Enauta Participacoes SA

BOVESPA:ENAT3

Earnings Call Transcript 2021-Q1

[Operator]

Good day, ladies and gentlemen time. At this time, we would like to welcome everyone to Enauta's First Quarter 2021 Earnings Conference Call. Today with us, we have Mr. Decio Oddone, CEO; Ms. Paula da Costa Corte-Real, CFO and IRO of the company; and Mr. Carlos Mastrangelo, Operations Officer. We would like to inform you that this event is being recorded. [Operator Instructions] After Enauta's remarks are over, there will be a Q&A session. [Operator Instructions]

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

Now I will turn the conference over to Ms. Paula da Costa Corte-Real, CFO and IRO of Enauta. She will start the presentation. Ms. Corte-Real, you may begin.

[Paula da Costa Corte-Real, executive]

Good day, everyone, and thank you for joining us on this first conference call of 2021 to discuss Enauta's first quarter results.

Let's begin on Slide 2 with the highlights of the quarter, which was quite a busy quarter for the company. Total production, including Atlanta and Manati, was 1 million barrels of oil equivalent in the quarter, equivalent to an average daily production of almost 12,000 barrels of oil equivalent. Atlanta resumed production on February 19 from 1 of the wells. So we had around 45 days with the field operational. We were very pleased and excited with the return of the second well at Atlanta, which happened in the beginning of May, increasing combined production to 18,500 barrels of oil per day. This was great news, particularly if we consider all the challenges we are facing in this pandemic environment.

At the beginning of April, we received approval by ANP to take over 100% of the field at Atlanta, now pending only the establishment of guarantee for future abandonment of the wells and the signing of the amendment to the concession contract, which we should finalize along the second quarter. Also, we moved forward with the bidding process for the FPSO as well as other necessary items for the implementation of the full development system at Atlanta, which I will explore in more detail momentarily.

From the financial standpoint, quarter results were impacted by lower operating income and the negative impact of exchange variation on leasing liabilities balances. Our cash position remains solid at BRL 1.8 billion. Just this week, we also had a dividend payment amounting to BRL 51 million or approximately BRL 0.19 per share.

On the next slide, Slide 3, You can see in more detail the company's production performance in the quarter. In Q1 '21, production at Atlanta was negatively impacted by a preventive shutdown during most of the quarter year-over-year. And in Q1 '20, the field was operating with 3 producing wells, and no stoppages occurred in the quarter. Lower production at Atlanta was partially offset by a 67% production increase at Manati Field, which inversely had its operation halted for a while in Q1 of last year.

Enauta's total production dropped by 32% year-over-year with a daily production of 12,000 barrels of oil equivalent, down from 17,000 barrels of oil equivalent in Q1 '20. The good news is that we already have 2 wells back in operation with an average day production of 18,500 barrels of oil. And in a couple of months, by the end of July, we will have all 3 wells in operation.

At Manati Field, production was 3.3 million cubic meters daily, up from 2 million cubic meters daily a year ago. I'd like to remind you that Enauta sold its 45% working interest in the field to Gas Bridge for BRL 560 million, an amount which can increase pending the fulfillment of conditions, precedent and regulatory and commercial conditions. If the sale of the field materializes as part of the agreement, the accounting result from January 1, 2021, until the sale of the Gas Bridge is completed, will be deducted from the selling price.

On Slide 4, we present our financial results. Revenue remained practically stable quarter-on-quarter, totaling BRL 181 million, with almost 70% of the revenue coming from Manati Field. We recorded significant cost reductions both quarter-on-quarter and year-over-year. Year-to-date, costs were down 44.3%, especially by virtue of reduced chartering costs of the FPSO and depreciation and amortization costs in the period resulting from lower production. With that, we were able to post an EBITDAX margin of 68.2%, 2.4 percentage points up from last year's first quarter and 5.2 percentage points higher than Q4 '20.

