PetroRio - 1Q15 Earnings Results

RIO DE JANEIRO, May 14, 2015 /CNW/ - PetroRio¹ (current brand of HRT Participações em Petróleo S.A. – "HRT", "HRTP" or "Company", BM&FBovespa: HRTP3 and TSX-V: HRP.V) announces its results for the first quarter of 2015 ("1Q15"). The financial and operational information below, except if otherwise indicated, is presented on a consolidated basis and stated in thousands of Brazilian Reais (R$) according to the International Financial Reporting Standards (IFRS), including our direct subsidiaries: HRT O&G Exploração e Produção de Petróleo Ltda., HRT Africa Petróleo S.A., HRT America Inc. and their respective subsidiaries and branches.

MESSAGE FROM MANAGEMENT

PetroRio continued overcoming great challenges in this first quarter, working hard to come out stronger from this challenging scenario. The decline in Brent prices, coupled with the tough macroeconomic scenario which has been affecting the Brazil, particularly the oil and gas industry, created challenges in terms of hiring services and cutting costs, but the Company has been recording healthy results by following the strategy initiated in 2014.

Among the examples of success, it is worth mentioning the improvement in the Polvo field's production curve and the excellent levels of operational efficiency, achieved through actions such as the improved management of underwater centrifugal pumps and the maintenance of process plants, besides the understanding of the reservoir as well as the reduction in unit costs.

Between January and March 2015, total production in the Polvo Field came to 842,343 barrels. It is worth noting that operational efficiency averaged 98.8%, one of the best figures in the entire Brazilian offshore.

Note that it is part of PetroRio's strategy to sell higher volumes to reduce freight costs and ensure lower discounts regarding Brent on the final price of each sale, which effectively occurred regarding the off-take in April. Following this guideline, the Company did not sell oil in 1Q15.

In a scenario which combined Brent prices approximately 49% lower than that of 1Q14 sales, a reduction in operating costs and expenses implemented by the Company was crucial.

In 1Q15, PetroRio recorded negative adjusted EBITDA of R$14 million, impacted by the Company's decision not to sell oil in the quarter.

On April 21, 2015, PetroRio sold approximately 623 thousand barrels of oil, at an estimated price of US$48.3 per barrel (already discounting the adjustments due to logistics and product quality), generating revenue of approximately R$92 million.

If 1Q15 production plus the inventory in December 2014 had been sold within the quarter itself, adjusted EBITDA would be positive by R$1 million.

In line with PetroRio's strategy of operating assets already in production phase, the Company acquired 80% of the rights and obligations of the concession agreements related to the Bijupirá and Salema (BJSA) fields. After obtaining the relevant approvals for this transaction, the Company will begin the operational integration between the BJSA and Polvo fields in order to take advantage of synergies and reduce costs. According to preliminary studies, BJSA's production may triple PetroRio's current production levels, confirming the Company's position as one of the most important emerging companies in the national oil industry.

PetroRio's new corporate culture focuses on increasing production through the acquisition of production assets, re-exploration, operational efficiency improvement and reduction of production costs and corporate expenses. In this context, mitigating the exploratory risk is of utmost importance to consolidate this strategy and, the divestment of the assets in the Solimões Basin and Namibia is fully aligned with this strategy, in addition to resulting in a capital inflow for the Company. (click here)

PetroRio's management believes to be on the right track and that the year of 2015 will bring major new achievements for the Company.

OPERATING RESULT

BIJUPIRÁ AND SALEMA (BJSA) FIELDS

In January 2015, PetroRio entered into a sale and purchase agreement for the acquisition of 80% of the rights and obligations of BJSA concession agreements with Shell Brasil Petróleo Ltda. ("Shell"). The remaining stake is held by Petróleo Brasileiro S.A. - Petrobras. The transaction also included other assets, among which the FPSO Fluminense platform, which is used in the production of both fields and has storage capacity of 1.3 million barrels of oil. The acquisition value agreed between the companies was US$150 million and is subject to adjustments. PetroRio will finance 80% of the acquisition with third-party funds and the remaining 20%, with its own funds.

The conclusion of this transaction is still pending certain conditions precedent, including approval of the assignment of rights by the Brazilian National Agency of Petroleum, Natural Gas and Biofuels - ANP and acceptance by TSX Venture Exchange ("TSX-V"), where the Company's Global Depository Shares ("GDS") are listed. As a result, PetroRio will only become BJSA's operator after said approvals are obtained.

BJSA's daily production totals 22,000 barrels of light crude and 325,000 m³ of associated gas, equivalent to 24,000 boe/day. These fields, in water depths of 480 and 850 meters, are located in the Pre-Salt polygon, just 80 km northeast of the Polvo Field.

