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Edited Transcript of QGEP3.SA earnings conference call or presentation 16-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 QGEP Participacoes SA Earnings Call

Sao Paulo Mar 16, 2017 (Thomson StreetEvents) -- Edited Transcript of QGEP Participacoes SA earnings conference call or presentation Thursday, March 16, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lincoln Guardado

QGEP Participacoes SA - CEO

* Paula Costa Corte-Real

QGEP Participacoes SA - CFO

* Danilo Oliveira

QGEP Participacoes SA - Production Direction

* Jose Milton Mendes

QGEP Participacoes SA - Exploration Superintendent

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Conference Call Participants

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* Frank McCann

Bank of America Merrill Lynch - Analyst

* Felipe Santos

JPMorgan - Analyst

* Luiz Carvalho

UBS - Analyst

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Presentation

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Operator [1]

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Good day, everyone. Thank you for waiting. Welcome to QGEP's Fourth Quarter and Full Year 2016 Earnings Conference Call. Today, we have here with us the executives, Mr. Lincoln Rumenos Guardado, CEO of the Company; Ms. Paula Costa Corte-Real, CFO and IRO; Mr. Danilo Oliveira, Production Director; and Mr. Jose Milton Mendes, Exploration Superintendent.

We would like to inform you that this event is being recorded and that all participants will be in listen-only mode during the company's presentation. After QGEP's remarks are over, there will be a question-and-answer session when further instructions will be provided. (Operator Instructions) There will be a replay facility for this call for one week.

Before proceeding, let me mention that forward-looking statements that might be made during this conference call relative to QGEP's business perspectives, projections and operating and financial goals are based on the beliefs and assumptions of QGEP management and on information currently available to the Company. Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions because 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 QGEP and could cause results to differ materially from those expressed in such forward-looking statements.

Now, I'll turn the conference over to Mr. Lincoln Guardado, QGEP's CEO, who will start the presentation. Mr. Guardado, you may begin.

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Lincoln Guardado, QGEP Participacoes SA - CEO [2]

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Good day, everyone, and thank you for participating in QGEP's Fourth Quarter and Full Year 2016 Earnings Conference Call. If you are following our presentation through website, I will start on slide 2. As we have mentioned in previous calls, 2016 was a very complex year, at the same time in terms of macroeconomic and industry conditions, but also full of opportunity. From the regulatory standpoint, key changes that took place in oil and gas will enhance the Brazil's attractiveness as a new frontier for global oil and gas companies to participate in. This regulatory improvement particularly is related to local content laws and the opening of the pre-salt to other operators, coupled with new bidding rounds already scheduled for 2017, are all propelling upward trend for the industry as a whole.

It is against this backdrop that we enter 2017, we will now present our operating and financial highlights for the fourth quarter 2016 and full year. The Brazilian recession directly impacted our activities, causing a decline in gas consumption in the country and consequently in the production at Manati, which ended the first quarter at 4.3 million cubic meters per day. As a result, we closed the year with an average production of 4.9 million cubic meters per day, and we expect to maintain these very same efforts for 2017. It is worth noting that Manati's production capacity remains unchanged at 6 million cubic meters per day with 2P net gas reserves for QGEP of 4.9 billion cubic meters in the end of 2016.

During the year, we took advantage of opportunities to add value to QGEP's exploratory asset portfolio. As you know, towards the end of 2016, we acquired the equity interest of two of our partners in exploratory blocks in the Foz do Amazonas and Para-Maranhao Basins in the Equatorial Margin. As a result, QGEP's interest in these blocks, all of which were acquired at the 11th ANP Bidding Round, is now 100%, and we are also the operator. Seismic data of blocks have been acquired and processed before the transaction, before this deal, and we are currently analyzing the data in order to define the next steps in these two (inaudible). It is worth noting that with these assets and the other high potential blocks that we acquired in the 13th ANP Bidding Round at Sergipe-Alagoas, QGEP now owns a substantial portfolio of potential farm-out opportunities. Currently, we are assessing the industry's potential interest in farm-ins and early indications down the interest from important global companies in the process gives us confidence that this could be a viable option for these blocks. Reducing our participation in these specific assets is part of adjusting our portfolio to our longstanding strategy of diversify our exposure, particularly to higher-risk exploratory assets. Thus, we plan to participate in a larger number of assets, but with reduced exposure in each one of them.

