In 2014, the largest ever corruption scandal in Brazilian history engulfed the state-owned oil company Petrobras. Major cuts were suddenly seen across the industry, impacting huge projects with substantial amounts invested in them. It was the oil and gas companies, together with other key suppliers, that suffered the most due to a sudden pause in activity.
Fortunately, however, PetroRio is among the players in the industry that have taken some positives from the crisis. In terms of a countrywide perspective, the scandal caused not only Petrobras, but all its major suppliers, to embrace stronger governance and compliance measures.
The National Petroleum Agency has evolved from a historically bureaucratic regulator to a fast-paced and business-friendly agent
This shift created new opportunities for PetroRio, since its strong balance sheet puts it in a leading position with regards to buying assets in distress – such as those owned by Petrobras – in a market that also saw oil prices slide as Petrobras underwent all forms of public scrutiny.
The experience led Petrobras to adjust its strategy, rationalise its asset portfolio and seek a divestment agenda. This was seen by all to be very positive, considering Petrobras alone made up 94 percent of market share, and had to be able to cope with the necessary capital expenditure for all new bids undertaken by the government. The divestment programme plans to raise $21bn by the end of 2018, but some divestment processes still face challenges. Legal actions by oil workers’ trade unions attempt to keep state-owned assets from being sold to private corporations. Nonetheless, we do believe this will be overcome and give way to a new competitive landscape.
Divestment programmes
The Arctic Project is part of Petrobras’ $21bn divestment programme. Assets are packaged in clusters to make projects more attractive in terms of scale and logistics. The list of shallow-water assets which are of interest to us amount to approximately 50,000 barrels of BOE per day. PetroRio plans to adopt an aggressive strategy in its effort to acquire multiple assets from Petrobras’ divestment initiative.
Many international oil companies and financial institutions have already approached us, looking to carve partnerships for the bidding process, given our expertise in purchasing and redeveloping the Polvo oil field, which is located in the Campos basin. Regardless of any business partners, PetroRio is capable of buying several of these assets on its own due to its solid balance sheet.
Since most of these assets have been left aside by the operator in the past five to 10 years, we believe there are significant upsides for those that buy these assets. PetroRio was invited to all the tender procedures and is heading the field. Indeed, most other players either have other significant exploratory commitments on larger assets, or are already too leveraged to buy assets that demand significant investments to deliver the necessary upsides.
Some of these assets are located near PetroRio’s Polvo field, therefore there are some valuable operational synergies. There are of course several other M&A opportunities in Brazil being analysed and discussed with PetroRio at present, but few assets have such clear upsides as those from mature producing fields offered by the Arctic Project.
Growth strategy
PetroRio’s business plan is based on growth through the acquisition of oil and gas-producing fields. The company sees great opportunities in Brazil and also in other regions, such as South America and the Gulf of Mexico. These opportunities come not only from divestment plans from major oil players, but also from other smaller players reviewing their strategies since oil prices dropped in 2014. PetroRio has been maintaining regular discussions with local and international financial institutions that have shown interest in investing in the sector. Our strong balance sheet is free of debt and enjoys a solid cash position of close to $250m; this allows for productive negotiations, since banks and the companies selling the assets know we can close deals in a very short period of time.
As for organic growth opportunities, soon after Polvo was bought from BP and Maersk, PetroRio initiated the first stage of a comprehensive revitalisation plan to extend the useful life of the asset. During the first half of 2016, Polvo conducted well intervention and increased production by 20 percent. At that stage, the company’s goal was to increase production by revitalising its producing wells through workovers.
In the latter stages of 2017, investments were made in revamping the platform’s rig to prepare it for drilling activity, which will take place in early 2018. This will trigger the second stage of the investment programme. A two-well project is expected, with investments estimated between $40m and $60m, which will target up to 19.1 million barrels of undeveloped proved reserves and probable reserves, and test its certified possible reserves.
We expect to undergo further drilling during 2018 and 2019, and interventions in producing wells, such as enhanced oil recovery techniques, including other advanced technologies used in areas such as the North Sea.