POLVO FIELD (click here)

The Polvo Field produced 842,343 barrels (100% of the field) in 1Q15, with daily natural gas output averaging 28,143 m³. Currently, 97% of gas produced is used as fuel in the field's activities.

In the first quarter, average operational efficiency reached 98.8%, reflecting an excellent improvement in Polvo's operation: in 2014, this average was 93.3% and in 2013, 79.8%. Since PetroRio began to be the field's operator in January 2014, production levels have become more stable and fewer interruptions are being registered. It is worth mentioning that Polvo's operational efficiency reached 100% in March 2015.

According to the ranking disclosed by the ANP, PetroRio is the seventh largest operator of oil-producing fields in Brazil and its daily average oil production per month since January 2014, considering 100% of the Polvo Field's output, is shown below: (click here)

At the end of March, the FPSO platform's oil stocks totaled 643.1 thousand barrels, 562.9 thousand barrels of which related to PetroRio's stake in Polvo.

As part of the Company´s strategy to sell higher volumes aiming to reduce freight costs and ensure lower discounts regarding Brent on the final price of each sale,, PetroRio decided to postpone the sale of its 1Q15 oil production. The Company believes that the strategy yielded positive results, given that the sale price on April 21, 2015 was estimated at US$48.3 per barrel (already discounting the adjustments due to logistics and product quality).

As part of its plan to reduce operating costs, PetroRio concluded renegotiating contracts with its main suppliers, including the revision of scope and pursuit of synergies. The Company expects positive impacts to be better perceived as of 2Q15. (click here)

In the first quarter, manageable operating costs in the Polvo Field (100% of the field) amounted to US$30.9 million, 3% down on 4Q14 and 17% down on 1Q14.

Operations in the Polvo Field reached 1,000 days without accidents resulting in sick leave in March 2015, confirming PetroRio's commitment to the environment and the safety of its employees.

MAERSK TRANSACTION

PetroRio entered into a purchase and sale agreement with Maersk in July 2014 to acquire 40% of the exploration, development and production rights in the Polvo Field area. In October 2014, the ANP informed the Company about the denial of this assignment request. This authorization depends on compliance with requirements whose deadline is still ongoing. The Company, Maersk and the ANP are currently negotiating to solve said pending issues.

UNITIZATION

In June 2013, the ANP approved the Development Plan of the Tubarão Martelo Field, of Óleo e Gás Participações S.A. ("OGpar"), and determined that the Plan's review should be presented by December 31, 2014, including "the submission of formalization of the Production Individualization Agreement (or Acordo de Individualizaçao da Produção - AIP) related to the extension of reservoir to the Polvo Field area".

Given there were no negotiations between PetroRio and OGpar regarding making use of or dividing the operating results of the Tubarão Martelo field, on August 5, 2014 PetroRio requested from the ANP an integral copy of the administrative proceeding which approved said Development Plan.

Since then, the parties have been discussing the matter within the ambit of the ANP without reaching an understanding.

As previously disclosed in the 2Q14 Earnings Release, PetroRio's technical staff has already prepared a Development Plan to be submitted to the ANP regarding the extension of Polvo Field's lifespan, which foresees, among other measures, increased production from producing wells.

SEDIMENTARY BASIN OF SOLIMÕES

PetroRio and Rosneft Brasil E&P Ltda, a Brazilian subsidiary of Rosneft Oil Company, continue to negotiate the transaction related to the sale and transfer of the Concession Agreements located in the Sedimentary Basin of Solimões, in the state of Amazonas, Brazil.

The Company adopted initiatives to control costs and preserve cash, reducing the recurring disbursements until the conclusion of the transaction. Among these initiatives, the end of the agreements with suppliers, the closing of logistics support bases and the 30% reduction in personnel costs are the highlights.

NAMÍBIA

PetroRio is carrying out the farm out process of the licenses it maintains in Namibia. With the end of several activities in that country, the monthly expenses were drastically reduced and should remain at approximately R$60,000 per month as of 2Q15. (click here)

In 1Q15, PetroRio posted negative adjusted EBITDA of R$14 million. This result was strongly impacted by the Company's decision not to sell oil this quarter, postponing said sales to a future opportunity, due to the prospects of larger transactions normally resulting in cost optimization. As a result, PetroRio understands that the strategy adopted was positive, given that Brent prices recovered in April compared to the last three months.

In the end of April, the Company sold approximately 623,000 barrels of oil, generating revenue of R$92 million. It is important to mention that revenue is recognized after the product is loaded and the oil is transferred from the FPSO platform to clients' cargo vessels.