Regarding Atlanta, the FPSO Petrojarl I adaption work continues. We are confident that we can overcome technical issues that we have identified and that the vessel will meet timeline, as these are scheduled to arrive in the fourth quarter of 2017. Negotiations with Teekay, the company responsible for adapting the FPSO in Rotterdam and the company that owns the vessel are underway or advancing, and we're closely monitoring the situation. As a reminder, the output from EPS early production system will be marketed by Shell through an oil sales contract. It is also important to highlight that the goal of the EPS is to provide a pace for full development, aiming to get the most profitable long-term production system for this project.

Regarding Carcara, the meetings with stat oil have stepped-up and the operator has shown a willingness to address different aspects regarding the future production in Carcara, as well as solving the short term problem with regards to the parameters and discussions related to unitization. Our financial position remains quite solid. Despite this year's lower production, net revenue was BRL477 million with EBITDAX of BRL188 million or a margin of approximately 40%. Net income totaled BRL153 million, well above the previous year when we encouraged significant exploratory expenses related to the relinquishment of one exploratory block to ANP. We ended 2016 with a cash position of BRL1.3 billion, equivalent to BRL5.19 cents per share, which combined with our future operating cash flow is more than sufficient to finance our operations and Capex plans over at least the next two years.

I will now turn the floor over to our CFO, Paula Costa Corte-Real, who will discuss our operating and financial results in more detail.

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Paula Costa Corte-Real, QGEP Participacoes SA - CFO [3]

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Thank you, Lincoln. Let's start with Slide 3. As Lincoln already pointed out, Manati's daily output fell by around 12% in the year, reaching daily average of 4.9 million cubic meters in the year compared to 5.6 million cubic meters per day in 2015. This production decline was primarily related to the recession that we experienced in Brazil, which led to a decline in gas consumption in Brazil -- throughout the country, particularly in the Northeast region where we operate. In the comparison with first quarter of the present year, the decreasing production was approximately 28% from 5.9 million cubic meters to 4.3 million cubic meters per day.

On Slide 4, we can see that reduction in revenue was less than the decline in gas production, as we have (inaudible) contract in place for Manati Field for the production of the field, which includes the contract cost and annual price adjustment tax for the Brazilian inflation. As a result, revenues in the first quarter fell by 22% year-on-year, reaching BRL104 million. In terms, revenue for the year fell 4% to BRL477 million, reflecting the contract increase in price, which partially offset the decline in production.

Let's move now to Slide 5 for a closer look at our operating costs. The largest impact in 2016 was due to an increase in maintenance costs, which were about three times higher than service in the previous year due to the painting and maintenance activities up in Manati platform that began in the second quarter of 2016. On the other hand, the depreciation and amortization in the period decreased by 46% compared to the previous year due to a higher reserve based on which depreciation is calculated. Now considering the additional volume from the addendum to the gas sale contract of Manati Field signed in July 2015. In addition, we had the impact of exchange variation on the provision for abandonment impacting property, plant and equipment. Another instance of the oil production was the 39% reduction in special participation in the annual comparison. Taking all these into account, the year-over-year decline in operating cost was 5% from BRL253 million in 2015 to BRL231 million in 2016. The same structure impacted the comparison between the fourth quarters of 2016 and 2015. Despite increase in maintenance activities, we were able to reduce total operating cost by 21% in the comparison between the quarters. Operating costs totaled BRL55 million in the fourth quarter of 2016 compared to BRL70 million in the fourth quarter of 2015.

On slide 6, we will present general and administrative expenses which was decreased both in the full year and in the quarterly comparison. For the year, G&A expenses were around BRL50 million, down about 6% as a direct result of the Company's cost rationalization program throughout the year, attesting to our commitment to controlling expenses in a year of declining revenues. In the quarter, G&A expenses declined by 8%.

