HRT Participacoes Em Petroleo's (HRTPY) Milton Romeu Franke on Q2 2014 Results - Earnings Call Transcript

Aug.15.14 | About: HRT Participacoes (HRTPY)

HRT Participacoes Em Petroleo SA (OTC:HRTPY) Q2 2014 Results Earnings Conference Call August 15, 2014 10:30 AM ET

Executives

Eduardo Jacome – IR

Milton Romeu Franke – Chief Executive Officer

Ricardo Bottas Dourado – Chief Financial Officer

Analysts

Gustavo Gattass – BTG Pactual

Vicente Benlloch – Bank of America

Andrew Reider – Credit Suisse

Operator

Good morning ladies and gentlemen. Welcome to HRT's second quarter 2014 Earnings Conference Call. 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 when further instructions to participate will be provided (Operator Instructions)

This event is also being broadcasted simultaneously over the Internet by a webcast and may be accessed through HRT’s Investor Relations website at www.hrt.com.br/ir by clicking on the banner webcast Q2 '14. As a reminder, this conference is being recorded and this presentation is available for download also the HRT’s Investor Relations website.

Before proceeding let me mention that forward-looking statements that might be made during this conference calls relative to HRT’s business perspective, projections and financial and operating goals are based on the beliefs and assumptions of HRT’s management and on information currently available to the company. They involve risks, 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 and Mr. Eduardo Larangeira Jacome.

I’d 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 and thank you for joining us today. It is great with pleasure that on behalf of HRT and with this meaningful picture of our proposal platform that's on and one more production day, I am here with the company officers to start the second quarter 2014 earnings conference call.

Please go to Slide 2. Please be mindful of Slide number 2, which contains a declaimer to investors regarding forward-looking statements.

Let us move to Slide 3 now. On this slide we gave you the highlights of the second Q '14 and subsequent period. As you can see in the period we had one good quarter for HRT. We continue to be debt free.

We continue to build a more and more solid cash position as a result of Polvo revenue and its stronger cost reduction. On the revenue side this quarter we had a very good oil production at Polvo and I would like to inform you that we are already preparing for a well work over aiming to increase output with highlighting and this quarter is the signing of an agreement with Maersk for the acquisition of Maersk 40% interest in Polvo Field when approved by ANP we will hold a 100% stake of Polvo.

The management of HRT gaining operational experience in offshore production is of paramount importance. Another important event in this quarter was ANP’s approval of the assignment of a 6% working interest of the Solimões Basin asset to roadmap to Brazil as well as the transfer of operator ship of the block.

A negotiation, which also included HRT's for Chinese onshore rig as previously informed changing from operator to a non-operator partner in Solimões is another very important step in HRT’s diversification strategy.

The complete this quarter's event it is worth highlighting the signing of a memorandum of understanding in Brasília with Rosneft and Petrobras. This was a very significant event. The signing ceremony was attended by Brazil President and Russia’s President Putin.

The project aims at setting the alternative to Solimões gas monetization. The focus now is to detail alternative considered to be more viable noticeably LNG liquefied natural gas and possibly the generation of thermal energy.

Slide 4 now. We see two charts one on the left is we consider volume produced in the field and on the right an indication of operating efficiency achieved by HRT in the first and second quarters of 2014.

We can also see the highlights for the second quarter of 2014. As we can see the chart of volume produced in the field even with the natural output decline in the second quarter of 2014 our production was 4.4% higher quarter on quarter-on-quarter, 941,000 barrels of oil and approximately 30,000 cubic liters of gas per day in the second quarter.

All of the gas was consumed to produce energy while in the first quarter we produced 901,000 barrels of oil. This improvement stems from a higher operating efficacy in the period as shown in the chart on the right, which increased to almost a 100%. We practically produced all hours of all days that we could in Polvo field in this quarter.

We also advanced our educational project at the municipalities surrounding the field as well as in power generation for the field using the natural gas produced.

So as you know, we've been using all this natural gas. We have to acquire a new additional gas for energy generation and diesel for gas generation. Practically all of the gas produced is used and oftentimes we get the question here in previous conference call and we thought that we would not have, people said that they felt that there was no production in the field because they could not see plains in Polvo, but it is difficult to see planes in those plays because it’s a very small volume burnt, practically 100% of the gas is consumed at the field.

