QGEP Participações S.A.

Transcription

1 (Convenience Translation into English from the Original Previously Issued in Portuguese) Individual and Financial Statements for the Year Ended December 31, 2014 and Independent Auditor s Report Deloitte Touche Tohmatsu Auditores Independentes

2 MANAGEMENT REPORT Dear Shareholders: We hereby present the Management Report and Financial Statements for the fiscal year ended December 31, Highlights Manati continued to produce at high output levels and provide steady cashflows for operations and capex Net revenue of R$503 million. Operational efficiency at Atlanta enabled signing the charter and operational contracts for Petrojarl I s FPSO to continue the early production system. Strong financial position places QGEP in a sound position for capex investment, financing and opportunities that may arise. MESSAGE FROM MANAGEMENT We made important progress across each of our major areas of operation in 2014, building long term value and laying the foundation for future growth. Our longstanding commitment to a balanced, diversified portfolio and prudent risk management continued to distinguish QGEP, providing us with important resilience to uncertain industry conditions in 2014, and positioning us well in 2015 and beyond. Highlights of the year included the following: Production of natural gas from the Manati Field averaged 5.9MMm³ per day in 2014, surpassing the guidance range we provided at the start of the year thanks to efficient operational efforts that enabled us to meet continued strong demand from Brazil s power plants. Total gas production was 2.2 billion m³ in 2014, similar to 2013 s levels. As a result, revenues were in line with those of We estimate that full year 2015 Manati s average daily production will be lower than that of 2014 at 5.5MMm³ given the scheduled 20 day production stoppage required to bring the new compression plant on line. However, in the last five months of 2015, we expect daily production capacity to return to 6.0MMm³, and be sustainable at that level for the following two years. Based on this scenario, we expect significant revenues and operating cash flow from this Field to remain this year and the next an important source of funding for our intermediate and longer term development and exploration projects. Development of the Atlanta Field in 2014 distinguished QGEP as an efficient operator in a technically challenging environment since, in the first half of 2014 we were able to complete two horizontal producing wells and the related drill stem tests. As a result, we achieved a critical milestone at the end of 2014 signing the charter and operation contracts of the Petrojarl I FPSO (floating, production, storage and offloading vessel) in order to develop the Field through an Early Production System. The vessel will be

3 customized to our specifications and is scheduled to be on-site in the first half of 2016, with production expected to start in mid Based on the results of the production tests at the first two wells, production capacity is estimated to average 25kbbl/day during this first development phase. We are considering drilling a third production well, which could raise production capacity up to 30kbbl/day. The independent reserve certification for the Atlanta Field prepared by Gaffney, Cline & Associates and released to the market in the 2Q14 indicated 1P reserves of 147 million bbls, 2P of 191 million bbls and 3P of 269 million bbls. These estimates were made based on drilling and test results from the first production well drilled on the Field. Exploration activities advanced across our asset portfolio, where we have a promising discovery and prospects that contribute to QGEP s substantial growth potential. Importantly, we continue to evaluate the entire portfolio with a view toward maintaining diversification, while keeping the appropriate balance between risk and reward based on technical challenges and economics of each individual asset. Our Carcará discovery in Block BM-S-8 remains our most important exploration project. In November 2014, we completed drilling the first phase of the appraisal well, located 5km from the wildcat, extending down to the lower section of the salt layer. The second phase of drilling, targeting the reservoir, is scheduled to begin in the third quarter of 2015, with a Drill Stem Test (DST) set to take place afterwards. The second Carcará appraisal well was spudded in January 2015 and will be drilled in a single phase. It is expected to be completed in mid-2015, at which point the Consortium will carry out a DST. Results of the test are expected during the second half of the year. The data gathered will provide information on the size of the accumulation, well productivity and will contribute to the design of the Field s production system. Drilling at the Guanxuma prospect is expected to begin in In the fourth quarter of 2014, we received ANP approval for the Evaluation Plan relative to our discovery in the Alto de Canavieiras prospect in Block BM-J-2. As part of our commitment under the Plan, we will proceed with reprocessing and reinterpreting seismic data of the Block in After concluding these activities and completing technical and economic evaluations, we will decide whether to proceed to the next stages. As announced in early 2015, we terminated our farm-in agreement at the BM- C-27 Concession. The decision was taken after technical and economic assessments were made and did not imply costs of any kind for QGEP. We also relinquished Block CAL-M-312 in the Camamu-Almada Basin. However, we will continue our exploratory activities at Block CAL-M-372, which include the drilling of a wildcat well. Block BM-CAL-5 located at the Camamu-Almada Basin is also being relinquished due to both environmental conditions and lack of economic feasibility. We continue to move ahead with seismic survey work on the blocks that we acquired in the 11 th ANP Bidding Round, where we are the operator of 5 out of 8 blocks. 3D seismic surveys have been completed in the Foz do Amazonas and Espirito Santo Basins. In Pará-Maranhão and Ceará Basins, seismic acquisitions

