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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 and Report on Review of the Interim Financial Information

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Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 and Report on Review of the Interim Financial Information Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 and report on review of the interim financial information Dommo Energia S.A. Interim Financial Information (ITR) on September 30, 2018 with Independent Auditors’ Report on review of the Interim Financial Information (ITR) Contents Management Report 3 Independent auditor’s report on the interim financial information 10 Statements of financial position 12 Statements of operations 14 Statements of comprehensive income (loss) 16 Statements of changes in equity 17 Statements of cash flow 18 Statements of value added 19 Notes to the interim financial information 20 2 Management Report Dommo Energia S.A. (“Dommo Energia” or “Company”) management, in compliance with legal and statutory provisions, presents its results for the third quarter of 2018 (“3Q18” or “Period”), as well as relevant subsequent events to the market. The values are presented in thousands of Real, except when indicated otherwise.. 1. Company’s highlights Tubarão Martelo Field production reached 543.5 kbbls (thousand barrels of oil) in the 3Q18 Revenues of R$ 165,487, with 47.1% gross profit margin in 3Q18 Revenues of R$ 408,477, with 49.4% gross margin in 2018 year to date (“9M18”) Adjusted EBITDA of R$ 58,635 and Adjusted EBITDA margin of 35.4% in the 3Q18 Adjusted EBITDA of R$ 163,990 and Adjusted EBITDA margin of 40.1% in 9M18 Cash balance of R$ 154,833 at the end of the period compared to R$ 42,676 in the third quarter of 2017 (“3Q17”), an increase of 262.8% in 12 months 2. Introduction The average international oil prices remained stable in the 3Q18 when compared to the previous period, verifying an upward trend as of the second half of the quarter, due to output shortcuts in Venezuela, USA embargo to Iran and to indication from Organization of the Petroleum Exporting Countries (“OPEC”) that it will not increase oil production in the short term, which drove prices in the international market to its highest level in 4 years. In the international economic environment, the emerging countries’ currencies were negatively impacted by the Turkish and Argentinean crisis, resulting in the devaluation of most currencies against the Dollar. Regarding the Brazilian currency (“Real”), it shall be added to the international environment impact, the uncertainties derived from the presidential elections proximity, which triggered a 25.0% appreciation of the average Dollar rate against the Real in the 3Q18, when compared to the average 3Q17 rates. These factors contributed to the maintenance of the Company’s performance in the Period that, as an oil exporter, soak up on its operational performance, both the Dollar appreciation against the Real as well as the oil prices upward trend verified in the second half of the Period. 3 Brent price 3Q18 average Brent price reached US$ 75.84 per Chart 1: Brent price barrel, a 45.4% increase compared to last year’s in US$ per barrel same period, when the average Brent price was US$ 52.17 per barrel. Compared to the second quarter of 2018 (“2Q18”), the 3Q18 average price increased 1.2%. In the last twelve months, Brent prices appreciated 43.8%, starting the period at US$ 57.54 per barrel and ending at US$ 82.72 per barrel. (Source: Bloomberg) Exchange rate The average Real rate against Dollar went from R$ Chart 2: Real-Dollar Exchange rate 3.16 in 3Q17 to R$ 3.95 in 3Q18, a 25.0% average in R$/US$ Dollar appreciation. Compared to 2Q18, when the average Real rate against Dollar was R$ 3.61, the average Dollar appreciation was 9.4% in the Period, having been verified increased volatility in rates, which reflected the global currencies devaluation movement against Dollar, and the uncertainties related to the pre-election period. (Source: Bloomberg) 3. Operational assets Tubarão Martelo Field Tubarão Martelo Field encompasses the concession areas of BM-C-39 and BM-C-40 exploration blocks and is located in the Campos Basin, at a water depth of 110 meters, in the north coast of the State of Rio de Janeiro. The Company is the asset operator, having acquired 100% of the exploration and production rights in 2007, in the 9th Bidding Round of Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (“ANP”), Brazilian regulatory agency. The production began on December 2nd, 2013 and reached 14.5 million barrels of oil produced. 