Please go to Slide 5. On this slide as you can see in yellow, we see the ring expands outline of Polvo with around 140 square kilometers of acreage in this HRT’s assets.

Inside the yellow area you can see in blue the outline of the limestone reservoir in the producing zone. In brown Solimões and in shaded green on the left [there] (ph) is not in production. The black dot at the center shows the location of Polvo platform and we consider producing well. As you have 10 producing wells and one injection well in Polvo field.

Processing units are all in the FBSO and it is important to remind you that all of our wells have dry completion in the platform equipped with its own drilling rig.

Today about 90% of Polvo production comes from Solimões and only 10% coming from the limestone reservoirs. What this map tries to show you is that there a number of upsides in Polvo fields, which will be tapped into by HRT in the coming months and years hopefully.

The technical group from HRT America is reprocessing the 3D mix data of the field and we need to enhance the characteristics of the producing reservoirs and therefore select the best sites for new drilling in the fields.

At the same time we have people. We have technical group from headquarters in the United States studying the world that have already been drilled to an enterprise wells ready for work over. So as to put new wells into production without needing to drill new wells, but finishing the completion of the existing well.

The first work over of this type is scheduled for the third quarter while the first drilling of new production development wells in Polvo is expected by year end beginning of 2015.

I’ll now turn the floor over to our CFO Ricardo Bottas Dourado who will give you details on the financial for the period.

Ricardo Bottas Dourado

Thank you, Milton and good morning.

So going to Slide 6 in the first half of 2014 HRT had three oil exports of three shipments, gradually increasing the volume of each shipment and taking the optimized cost as well as finding new price opportunities resulting from increased scale from each shipment.

It's also important to highlight that revenue is only posted after shipments are concluded and the oil is then transferred from FBSO Polvo to client's cargo ship and it is only that, that the invoices are issued.

A higher brand price coupled with a lower negotiated discount allowed for a 6.8% increase in prices in Q2 2014 when compared to Q1. Therefore even though the shipment completed in June 14 was 5% smaller when compared to some of the shipment in Q1 revenue in dollar terms was 1.2% higher.

Next shipment from HRT is scheduled for the second half of September for an originally planned amount of 550,000 barrels. HRT has a commercialization agreement with Glanco since the second shipment has been in charge of identifying and negotiating prices with end consumers.

Slide 7 now, now we see that net revenues in the second quarter totaled R$138 million coming primarily from exports of 595,000 barrels of oil. Year to date of approximately one million barrels were exported generating revenue of R$281 million. Gross income of R$55 million in the second quarter and R$78 million in the first half reflects the result of our production operations in Polvo field that of allocation of corporate expenses, G&A and geology and G&G expenses.

It's also important to highlight that the amortization of the Polvo concession primarily recognized was posted as a cost as well as a provision for abandonment representing amortization costs of R$20 million and R$43 million referring to recent in the period in terms of production costs as I said R$20 million for the first and second quarter.

Excluding the impact of amortization and depreciation and already considering operating expenses including G&G and G&A to companies EBITDA in the second quarter was R$34 million with 25% EBITDA margin in keeping with the accumulated margin in the half year. So the year to date for the past six months is R$70 million.

Personnel expenses were done 83% when compared to the second quarter of the year before that was a significant reduction in the company's headcount amounting to 50.5% when compared to the headcount we had in the second quarter of 2013.

I would also like to point out that in the second quarter of 2013, a 100% of personnel expenses were allocated to HRT as we carried all the cost to our partner in Solimões as set for the 45% farming agreement, which rose next previously Solimões.

This agreement was concluded throughout the second half of 2013 and so by the second quarter that a -- we were still carrying some of the costs and still referring to personal expenses -- personnel expenses in the second quarter it's also important to say that during that period we also posted nonrecurring items in the second of 2013.

Items related to the termination of agreements of some officers of the company and when comparing the second half of that year in the first quarter we also recognized R$20 million in stock options of the company both nonrecurring in 2014 and together with a very severe reduction in our headcount of about 50%. So this significant reduction in personal costs occurred in the first and second quarter.

