Enauta Participacoes SA

BOVESPA:ENAT3

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and thank you for waiting. We would like to welcome everyone to Enauta's Second Quarter 2021 Earnings Conference Call.

Today with us, we have Mr. Decio Oddone, CEO; Ms. Paula Costa Corte-Real, Chief Financial Officer and Investor Relations Officer; and Mr. Carlos Mastrangelo, COO. We would like to inform you that this event is being recorded. [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 management and on information currently available to the company. Forward-looking statements are not a guarantee of success. They involve risks, uncertainties and assumptions as they relate to future events and therefore, depend on circumstances that may or may not occur.

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 Mr. Decio Oddone, CEO, who will start the presentation. Mr. Oddone, you may begin.

[Decio Oddone, executive]

Good morning. Thank you. It's a pleasure to be here with you. I'd like to start apologizing for the delay. We like to be punctual, but we had a technical problem connecting to Chorus. So again, I apologize for the delay. We will start the presentation and then we'll be available for questions.

I would like to start with the highlights of the company. First, we have effective actions in ESG, 0 lost time injuries, no spills, 26% reduction of CO2 emissions and an important female leadership in the company, 40% of women in leadership positions. We had higher production and operating efficiency.

Total average production for oil and gas totaled more than 17,000 barrels a day. We had production returning fully at Atlanta Field and a reduction of BRL 3 per barrel lifting cost in Q2 '21 over Q1 '21. The company is working to deliver growth. We have ability, capacity for that.

Our liquidity reinforced our cash position of BRL 2 billion. In the second quarter, we had a 50% working interest in Atlanta Field recognized as Barra Energia transferred their stake to us in the end of last year. And that had a very positive impact on net income of more than BRL 630 million.

Lastly, we had an active portfolio management. We relinquished an exploratory block in Sierra Basin. We signed concession agreements for 4 new blocks in Parana Basin. We intend to explore gas at a low cost. And we are proactively analyzing, as we have mentioned before, some acquisition opportunities for new assets.

As regards ESG, I would like to highlight that Enauta has 15.2 kilos of CO2 [ e ] per barrel of oil equivalent scope 1 and scope 2. And this is very good compared with the market. I removed the mask. And maybe you can hear me better. I've had more than 15 days since I had my second vaccine dose and I'm taking care of myself, and I think it's -- you can understand me better without the mask. So I was saying we had emissions of 15.2 kilos of CO2 e per barrel produced. We have a very low sulfur content low methane.

The average of major oil and gas companies is about 21 kilo so -- and not as well-positioned in that regard. I talked about the fact that we have 40% of women in jobs and in the leadership positions. And also, I'd like to mention our governance, the company is listed on Novo Mercado. So we have to provide good governance, and we do so. Now we will speak more about production and operating efficiency.

And I'll ask Mastrangelo to help me with the coming slides.

[Carlos Mastrangelo, executive]

Thank you, Decio. Speaking about our Atlanta Field operation and the development plan. On Slide 7, in the top left-hand corner, we can see that Atlanta oil is highly valued with a reduction in the discount as regards Brent and you see increase in the Brent oil price in the international market. On the left, on the bottom, we can clearly see that there was a reduction compared to last year, a reduction in Atlanta production because we needed to adapt the FPSO of the early production system to the oil flow, current oil flow conditions at Atlanta.

We had to exchange some of the equipment in the FPSO. And we see that production at Atlanta was low in Q1 of '21, but increased in Q2. So we will end the adaptation phase in this month of August, and then we will have production returning to all wells. We currently have 2 wells in operation. And the third one will resume production this month.

And on the right, we see the reflects of that on revenue. The high value of our barrels of oil and the Atlanta revenue net for Enauta. And here, we can see the work we did for operating optimization, which brings efficiency gains. We made a number of changes, particularly in logistics, in maritime support. There was a fleet reduction, reduction of the fleet available to operate at Atlanta Field. We had a more efficiency use of our vessels in terms of number of trips. So we had a reduction in operating cost. Our lifting cost had a BRL 3 reduction per barrel. And on the right, we see the combination of both sales price and lifting cost. We see BRL 28.1, reducing the lifting cost from BRL 28.1 to BRL 25.2, and we see the increase in the sales price.