4 are scheduled to begin in the second half of QGEP has started the environmental studies related to operational activities in the Foz do Amazonas and Pará-Maranhão Basins, where drilling is due to begin by the end of Hand in hand with our operating achievements in 2014, was QGEP s solid financial performance. Highlights included: Net revenue growth of 3.5% to R$503 million, thanks to stable Manati Field production; EBITDA of R$215 million and EBITDAX of R$285 million, representing strong margins during a period of normalized exploration expenses; Net income of R$166 million, or R$0.64 per share; Operating cash flow of R$348 million; and Year-end 2014 cash and liquid investments of R$1.1 billion. Thus, QGEP ended 2014 in a very strong financial position, with a net cash balance of R$878 million. Our modest debt of R$251 million, contemplated in our balance sheet in the end of 2014, refers to funds withdrawn to date from the FINEP financing for the development of the Atlanta Field. Despite the fact our industry is facing a challenging adjustment to the sharp drop in world oil prices that accelerated in late 2014 and has continued in early 2015, QGEP s fourth quarter and full year 2014 results were unaffected by this volatility and price erosion, as our revenues and operating cash flow are not linked to oil prices. Admittedly, a prolonged period of exceedingly low oil prices would not be good for our industry or any of the companies of the sector, but given our production and development schedules, we do not expect such a scenario to affect QGEP s results until mid-2016 at the earliest. In fact, during this most recent period, lower prices should help us negotiate favorable contracts with service providers as we move forward with the development of the Atlanta Field. Our strong financial position enables us to maintain a long term perspective in our decisionmaking. Within the current business environment, we are retaining a defensive posture, ensuring that our investment determinations are based on thorough economic analyses. At the same time, we are ready to take advantage of the opportunities that always arise in challenging industry conditions. In Brazil s independent oil and gas arena, QGEP stands out as a player that has the financial, technical and human resources to acquire and develop assets at favorable entry points and the flexibility to act quickly when the right opportunity is at hand. In summary, we are pleased with the financial and operating results of 2014 and believe they are sustainable in We look forward to continuing our dialogue with investors and analysts in Brazil and internationally with a view toward reinforcing QGEP s investment strengths and gaining additional recognition for our differentiated position. We thank all of our people, partners and investors for their support of QGEP and look forward to providing progress reports throughout 2015.

5 ECONOMIC AND SECTOR OVERVIEW 2014 was a challenging year for both the Brazilian economy and the oil and gas sector specifically. Brazilian GDP, estimated at US$2.2 trillion in 2014 and representing the largest in Latin America, remained flat in 2014, according to the International Monetary Fund s World Economic Outlook (WEO) Update, released on January 20, Despite this, local inflation rate (IPCA) was 6.4% at year end, compared to 5.9% at the end of The Central Bank increased benchmark SELIC interest rate to 11.75% in November, from 10% at the end of 2013, and raised it further to 12.25% in January, Unemployment remained low, ending the year at 4.8%. With respect to the oil and gas sector, two factors stood out. Firstly, the sharp decline in oil prices in late 2014 and early 2015 had an immediate impact on oil producers. Brent crude oil fell 46% in the course of 2014 and continued to fall in January Brent price has rebounded in February to U$58/barrel, approximately a 25% rise since its low in January, confirming the mid-term recovery in oil price trend. QGEP does not currently have relevant output linked to the price of oil, and will not have until the Atlanta Field begins production in mid The second Brazil specific factor affecting the local industry are the circumstances involving Petrobras, the state controlled and Brazil s largest oil company and the potential impact it has on the company s capex plans. QGEP does not currently expect this situation to have a direct effect on its portfolio or exploration schedule in We expect 2015 to remain challenging for Brazil and the industry. There are many economic issues to be dealt with: reverting the public deficit, curbing inflation, improving our balance of payments, rebalancing infrastructure prices (gasoline, electricity and transport) and enhancing the country s competitiveness. In addition, the Brazilian Southeast has been facing reduced availability of water for power generation and consumption which could lead to a rationalized usage of these resources and result in lower economic growth. Economic policy choices to be made, mainly related to the exchange rate and taxations may affect the growth of the sector. While we will not purport our business to be exempt from the outcomes of these challenges, we believe we have specific strengths that place us in a favorable position to face and even take advantages of opportunities that may arise - as we have in the past year with a steady demand from thermo power. As stated, our financial position is strong and enables us to maintain a long term outlook for the business; our revenue stream from Manati provides a stable source of funding for operations and part of capex; our commitment to a balanced, diversified portfolio and prudent risk management supports sound business decisions. Lastly, but not least important, we rely on a highly qualified team of technical and corporate expertise whose proven track record makes us comfortable to say they are up to the task ahead.

6 CAPEX In 2014, total capital expenditures were US$125 million. A total of US$27 million was spent on exploration, mostly on the exploratory drilling in Block BM-S-8 and on the acquisition of seismic data for certain blocks acquired in the 11 th ANP bidding round. US$87 million was spent on the development of the Atlanta Field, US$6 million on production regarding the construction of the compression plant at Manati Field and US$5 million was spent on other expenses. Below is the breakdown of the projected CAPEX for the next two years: CAPEX net to QGEP (US$ million) CAPEX net to QGEP (US$ million) Production Development Exploration Other Manati BS-4 Development BM-S-8 Blocks Round 11 CAL-M-372 Other BM-J