As evidence firm actions have been taken to reduce operating expenses mainly related to cost arising from maintenance of the Solimões structure, SG&A expenses showed a 49% reduction and the focus on cost and expense reductions had a positive effect on third party services down by 15% year-to-date.

It’s also important to emphasize that unlike 2013 when there were ongoing drilling campaigns and consequently exploratory expenses were allocated to intangible assets, maintenance expenses and expenses related to operating agreements of Namibia and mainly in Solimões in 2014, they’re directly allocated to that period.

So in conclusion for that slide the company posted a net income of R$10 million approximately in the second quarter and R$11 million in the first half of 2014.

Now going to the Slide number 8 and now referring to more financial figure, the company ended the second quarter of 2014 with a consolidated cash position of R$365 million up 19%, these at the end of the first quarter of 2014 and comparing that to our position at the end of 2013, that decision only considering liquidity results, posted an increase of 135%.

It’s also important to highlight our cash generation position amounting to and we have a small chart that shows the cash flow of the company, cash operating was R$149 million in the first quarter, which can be measured by the difference business between inflow and disbursements.

In addition to all inflows coming from divestment programs totaling R$47 million this quarter, basically coming from a partial collection of sales to Rosnička and the conclusion of sales of one more helicopter during that period.

I would just like to remind you that in the first half and more specifically in the first quarter, we settled with BP the outstanding balance for the acquisition of Polvo included in disbursements amounting to R$163 million in that some of our cash flow and we also settled in an anticipated fashion the loan that we took with Credit Suisse for the acquisition of Polvo amounting to R$96 million an disbursements.

Now I turn the floor to Milton.

Milton Romeu Franke

In a nutshell, we tried in this conference call to be very brief in the presentation of our results because we want to leave more time for the Q&A but in a nutshell, we are quite aware of the challenges that we have ahead of us, but I am happy with the results achieved this far. HRT had a step change in our growth with our cash provisions, operating revenues and zero debts.

This first half will also be remembered for adjustments in the company’s organization with new Board members and new executive officers and as you could see with a strong cost reduction.

The implementation of initiatives to achieve a greater operating efficiency are already part of the company’s daily routine. So we have new goals that need to be achieved in the coming quarter and the operation of Polvo for seven consecutive months now have shown that HRT has the know-how to operate in offshore field, but we’re aware that we need to implement initiatives to not only increase production, but also to reduce unit costs in the field so that Polvo may have a long lasting future.

I would like to thank you all for joining us in this conference call and together with HRT’s management team we remain available to answer questions that you might have. Again thank you very much and less move to the Q&A.

Question-and-Answer Session

Operator

Ladies and gentleman, we'll now begin the question-and-answer session for analysts and investors. (Operator Instructions) Our first question comes from Gustavo Gattass of BTG Pactual.

Gustavo Gattass – BTG Pactual

Good morning. I have two questions. Perhaps you could help me here.

My first question is I would like to get a sense of what have been defining this price discount against the Brent price that you managed it. Just wanted to get a sense that if this is something quite hectic, onetime thing, because it’s difficult to call it a trend we have just one or two data points, but do you think that a narrow spread is something that could be considered viable for the future.

And my second question is I think that you briefly mentioned at the very end the process of selling assets in the divestment program that the company has adopted. Any news there? Any novelties coming along or is the process continuing at the same pace as before? Anything that we should expect in the future?

Ricardo Bottas Dourado

Good morning Gustavo and thank you for the question. I will answer the first and Milton Franke will answer the question about the divestments. As for the price in this income statement that we included in the presentation and we posted the final price and as you mentioned the type of oil at Polvo which has a 20 to 23 degrees API has a discount level, an average discount level that we have presented in the previous quarter that is somewhat volatile historically following the results of the last two years when he had this average price determined by commercialization and directly by Maersk and BP.

They would sell each shipment and that discount varied from 6% to 9% of the Brent price. So there is some volatility there and this was basically stemming from the window for the oil shipment and this depends on the expectations and on the refineries’ expectations of receiving the oil and then also depends on market movements and market demands.

So we have no correlation -- direct correlation with the brand, but the contract that we have with Glencore set forth that in each aspect we have a spot price to sales. So we’re subject to this kind of volatility within this range. So I cannot say that it is established discount that we’re going to enjoy. I hope that this is clear.