Here we give you an overview of the transition to the full development system at Atlanta Field. So after the initial phase with the early production system, EPS, that will extend until 2023, we will then start with the full development system, FD. So we reviewed the development plan with a reduction of the necessary CapEx to deploy full development system. The FPSO currently has a water processing capacity, which is restricted. And we are working to increase the water treatment capacity so that we can have a higher oil production still in the early production system phase. We decided to bring forward the drilling of a fourth well, still in the early production system. Drilling is estimated to begin in Q3 of 2022, and production is expected to begin at the fourth well in mid-2022. For the full development system, we have an exclusivity contract to use an existing FPSO, which was never used, [ OSX2 ].

Total CapEx for the project, including well drilling, subsea equipment, will amount to $500 million to $700 million, excluding the FPSO because the FPSO will be chartered. The bidding started in March, and it is on schedule. We are commissioning all of the equipment, FPSO and other pieces of equipment. The last package to commission equipment for the full development system is underway. And now we are carrying out a more detailed analysis of how to handle the transition between the early production system and the full development system to see where is the optimal points of studies still optimize SBA transitioning to full development.

[Paula da Costa Corte-Real, executive]

Good morning, everyone. I'd like to make comments on the company results now on Slide #11. This quarter posted a substantial improvement, both in terms of the total result and also in the operational aspects, operating aspects as Mastrangelo mentioned in previous slides. The revenue nearly doubled when compared to the first quarter, and it has an impact on the recovery of Atlanta production and also behavior of brand and also the high value of Atlanta oil as we had in the low sulfur content, becoming more and more attractive. Atlanta therefore contributed with 62% of our reported revenue and Manati with 38% of this revenue.

In addition to revenue, EBITDAX of the company was also impacted by a reduction in operating costs. As we said before, this change in the operating performance brought gains of BRL 3 per barrel produced vis-a-vis the operating cost of the oil produced in Atlanta in Q2. When you think about going forward, the expectation, like Mastrangelo said, is that these numbers will continue to grow as we have an increase in Atlanta's production right now in Q3, with the first oil in the third well and also the full quarter with 100% takeover of the field, which happened in the last week of the second quarter on June 25, when we had the approval to transfer 50% additional from Baja Interest into Enauta Energia.

Nonrecurring effects, the contribution of Manati for EBITDAX was approximately 40% and 60% Atlanta, BRL 100 million to Manati and BRL 130 million to Atlanta as a contribution to EBITDAX in this quarter. In addition to the strong net income, a strong operating result and a nonrecurring impact in EBITDAX and net income, an impact of BRL 37 million referring to the relinquishment of Sierra exploratory block like Decio said, as a means to manage the portfolio with an impact on the quarter results. And the main impact, BRL 542 million. When you think about net income, the adjustment and recognition of additional 50% interest in Atlanta Field.

Now on the next slide, Slide 12, I'm going to tell you more about the impact of the adjustment of Atlanta Field's fair value. Just to give you a track record of the project. At the end of last year, we had this decision of Barra Energia leaving the Atlanta project. It was a different scenario. At that time, we had lower oil and even the EPS was going through a period of stock production late last year and early this year. And in-house, we decided to give a new design to the project, becoming more resilient as a project and also increasing the operating efficiency, which became more resilient at Brent price.

So substantially decreasing the breakeven point of the operations of the project. And we resumed production in the FPSA. So operational aspects were overcome over the first quarter. And the third well concluding now in August this year, and operation can come back to normal. And during the 6 months, that's the time we had to have the approval of the agencies to transfer 100% taken over of Barra to Enauta.

