Enauta Participacoes SA

BOVESPA:ENAT3

Earnings Call Analysis

Positive Earnings and Strategic Moves to Boost Growth

In Q2, the company presented strong results with a recurring EBITDAX of BRL 380 million despite a 27-day production downtime. This followed a ramp-up of the Early Production System (EPS) in Atlanta achieving over 24,000 barrels per day. The company highlighted a reduction in operational costs and increased investment in Atlanta and Oliva, projecting Phase 1 completion by 2024. Free cash flow stood at USD 41 million with future positive contributions expected from resumed production in Atlanta. The balance sheet remains robust with USD 1.3 billion in cash equivalents, bolstered by new bond issuances aimed at reducing capital costs.

Second Quarter Overview and Challenges

In the recent earnings call for the second quarter, the company managed to report a total EBITDAX of BRL 380 million, despite facing significant operational challenges. These included 27 days of downtime for the FPSO Petrojarl I and maintenance issues at Manati. Nonetheless, the operator expects a resumption of production in the third quarter. Nonrecurring items also impacted results, with a total of BRL 88 million related to portfolio and capital management efforts.

Production Insights and Future Expectations

As of late July, the company successfully resumed its early production system (EPS) in Atlanta, achieving over 24,000 barrels of oil equivalent per day. Moving forward, the company forecasts an impressive ramp-up, targeting a future capacity of 50,000 barrels per day from the Atlanta system, which is expected to significantly improve profit margins. Management has indicated that production should stabilize in the upcoming third quarter, reliant upon obtaining necessary authorizations.

Profitability Management and Operational Efficiencies

The second quarter saw a concerted effort on cost management, wherein charter costs for the Petrojarl platform were adjusted down to approximately $165,000 per day, compared to $264,000 per day for the Atlanta platform. By focusing on efficient operations, the company anticipates these adjustments will yield improved profitability, particularly as they scale production volumes at Atlanta. The financial strategy includes heightened diligence in capital allocation especially as they prepare for Phase II of Atlanta.

Cash Flow and Financial Health

The company realized a positive free cash flow of USD 41 million for the second consecutive quarter. This success can be attributed to prudent investment management and a robust cash position that reached over USD 1.3 billion, a substantial figure that exceeds the company's market capitalization. This strong liquidity supports the company’s ability to navigate upcoming financial obligations and potential growth opportunities.

Strategic Mergers and Growth Potential

A significant point of discussion was the merger with 3R, aimed at creating a financially stable and diversified operational base. This merger is projected to produce at least $1.2 billion in synergies, primarily from capital allocation efficiencies and improved cost management, with expectations to realize many of these benefits by 2024. The new company will prioritize shareholder value alongside prudent growth strategies, allowing the combination of resources to efficiently manage multiple production projects.

Dividends and Capital Allocation Plans

Looking ahead, the combined entity will deliberate its capital allocation and dividend policy in upcoming board meetings. The expectation is to balance between reasonable dividend payouts and reinvestment into growth projects. Future considerations will align with maintaining a robust financial posture while pursuing opportunities for expansion in new ventures.

Final Remarks and Outlook

The management remains cautiously optimistic about operational stability amidst regulatory challenges surrounding the IBAMA certification process for the new FPSO Atlanta. The next quarter holds potential for scaling production across various assets, and the management team is focused on leveraging synergies and optimizing capital structures for maximum return to shareholders. The operational strategy includes developing existing fields while exploring new opportunities, ensuring resilience in an ever-evolving energy market.

Earnings Call Transcript 2024-Q2

[Pedro Rodrigues de Medeiros, executive]

Good morning, everyone. Now, we're going to talk about the results of the second quarter in further detail. On this table, we show the highlights of the quarter and the main financial items, indicators of financial leverage and cash equivalents of the company. Results were positive even though they were compromised by a downtime of at least 27 days this quarter in the production of FPSO Petrojarl I and EPS in Atlanta. And also, maintenance of Manati downtime. According to the operator, we expect this to be resumed in the third quarter. In addition, results also had some nonrecurring items associated to the long journey of management of portfolio, capital and new investments by the company, discussing tax liabilities with positive reversals or even agreements that led to payments by and out with Petrobras, and they led to nonrecurring items of BRL 88 million. And here, we highlight total EBITDAX recurring for the quarter of BRL 380 million.