On Slide 5, we present Enauta's solid financials and why we believe we are in a unique position to take advantage of consolidation opportunities in the oil and gas industry in Brazil as part of our strategy to renew the company's portfolio and expand our business. Enauta's total indebtedness continues to reduce with debt repayment, which totaled BRL 202.6 million. As regards to leverage, we clearly have room in our balance sheet to access the market. We are in a very comfortable position to execute our CapEx commitments for the next 2 years of around $145 million and still being able to grow the company.

I will now turn the floor to Decio to continue with the presentation, and I'll be back during the Q&A.

[Decio Oddone, executive]

Good morning, everyone. It's a pleasure to be here with you, and thank you for joining our earnings conference call.

On Slide 6, we share important headway achieved in Atlanta in recent months. Paula already mentioned a couple of them. We had, for instance, final approvals to take over the total field and resume production. We had a second well in early May, May 10. And with that, we continue with our estimate for the year, around 14,000 barrels of oil per day within a range of plus or minus 10%. The bidding process of the FPSO in the full development system is in progress. We already reported that capacity of 50,000 bbl per day, connecting from 6 to 8 production wells, out of which 3 are up and running in the early production system. Like we said before, the bidding process considers the adaptation of OOSX-2 (sic) [OSX-2], an existing FPSO, which has not been used yet, and we signed a 12-month exclusivity agreement with a purchase option by the chartering company.

And this May, we started a bidding process of other subsea systems, special boats and wells of the full development system, everything as expected.

Another good piece of news is that we signed a new COSA with Shell, which was approved last year with better trading conditions in the FPSO with a discount lower than $1 per barrel vis-à-vis Brent. And it helps to reduce the volatility of our revenues by the end of the early production system.

And last but not least, we recently signed an agreement with Dommo Energia, which provides for the termination of all lawsuits related to the Atlanta Field.

On Slide 7, we show Enauta's exploration portfolio. Drilling of the first well of Sergipe-Alagoas basin is scheduled for the second half of 2021 and the Cutthroat prospect located in Block 428. We expect to see something very similar to previous discoveries. In the West Africa's Coast, our consortium comprised of ExxonMobil, Murphy Oil and Enauta and holding 9 blocks in the region awarded over the last 3 years. Due to the carry negotiated with partners as a result of the farm-out process, Enauta is not going to pay the full cost. So our spend is estimated at only USD 8 million to drill this well.

Next slide, please. So on the last slide, we show a summary of Enauta's strategic repositioning, which has been announced for a while now. And we've continued to focus on value generation in our portfolio, either by diversifying our asset or by dividend payout. We believe that by having a diversified portfolio with key assets and moving forward with a full development system in Atlanta and selective investment in exploration, we may have a portfolio with a lot of value generation and therefore, bring good results to the company in the future. We keep an eye on the opportunities for assets in the future repositioning, and this applies to Brazilian and foreign big companies. And in Brazil, we are assessing the possibility of moving into acquisitions in order to work with offset Manati. And we are just waiting for good conditions so transactions are performed and the deals are performed.

In the short term, we are focusing on having the third field -- well of Atlanta with the first oil, benefiting from our position in the oil market. A barrel increased a lot recently. And we are also going to work very strongly to improve our efficiency in Atlanta, both in terms of our operations and also with regards to any measures that may bring positive effects and reduction in greenhouse gas emissions.

So these are our early remarks. And we are here to take your questions during the Q&A session. Once again, thank you very much for being with us.

[Operator]

[Operator Instructions] Our first question comes from Mr. Guilherme Levy with Morgan Stanley.

[Guilherme Levy, analyst]

My first question is more related to accountability. Overall speaking, considering booming accounting numbers that were implemented in the first quarter of last year, we have more volatile results and harder-to-read above EBITDA numbers. So I'd like to have a better understanding of how to build this bridge between the BRL 54 million of cost in Atlanta ex IFRS and the positive cost of BRL 11 million. Like you said, it was a leasing payment. So what about the FX effect and other factors in between?