So on June 25, we take over 100% interest stake in the field. For accounting purposes, that's a combination of businesses. So at the end of the day, once we take over the field, because it was shared in the fast with a joint operating agreement, now we need to adjust the asset and reassess the asset to recognize not only Barra's interest, but also our own working interest with an impact net of tax in our result in the second quarter of BRL 821 million, which is the recognition of 50% additional interest plus gain of Enauta's portion net of income tax, deferred income tax. So we don't have an immediate cash impact from income tax. But from the moment the asset generates value, then we have an impact on income of BRL 542 million.

Now on Slide 13, I'd like to comment on the company's financial capacity when it comes to the cash position. We ended the year -- we ended the quarter with a very robust cash position, BRL 2 billion. And also an increase of nearly BRL 250 million compared to the cash at the end of the first quarter. In addition, we also had financial options. When we check the net cash, the impact was over BRL 300 million vis-a-vis the end of the first quarter. And the main impact, which contributed to increase our cash position where the agreement with Barra Energia around BRL 200 million cash received in addition to the operation of the company. So when we check EBITDA -- adjusted EBITDA with a noncash effect of adjustment of the asset, we also see an impact on the operating cash of BRL 193 million.

Going forward, the company is at a very comfortable position to face our investments reported in our CapEx. So for 2021 and '22, around $145 million. As future receivables vis-a-vis the sale of assets, once we perform the sale of Manati Field, we have BRL 560 million as receivable. And the third portion or less installment of BMS 8, which is BRL 144 million additionally, substantially strengthening the company cash.

And the company generates cash with ongoing projects and within our strategy to diversify our portfolio and bringing new projects to improve revenue and EBITDAX, giving more room for indebtedness, we can see the market opening and very liquid for indebtedness. So we have an opportunity to improve our capital structure at the company level with another lever to increase value to shareholders. So the company today has a financial position and capacity which is very strong to face not only our current investments in the portfolio, but also benefiting from market opportunities in the future.

Now I'll give the floor back to Decio for the final remarks, and then we open for questions.

[Decio Oddone, executive]

So coming back to the slides and talking about portfolio management, we pursue to lower the company risk. Enauta wants to lower the risk exposure in exploration. We're not going to be in the next bidding round because we'll be focusing on assets, which already generate cash to improve our EBITDA position and also to leverage our ability to improve production. So we are participating and considering some M&A processes. We don't make comments on any particular opportunity.

Our company is, however, actively pursuing opportunities, but we don't make comments. That's a policy we have. And a potential upside, an important upside, which is drilling of the exploratory well in Sergipe-Alagoas possibly by year-end. Murphy is the partner, and we're going to drill the well as soon as we end the [ Tatana ] block in the pre-salt basin. And then we move to Sergipe. So we have this very good expectation when it comes to this prospect.

Like we said before, we have the highlights for the quarter. I'm not going to be redundant. And just to give more time for us to interact with you and answer questions, I'll move to the last slide. Enauta can be the first independent company to produce natural gas in Brazil. Our intention is to build our portfolio with the best capacity to generate value for shareholders. That's because we have a group of assets with the ability to generate asset throughout the exploration and production chain, but also over time, assets with different levels of maturity, which over time can provide the best value for shareholders.

With a solid production capacity and today with Manati asset and the Atlanta early production system with 24 million, 25 million barrels of oil equivalent per day production, we invest in Manati with ongoing projects, which lowers our average production. So we have the challenge to resume production, and we need to buy additional assets in addition to Manati assets. And the idea is to transform Atlanta EPS, which currently produces around 15,000 and can get close to 20,000 barrels per day with a full development system with a capacity of 50,000 barrels of oil per day.

That's the highlight of the company, the main project today. Also exploration projects in a very selective basis to allow and bring more value in the long run with significant discoveries. So Enauta is very well-positioned in the upstream chain and in projects with different maturation times. Some are ongoing in production. Others will be increasing production in the short term, like Atlanta in 2024, we expect to allocate a vessel at first with 50,000 barrels per day and the growth asset via production.