7 FINANCIAL RESULTS The following financial statements correspond to the Company s consolidated financial information for the year ending December 31, As a firm that holds interest in corporations dedicated substantially to the exploration, production and sale of oil and natural gas products, the Company s results basically reflect those of Queiroz Galvão Exploração e Produção S.A. Below are the major financial highlights for the fourth quarter and full year ended 2014: Financial Information (R$ million) 4Q14 4Q13 % % Net income % % Amortization and depreciation % % Net financial income (expenses) (24.9) (18.0) -38.6% (85.8) (62.1) -38.3% Income tax and social contribution (16.3) (14.7) -10.9% 18.6 (4.6) N/A EBITDA (1) % % Oil and gas exploration expenditure with subcommercial and dry wells (2) % % EBITDAX (3) % % EBITDA Margin (4) 26.3% 15.8% 66.1% 42.7% 45.9% -7.0% EBITDAX Margin (5) 57.6% 52.1% 10.4% 56.7% 55.8% 1.4% (Net Cash) (6) (877.7) (837.8) -4.8% (877.7) (837.8) -4.8% (Net Cash)/EBITDAX (3.1) (3.1) 0.3% (3.1) (3.1) 0.3% (1) We calculate EBITDA as profit before taxes and social contributions, net financial results and amortization expenses. EBITDA is not a financial measure according to Brazilian GAAP or IFRS. It should also not be considered in isolation or as a substitute for net income, as a measure of operating performance, or as an alternative to operating cash flow as a measure of liquidity. Other companies may calculate EBITDA differently than us. Furthermore, EBITDA has limitations which inhibit its usefulness as a measure of our profitability as it does not consider certain costs inherent in our business, which could significantly impact our net results, such as net financial income, taxes and amortization. EBITDA is utilized by us as an additional measure of our operating performance. (2) Exploration expenses relating to subcommercial wells or to non operational volumes. (3) EBITDAX is a measure used by the oil and gas industry calculated as follows: EBITDA + exploration expenses with subcomercial and dry wells. (4) EBITDA divided by net revenue. (5) EBITDAX divided by net revenue. (6) Net cash corresponds to the sum fol cash, cash equivalentes and short term investments, excluding total debt comprising of current and longterm loans and financing and derivative financial instruments.. Net cash is not recognized under Brazilian GAAP, U.S. GAAP, IFRS or any other generally accepted accounting principles. Other companies may calculate net cash in a different from QGEP Operating Results In 2014, Manati Field was responsible for approximately 7% of the total gas production in Brazil and 30% of the gas production in the Northeast of Brazil, according to data disclosed by the Brazilian Regulator Agency, Agência Nacional do Petróleo, Gás Natural e Biocumbustíveis (ANP). Below is the Field s production curve:

8 Average Daily Gas Production (MM m 3 per day) 5,2 6,6 6,7 6,1 6,6 5,0 6,2 6,1 6,0 5,9 5,9 5,9 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Average 2012: 6.1 Average 2013: 6.0 Average 2014: 5.9 Net revenues for 2014 reached R$503.2 million, an increase of 3.5% from 2013, due to adjustments in the price of Manati natural gas as total gas production net to QGEP was 973 million m³ in 2014, similar to 2013 s levels. Total operating costs in 2014 were R$235.4 million for the year, an increase of 12.1% compared to 2013, mainly due to the permanent increase in depreciation costs related to the provision for abandonment at Manati. Maintenance costs in 2014 also contributed to this increase since repairs in the subsea hydraulic lines and the inspection of all the subsea controls and pipelines of R$13.6 million were carried out. In 2013, this cost line had included the scheduled stoppage for plant maintenance. Operating costs (R$ million) % Depreciation % Production Costs % Royalties % Maintenance Costs % Special Participation % R&D % TOTAL % GENERAL AND ADMINISTRATIVE EXPENSES In 2014, General and Administrative Expenses were R$58.5 million, compared to R$68.6 million in The decrease mainly reflects a 78.7% increase in the amount allocated to partners on the blocks operated by QGEP.

9 EXPLORATION EXPENSES Total exploration expenses in 2014 was R$110.3 million, compared with R$81.5 million in This increase in 2014 was due to write-offs related to the relinquishments to the ANP of Block BM-CAL-5 (totaling R$34.3 million) and Biguá (total amount of R$28.9 million), as well as exploratory costs related to the ongoing acquisition of seismic data for the blocks acquired in the 11 th ANP Bidding Round. Total exploration expenses in 2014 were partially offset by a R$6.2 million provision reversion related to Block BM-C-27. NET FINANCIAL INCOME Net financial income was R$85.8 million in This resulted primarily from a combination of financial income of R$119.5 million from the investments of the Company s cash, as well as net financial expenses of R$33.5 million related to exchange rate variations associated with the provision for abandonment. Compared with 2014, financial income rose R$34.9 million due to the effect of the appreciation of the US dollar relative to the Real on the Company s exchange rate pegged funds. NET INCOME The Company reported net income of R$166.1 million in 2014, representing a combination of operating income from the sale of gas from the Manati Field and financial income from the investment of the Company s cash. Compared with net earnings of R$192.2 million in 2013, this was a year-over-year decline resulting primarily to the relinquishment of Block BM-CAL-5 and Biguá. BALANCE SHEET/CASH FLOW HIGHLIGHTS CASH (CASH EQUIVALENTS, FINANCIAL INVESTEMENTS AND RESTRICTED CASH) The Company ended 2014 with a cash balance of R$1.1 billion, a 12% increase compared to our 2013 year-end position. This included funds of R$250.3 million drawn down from our FINEP financing package. On December 31, 2014, QGEP had 25% of its cash invested in exchange rated pegged funds to hedge part of our US dollars denominated development costs and the remaining balance in Brazilian real-denominated instruments. As of December 31, 2014 the average annual return on cash investments was 102.3% of the CDI rate and 80.0% of the funds resources have daily liquidity. The breakdown of the investments in Brazilian reais is shown on the charts below:

10 Investment Distribution Ratings * Caixa Econômica 11,0% Bradesco 10,3% BNB 6,3% HSBC 4,6% AA 1% Santander 3,8% Government Securities 56,7% Votorantim 2,5% Other 4,7% AAA 99% *Does not include Government Securities PROPERTY PLANT AND EQUIPMENT Property, plant and equipment totaled R$1.1 billion at the end of 2014, up 6% from the end of The increase is due to exploratory and development activities the Company carried out during the year. The Company did not acquire any new blocks in INTANGIBLE ASSETS At the end of 2014, intangible assets totaled R$630.5 million, in line with R$631.4 million registered at the end of This mainly consists of the Company s upfront payments in signature bonus and farm-ins for each of its assets. ACCOUNTS PAYABLE Accounts payable were R$35.2 million at the end of 2014, compared to R$160.2 million at the end of The decrease was due to the payments to suppliers after the conclusion of drilling and completion activities for the two producing wells at the Atlanta Field, as well as lower future provisions for accounts payable related to the Field. LOANS AND FINANCING At the end of 2014, QGEP had borrowings and financing of R$250.9 million, up from R$168 million at the end of This represents the funds drawn down from the financing package awarded to QGEP by Brazil s Financiadora de Estudos e Projetos (FINEP) to support the development of the Atlanta Field EPS. The package consists of two credit lines, one with a fixed rate and one with a floating rate. Both lines feature a 3-year grace period and an amortization period of seven years, with an initial credit line available to QGEP of R$266 million. In September, 2014, QGEP signed a contract with Banco do Nordeste do Brasil for a financing package of R$232 million dedicated to the funding of the exploration of QGEP s assets in the

11 northeast of Brazil. The Company received reimbursments of R$117.8 million to cover investments in BM-J-2 under this credit line. OPERATING CASH FLOW Operating cash flow for FY14 was R$348.5 million, compared with R$376.4 million in FY13. This was mainly due to the R$26.2 million decrease in net income compared to last year s same period. CAPITAL MARKETS Representing a market value of R$1.9 billion, QGEP s stock price (Ticker: QGEP3) was R$7.20 at the end of 2014, down 26% from December 31, 2013 due to investor concern regarding Brazil s economy, the oil and gas sector, following the sharp decline in oil prices in the second half of the year and also affected by weakening Brazilian currency. QGEP s average daily volume in 2014 was R$5.7 million. In January 2015, QGEP3 was included in the IBRX index, which includes the 100 companies with the highest level of liquidity in Brazil s stock exchange. At the end of 2014, QGEP had 17 covering sell-side analysts, including both domestic and international banks and brokerages. 14 of the analysts had BUY recommendations and 3 had NEUTRAL recommendations on the stock. The stock s highest target price was R$19.2/share and the lowest, R$9.9/share, with an average target prices of R$14.9/share, representing a 107% upside from QGEP s stock s closing price on the end of DIVIDENDS On March 12, 2015, QGEP s Board of Directors approved a dividend policy establishing a supplementary dividend payout over and above the statutory minimum. According to this decision, valid as of 2015, the profit distribution proposal to be summited by the Board at each Annual Shareholders Meeting, contemplates the payment of a dividend of R$0.15 per share. This amount includes the minimum mandatory dividend payout. The payment of the dividend supplement is subject to the existence of profits or profit reserves. Furthermore, the allocation of the Company s net profits are, in each case, subject to approval at the Annual Shareholders Meeting and may be revised, at any moment, by the Company s Board of Directors given its plans and needs at the relevant time, among which, but not exclusively due to, material acquisitions, relevant investments, debt covenants and regulatory requirements. Given the above mentioned Board resolution, the requirements of Law nº6.404/76, as amended, Comissão de Valores Mobiliários Regulation, and the Company s bylaws, the Company will adopt the following rules and practices regarding its dividend distribution: The proposal for net profits destination abides by the following allocation:

12 (i) 5% of the year s net profit will be allocated to the legal reserve until such reserve reaches a sum equal to 20% of capital stock. The constitution of this reserve could be waived if its balance in any fiscal year, added to the balance of capital reserves, exceeds 30% of the capital stock; (ii) After constituting the legal reserve, of the remaining net profit portion, priority will be given to the payment of supplement dividend of R$0.15 per share. This amount includes the minimum mandatory divided of 0.001% of net profit according to the Company s by-laws. If in a given year, the adjusted net profit is insufficient for the payment of the dividend supplement, the Company s administration may propose to revert part or all statutory profit reserves in order to meet dividend payments; and (iii) with due regard to the foregoing allocations, the Board may propose that the remaining net profit portion be, all or in part, used to constitute the Investment Reserve. This reserve can reach a maximum limit of 100% of capital stock provided that the balance thereof, added to the balances of the remaining profit reserves, other than unrealized profit reserves, contingencies reserves, and tax incentive reserves, shall not exceed one hundred per cent (100%) of Company's capital stock. Exceptionally, the dividend supplement may be suspended if in any fiscal year, the Company s administration notifies the Annual Shareholders Meeting that it is incompatible with the Company s financial situation. CORPORATE GOVERNANCE QGEP adopts good Corporate Governance practices in order to align stakeholder interest with aim of preserving and optimizing Company value. For that purpose, it was listed in 2011, under the BM&FBovespa s highest corporate governance segment, the Novo Mercado. The Company conducts its activities based on the principles of the following corporate policies: (i) Policy on the disclosure of Material Act or Event and the trading in Securities, which disciplines disclosure and Company security trading by employees and its administration; (ii) Market Risk Management Policy, that formalizes the mechanisms the Company may use to mitigate its exposure to market risks not inherent to the oil exploration and production activity; (iii) Integrated Management System Policy, which comprises issues related to quality, health and safety, environment and social responsibility and whose guidelines are the starting point for the development of all company processes.