And the second question has to do with Manati. I would like to understand more about expectations to conclude the sale in terms of timing and also considering the expected cash generation for the year. What do you expect to see today when it comes to the net pay for this field?

[Decio Oddone, executive]

Guilherme, I was muted, sorry. Decio speaking. I'm going to give the floor to Paula, but first of all, I would like to apologize. We are wearing a mask. That's why the sound is not so clear, but that's necessary at this moment.

[Paula da Costa Corte-Real, executive]

Paula speaking. Thank you for your question. Actually, IFRS 16, regardless of the change in the reading, which happened late last year, at the end of the day, it brings a uniform cost over the life of the agreement. So in this period, more specifically or prior to IFRS 16, we used to post costs according or based on the invoices we had from the chartering contracts. And now with IFRS 16, we have to post all liabilities related to the contract close assets. And this is linear over the life of the agreement.

So because this quarter, more specifically, is a quarter that owing to the lower performance in the field and lower performance of FPSO, the cost of FPSO, which is relevant in OpEx, eventually was lower than the average in the agreement. So when we reclassify this cost in the OpEx item into depreciation line, which is where it is impacted in IFRS, it eventually has a creditor impact on cost and becomes positive. This is purely for accounting purposes. When we check the effect of the company, excluding IFRS, in the end, it is better than when it includes our IFRS because the effective cost of the quarter was lower. However, IFRS makes it a linear effect under the terms of the agreement.

So it's not only the linear effect, but it increases a specific effect due to the performance of FPSO. But when it's except from this and becomes into depreciation line, we also have an impact on the financial owing to the present value of the flow and exchange variation. So when we have this reclassification, eventually, the creditor cost appears. And then we also have the linear effect of the contract and reclassification into the amortization line in the project.

As for Manati, mid-last year, we signed an agreement with Gas Bridge. This contract has a limit -- has a deadline to happen, which is by the end of this year, year 2021. So it could happen until the end of 2021 with some conditions and requirements to be met so the operation be performed. And once it happens, there is a deadline by the end of the year. As far as we know, things are evolving well, but we don't have any final date yet, and we don't have a date for -- expected for this contract. But once it materializes, we have about BRL 500 million, which may be changed owing to some commercial conditions, which is confidential according to the terms of the agreement. And the effective date starts in December -- in the end of December ['20]. So the result for 2021, if the sale materializes would be adjusted according to the selling price that we disclosed. But when it comes to timing, it is a deadline and to be materialized by the end of 2021.

[Operator]

Our next question comes from Gabriel Barra with Citibank.

[Gabriel Coelho Barra, analyst]

Building on the prior question, cost of Atlanta was a lot lower because of the operating problems. The question is until when would you have this discount? And according to the contract, how long can you enjoy this deduction in the cost? Once you resume production, let's suppose it normalizes in July for the third well, will the cost to go back to the previous levels? Or would it remain in the current level? I'm just trying to understand the lifting cost once you have the third well.

And still on the third well, you confirmed the guidance of 14,000 barrels a day. But doing a calculation with the current 2 wells and the average production in the quarter, we would have an average in the second half of close to 20,000 barrels a day. My question is, is there any upside? Because looking at the 2 producing wells reaching 18,000 barrels with a third well being added in July, would there be any upside -- possible upside?

And my third question, if I may ask a third question, looking at this new contract, considering the Brent oil price, could you extend this agreement in the full development system? Is there a provision to extend the contract once you start the full development system? These are my 3 questions.

[Decio Oddone, executive]

This is Decio. I'll ask Mastrangelo to answer the first 2 questions. The third one, I can answer. The contract extends until the end of 2022, and there is no provision to extend it. Once we have the full development system, there will be a new negotiation. But this contract is a good benchmark for us. And Mastrangelo will answer the first and second questions.