Please move to the Slide 7, which represents the profitability of our operations in a challenging year. We recorded EBITDAX of BRL37.5 million in the fourth quarter of 2016 with EBITDAX margin of 36%. In the year, EBITDAX totaled BRL188 million with a margin of 40% compared to BRL273 million in 2015. The low performance in both periods reflect three factors; lower production at Manati Field, non-recurring painting and maintenance costs and also higher exploratory expenses related to the acquisition of seismic data for blocks at the 11th ANP Bidding Round.

The Company posted an increase in net income in the annual comparisons, as you can see on Slide 8. The profit for the year 2016 was BRL153 million, 63% up compared to the BRL94 million posted in 2015, attesting to the profitability of Manati Field, which remained possible, even with a lower production. In addition, lower exploration expenses contributed to the higher profit for the year, as mentioned by Lincoln before.

On Slide 9, we present CapEx in 2016 and budgeted CapEx for 2017, 2018. In 2016, we invested $53 million, less than the $60 million budgeted, with almost half was spent on the development of Atlanta, the other half was spent in exploratory activities with most of it, $20 million, spent on the acquisition of seismic data for the blocks of 11th ANP Bidding Round and the remaining $8 million in blocks BM-S-8. For 2017, we're adjusting our budget as (inaudible) to $70 million in 2017, 60% of the expenditures will be concentrated again in Atlanta field and the remaining 50% in exploratory activities related to the blocks of the 11th Bidding Round and to block BM-S-8. This lower amount (inaudible) is due to the postponement of the drilling in Block CAL-M-372 and to the third Atlanta well that should occur only after the beginning of production in 2018. I underscored that our CapEx requirements for 2017 and 2018 amounts to $130 million, so we are 100% funded to meet these investments.

I now turn the call back to Lincoln for some further remarks, and then, we will open to questions.

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Lincoln Guardado, QGEP Participacoes SA - CEO [4]

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Thank you, Paula. During 2016, we continued to move forward in our project by trying to enhance our asset portfolio despite complex macroeconomic and industry conditions. Looking ahead, we are optimistic about Brazil's economic, bolstered by declining inflation and the onset of the cycle of lowering interest rates that began at year end 2016. These factors are gradually instilling greater confidence in companies and consumers.

In the global oil market, oil prices increased more than 50% in 2016, and there was less volatility than in 2015. At the same, oil and gas production increased in Brazil, mostly during the second half of the year. In 2016, oil and natural gas production in Brazil reached a record of 3.2 million barrels of oil equivalent (boe) per day. These events highlight our trust, vis-a-vis the positive outlook for the industry in the medium and long term and the resulting impact on QGEP thanks to the Company's current portfolio and potential (inaudible) valuation. In addition to the blocks in the Equatorial Margin and Atlanta, which I had already mentioned, we believe we have now a better visibility of Block BM-S-8 regarding the next steps related to the discovery of Carcara after Statoil's entry as the operator. The consortium is currently evaluating the availability of drilling rigs for the Guanxuma pre-salt prospect 30 kilometers southwest of Carcara and drilling work is scheduled to begin by year-end, subject to the award of the drilling license by IBAMA.

It is worth mentioning that ANP's new Bidding Round, which includes the extension of Carcara's reservoir area to the north adjacent to Block BM-S-8, is already scheduled for mid-2017. We believe that the completion of this round is key to define the field's development schedule.

We are also the operator and the sole owner of two high-quality assets in the Sergipe-Alagoas basin, which has been clearly showing potential in Brazil. We will look for opportunities to monetize these assets, primarily via farm-outs in these areas. We'll do the same for the newly acquired PAMA blocks from specific end premier, as I mentioned earlier. We believe that the current diversification of our portfolio gives us flexibility to potentially participate in more bids in a very selective way.

In this scenario, we are very well positioned to grow. We have a strategic and attractive portfolio and a deep understanding of the oil and gas sector in Brazil. We continue to carry out our long-term strategic plan, while actively exploring opportunities in the industry. In the last 12 months, we have added value to our portfolio by increasing our share in certain blocks without, however, losing sight of our high potential assets.