13 With the diversification of its partners and the growth of its activity as operator, QGEP revised its Code of Ethics, which conforms to the industry s ethical principles and best practices. The Code observes the principles of the new Anti-Corruption Law which aligns Brazil s with international legislation. The Code treats, among other matters, of its management, Anticorruption Guidelines, Competitive Procedures, Formation of Partnerships, Hireing of Suppliers and Outsourced Services, Related party Transactions and Conflict of Interest. Specific policies related to the guidelines implemented by the Code are in the process of being developed as is the establishment of a compliance manager position and a complaints/whistleblower channel. Additionally, since foundation, the Company discloses on its annual Sustainability Reports all its activities with transparency and accessibility. In 2014, QGEP installed a Fiscal Council with three effective members one of which was elected by minority shareholders. The Council is formed by highly qualified and experienced professionals. HUMAN RESOURCES QGEP s employees are skilled executives and technical staff with extensive experience in the local, regional and global oil and gas sector. Their areas of expertise include geology, geophysics, reservoir engineering, production, drilling and sustainability, among others. Numerous team members previously held senior roles at Petrobras and have worked on important discoveries in Brazil. All QGEP operations adhere to the highest levels of sustainability, including employee safety. At the close of 2014, the Company had in total 133 employees, including QGEP employees and third-party workers, a 15% increase compared to our workforce at the end of SOCIAL AND ENVIRONMENTAL RESPONSIBILITY QGEP is committed to human rights respect and environmental preservation. The Company is socially responsible and prioritizes employee and operational safety. As an operator, QGEP establishes close relationships and direct two-way communication channels with communities within the area influenced by its activities, respecting local culture, values and knowledge of traditional communities and making investments in local educational and social projects. The Company evaluates outcomes and manages the potential environmental, social and safety risks of its projects taking action to minimize and control them. QGEP seeks the commitment of all those involved (employees and outsourced services) in order to achieve high operational, environmental, safety, health and social responsibility standards. In the context of the Block BS-4 operation, QGEP gave continuity to the social and environmental projects on which its operating license depends and for the first time in Brazil conducted a workshop to discuss an emergency plan to save small cetaceans in case of an oil spill. It organized and sponsored the Portinari - Art and the Environment exhibition in several

14 municipalities on the coast of the State of São Paulo, where the study area of field is located. It also maintained the Viva Volei activities in two centers in the State of Bahia. We were certified for ISO (Environmental Management System) and OHSAS (Health and Safety Management System) on our exploration and production activities, a big achievement which rewarded the dedication of all sectors. The effort is also consistent with our commitment for the continued improvement of our processes ensuring our operations are developed under safe, socially and environmentally responsible, and highly efficient conditions that are in line with market best practices. RELATIONS WITH THE INDEPENDENT AUDITORS The Company s policy regarding its relationship with external auditors in the provision of services unrelated to external auditing is rooted in principles that safeguard their independence. These principles are based on the idea auditors should not audit their own work, nor exercise managerial functions, advocate for their clients or provide any services that could be considered restricted under current regulations. Deloitte Touche Tohmatsu Auditores Independentes were engaged by QGEP Participações S.A. to provide external auditing services relating to the review of its financial statements and those of its subsidiaries for fiscal year As stipulated by Brazilian accounting independence rules, the external auditor did not perform any services for the Company or its subsidiaries other than those mentioned above in the period. Rio de Janeiro, March 12, QGEP Management

15 QGEP PARTICIPAÇÕES S.A. CNPJ/MF nº / NIRE: (Convenience Translation into English from the Original Previously Issued in Portuguese) Annex I to the Minute of the Fiscal Council Meeting held on March 12, 2015 FISCAL COUNCIL OPINION The members of the Fiscal Council, all independent, elected on April 16, 2014 by the Ordinary General Shareholders' Meeting of QGEP Participações S.A., developed thereafter, a broad scope of work, as well as independently as combined. All Fiscal Council meetings held to the present date involved the participation of its three effective members, always in presence. Not only, but including at these occasions, a vast array of documents and information were required by the councilors and provided by the Company When requested, the meetings included the Management and their teams, the engagement partner and managers from Deloitte Touche Tohmatsu Independent Auditors, as well as several specialists and external consultants, in order to provide clarification on, among others, the Company s (i) operations and subsidiaries, (ii) business dynamics, (iii) main assets and liabilities, (iv) adopted risk management to protect its investments and operations, (v) oil and gas exploration business and acquisition of exploratory assets, (vi) human resources policy, (vii) methodology of the impairment tests on non-financial assets and its premises adopted, (viii) tax incentives arising from technical innovation; and also included (ix) a technical visit to Manati, Bahia, which is the Company s gas producing complex. The Fiscal Council members, in exercise of its legal and statutory duties and in compliance with Law 6.404/1976 and its amendments, examined (i) the Management Report, (ii) the Financial Statements for the year ended on December 31, 2014, which comprise the

16 balance sheet and the income statements, the statement of comprehensive income, the statement of changes in equity, the statements of cash flows and the statements of value added, complemented by explanatory notes, (iii) the proposal of the Management for the profit distribution and (iv) the technical appraisal on deferred tax credits as of December 31, 2014, in accordance with CVM Instruction 371, as of June 27, Based on the foregoing examined documents, analysis performed, clarifications provided by the Management and Deloitte Touche Tohmatsu Auditores Independentes s unqualified opinion, the Fiscal Council s unanimous decision is that the aforementioned documents are in proper condition to be presented to the Shareholders General Meeting for deliberation. Rio de Janeiro, March 12, Axel Erhard Brod José Ribamar Lemos de Souza Sérgio Tuffy Sayeg