[Carlos Mastrangelo, executive]

Hello, Gabriel. And I'm sorry for the muffled voice, but we are all wearing masks here. The Atlanta cost was lower. Our contract is a performance contract. And since the FPSO had a downtime in the beginning of the year and production is partial, that has an impact on operating cost, which also takes into account the FPSO chartering cost.

So your second question was, if we go back to previous levels, well, we expect to get close to that. But parallel to that, we are performing some optimizations in our operating costs, removing some unnecessary items. And we expect to get back to a level that is lower than before the last year when the FPSO was 100% operational.

And then your second question was about the third well. Well, it's scheduled to start operating in July. We're maintaining the same guidance of 14,000, plus or minus 10% barrels. I would say that today, we're more towards the lower range. But with the third well starting operating, we should match the guidance of 14,000, plus or minus 10%.

And the third question has been answered by Decio. Thank you.

[Operator]

Our next question comes from Christian Audi with Santander.

[Christian Audi, analyst]

Decio, Paula, Mastrangelo, I would like to ask 3 questions. First, on the operating side, and then we'll talk about strategy. On the operating side, this contract with Shell. And by the way, congratulations. It looks a very interesting contract. I just try to understand if they'll buy the oil, they'll buy the oil with the discount of more or less $1 from Brent. It seems to be a very low discount. So I just want to try and understand the dynamic of this. How are you able to negotiate this? And does it stretch until the end of 2022? Or can it be -- can you go beyond that?

My second question is also focused on Atlanta and Atlanta costs. Decio, you mentioned the potential of lowering costs even further. So I'd like to try to understand how fast this will happen in the order of magnitude of cost reduction at Atlanta.

And then my third question, Decio, that's more on the strategic side. Of course, you're working strongly since you took over to reposition the company strategically speaking. And I would like to understand how is the whole process unfolding? You probably had an opportunity to analyze a number of segments in the market. Are you focusing how you're finding more interesting opportunities in shallow waters, ultra-deep waters or onshore? We just want to get a sense of how the strategy is evolving. Any comment in that regard would be very helpful for us.

[Decio Oddone, executive]

Thank you, Christian. With production returning in the second well and eventually in the third well, our next focus is to optimize operating costs. We will devote to optimize operating costs. We will revisit our whole cost structure to see whether we can have some kind of further operating costs reduction. We have to wait a little to speak about numbers because the process is only beginning, but we're hoping to bring about a cost reduction in our current operations at Atlanta. That's what we are working on.

Regarding the Shell contract, it's what we said, the contract goes until 2022 with a discount lower than $1 per barrel. And this results from the change in the oil market and the fact that low sulfur oil is valued now and with the IMO 2020 changes. And that led to a greater interest in Atlanta oil, and the contract extends until the end of 2022.

Regarding our strategic position. While we are assessing some opportunities, we have validated the new strategy with the Board of Directors. It was approved. It is now reflected in the planning of the company. We revisited our purpose, our mission, our vision, our values. But as mentioned, we're looking into opportunities that we believe can create value. And there's no limitations. We are looking at business opportunities that make sense in our current environment, and more than that.

Well, we don't like to talk about business opportunities that are being assessed, of course. So we tend to be more cautious for that kind of thing. So that's all I can say for now.

[Christian Audi, analyst]

And Decio, to your last point, I knew that some of these opportunities can potentially be with petrol price in perhaps lots that they want to divest from. So I'm curious, Petrobras is going through management and board changes, have you felt any kind of impact from these changes that are happening to Petrobras? Any impact on these processes that you might be involved with, with Petrobras?

[Decio Oddone, executive]

No comments, Christian.

[Operator]

Next question is from [Matthias Ancram] with UBS.

[Unknown Analyst]

Considering the company's cash, which is at a very solid level, and receivables to be received by Enauta in the short to midterm, what's your mindset in order to use this cash for new investments, maybe? Do you consider increasing investments in Atlanta or new assets or, for instance, if you're considering a level of dividend slightly higher, be it on a recurring basis or one-off? So this is my question.