Manati Field remains a valuable source of revenue, EBITDAX and cash flow, despite its lower production, as shown by 2016 financial results. Considering that the field's production capacity remains unchanged, we believe that we will be able to increase production and consequently profitability as soon as there is greater demand for gas in the local market. We ended the year with a cash balance of approximately BRL1.3 billion, which provides ample funds to maintain our investments for the next two years. We remain confident that our operational capacity, the relationships build through partnerships with large companies and the diversity and quality of our asset portfolio put us in an excellent position to benefit from the sector growth projected for 2017 and beyond. Strategic investments and financial discipline are our trademark and will ensure our growth in the medium and long-term.

Thank you, and we are now available for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Frank McCann, Bank of America Merrill Lynch.

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Frank McCann, Bank of America Merrill Lynch - Analyst [2]

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Two questions if I might. One is just in terms of the price adjustments that I believe would have occurred at the beginning of the year, if you could just say what adjustment was made for the gas price coming from Manati for 2017? And then, secondly, looking at the market right now, obviously, oil prices have come off a little bit, but they're still at much higher levels. Thinking about the profitability of Atlanta as you're looking into 2018, 2019, what level of oil price do you need for that field to give you a return that you think will be acceptable? And perhaps, if you have a breakeven price that you estimate what that would be for Atlanta?

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Paula Costa Corte-Real, QGEP Participacoes SA - CFO [3]

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Frank, Paula speaking. Answering your first question about price adjustment in Manati, this is corrected by IGP-M in January, 6.7 this year, and Lincoln is going to give you further information about Atlanta point.

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Lincoln Guardado, QGEP Participacoes SA - CEO [4]

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Frank, Lincoln speaking. Thank you for your questions. If I may, I would like to comment on your question about the near future of the EPS, Early Production System, in Atlanta. Our current break-even point, if we consider production of 20,000 barrels or the average production, our break-even point, considering market conditions, logistics, infrastructure monitored to date -- by the way, these are considered things that -- these things may change over time due to the higher availability of the tankers $18 to $20 in the market. But if you consider the average production of 20,000 barrels, we are working today with a break-even point of $45 for Brent oil, which would be enough to generate positive operating revenue for the early production system in Atlanta. Should we drill a third well and -- well, first, we have to wait and see the result and the behavior of the reservoir, the flow assurance and other conditions in the field and there might be a drop -- a reasonable drop in the break-even point. And if you think about 30,000 barrels on average in three wells, break-even would be between $35 and $37 for Brent oil in order to keep on generating positive operating revenue. It's always important to remember that the EPS, the Early Production System, has the goal to provide us with early and anticipated information with good economics, even if it's at a marginal state, but that's for the full development system. So, we don't expect to see capital already with the early production system, but this is possible. It all depends on the output, we have a cap of (inaudible) barrels to process and also Brent oil prices. If these amounts are not reached, then we'll have to make a decision. If Brent goes down too much, we wouldn't even drill a second well or the third well naturally, we won't have a third well in this case. If production volumes and Brent are enough for us to have an increase in our net revenue, okay, then we are going to drill a third well. The idea is not to be too long with negative operating results, but there is no doubt that our outlook -- our idea is to maintain the EPS very close or perhaps even higher than a revenue that is high enough to pay our operating costs. And then, naturally, as the process unfolds, the external factors due to the Brent oil or increased factors related to the field, productivity and flow assurance, then we'll have to make the right actions so that the goal of having a positive operating flow is maintained. So that's our assumption early on and that's why we consider two or three wells; otherwise, we're only going to drill single well, but it wouldn't be enough to pay all our operations. So that's to be considered, and we have several thresholds to be evaluated, drilling of the well is one of them. And we have to sit down again and consider what to do with the agreements underway in order to maintain this positive operating revenue. So that's our intention right now.

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Operator [5]

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Felipe Santos, JPMorgan.

