the joint venture partners. Our cost to be shared by the joint venture partners and we think that with the studies that we are conducting and we have reprocess, so all of the seismic data for the fields, and our intention is to review the prospect and perhaps drill additional wells, but we haven’t made the decision yet.

So given the fact that we have the rig that has been amortized and included in the cost of the field. Obviously, we have wells that can be drilled at a lower cost than if we needed another platform, another rig to drill. And so this is the kind of information we can disclose for now. Thank you.

Operator

(Operator Instructions) This concludes the question-and-answer session. We would like to give the floor back to Mr. Milton Franke for the closing remarks. Please go ahead, sir.

Milton Romeu Franke

Dear friends, thank you for joining us at this earnings call for 2013. We had few questions, but we were happy because probably our presentations were – even though they were summarized, they had a lot of data, so we wish you a lot of happiness in the future. Have a great day.

Operator

This concludes HRT conference call. Thank you all for being with us. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!