[Decio Oddone, executive]

Thank you, [Matthias]. I think I mentioned it before, maybe in the last call or 2 calls ago, with a new scenario with interest rates, our cash has to be solid. Either you work on it or you give it back and return to your shareholders. Having the company's cash in Selic and the company is not efficient when it comes to value generation. So we are working on a diversified portfolio, like I said before, using this cash for acquisition purposes and work on the company's portfolio. It used to be Manati in production for a while, generating cash; Atlanta with an early production system, in order to have information and to have the approval of the full development system and some selective exploration cases. So we maintain the selective exploration. We move forward in Atlanta's full development system, which is the news for the year, and we are selling Manati. So we need to make up this part of immediate cash generation once we have Manati divestment, and we'll be on the lookout for the opportunities.

The company has a tradition with dividend payout, and it stems from results and cash. So our strategy is to be in this position, generating value to shareholders through a combination of asset value generation and some dividend payout, and the balance will be seen over time over the year and over the years when it comes to availability.

[Operator]

The next question comes from Leonardo Marcondes with Itaú BBA.

[Leonardo Marcondes, analyst]

My first question has to do with the purchase or acquisition of new assets. You have nearly BRL 2 billion cash. I would like to understand what you envisage to be a value to the company for asset acquisition?

The second question is about Atlanta. Now that things are more solid when it comes to the full development system, lawsuits and working interest, do you still -- are you still looking for a partner for the field?

[Decio Oddone, executive]

Thank you, Leonardo. Firstly, like we said before, we have a cash position and net debt over EBITDA capacity. Now the net debt is negative. So we want to start for or pursue our position and working on national opportunities.

The second question is about Atlanta. We are very confident with Atlanta's potential. We believe we have a resilient project, that's why we're moving forward. Otherwise, we wouldn't. And the idea is to have a partner alongside in order to diversify our portfolio. We would like Enauta's portfolio to be more diversified than today. Today, we are more focused on cash generation in Atlanta once we have Manati sale. We want to build a portfolio in order not to rely on just a couple of assets and have a wider diversification. As for bringing new partners, it releases funds to have a more diversified portfolio. That's our strategy.

[Operator]

Our next question comes from the webcast by Mr. [Carlos Ejeda] with Counter Insider. He says, I have 2 questions. One, in the -- we're in the middle of the second quarter of 2021. Do you see -- what are the trends that you see in the second quarter? And my second question. To that end, how do you see the rest of the year? Do you see activity recovery?

[Decio Oddone, executive]

Hello, Carlos. Well, from the standpoint of Enauta, we see resumption of production at Atlanta with the second well resuming operation. And the third one will come on very soon.

Now in terms of the oil market, we see improvement in the global economy with vaccination advancing, particularly in the United States, we see improvement in the economic environment, and we see reaction in the price of the commodity. Today, We are working with an oil price, which is way above what we imagined a few months ago, and that is positive for our industry, high prices benefiting out as cash generation.

[Operator]

Our next question also comes from the webcast by [Lucas Kansu], an individual. And he asks, final transfer of the 50% working interest from Barra Energia to Enauta, when will it happen?

[Decio Oddone, executive]

We've had formal approval by CADE, the Brazilian Antitrust Agency, and preliminary approval by ANP. It is now pending presentation, the establishment of Enauta's guarantees replacing Barra Energia guarantees. This is in the hands of the regulator, and the timing will depend on how fast the ANP can work. We believe that in the coming months, this should happen.

[Operator]

Our next question comes from webcast by [Vicente Velazquez]. He's an investor. And he asks, congratulations on the new Enauta phase that is increasing production, executing projects that have been announced a long time ago.

First question. Why is the cash not being invested with a yield 98% higher than CDI? Second, you are taking long to buy new fields. And don't you think that this can make these acquisitions a little more expensive?

[Decio Oddone, executive]

Well, I'll ask Paula to give more detail regarding the first question, but our cash is invested in conservative funds, and the yield is close to market profitability.