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Felipe Santos, JPMorgan - Analyst [6]

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I have a couple of questions, but just one follow-up question. It wasn't too clear to me, why is that the breakeven would drop from 47 or 45 to 37, could you please clarify that? And my questions are, we saw your CapEx for 2017, 2018. Are you considering your CapEx in terms of development of a plant, do you intend to drill a well in a full development system or is it too early to make that decision? Second question, with the sale of assets by Petrobras, are you considering anything, is there anything in your rate or do you intend to focus more on Atlanta -- on the transition to start having first oil as of next year? And my third question, Atlanta production would begin in January 2018, there would be a delay of a month or so or can we expect it to begin at the end of the third quarter? When will the (inaudible) arrive, when will it be positioned and when can it start operating once it is deployed?

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Lincoln Guardado, QGEP Participacoes SA - CEO [7]

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Okay. Felipe, this is Lincoln, and I'll try to answer the question related to Petrobras, then I will turn the floor to Danilo to answer your three other questions about the break-even point, reduction CapEx and first oil. All right. Yes, we sent a letter to Petrobras saying that we are interested. Of course, I think we even have to mention also of interest would be Carcara. But given the negotiation, there was practically no space for our option, they sold 66%. And of course, we could not make a bid for that. Also, there are some Petrobras assets, for example, some assets onshore and some assets that Petrobras is working in partnership with other companies, and these companies are bidding for those assets. And although some production data could be interesting to us, we are always comparing, not only the upfront payment, not the upfront money, but also future abandonment. For some assets, there is abandonment in the future, in the next 5 years approximately. And of course, we take that into account when we compare this operational aspect with our financial upfront payment. So, yes, we are -- yes and no, we are not actually looking at anything in particular at this point.

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Danilo Oliveira, QGEP Participacoes SA - Production Direction [8]

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Okay. Felipe, this is Danilo speaking. To answer your questions regarding Atlanta, first, the breakeven point dropping from 45 to around 35 to 37. This would be linked to an increased production by 10,000 barrels per day with no increase in operational cost. This would drive down our break-even to these levels, 35 to 37. The second question was about the CapEx. In 2017, we are concentrating all of the CapEx necessary to install the production equipment at Atlanta. And in 2018, the CapEx refers to the third well. So 2017, all the installation costs for first oil and in 2018, at Atlanta, the possibility of drilling the third well. And your last question about first oil, well, it is based on our agreements with Teekay. We're advancing in our negotiations with them, and we expect the FPSO to arrive the end of the year, and 60 days after the vessels arrival, we expect first oil. So that would give us first oil in the very beginning of 2018. Okay.

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Operator [9]

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Luiz Carvalho, UBS.

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Luiz Carvalho, UBS - Analyst [10]

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I have basically two questions. My first question goes back to Carcara. I think Lincoln mentioned publicly that we have to assess the part that is going to be unitized and that should be auctioned this year, according to government information. I would like to understand the rationale for this bid. I mean -- let's assume -- okay, an example. Let's suppose the subscription, the warranty bonus would be the same that you paid in the past or something similar to that. Would you be bidding in this new auction to buy this other part? I just want to understand in terms of using your cash versus your growth strategy looking forward. This is my first question. And second point has to do with growth. Lincoln, you talk a lot about growth. The Company has the cash position that would allow the Company to grow. But I would like to know how this would vis-a-vis as return? I have discussions with investors and it's hard to price that in the share performance, and how can we look at this in terms of financial return? Looking at Carcara, as an for example, if we got an investment done so far, I have today -- the information I have available, the return would be negative and the deal would be negative. So I would like to know how do you look at return flash growth? And my third question, could you give me an update regarding the farm-out you intend to carry out with the assets that you bought in the last bidding round?

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Lincoln Guardado, QGEP Participacoes SA - CEO [11]