In a comparison basis, in 1Q14 PetroRio concluded two sales, totaling approximately 630,000 barrels exported (net for the Company).

Non-cash amortization and depreciation costs totaled R$5.0 million.

As the Company did not sell oil in 1Q15, production costs were registered as inventory. The amount of R$82.3 million reflects the market value of this inventory, considering the best sale value estimate at the end of 1Q15. Of this amount, R$27.8 million did not impact cash generation. Inventory net sales value comprises the estimated sale price minus the estimated costs of conclusion and those necessary to execute the sale. The Company constituted a provision for losses totaling R$19.1 million, reflecting the market value of its oil inventory.

Geology and geophysics (G&G) expenses totaling R$76,000 confirm the Company's new strategy, focusing on production assets and divestment of exploration assets.

PetroRio has been going through a corporate restructuring, optimizing its workforce and adjusting personnel costs to its new reality.

The Company ended March 2015 with 82 employees (27% fewer than in December 2014), which already reflects the demobilization of personnel from the HRT America subsidiary. First-quarter own personnel expenses amounted to R$6.7 million, 38% down on 1Q14. Personnel expenses are net of the amount allocated to Polvo and Solimões, and offset by partners proportionally to their stake in these projects.

General and administrative expenses contracted by R$6.5 million in 1Q15 over 1Q14, equivalent to 53%. The end of various agreements related to exploration activities in the Solimões Basin, including drilling rig rental, contributed to this reduction in expenses. Expenses with maintenance and the operational agreements in Namibia and Solimões are allocated directly to the results.

Third-party services expenses totaling R$5.8 million reflect the demobilization of the bases in the Solimões Basin, in addition to non-recurring expenses with the termination of agreements related to this project.

It is worth mentioning that in 1Q15 manageable costs and expenses declined by 35% in USD compared to 1Q14. The Company estimates that additional reductions should be recorded in 2Q15. (click here)

In 1Q15, the financial result was a loss of R$15.8 million, composed of financial revenue of R$59.9 million and financial expenses of R$75.7 million.

The net result was negative by R$53.5 million, influenced by the Company's decision not to sell oil in the first quarter. As previously mentioned, if PetroRio had sold oil in 1Q15, adjusted EBITDA would be positive by R$1 million.

The charts below show the quarterly variation of the main groups of accounts in PetroRio's Consolidated Income Statement. (click here)

TOTAL CASH, CASH EQUIVALENTS AND INVESTMENTS  

The Company closed 1Q15 with a cash position of R$362.1 million, basically allocated abroad, most of which in U.S. dollars. Among the factors which explain the 19% reduction over December 2014, it is worth mentioning the following:

• Net positive impact of R$54 million resulting from the exchange variation in the period;
• Disbursements with costs, operating expenses and the payment of royalties (net of cash calls) totaling R$67 million;
• Disbursement of R$83 million for the acquisition of the rights and obligations in BJSA concession agreements and other assets, including the FPSO Fluminense platform. The amount paid corresponds to 20% of the total transaction amount;
• Disbursement of R$2 million related to the Solimões project;
• Capital inflow of R$13 million related to the sale of four helicopters.

The Company's cash flow is summarized below and includes the main financial transactions between December 2014 and March 2015. (click here) 

It is worth mentioning that at the close of March 2015, the volume of oil in inventory related to PetroRio totaled 562.9 thousand barrels, equivalent to R$82.3 million, while in the end of December 2014, inventory stood at 57 thousand barrels, equivalent to R$8.1 million.

The chart below shows the variation in the Company's consolidated cash and cash equivalents as of 1Q14, which increased throughout 2014. If the sale of inventory registered at the end of March 2015 is considered, cash and cash equivalents remained stable in 1Q15 over 1Q14, despite the decline in Brent prices. (click here) 

CONVERTIBLE DEBENTURES

In 4Q14, the Company issued 4,359,624 debentures convertible into common shares (1^st Convertible Debentures Issuance), which generated proceeds of R$87.2 million.

The debentures will mature in five years and can be convertible into shares at the sole discretion of the debenture holders, from October 24, 2015 until its maturity, on October 27, 2019. The compensatory interest corresponds to the accumulated variation of 90% of the daily average DI rate - Over Extra Group (DI Rate), with half-yearly payment, being the first installment payable six months after the issue date.