4 The average daily production in 3Q18 was 5.9 kbbls, Chart 3: Production, Commercialization and Inventories totaling 543.5 kbbls. The volume produced in the in kbbls Period presented a 11.7% reduction compared to 2Q18, when it was produced 615.7 kbbls, arising from the natural decline of the wells flow and interruption of well 7-TBMT-2HP production, which on July 29th, 2018 presented drawbacks in the submerged centrifugal pump culminating in the production suspension, remaining since then 3 active producing wells. The Company evaluates alternatives to resume well 7- TBMT-2HP production. Atlanta and Oliva Fields – BS-4 block The BS-4 block (“BS-4 Block”), comprised by Atlanta and Oliva fields ("Atlanta and Oliva Fields" or "Atlanta Field"), is located in Santos Basin post-salt area, approximately 185 km from the coast, in water depth of about 1,550 meters. As disclosed by Dommo Energia through the Material Fact dated October 23rd, 2017, there is an arbitration proceeding managed by London Court of International Arbitration – LCIA, established by the Company against the consortium partners ("BS-4 Consortium"). On September 25th, 2018, the Company received the arbitration award issued by the Arbitration Court (“Decision”) in respect to the first phase of the arbitration proceeding, which stated, among other things, that the notification issued by one of consortium partners on October 10th, 2017 (“Notification”), was valid at the time it was issued, without prejudice to the possible annulment of this exclusion in a subsequent step of the arbitration proceeding, based on analysis of evidence that could support such an annulment. The Notification had the purpose to exercise, without offer of payment, the option to demand the Company’s exclusion from the Joint Operating Agreement – JOA, the Consortium agreement and the Concession agreement, all related to the BS-4 Block. The first phase of the arbitration did not include the analysis of evidence, having the Decision foreseen that, in any additional phase(s) of the arbitration, through the fact-finding exercise, Dommo Energia may still seek to annul the exclusion and the transfer of its stake in BS-4 Block and argue for an indemnity for losses and damages against the consortium partners. The Decision is subject to eventual clarification requests from the interested parties, which may change its content. Regarding Atlanta Field’s operational performance, the operator announced on October 4th, 2018 that the 3Q18 production was 1,185.1 kbbls with average daily production of 12.9 kbbls. Since the operation started, on May 2nd, 2018, it was produced 1,778.8 kbbls. 4. Other assets Corporate stake The Company holds 4,958,471 shares issued by Eneva S.A. booked as Marketable Securities. On September 30th, 2018, the shares marked-to-market value was of R$ 65,700. 5 Tubarão Azul Field Considering that no economically feasible alternative was found to continue the activities in Tubarão Azul Field, located at Campos Basin, it was requested the concession’s return to ANP, in accordance with the Material Fact disclosed on September 20th, 2016. Dommo Energia, as operator, began in 2017 the decommissioning and abandonment process of the aforementioned field, in compliance with norms from ANP, regulatory bodies and authorities. The wells abandonment process was completed in 1Q18 using financial resources from the escrow account established through an agreement signed in 2015 with FPSO OSX-1 rights holders. 5. Financial performance The financial statements are presented on a consolidated basis, in Real thousands, and were prepared in accordance with accounting principles adopted in Brazil including the pronouncements issued by the Comitê de Pronunciamentos Contábeis – CPC, Brazilian accounting committee, and by the International Financial Reporting Standards – IFRS, issued by the International Accounting Standards Board – IASB. Table 1: Key indicators (in R$ thousands) Key Metrics 3Q18 2Q18 Var. % 3Q17 Var. % Average exchange rate (R$/US$) 3,95 3,61 9,4% 3,16 24,8% Volume traded (kbbls) 643,6 367,6 75,1% 817,7 -21,3% Net revenue 165.487 96.231 72,0% 116.827 41,7% Cost of goods sold (87.491) (46.979) -86,2% (183.869) 52,4% Gross profit 77.996 49.252 58,4% (67.042) 216,3% Gross profit margin 47,1% 51,2% -4,0 p.p -57,4% 104,5 p.p Adjusted EBITDA 58.635 41.543 41,1% (25.446) -330,4% Adjusted EBITDA margin 35,4% 43,2% -7,7 p.p -21,8% 57,2 p.p Net profit (loss) (610.713) 198.770 -407,2% (1.749.978) 65,1% Earnings per share (R$) (0,23) 0,07 - (13,13) - The volume sold increased from 367.6 kbbls in 2Q18 to 643.6 kbbls in 3Q18, a 75.1% growth, arising from the Company’s offloading optimization with its client, resulting in a larger number of offloads in the Period when compared to 2Q18. Therefore, part of the oil produced in 2Q18 and held in inventories was sold during 3Q18. As a result, mainly due to the higher volume sold in the Period, net revenues was 72.0% compared to 2Q18, reaching R$ 165,487 in 3Q18. Compared to 3Q17 net revenues of R$ 116,827, period that had a higher volumes sold, 3Q18 performance is 41.7% stronger, explained by the 22.7% Real devaluation and Brent prices appreciation.
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