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19 (Convenience Translation into English from the Original Previously Issued in Portuguese) QGEP PARTICIPAÇÕES S.A. BALANCE SHEET AT DECEMBER 31, 2014 (In thousands of Brazilian reais - R$) Parent company Note ASSETS 12/31/ /31/ /31/ /31/2013 CURRENT ASSETS Cash and cash equivalents , ,765 Short-term investments 4 2,897-1,011, ,954 Accounts receivable ,627 99,446 Inventories ,477 47,769 Recoverable taxes ,692 10,380 Dividends receivable ,277 4, Credit to partners , ,185 Others - 3 1,967 4,724 Total current assets 6,200 4,608 1,339,715 1,284,223 NONCURRENT ASSETS Restricted cash ,916 4,167 Recoverable taxes , Deferred income tax and social contribution ,392 22,477 Related parties , Investments ,522,772 2,404,666 22,843 10,428 Property, plant and equipment ,121,384 1,083,459 Intangible , ,350 Others non current assets 1-1,810 2,401 Total noncurrent assets 2,522,773 2,404,666 1,831,347 1,755,098 TOTAL ASSETS 2,528,973 2,409,274 3,171,062 3,039,321 LIABILITIES AND NET EQUITY CURRENT LIABILITIES Suppliers , ,245 Borrowings and financing Taxes payable ,313 30,059 Payroll and related taxes ,914 19,367 Related party transactions Provision for research and development ,760 8,577 Insurance - - 6,256 3,129 Other obligations ,442 12,081 Total current liabilities , ,704 NONCURRENT LIABILITIES Provision for abandonment , ,894 Borrowings and financing , ,666 Total noncurrent assets , ,560 NET EQUITY Capital stock 24 2,078,116 2,078,116 2,078,116 2,078,116 Capital reserve 31,632 22,628 31,632 22,628 Shares held in tresury (81,007) (62,501) (81,007) (62,501) Investment reserve 494, , , ,623 Other comprehensive income 5,410 2,191 5,410 2,191 Total net equity 2,528,828 2,409,057 2,528,828 2,409,057 TOTAL LIABILITIES AND NET EQUITY 2,528,973 2,409,274 3,171,062 3,039,321 The accompanying notes are an integral part of these financial statements. 3

20 (Convenience Translation into English from the Original Previously Issued in Portuguese) QGEP PARTICIPAÇÕES S.A. STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2014 (In thousands of Brazilian reais - R$) Note 01/01/2014 to 12/31/2014 Parent company 01/01/2013 to 12/31/ /01/2014 to 12/31/ /01/2013 to 12/31/2013 NET REVENUE , ,088 COSTS (235,388) (209,899) GROSS PROFIT , ,189 OPERATING INCOME (EXPENSES) General and administrative expenditure 18 (4,019) (3,314) (58,475) (68,594) Equity method , ,469 (185) (440) Oil and gas exploration expenditure (110,348) (81,522) INCOME FROM OPERATIONS BEFORE 165, ,155 98, ,633 FINANCIAL INCOME FINANCIAL INCOME, NET ,787 62,050 INCOME BEFORE INCOME TAX SOCIAL CONTRIBUTION 166, , , ,683 Deferred Income tax and social contribution (15,482) (17,918) Current Income tax and social contribution (3,085) 22,477 NET INCOME FOR THE YEAR 166, , , ,242 NET INCOME PER SHARE - BASIC AND DILUTED The accompanying notes are an integral part of these financial statements. 3

21 (Convenience Translation into English from the Original Previously Issued in Portuguese) QGEP PARTICIPAÇÕES S.A. STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2014 (In thousands of Brazilian reais - R$) Parent company Note 01/01/2014 to 12/31/ /01/2013 to 12/31/ /01/2014 to 12/31/ /01/2013 to 12/31/2013 Net income for the year 166, , , ,242 Other comprehensive income Comprehensive income of investees recognized by the equity method 11 3,219 2,191 3,219 2,191 Total comprehensive income for the year 169, , , ,433 The accompanying notes are an integral part of these financial statements. 3

22 (Convenience Translation into English from the Original Previously Issued in Portuguese) QGEP PARTICIPAÇÕES.A. CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 2014 (In thousands of Brazilian reais - R$) Capital Reserves Income Reserve Other Capital Stock Shares held Legal Investment comprehensive Retained Note stock options in treasury reserve reserve income earnings Total BALANCE AT DECEMBER 31, ,078,116 12,197 (38,899) 10, , ,227,797 Net income for the year , ,242 Appropriation of profit for the year: Legal reserve , (9,613) - Investment reserve ,627 - (182,627) - Minimum mandatory dividends (2) (2) Shares held in treasury (23,601) (23,601) Cumulative translation adjustments ,191-2,191 Stock option 24-10, ,430 BALANCE AT DECEMBER 31, ,078,116 22,627 (62,500) 20, ,500 2,191-2,409,057 Net income for the year , ,056 Appropriation of profit for the year: Legal reserve , (8,303) - Investment reserve ,751 - (157,751) - Minimum mandatory dividends (2) (2) Dividends payment (40,000) - - (40,000) Cumulative translation adjustments ,219-3,219 Shares held in tresury (18,507) (18,507) Stock option 24-9, ,005 BALANCE AT DECEMBER 31, ,078,116 31,632 (81,007) 28, ,251 5,410-2,528,828 The accompanying notes are an integral part of these financial statements. 3