Gustavo Gattass – BTG Pactual

Yes. Thank you very much.

Milton Romeu Franke

Still what I can add is that we had three shipments and the first shipment was a sale of HRT since we had a closing with BP. This shipment in January was negotiated according to the previous structure BP and Maersk. The second shipment was sold as per the agreements with Glencore and we saw a better discount and hopefully we will continue following that line.

Historically we’ll be able to see how this goes. We’ll start creating a base where this kind of oil sell for a good benchmarking that you can use is this type of oil and the price that it is sold for.

Gstavo is a pressure to have you on Board this conference call. As for the sale of assets, we continue with a strong activity of divesting. One is IPEX. We are receiving proposals from companies interested in acquiring that asset and also are blocks and licenses in Namibia. We are in a very strong discussion with a number of international players. They are trying to get into the African business and we’re hopeful that we’ll be successful in farm-down in Namibia.

Our main goal in Namibia -- well we’re entertaining some discussions with the local government is to extend the period with no compulsory investments specifically in drilling because any drillings today in the current environment while the preparation in a country like Namibia can take over two years.

I believe we have three helicopters, one Embraer plane for sale and we were able to rent one aircraft temporarily for a company that is operating in Brazil and this was a very good inflow of capital. So IPEX and Namibia are the two major assets that are closer to be divested in our divestment program.

Gustavo Gattass – BTG Pactual

Thank you very much.

Operator

Our next question comes from Vicente Benlloch of Bank of America.

Vicente Benlloch – Bank of America

Good morning, everyone. I have two questions. Firstly, when can we expect novelties in this gas monetization feasibility study? Any sense when this will be completed? And my second question is just a confirmation one.

You’re trying to have a farm-down in Namibia, right? So you’re seeking a 100% carry. So you’re now willing to have drilling CapEx in Namibia. Is that so? I just want a confirmation please.

Milton Romeu Franke

Vicente, good morning. Solimões gas monetization project, this Memorandum of Understanding that we signed with road map in Petrobras has narrowed down quite a lot the alternatives in the feasibility study.

We are basically now analyzing two alternatives. One is to gas in Solimões LNG and we’re including a number of alternatives there. Including LNG they can close the production site and the second one is thermal energy for the production of electricity and this would be injected in the national system FIN.

We have some companies talking with us that are interested in gas. At this point we have no clear feasibility of a short term result. But I can tell you that our feeling is that given the Solimões gas particularly given the national scenario in Brazil of the lack of energy while this gas is being valued and there are number of companies trying to get to know more Solimões and trying to find an alternative to put this gas in the market.

As for Namibia, the current situation is at Namibia we have practically 80% in our four exploratory licenses. Our feeling is that the companies should have a lower exposure to the risk in Namibia.

Although we are convinced that we should continue in Namibia because it has a high discovery potential in these licenses. This year it is not new. A number of international events are taking place in Namibia in South Africa and the oil industry is looking at these countries.

And the fact that we have some companies in these events is good for us because we’re taking this opportunity to announce our data. We’re participating in these meetings. We’re making presentations and a lot of companies are showing interest in eventually investing in Namibia. Our goal is to reduce our stake. At the same we’re negotiating with the Namibian state owned company to have them participating in the assets and extending the deadlines that we have with the government of Namibia.

At presents, things seem to be unfolding quite well. Namibian Government seems to be interested in partnering with us and they’ve got oil companies internationally also directing their eyes to Namibia.

Vicente Benlloch – Bank of America

Thank you, Milton. Thank you very much.

Operator

Our next question is from Andrew Reider from Credit Suisse.

Andrew Reider – Credit Suisse

Hello and thank you very much for this call. I have three questions Milton and Ricardo. First regarding Polvo.

Today you have visibility for one recompletion of a well and a new well or is that right or you could still do more CapEx for that? I would just like you to tell me about the cost of the new well or recompletion and what is the lifespan of the field? So that’s my first question.

My second question is whether the discussion with the adjacent field is something relevant that we should look into it and the third question is just a refresher on the exploratory period of Namibia. When that ends and what is the current negotiation status with the government?