And as for the strategy and the fact that we're taking long to use our cash and the fact that this can lead to losses, well, the cash has to be used in a responsible fashion. So asset acquisition processes have to be handled carefully. The cash has to be used in projects that will create value. What I have mentioned is that in recent months, we have identified some opportunities. We've been devoting time to identify opportunities. Hopefully, the process will advance, but I have nothing to report at this point. And we recognize that the cash remunerated ex CDI were a little less or a little more than CDI. It's not an adequate remuneration for the investments. So we are working to putting these resources to create value. And Paula can explain what we're doing with our current cash.

[Paula da Costa Corte-Real, executive]

Thank you, Decio. Actually, cash investment follows the policy of investments of the company, which is approved by the Board of Directors, where we have some restrictions. In terms of concentration by issue percentage of AAA or AA banks, but these are conservative funds and profitability is very much in keeping with the benchmark of comparable funds.

And I think it's exactly what Decio mentioned, the goal of the company is put the cash into projects that will remunerate our shareholders better. And over time, when we saw that we had excessive cash in the company, and indeed, CDI-based remuneration is not adequate remuneration for the company's capital, what we did was to pay -- to distribute the surplus of cash because we understood that this would generate more value to our shareholders. But again, we have to abide by a conservative policy. This is the profile and the role of the company. That's why the benchmark ends up being CDI. The goal is to put the cash to work in oil and gas activities and to generate more value in that way.

[Operator]

[Operator Instructions] Our next question comes from Christian Audi with Santander.

[Christian Audi, analyst]

Just a follow-up question, Paula. Considering the financial status, which is still strong with net cash, could you just remind me of your target for how this net debt? If you were to borrow or have further loans for acquisition purposes, would you be comfortable with a maximum of 2x or 2.5x net debt-over-EBITDA ratio? If we consider 2.5x, will that mean that you would have a capacity to -- or how much in terms of funds could you use? What is the firing power of the company considering the net debt-over-EBITDA ratio today? And if you were to reach a higher level, which level would be comfortable? How many millions of BRL in firing power that you could use with acquisitions?

[Paula da Costa Corte-Real, executive]

Christian, Paula speaking. Thank you for your question. As we speak, our search in order to work on the portfolio and buy an asset is pretty much focused on production assets. The company wants to diversify and improve revenues and EBITDA. So the beauty of this kind of acquisition is to have a feedback in our ability to leverage the company. So our focus is on each one of these assets right now, considering the value generation profile, some of them still require CapEx and others don't. So what is the debt that can fit in each one of the assets? If we consider what we analyze is that further growth for leverage and how much would be in corporate terms. If you think about capital markets and now focusing more strongly on the corporate level for any future emission, I -- or issue, I think the level that you mentioned, up to 2.5x, I think that's reasonable for any further issue.

And when it comes to covenants, we have to work on them under the corporate model, trying to check whether there's any current trust point or if it is a level of net debt-over-EBITDA ratio that is going to last longer and also the profile. It's a case-by-case basis. I don't have a final figure to show our powerful acquisition. So the message is there is room in our current projects and also in the corporate arena, and I don't think it should be a constraint for growth and value creation of the company. The thing now is to have projects that make sense, creating value and turning to good acquisitions.

[Operator]

[Operator Instructions] There are no further questions. This concludes the Q&A session. We'd like to give the floor back to Mr. Decio Oddone for the final remarks. Over to you, Mr. Oddone.

[Decio Oddone, executive]

Thank you all for joining us today. Thank you for your interest in our company, and we will keep on doing our best in order to improve our portfolio and improve our efficiency, both in terms of our operations and also issue and also going to work so we can work on diversity and action. So we hope we can see you again in our next earnings conference call in a couple of months. Thank you very much.

[Operator]

This concludes Enauta's conference call. Thank you all for joining us. Have a good day. You may disconnect from the lines now. Thank you.