23 (Convenience Translation into English from the Original Previously Issued in Portuguese) QGEP PARTICIPAÇÕES S.A. STATEMENTS OF CASH FLOW FOR THE YEAR ENDED DECEMBER 31, 2014 (In thousands of Brazilian reais - R$) Note 01/01/2014 to 12/31/2014 Parent company 01/01/2013 to 12/31/ /01/2014 to 12/31/ /01/2013 to 12/31/2013 CASH FLOWS FROM OPERATING ACTIVITIES Net income for the year 166, , , ,242 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity method 11.2 (169,759) (195,469) Depreciation and amortization 12/ ,897 97,286 Deferred income tax and social contribution ,085 (22,477) Financial charges and exchange rate (gain) loss - - on borrowings and financing - - 5, Reduction of fixed assets and intangibles 12/ ,647 45,967 Stock option plan ,005 10,430 Provision for income tax and social contribution ,482 17,918 Provision for research and development - - 4,183 (443) Exchange rate on Trade accounts payable - acquisition of the , ,432 Exchange rate on provision for abandonment (Increase) decrease in operating assets: Trade accounts receivable (2,181) (6,677) Recoverable taxes (27) (25,629) 25,411 Other assets ,083 (149,371) Increase (decrease) in operating liabilities: Suppliers (90) 36 (131,180) 57,392 Taxes payable (3,441) Interest paid (6,435) (412) Income tax and social contribution paid - - (19,329) (8,213) Related parties (77) Other liabilities 8 (4) 1,033 7,330 Net cash provided by (used in) operating activities (3,774) (3,115) 348, ,440 CASH FLOWS FROM INVESTING ACTIVITIES Restricted cash (23,749) 20,064 Short term investments 4 (2,897) - (363,463) (567,007) Increase capital in foreign company - (109) 9,843 7,120 Payment of investment 63,879 2,428 (22,443) (17,988) Payment of property, plant and equipment (215,615) (380,812) Payment of intangible (1,840) (97,596) Dividends recieved ,032 24, Net cash provided by (used in) investing activities 62,014 26,319 (617,267) (1,036,219) CASH FLOWS FROM FINANCING ACTIVITIES Payment of financing , ,632 Shares held in treasury 24 (18,507) (23,601) (18,507) (23,601) Payment of dividends (40,000) - (40,000) - Net cash provided by (used in) financing activities (58,507) (23,601) 25, ,031 Cumulative translation of adjustment of foreign companies - - 3,219 2,191 Total of cumulative translation of adjustment of foreign companies - - 3,219 2,191 Increase (decrease) in cash and cash equivalents (267) (397) (240,574) (513,557) Cash and cash equivalents at beginning of year , ,322 Cash and cash equivalents at end of year , ,765 Increase (decrease) in cash and cash equivalents (267) (397) (240,574) (513,557) The accompanying notes are an integral part of these financial statements. 3

24 (Convenience Translation into English from the Original Previously Issued in Portuguese) QGEP PARTICIPAÇÕES S.A. STATEMENTS OF VALUE ADDED FOR THE YEAR ENDED DECEMBER 31, 2014 (In thousands of Brazilian reais - R$) Note 01/01/2014 to 12/31/2014 Parent company 01/01/2013 to 12/31/ /01/2014 to 12/31/ /01/2013 to 12/31/2013 REVENUES , ,197 Gas sales , ,804 Other revenues - - 1, Revenues related to own assets of construction , ,812 INPUTS ACQUIRED FROM THIRD PARTIES , ,120 (including Tax - ICMS, IPI, PIS and COFINS) Gas production and service costs , ,331 Material, energy and other service , ,661 Others ,607 17,128 GROSS VALUE-ADDED (879) (746) 454, ,077 DEPRECIATION, AMORTIZATION AND EXHAUSTION 12/ ,613 97,286 NET VALUE-ADDED PRODUCED BY THE ENTITY (879) (746) 336, ,791 VALUE-ADDED RECEIVED IN TRANSFER 170, , ,423 84,146 Equity income and dividends , ,469 (185) (440) Financial income ,608 84,586 Others TOTAL VALUE-ADDED TO BE DISTRIBUTED 169, , , ,937 VALUE-ADDED DISTRIBUTION PERSONEL: Personnel 2,491 2,036 53,530 51,820 Benefits ,282 3,792 Charges and fees - - 2,161 1,850 2,619 2,132 60,973 57,462 TAXES: Federal ,545 57,934 State ,000 54,539 Municipal ANP (Bonus e royalties) ,076 48, , ,324 PAYMENT OF THIRD PARTY CAPITAL: Interest Rentals - - 3,650 3,224 Bank charges ,431 Monetary/Exchange variation ,552 20, ,221 25,909 SHAREHOLDERS Net income for the year 166, , , , , , , ,242 DISTRIBUTION OF VALUE ADDED 169, , , ,937 The accompanying notes are an integral part of these financial statements. 3

25 (Convenience Translation into English from the Original Previously Issued in Portuguese) QGEP PARTICIPAÇÕES S.A. NOTES TO INDIVIDUAL AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2014 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) 1. GENERAL INFORMATION Operations QGEP Participações S.A. is headquartered at Almirante Barroso Avenue 52, room Centro, Rio de Janeiro ( Company or QGEPP ). and its corporate purpose is to hold interests in companies that are primarily engaged in the exploration, production and sale of oil, natural gas and their byproducts, either as a partner or shareholder, or through other forms of association, with or without separate legal personality. On December 31, 2014, the Company's ownership structure was as follows: Constituted on October 16, 2009, the objective of Queiroz Galvão Exploração e Produção S.A. (QGEP) is exploration for oil and gas, production and trade of oil, natural gas and their derivatives, and investment in other entities substantially focused on related activities. Such investments may be as partner, shareholder or through other forms of association, with or without separate legal identity. 9