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Luiz, this is Lincoln. Well, on the rationale regarding the bids, particularly for the external area of Carcara, I can tell you that our intention is to participate. Carcara is an important area for us in terms of long-term planning also. We expect production in the mid-term, but we have to consider long-term cash flow and high profitability given the quality expected for that oil. So our idea -- and I'd like to say that very candidly, our idea is that we're not going to be diluted there. Once through unitization, there will be some dilution, although it is a volume-related dilution. Theoretically, volume-wise, there shouldn't be an alteration, but we don't want to be diluted. Now, there are numbers positioned for that. It depends on the bidding, it depends on the bonus, it depends on (inaudible) and if there is any possibility that we can join a consortium. These are sayings that we are all trying to learn more about. These actions haven't started yet, at least for us, because all of the companies are still awaiting some of the decisions that are underway. Some have been taken, other does, local content with petro, which is the special tax program for the oil industry and other things that have postponed a future bid, any decisions to participate in the future bid. So this links to your other question, which is capital allocation, but still going back to the bid rationale, we have to think about divestment. In other words, we know that in the future, there is a postponement of investments, particularly in the equatorial area, promoted by the government itself, and this help us and will help us to plan our long-term investments. If these actions that are scheduled to occur soon and prior to the bid, if they do occur, then we'll be able to see what is our cash balance that we can make available for this kind of bidding. And we can analyze the interest on divestments. Again, we have to try to deleverage our exposure. When we do that, when we deleverage our exposure, which is a process that has started in a farm-out process, those have started, it is underway. Then, we'll be able to redefine our participation in the bid, particularly in BM-S-8 area. There might be other areas too and there might be other bids relative to concession, for example, outside this area. All of these things are happening in parallel. Are we willing to do it? Yes, we are. But we have to compare our capacity and our cash flow, the cash flow for Atlanta. Danilo mention that, we still have to work on the installation of equipment, et cetera, and we have to consider the cash flow only to consider the CapEx investments for the first phase of Carcara. So as we are today, it's quite difficult to position ourselves because there are external factors that will have an implication, and there are some intrinsic factors to all the companies, i.e., farm-outs, that will be able to guide us in this kind of exposure we should have. One fact is important, what we have today in considering the average risk versus possible potential return from our portfolios. I mean, we are not pressed to join the bid. We are in a reasonable position with short, mid and long-term investments and high-low risk, which is what we want to have, this kind of balance in our portfolio. And that takes me to your second question, how we see growth? Our growth doesn't necessarily have to happen through a CapEx increase. We can grow by diversifying routes. We have a 100% ownership in many areas. And one natural and potential way to do that is using part of the assets that we own today, to have an interest or stake another asset. I can reduce my stake in some assets, and I can join other assets as a way to using a generic term, to have a swap, to diversify exploratory asset. It is one way to grow, diverting this, and it always bring growth. We not seeking to do that right now, but it is something that we potentially can do as a result of so many bids that are probably coming up. That's where the NPD. It is important to highlight that we are still in the investment phase, right, the NPD. The NPD can be negative. Considering everything because we're still in the investment phase, there are some delays and so on and so forth. But our rationale has always to have the capacity to invest, and we'll definitely need to go to the market for development, there is no doubt about that, but there is no exposure there that -- we are not thinking of having an exposure. So as to have an overexposure of the company, this is something that we have not done, we did not do, and we do not intend to do. We want to invest in development, but it is always a concern, but this is very clear. It's clear that we'll have to go to market to use different instruments to fund our activities. This is how we are approaching the business. We always seek to have a profitability in dollars close to 15%, 20%. We try to do this kind of analysis, again, considering the elements that we can control, considering risks and premiums that we have seen so far. This has been our rationale, and I believe that it will continue in the coming years, even if there are growth opportunities that can arise through acquisition. Well, I answered little while ago a question about acquisition -- an acquisition considering where we've seen the market. There are some opportunities out there in the market. Some opportunities with very high short-term value, but that will give us a mid-term exposure related to abandonment, and the company is avoiding this kind of opportunity, even with the fact that we have seen a lot of that happening in the last six to eight months. And as for the farm-out question, I will ask Mendes to answer your question. Okay?