To enable these investments, the company filed for a reduction in Polvo’s royalty rates, from the current 10 percent to the lower limit of five percent. The request, if granted, will extend the lifecycle of the field and increase its recovery factor and avoid premature decommissioning. It will also allow us to access and test undeveloped reserves and new geological horizons.
At present, the company’s operational efficiency rate averages 98 percent, much higher than the countrywide average of 85 percent. This high efficiency rating places PetroRio as a top-ranking player and a genuine benchmark for the industry. This was achieved after we underwent a strong switch in company culture between 2014 and 2016, a move led by the new management. Furthermore, through the active measurement of indicators provided by world-class systems, and a strong sense of urgency, we helped implement the changes that were needed to decrease the number of shutdowns and enable investments through a maintenance programme. A lot of hours were also put into innovation and training for our people, while a new health and safety programme was also successfully introduced. As a result, PetroRio achieved the incredible mark of 2,000 days without lost-time injuries, and is now part of the select group of companies with the Great Place To Work certification.
Acquisition of Brasoil
The acquisition of Brasoil was aligned with the company’s business model, which is driven by acquisitions, and represents a diversification of PetroRio’s portfolio of revenue-generating assets, adding a natural gas field to reduce reliance in Oil-only assets.
Brasoil has a 10 percent stake in the Manati field concession contract, which currently produces 4.8 million net cubic metres of natural gas per day (approximately 30,000 BOE per day), placing it among the largest producing natural gas fields in Brazil. The concession also enjoys a take-or-pay contract with Petrobras, making it a strong cash-generating asset, with a 70 percent EBITDA margin.
PetroRio managed to acquire the asset at a low price. There are some significant tax benefits with the incorporation of Brasoil and we have identified some operational upsides which we are currently working on. With a low debt position and strong cash flow, we are also able to leverage Brasoil at an asset level for future investments and M&A opportunities.
Other Brasoil assets include a stake in the concessions of the Pirapema field – a natural gas asset currently in development – and an oil asset in Block FZA-M-254, both of which are located in the north of the country.
Now, and tomorrow
PetroRio went through a transformational programme when the controlling stake of Polvo was purchased in late 2013. Output had once peaked at 26,000 barrels of oil per day (BPD) in late 2010, but has been naturally declining ever since. Investments in Polvo’s redevelopment programme cost $13m, and saw an estimated increase of 1.7 million barrels in proven reserves and over 20 percent increase in production. With the incorporation of Brasoil, the Company now has the equivalent of an additional 3,000 BPD added to its production bringing it to 11,000 BPD in total.
PetroRio also carried out intervention with the use of advanced technologies, such as polymer injection tests in a producing well in order to reduce water and increase oil production volume. The result of these tests should help us in the next rounds of enhanced oil recovery techniques, which are estimated to take place between 2018 and 2019.
Investments in Polvo’s redevelopment programme cost $13m, and will see an estimated increase of 1.7 million barrels in proven reserves and a 20 percent increase in production. At the time, PetroRio increased its daily production, from 7,100 BPD (Q1 2016) to 9,000 BPD after completing these interventions. With the incorporation of Brasoil, we now have the equivalent of an additional 3,000 BPD added to our total production.
Brazil is living a fantastic moment in the oil and gas sector, with opportunities arising on many fronts. The National Petroleum Agency is playing its part in stimulating these opportunities. The agency has evolved from a historically bureaucratic regulator to a fast-paced and business-friendly agent. It has fuelled deals in the sector and ensured all rounds of bids are carried out within the original timeframe.
It is worth noting that opportunities are still arising in other regions of the world, not only from divestment plans already announced by oil majors, but from other smaller players who are reviewing their operations in multiple fields and focusing on large assets, as opposed to several smaller, more mature producing assets.
We expect to have some good news on the M&A front in the coming months, since the deal flow is high in the country and in other regions of interest. We also believe PetroRio will be the fastest-growing independent oil company in Brazil, being the best positioned company from a financial standpoint, while also targeting strong growth in the near future with our current investment programme.