26 On January 31, 2013, QGEP Netherlands B.V. ( QGEP B.V. ) was established as the QGEP s wholly-owned subsidiary, which is headquartered in Rotterdam, in the Netherlands, and its objective is incorporate, manage and supervise companies; carry all types of commercial and industrial activities, and things that are related to the activities described. On November 2, 2012, Atlanta Field B.V. ( AFBV ) was established as an indirect subsidiary of QGEP and direct subsidiary of QGEP B.V., which is headquartered in Rotterdam, in the Netherlands, and its objective is the acquisition, budgeting, construction, purchase, sale, rental, lease or charter of materials and equipment to be used for the exploration and exploitation of the Concession Area and also acquire, manage, operate equipment, including equipment recorded to support the activities of the Group. On February 12, 2013, QGEP sold its entire participation in AFBV to QGEP B.V. This procedure did not generate goodwill, gain or loss. On February 21, 2013, OGX Netherlands Holding B.V and FR Barra 1 S.à r.l., partners in concession Block BS-4, entered the structure, holding 40% and 30%, respectively, of participation in AFBV. Thereafter, QGEP B.V. holds 30% participation in AFBV. On October 3, 2013, QGEP International GmbH ( QGEP International ) was established as the QGEPP s wholly-owned subsidiary, which is headquartered in Vienna, Austria, and its objective is acquisition of companies in Austria and abroad, constitution and management of subsidiaries in Austria and abroad, and asset management. The E&P business is regulated by the Brazilian Oil, Natural Gas and Biofuel Agency ( ANP ). The company and its subsidiaries (QGEP, QGEP B.V. and AFBV) are referred to in this financial statements as the Group. On December 31, 2014, the Group s portfolio included a participation in thirteen E&P concessions located offshore of the Brazilian Continental Margin (Note 21). The BCAM-40 and BS-4 concessions are under development and under production, respectively. Manati and Camarão Norte fields, both located in BCAM-40, are currently under production and under production development, respectivaly. The Atlanta and Oliva fields, located in the BS-4 block, are under production development. The Manati Field was developed through the drilling of six wells completed with Wet Christmas Trees (WCT). These wells produce for a fixed production platform (PMNT-1) which pumps gas along a 24 diameter pipeline, approximately 125 km long, to the treatment station, which stabilizes and condenses the gas (Geologist Vandemir Ferreira Plant). In the fourth quarter of 2014, QGEP received ANP approval for an Evaluation Plan (EP) for Block BM-J-2. Under this Plan, QGEP commited to seismic reprocessing and geological reinterpretation of the Block. These activitivies must be completed by the end of 2015, when a decision regarding the following steps of the project will be taken. The EP relates to the August 2013 Notice of Discovery filed with the ANP based potential pay zones identified in the presalt section of its Alto de Canavieiras (1-QG-5A-BAS) well. On August 21, 2013, the Company obtained the approval of a development plan for Oliva Field. The Oliva Field is a post-salt oil field located in BS-4 Block, 17 km distant from Atlanta Field, whose development is already in progress and is also part of the Block. 10

27 The approved Development Plan provides for the drilling of a well for acquiring reservoir data in 2016, followed by a test, in such a way to support the reserve estimate and the production curve. This development plan also includes the drilling of five producing wells and three injection wells. All of these wells will be horizontal and will be connected to the facilities at Atlanta Field. The first oil from Oliva Field is expected in In 2014, the Company proceeded with the development of Atlanta Field, operated by QGEP. The development plan for Atlanta Field includes an Early Production System (EPS) with two horizontal wells, already drilled and tested in the first semester of At the end of 2014, the Company signed the contract of the Petrojarl I floating, production, storage, and offloading vessel ("FPSO"), chartered for the Atlanta Field Development. The vessel will be customized to the Field s specifications and is scheduled to be on site in the first semester of Production is scheduled to begin in mid The CAPEX estimated for this EPS is US$728 million, of which US$219 million net relate to QGEP. This amount refers to a system of three production wells and the drilling of the last well is expected to begin at the end of As of December 31, 2014, the Company had disbursed US$114 million of the total EPS CAPEX. QGEP is in the process of contracting the acquisition of 3D seismic data for the blocks in the Foz do Amazonas, Pará-Maranhão, Ceará, Pernambuco-Paraíba and Espírito Santo basins that were awarded in the ANP s 11th Bidding Round. The total amount until December 31, 2014 is R$25,914. Well drilling, which we have a commitment to initiate in the first period, is scheduled for SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies applied in the preparation of the individual and consolidated financial statements comprise: 2.1. Statement of Compliance The consolidated financial statements of the Company comprise: The individual and consolidated financial information have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and accounting practices adopted in Brazil. The accounting practices adopted comprise the policies set out in Brazilian Corporate Law and the pronouncements, guidance, and interpretations issued by the Accounting Pronouncements Committee (CPC) and approved by the Federal Accounting Council (CFC) and the Brazilian Securities and Exchange Commission (CVM) Basis of preparation The financial statements have been prepared using the historical cost, except for certain financial instruments measured at fair value, as described in the accounting policies below. The historical cost is generally based on the fair value of the consideration paid in exchange for an asset. 11