Ricardo Bottas Dourado

Andrew thank you for your question. I just want to make sure I understood your question. So you asked me whether the planning of Polvo in terms of the wells is still underway because we also announced the possibility of a work over so I don’t think -- maybe you didn’t understand whether it’s a work over or a new well. So you just want me to give you an update on the well development and second question relates to monetization of Polvo?

Andrew Reider – Credit Suisse

Yes two, about Polvo. I remember that back then there was a debate concerning the possibility of a reservoir that would be split between [two] (ph) I don’t know whether that is something relevant or not. I just want to hear something to that end and the first question refers to Namibia. Okay so let me just give the floor to Milton.

Milton Romeu Franke

Andrew I am happy to see you in this call. Regarding Polvo’s development, the plans are still the same, but the more we study Polvo the more upside we find and therefore we are not -- I wouldn’t say redoing it but we are mainly improving the initial plans.

During my presentation I said that Polvo, we drilled almost 50 wells, exploratory wells and then 36 development wells and today there are only 10 producing wells and one water injection well.

And once we analyzed the 36 wells in the fields we were able to identify some possibilities of simple work overs that may result in an output increase in the field but because these are lower cost work over we are putting priority in the study of these potential workovers.

So second point is that when it comes to drilling, the development wells that it was already estimated and also to use the non-development well deposit, these reservoirs are about six kilometers away from the platform and in order to drill these wells with the rig that we have already in place in the platforms we would need to make some reviews and adaptation.

We have to replace some basic equipment like top drive floating devices, which takes about six months until setup is completed. So drilling process will only be initiated by November or December of this year.

So our current plan is that in the short run we will make one or two workovers aiming at increasing oil production and by the end of the year, we would start the drilling process because by then the rig will be totally prepared and we will have all of the necessary licenses to conduct the drilling.

Ricardo Bottas Dourado

I would just like to add one more thing to Milton’s answer and then I will go back to your second question. If you remember when we posted a report of our results by the end of December, we talked about the three possible landscapes until the development of 2P in CapEx, a 2P and also the reserves.

One for an approved reserve and not yet developed and one for a 2P even though it doesn’t cover the resources for the 3P, but the original plan is that what we are doing we are currently updating the model to verify possible results that may stem from these workovers coming from wells that were abandoned or have been previously drilled, so in terms of two initial wells, so that decision is still maintained. Yes it is.

Well, regarding Polvo’s utilization, this is still a subject under consideration and there isn’t much I can say because ANP is still looking into the matter but I can say that part of the producing reservoirs and the adjacent fields to Polvo and the ring fence is an issue that is currently being analyzed. We’re looking at all the technical and legal aspects but at the moment, I cannot volunteer any additional information.

Now referring to the exploratory period of the blocks or licenses in Namibia, there are different periods here because each license is a different case. One of the licenses, which the term was for August or June we already informed the Namibian Government that we wanted to renew the licenses and look for an expansion to the license and we already met with delegates from the Namibian Government and the President of Glencore, which is a state owned company and we are now preparing all of the necessary documentation required to renew all the licenses in Namibia in an attempt to avoid delay so we hope that we should have two or three years with that commitment for the foundation.

Now adding to that answer and also to give you a more objective information, on Item 21 of quarterly information you will have more detail regarding licenses and everything that has been done up to now for Solimões and Namibia as well.

Andrew Reider – Credit Suisse

Thank you very much. The idea of the format in Namibia is still very feasible, right? If you could would you like to operate it or you could do 100% farm-out or have a lower stake.

Ricardo Bottas Dourado

Andrew, as part of our objectives, I do not want to drill down into our strategy, but what we want at HRT is to think for alternatives that are positive that generate positive results and concrete results in our account and so we’re open to talk about that operation.

We do not want to be operators at that totally Solimões or Namibia, but if it is important we will have operators, but if we see any opportunity with that being to sole operators we will certainly be on the other side of the discussion table and we will do the best we can. What we concluded that Namibia, in order for all of the several basins of the country, have a good and more aggressive exploratory program with greater continuity.

It’s important that it attracts companies with a stronger investment breadth and we are now talking to several large international oil companies and this current debate has been so far very successful and so we hope to give investors good news very soon. So thank you very much.