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Jose Milton Mendes, QGEP Participacoes SA - Exploration Superintendent [12]

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Hello, Luiz. As you know, we are in a farm-out process of five exploratory blocks where QGEP has 100% ownership in the high potential Sergipe blocks and have 100% in the two PAMA and SEALs blocks, given the exit of the original partners at the time of the bid. Our original plan was to start the farm-out now in March. But by the request of some companies, we began the process in December. There are many companies showing interest, some big global companies as mentioned. And we are quite excited with the progress of the process. We've had good input from the companies that came and participated in the data room for these blocks -- for the Sergipe block. As you all know, these blocks are high potential. Many companies that are interested are evaluating these blocks at the time of the day-to-day agree with our prioritization regarding these blocks acquired in the 13th Bidding Round. So that's what's Sergipe. We have just hired the seismic data for this year and beginning of 2018. And with 3D data, we'll have a true idea of the potential for the Sergipe block. For PAMA, we have preliminary 3D seismic data, and I can tell you that we are very, very satisfied with the results so far. And we now have a much better assessment of the block than we had before the bidding. With preliminary data, we are quite optimistic about these two blocks at PAMA. And the companies that are visiting us have shared our optimism regarding the potential of these two areas. And as for Foz, the results after the 3D seismic data assessment, the assessment was in line or a little over our expectation pre-bid. But Foz -- this a more difficult areas, so we are still waiting. We're in a comfortable position because we should wait for the results of the first wells to be drilled by other operators, BP, Statoil and others, and we are in a very comfortable situation. But we are quite optimistic regarding the success of our divestment in these five blocks, and we expect that by mid-2017, we should have a definition of the results of these negotiations.

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Luiz Carvalho, UBS - Analyst [13]

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Thank you very much. So by the end of the first half, we could expect more news on that, yes?

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Jose Milton Mendes, QGEP Participacoes SA - Exploration Superintendent [14]

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Yes, you're correct. By mid 2017, we should have the divestment process more clear.

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Lincoln Guardado, QGEP Participacoes SA - CEO [15]

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And this is Lincoln. If I may, I would just to like to add to Mendes' answer. I'm not going to say that everything that is happening in Brazil impacts the form-out processes. They will impact the bidding and impact the form-out process, so rules about local content. The issue was of an extension of REPETRO. All these elements that are coming up or have come up already, there is a proposal for local content, but the extension of REPETRO, the special tax program for the oil industry, all of these factors interfere with the process, will interfere in the bidding. I mean, we need to have these elements very explicit because not having them leads to legal insecurity, but it also impact all of the companies. The oil companies need this clear position -- to have a position and to be more comfortable regarding the farm-out process considering the pre-bids here in Brazil. So it is important for any process that company is selling at. In our farm-out, we need these rules to be very clear. This is absolutely paramount. It is critical for companies to make a final decision to sign a kind of investment they are willing to make in Brazil. We felt this when we talked to many of the players. Okay? All right, thank you. And it's a good thing that you don't have to rely on the TCU, the Court of Accounts.

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Operator [16]

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(inaudible), Morgan Stanley.

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Unidentified Participant [17]

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First of all, I would like to understand the (inaudible) and the platform painting. Is it -- do you have anything still pending, and what about the delay in the FPSO? It was scheduled to start by year-end and apparently, what happens before early next year? And next question about all the actions for cost reduction, what about the SG&A evolution for year 2017? Thank you.

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Lincoln Guardado, QGEP Participacoes SA - CEO [18]

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Hello, Ana. Answering the question about Manati's platform painting, we started doing this in mid last year. This operation requires a lot of logistics because it takes a supporting vessel connected to the platform all the time because it's not in habitat. We had $38 million spend in 2016; therefore, lower than our budget because we want to continue in the first quarter of the year. And we assume we will -- well, at least we want to be closer to our early estimates. So it should be around another 8 million to 10 million this year in order to complete the platform painting. As to Atlanta, as to the delay, like I said before in previous conference calls, it is no longer a technical issue. Technical issues were all solved. All these construction and building elements are aboard the FPSO. So everything is in Teekay's hands now. Teekay is managing the three elements that might comprise the final decision. So we are the chartering company, we have the banks, which fund Petrojarl's upgrade and the shipyard, because it required longer and more work at the shipyard, so these three elements, these three parties have to settle with Teekay in order to meet the schedule and the delay results from that because we had many different processes involving these three parties. But we are moving forward, and I think we are now more confident that they will meet the deadline, the date that we agreed upon in the last quarter of the year. Policy, again, as the G&A this year, like I said in my presentation, we've already made an effort in-house in order to adjust comps to the companies we already end the market reality. So we managed to have a good reduction and consolidating costs, the previous contracts. And even when it comes to headcount reduction, we also postponed some new contracts due to the delay in FPSO and Atlanta first oil. So BRL50 million is our G&A. And for the coming years, if you consider our track record, our G&A is between BRL50 million to BRL60 million, and going forward, we don't expect to see the same level.