A portion of the proceeds raised with this debenture issue was allocated to cover 20% of the amount paid on the acquisition of the rights and obligations of the concession agreements related to the BJSA fields, the Fluminense FPSO platform and other related assets, as announced in January 2015. The remaining 80% should be financed through export pre-payment operations led by Glencore Ltd., a wholly-owned subsidiary of Glencore PLC. These export pre-payment operations will be used to replace the guarantee already granted by Glencore through a standby credit facility. (click here)

ABOUT PETRORIO

PetroRio is one of the largest independent oil and gas production companies in Brazil. PetroRio is the operator of the Polvo Field, which is located in the southern portion of the Campos Basin, Rio de Janeiro, holding a 60% participating interest in the field. The Polvo Field has Brazil's seventh largest daily production of barrels of oil equivalent (boe), with 20.3º API, deriving from three producing reservoirs. PetroRio is the owner, through its subsidiaries, of "Polvo A" fixed platform and a 3,000-HP drilling rig, currently in operation in the field, being the platform connected to the "Polvo FPSO" vessel, with capacity to segregate hydrocarbons and water treatment, oil storage and offloading. Polvo Field license covers an area of approximately 134,000,000 sqm, with several prospects with potential for further explorations.

In January 2015, PetroRio announced the acquisition of 80% of the Bijupirá and Salema Fields located at the same basin, the Campos Basin, at a distance of approximately 80 km from the Polvo Field, tripling its current daily production to more than 33,000 barrels of oil. Such acquisition is subject to the approval of Brazil's Council for Economic Defense (CADE) and the National Agency of Petroleum, Natural Gas and Biofuels (ANP). Furthermore, PetroRio is born of a new corporate culture focused on increasing production through the acquisition of production assets, the re-exploration and optimization of the Polvo, Bijupirá and Salema fields, increasing operational efficiency and reducing production costs and corporate expenses. The Company's main objective is to create value for its shareholders, protecting its liquidity and increasing revenue and profits, with full respect for safety and the environment. For more information please visit the Company's website: www.petroriosa.com.br.

Disclaimer

This document contains statements about future events. All statements other than those of historical fact contained herein are forward-looking statements, including but not limited to, statements regarding plans for drilling and seismic acquisition, operational costs, equipment acquisition, expected oil discoveries, the quality which we expect to produce oil and our other plans and objectives. Readers can identify these statements by reading several words such as "estimate," "believes," "expect" and "will" and similar words or their negative. Although management believes that the expectations represented in such statements are reasonable, it cannot ensure that such expectations will be confirmed. By their nature, statements about future events require us to make assumptions and, thus, such statements are subject to risks and uncertainties. We caution readers of this document not to place undue reliance on our forward-looking statements considering that certain factors may cause future circumstances, results, conditions, actions or events which may differ materially from the plans, expectations, estimates or intentions expressed in said statements regarding future events and assumptions that support them. The following risk factors may affect our operations: the contingent resource and prospective resource evaluation reports involving a significant degree of uncertainty and being based on projections that may not prove to be accurate; inherent risks to the exploration and production of oil and natural gas;  inherent risks to the exploration and production of oil and natural gas; drilling and other operational problems; breaches or failures of equipment or processes; errors in contracts or operators; execution failure of contractors, labor disputes, interruption or decline in productivity; increase in material or personnel costs; downtime to attract sufficient personnel; requirements for intensive capital investment and maintenance costs that PetroRio may not be able to finance; delay costs; exposure to fluctuations in currency and commodity prices; political and economic conditions in Namibia and Brazil; complex laws that can affect the cost, manner or feasibility of doing business; environmental, safety and health regulation which may become stricter in the future and lead to an increase in liabilities and capital expenditures, including indemnity and penalties for environmental damage; early termination, non-renewal and other similar provisions in concession contracts; and competition. We caution that this list of factors is not exhaustive and that, when relying on forward-looking statements to make decisions, investors and others should also carefully consider other uncertainties and potential events. The forward-looking statements herein are made based on the assumption that our plans and operations will not be affected by such risks, but that, if our plans and operations are affected by such risks, the forward-looking statements may become inaccurate.

The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. Such declarations were made on the date hereof. We do not undertake to provide updates on statements regarding future events, except as required by applicable securities legislation.

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The Company's corporate name will remain HRT Participações em Petróleo S.A., until the modification is approved at the Shareholders' Meeting, in accordance with the Management Proposal already submitted. The Company's shares and GDSs will continue to be traded under the tickers HRTP3 on the BM&FBOVESPA and HRP on TSX-V until the new corporate name is approved and the request to change the tickers is authorized by the BM&FBOVESPA and the Brazilian Securities and Exchange Commission (CVM). The Company will keep its shareholders and the market in general informed of the progress of this process.

SOURCE HRT Participações em Petróleo S.A.

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Investor Relations: www.petroriosa.com.br, [email protected], [phone]