So this is our strategy. Paula already mentioned that we focus on our capacity to optimize the capital structure and generate value for shareholders in 3 different avenues: by optimizing the company's capital structure, which is not fully optimized yet, we have free cash and also room to grow the company value and dividends. So this combination, we believe it is a winning match for shareholders. And we'll be managing this company with this growth the best way it can. Whenever we have opportunities to grow, we'll be prioritizing investments. And if there is no opportunity, we better give return to shareholders rather than putting it at risk. So this is our main goal. With contracts which allow us to improve the production capacity in the very short-term and moving forward with Atlanta project to improve production significantly in the midterm and also have long-term projects, which can be the icing on the cake if you trust the company's management.

So this concludes our presentation. And if there are -- if my colleagues have no further comments, then we can start the Q&A session.

[Operator]

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

[Guilherme Levy, analyst]

My 2 questions are related to the next well drillings that you have in the horizon. The first in Sergipe-Alagoas Basin, if you can, perhaps you could comment on your expectations regarding the timing of the drillings. You mentioned that the drilling rig will handle the Exxon project and then will be relocated there. So do you know when the drilling rig would start drilling in Sergipe-Alagoas Basin? And also, how long do you think the drilling will take and then the analysis of the results? Just so we can organize our expectations regarding timing and regarding the expected results of these blocks?

My second question regards Atlanta. You mentioned in the release the possibility of drilling a fourth well in Q3 of next year. So I just want to get a sense and to understand regarding brand prices, what can we expect?

[Decio Oddone, executive]

Hello, Guilherme. To start with Sergipe-Alagoas. The exact date of starting the drilling will really depend on the analysis of the well. We are expecting it for the last quarter of this year we would start drilling. And it shouldn't take long, around 2 months. So we expect to have the results by the first quarter of next year. We have a good indication and good expectations regarding the drilling in Sergipe-Alagoas.

As for Atlanta, we are taking the first measures to drill the fourth well. We haven't gotten final approval yet. That's why we are not touching the CapEx yet or mentioning any guidance. But we intend to have the fourth well drilled in Q3 of last year to start production in Q4 2022. If we couple that with an improved ability for water treatment at Petrojarl, we believe that we have a great potential to improve production at Atlanta the moment we have the fourth well.

[Operator]

Our next question comes from [ Paso Vasconcelos ] with UBS.

[Unknown Analyst]

I have kind of a follow-up question to the first one. Perhaps you could give us more color on the drilling of the third well of Atlanta. You mentioned that you expect it to be completed in August. And we are practically halfway through August. So could you give us more color on the drilling process to date? And along those same lines, I would like to understand if you can comment on the main execution risks associated to this well into the second well. My goal here is to try and get a better understanding of how difficult production can be. So far, 2021, this has been shown quite relevant.

[Decio Oddone, executive]

Well, to start, the third Atlanta well is already drilled. Let's remember that we started having operating difficulties with the oil heaters on the vessel in mid of last year, so we made a decision in November of 2020 to have a permanent repair to permanently replace the oil hedges because they hit the oil to more than 100 degrees C. More than 1,200 little tubes in there, and the oil gets in touch with heat and that circulates in the process plant. So we repaired the first heat exchanger.

So that was for the first well that started operating in the beginning of February. Then the second well. And now we have the third well. The well is drilled. It is ready. We are just waiting for the finalization of the oil heater exchange and repair. Why is it taking so long? Well, because this is an offshore project. Working offshore is more complex. The pandemic got in the way because every time I have to avoid people, move people around, we have to wait 14 days for people to be quarantined. Any suspicion of COVID meant that we had to stop the whole work and send people on-land again for testing and so on and so forth. And that did delay the offshore works altogether. What about the risks? Well, we have the conventional risks of any operation in offshore in deep waters when you use equipment like pumps, ESPs. And they tend to fail every 2 to 3 years on average.

In the early production system, in the wells, we used to work with wells in the well and subsea wells as backup. And because of those circumstances in the beginning of July, we had 2 of these wells and -- pumps inside the wells failing, and they were replaced by the seabed pumps. The third well has the pump ready, which is waiting to return production. Like I said, we're just waiting for the repair of the oil heaters. And we believe that with that we will return the field to its full production capacity. And we will have a normal regular operation. They just happen. If they happen again, we'll use the backup pumps and the tools we have to correct that.