Operator

Our next question is from Philip Spencer from JPMorgan.

Unidentified Analyst

Good morning. Hello here is [indiscernible] I have two questions and in fact it's just the continuation of some of the topics that have been mentioned here.

Number one, Namibia. Milton, could you tell me a little bit about the development of Kudu. I think more recently, I’ve heard that you were reviewing that and it would be another change in partners and then you were reviewing that subject.

So I just want to know whether the Kudu gas project is advancing or rather this would be any -- I know that will have a positive impact but whether there are some adjacent areas to the region that would have probably have some gas. So how will that change your outlook for the blocks that you have close to Kudu.

And the second question, on the tale of the webcast of last quarter you said that one of the initiatives would be look for opportunities similar to that of Polvo, more mature fields and with more careful work that you could probably improve productivity. Certainly I do not expect you to give me a lot of detail but I just want to know the current status of the situation whether the companies still see good opportunities in these kinds of projects.

Milton Romeu Franke

Hi. I am pleased to see that you’re participating in this call and I remember once we participated in the same company. So starting with your first question, one important progress related to that subject is that as in Namibia the demand for energy is growing considerably. South Africa seems to have certain difficulty to supply power to Namibia and the Nigerian Government.

The Namibian Government is trying hard to find a feasible solution to Namibia and in terms of the potential development of Kudu. Currently I don’t have anything new to tell you. We are just adjusting the database of Kudu but I don’t have any information of any large company that is determined to invest.

At the same time, we noticed that many of the companies that approach us stay in area that is between Kudu and the Namibian Coast is an area that is merely more attention in the last few months than today.

We see some apparent interest for Kudu or PEL 22 but as what happens in South Africa and the world market there is a scarcity of assets being offered to large companies. So Namibia seems to be now on the spotlight and also attracting many large companies and many of the large international companies.

Now as to your second question, that was on Polvo. As I said before, we’re extremely pleased with the fact that we acquired 60% stake of BP and we are operating with operating efficiency showing that that not only HRT was able to drill in deep waters offshore, but also we are very eligible in offshore drilling and further step is Maersk because we already signed an agreement between HRT and Maersk and we’re just waiting for a transfer of the 40% stake at Polvo.

With this second transaction, we would then hold a 100% stake of Polvo and at the same time we are now also identifying other opportunities. We have received some offers of other production fields outside Brazil and that would be our second priority. The first priority is still Brazil and the top priority in Brazil is the Campos Basin.

Logistics for production has costs certainly so if we can serve our work in two fields in logistics terms this will represent a significant cost reduction. So we’re also looking for other assets in the Campos Basin.

Some of them have already been identified. We have started some talks to them and nothing is already firm or has been materialized. But there are also other Brazilian basins to be considered.

We have some assets on ocean and land basins that we’re looking in Brazil onshore and offshore. So to conclude that subject, I must say that HRT we consider that its entry is positive and we intend to move on in that direction. We intend to reduce our exposure to exploratory asset and increase our stake in production assets particularly oil production in the next month and years to come. Thank you very much.

Operator

We are closing the question-and-answer session. I would like to give the floor to Mr. Milton Franke for his final remarks. Mr. Franke, go ahead.

Milton Romeu Franke

Well I would like to thank all of you joining us in this conference call. To us, the management, it is always important to talk with you because you cover the industry and we have an opportunity to do so in the end of every quarter.

I would like to thank those who participated with questions. Your questions were very pertinent. To us it is always very relevant to know what kind of questions you have in mind. I would like to highlight that we’re trying to be also more efficient in these presentations.

In the second quarter, our presentation had a very reduced number of slides. This was on purpose. We are trying to optimize our conversation with you. So my take home message here is a positive one. We the management of HRT are extremely happy with the way our activities are unfolding. The HRT teams are a lot smaller today than they were in the past and still we have been able to cope with all the workload.

We have introduced measures that are oftentimes not welcome by people. We have to be very careful in introducing these measures and I think that we’re dealing with this quite well. To end we are convinced that this growth path for HRT can continue in the coming quarters. This is what we hope to have. I wish you all a great day.

Operator

That does conclude HRT’s conference call for today. Thank you very much for your participation and have a good day.

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