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Operator [19]

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(inaudible), Citibank.

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Unidentified Participant [20]

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I have some question on cash flow. First of all, Manati. When do you expect to see this difference in take or pay in accounts receivable? And the second question is about Pacific. We also received the cash flow related to the pen or the minimum evaluation planning, BRL3 million. And the third question is about the credit with partners of BRL45 million. Do you have a guidance about when you expect to have this money, and what about the BRL45 million? Is it the total that OGX holds owes to the asset consolidating 100% of OGX debt or concentrating just part of it by OGX?

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Paula Costa Corte-Real, QGEP Participacoes SA - CFO [21]

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Just bear with us for a moment, Fernanda. With regards to the take or pay, Fernanda, by the way Paula speaking, this relates to Petrobras volume last year. I don't know if it was clear how we accounted for it, but it comes as an advance payment versus a liability, which is our obligation to deliver the gas. The interested company has not had this cash yet. It is still posted as a receivable amount from Petrobras. This figure is what we accounted for BRL19 million. This is the number that is still at the final stage of adjustment with Petrobras. And as soon as we close the figures, the payment will be made. We don't have a specific date yet, but we know we are at the end of the process to set this amount with Petrobras, so payment be made in the coming weeks or coming months. So that's not something we expect to take long to happen. It is posted as BRL19 million in accounts receivables at the Company. Answering your second question, it is about Pacific cash -- cash balance. Pacific made payment through an escrow account, the commitment or part of the commitment in the blocks acquired or where we have a stake, the blocks of PAMA and Foz. This process, by the way, was already approved by ANP, and we're just awaiting for the final stage, the signature of the agency so we can submit the letter of credit of Pacific with our own. And as soon as the process is concluded, the amount will be delivered. So, it is still restricted cash, but we are at the very end of the process, it already happened at ANP, signature, replacement of the escrow account, and then, this will be released to us, the letter of guarantee. At the OGX, by the end of 2016, we have BRL45 million as credit with partners related to OGX, out of which BRL35 million were already past due. This is just for cash call issued in Brazil. The BRL35 million account for 100% of OGX default in Brazil, and our share would be BRL18 million approximately of this. This is the amount supported by QGEP. Additionally, our cash call was issued after closing the year BRL8 million during January and OGX has not paid yet the total amount paid for OGX. With regards to our expectation for the receivable amount, we know they're about to divest the asset and a transfer of share necessarily goes through the payment of the DIFOT allow for transfer. So as far as we know, and as an operator, we are indirectly involved in the process. It has been unfolding well, and we expect to have the process concluded so we can really bring the DIFOT to an end. So that's what we envisage for now.

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Operator [22]

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(Operator Instructions) This concludes today's question-and-answer session. I would like to invite Mr. Guardado to proceed with his closing statements. Mr. Guardado, you may go ahead.

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Lincoln Guardado, QGEP Participacoes SA - CEO [23]

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Well, after the slight problem with the telephone line, again, I would like to thank you for your attention always and for joining in our earnings conference call. I always like to underscore our confidence in the improvement of macroeconomic conditions in Brazil and REPETRO conditions with revival of the oil industry in Brazil and globally. It has remained important for us, particularly for a company to be in Brazil, we're bound to be in Brazil, the way the vast portfolio that can be a driver of the business and for the continued growth of the company in this short and medium term. Again, I would like thank you for participating, and I would like to remind you that our Investor Relations department is always available. If you need more detail, if you want to have more detail about last year's results and about what we are expecting in the future for QGEP, I believe that it will be a QGEP future -- a future for QGEP of growth with a good return for our investors and shareholders. Thank you very much and have a good day.

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Operator [24]

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This concludes QGEP's conference call of today. Thank you very much for your participation and have a good day.