And I want to use your question to make a comment for everyone. This month, we should have the third well restarting operation. And that will mean a short shutdown of 2 to 3 days so we can connect the well to the process plant. So until the end of the month, we'll have a short shutdown, but it's all accounted for in terms of the production guidance we have for the year. That has been contemplated. That's absolutely normal.

[Operator]

The next question is from Leonardo Marcondes with Itau BBA.

[Leonardo Marcondes, analyst]

My first question is about inorganic growth. I know Decio said that he cannot share specific comments. But ever since you announced this new strategy in terms of being more proactive in acquisition prospects, you talked about Albacora [indiscernible]. So I'd like to know if you still continue to consider other assets in addition to Albacora? And if you also consider onshore or other assets as well, not only Albacora?

The second question is about the full development system. You also mentioned that you should have a total from 6 to 8 wells in the full development system, all producing wells. What about the return to the project? Could you make some comments on it? And also about the bidding process of supporting vessels, how many vessels do you expect to contract for the full development system?

[Decio Oddone, executive]

Thank you, Leonardo. The second part of the question, we couldn't hear that well. Maybe we had a connection problem. But I could hear the first question well. So first question is about inorganic growth. Like I said before, we are actively assessing potential acquisitions. No restriction. Can be deepwater, onshore, shallow water, but it has to generate value and makes sense to us. We're not going to work on transactions just for the sake of doing it, it should make sense to Enauta. We have a good acquisition capacity, owing to our cash position and leverage possibility. But we have to act responsibly, and we're being very diligent in our analysis. It's our policy not to make comments on any opportunities before they become more concrete. Now I'll turn it over to Mastrangelo to answer your questions. I think the second question was about having more wells or injection wells. It was not clear. We couldn't hear you well. I'm sorry.

[Leonardo Marcondes, analyst]

So you mentioned that you should have from 6 to 8 wells in the full development system, all producing wells. I'd like to understand why can't you have an injector well, maybe owing to the amount of water or due to the characteristics of the FPSO that you're trying to contract? And what about the supporting vessels? I would like to know the kind of vessels and how many would you need for the full development system?

[Decio Oddone, executive]

Perfect. Mastrangelo is going to answer the question. Just one comment. This pursuit to optimize logistics has 2 upsides. Firstly, cost reduction. We're trying to transfer from EPS to the full development system in an optimized manner compared to the past and an additional positive side effect to lower emission levels. And now I'll turn it over to Mastrangelo.

[Carlos Mastrangelo, executive]

Hello Leonardo. About your question about injector wells. The Atlanta Field has a big advantage. It doesn't need injector wells in the development plan. And this is owing to the aquifer, which is very active. As you mentioned, the process in Atlanta for the early production system in order to involve more water. In the full development system, we already designed it for the ability to process a big amount of water, more than 140,000 per day and annual reservoir of need water. For Atlanta Field, the benefit is not to need any injector well. So we only have production well, which makes our lives easier, both in terms of CapEx and also in order to prevent problems of contamination or fluid from the sea into the reservoir or problems of compatibility. So in Atlanta's design, we don't have no injector well.

The second part of your question is about supporting vessels. Currently, we have 3 main supporting vessels. In addition, we also have room to further optimize the process. We are still considering possibilities to have 2 main vessels. One of them has a capacity to haul the vessel, the relieving vessel, which is in the offloading operation, we need 2 vessels, 2 larger vessels and a speedboat. For the full development system, we expect to have the fleet system, which is similar to the one that we will have by the end of the early production system.

[Operator]

[Operator Instructions] The next question is via webcast. What is the best choice for Enauta's current manager to pay out BRL 1 per share or have asset -- cash-generating asset, which brings value to shareholders turning BRL 1 to BRL 1.50 over time?

[Decio Oddone, executive]

Thank you for the question. Well, there should be a balance. I guess that's the best option. A company should also work on projects that give a higher return to shareholders when it comes to the capital. But a balanced position of dividend payout to shareholders allow the return to shareholders to happen over growth over time. So if shareholders need assets, they can sell the shares or the dividend payout, which is a daily payment.

So we want to give robust return to shareholders with these 2 pillars. One of them is [indiscernible] and the other is dividends. So we'll consistently be assessing opportunities in order to invest and matching our leverage capacity to benefit from opportunities in the business or via dividend payout. There is no restriction when it comes to the company's growth. So we'll be working on these possibilities to use our funds to go for further funds, but also preserving the return to shareholders the best way we can.

[Operator]

Next question comes from the webcast. Could you elaborate more on the shutdowns that were necessary at Atlanta in this quarter? In addition, is it possible that we expect new shutdowns in the future, considering a number of stoppages that happened in the past?

[Decio Oddone, executive]

Well, we had 2 shutdowns to reconnect the wells that were halted. Like I said, by the end of August, we'll stop for 2 or 3 days to reconnect the third well. These are the shutdowns expected for Atlanta this year. And I'd like to remind you, regularly, any maritime production unit will have scheduled maintenance shutdowns. And of course, we will follow that schedule as of next year.

[Operator]

Our next question also comes from the web. As regards the Albacora process, the media said that you submitted a proposal of $2. Is that correct? Could you give us some color on that negotiation?

[Decio Oddone, executive]

We've spoken about this a number of times, but let me stress that we prefer not to comment on any business deal in particular. So no comments at this point.

[Operator]

Our next question comes from the webcast. Could you please detail more the CapEx for the full development of Atlanta, a CapEx of $500 million to $700 million without the FPSO? With -- what does that mean? And what would be the CapEx necessary to acquire the FPSO?

[Decio Oddone, executive]

Thank you for the question. I will ask Mastrangelo to answer.

[Carlos Mastrangelo, executive]

We cannot give you an amount. We're expecting $500 million to $700 million, not including the FPSO. And why? Because the FPSO will be accounted for in the operating cost. It will be a chartered FPSO, so it doesn't consume the company's CapEx for the project.

[Operator]

The next question is also via webcast. When it comes to the implementation of Atlanta's full development system, the first question is, how long will the shutdown take place? What about the transition study? Second question, how does Enauta envisage the booming market of service providers, particularly for FPSO and starting with Petrobras? And do you believe this might have an impact on Enauta's plans?

[Decio Oddone, executive]

Like I said before, the schedule shutdown is 2 to 3 days to connect the third well. And Mastrangelo is going to give you more comments.

[Carlos Mastrangelo, executive]

So you're referring to the transition between the early production system and full development system. The early production system is estimated to happen until mid-2023. And the full development system will start in mid-2024. We are working in order to optimize this transaction. So the optimum point for transition, lowering risks, no offshore problems and also a better return to the company. So that's the variable we are considering. We may extend the early production system a little or we can anticipate the full development system, a margin to be considered for optimization purposes.

And the second question is about the market recovery or resumption and ongoing projects in the market, particularly in Brazil, maybe more focused on FPSO. This was already mapped even before we started the bidding process in March this year. At that time, we had already answered a question. In other words, we are not working with the same market metrics. So we're not directly competing with big projects that are underway. In this case, more specifically, we are using existing units. So this is not a new building process, a different kind of strategy. So it's not the same type of competition. No restrictions when it comes to these other units in the market.

[Operator]

[Operator Instructions] This concludes the question-and-answer session. Would like to give the floor back to Mr. Decio Oddone for the final remarks. Over to you, Mr. Oddone.

[Decio Oddone, executive]

Thank you. Well, no, I just want to thank everyone for your patience with us. We started a little late. But it was a pleasure for us to share with you the news of Enauta in Q2 '21. And again, I hope to see you all on board in the next 3 months in Q3 conference call. Thank you very much, and have a good day.

[Operator]

That concludes Enauta's conference call for today. Thank you very much for your participation, and have a good day.