Next slide, please. Starting with production, you will show a highlight of the journey for the last 12 months. Last year, the company resumed Petrojarl I after an upgrade successful upgrade in the pumping system, subsea pumping system, very consistent operation of the quarter. We had preventive maintenance downtime in order to include some safety items. And like Decio mentioned, we also have an option to extend the operation of Petrojarl by year-end. Should this be necessary and timely. Now, we resumed our EPS in Atlanta at full capacity for the last days of July, a recent change last Friday, actually. Here, we highlight production for July 29 in the early production system with more than 24,000 barrels of oil equivalent per day, and the contribution of the deal in progress of Parque da sconces, considering that our working interest acquired would show total production of 6,000 barrels of day -- equivalents per day in most recent days.



Next slide, please. Moving now to profitability of the company. We also highlight maintenance of full diligence in cost management and execution of Atlanta project. The second quarter in light of the downtime for maintenance in Petrojarl, we highlight here a reduction of total charter paid this quarter with our main supplier of the equipment. And a comparison considering the level of operating leverage brought by the new Atlanta system, a cost base expected at least considering chartered maintenance and operation of FPSO compared to the EPS. In this case, currently charging cost of Petrojarl is around $165,000 per day, and the agreement with the supplier of FPSO Atlanta, around $264,000 per day. However, a deduction coming from funding by Enauta to the platform, which will be posted at financial revenue of EUR 15 million per day, leading to operating costs in the agreement as investments was performed magnitude of $159,000 per day. The difference being that our capacity will be 50,000 barrels per day once we deliver a ramp-up production, they should be converted into a significant increase in the margin of the company.



Next slide. Moving now to cash flow and performance of investments in Atlanta and Oliva, the quarter considered an increase in investments or the rate of total investment this quarter vis-a-vis the last quarter, reflecting exclusively the progress in the installation campaign connection of the wells and FPSO lines and the completion of delivery of most equipment necessary to perform the project as a whole, including the 6 wells expected for Phase 1 of Atlanta. On the right-hand side chart, this is an update of expected investment for year 2024. We highlight total contingency included in this investment vis-à-vis, we're getting closer to all the operating steps and day after day, performance is as expected, and we are becoming more confident that we'll be achieving these contingencies in total investment.



Next slide. Just to conclude our financial highlights. When it comes to the second quarter, this is the second quarter in a row of expansion of a positive net cash flow -- free cash flow for the company. We highlight free cash flow in the quarter of USD 41 million. Going forward, we expect to have a return or resumption of EPS in Atlanta production to positively contribute to the earnings of the third quarter. We expect to have full stability of the working capital line and a conclusion of financing, long-term financing associated to FPSO Atlanta, owing to delivery and anchoring in Q3. These are important points to consider when we consider the performance and possibility to increase the company's cash in the coming quarters.



Now, when we look at the balance sheet, this quarter was also full of important movements. They include the issuance of 2 new incentivized domestic bonds in the market. Both had a strong demand, along with the company to significantly lower the average capital cost, and also extending the amortization debt profile considering the deadline of both issuance of 6 and 10 years in a different format compared to different issues. Here, we highlight the second quarter, reporting the company showing a balance sheet with cash equivalent -- adjusted cash equivalent, which is pretty high. We're speaking of more than USD 1.3 billion. If we add cash, financial investments, receivable credit long-term associated to FPSO Atlanta and also total funding invested in the abandonment fund of Manati with operator with USD 55 million. The total amount in an order of magnitude exceeds the company's current market cap, a very extended profile of amortizations, which will allow to achieve a collection of synergies expected in the deal with liability, asset management very strongly in the second half of the year.



Just to conclude, here is a map of events expected for the coming quarters when it comes to Enauta's management, and also a couple of highlights presented in the second quarter. Going forward, we expect to see the final replacement in the agenda of efficiency in the company's balance sheet, and which will be replacing the abandonment fund of Manati by financial collateral, leading the USD 55 million and converting them in cash equivalent, new cash equivalent to the company, liability management will be short term in the light of new investments. So, we expect to reducing and extending the capital cost. Like Decio mentioned, we expect to conclude today the integration with -- the last highlight of our earnings, like my colleague said before, we expect to begin to deliver FPSO Atlanta production as planned, on schedule in August. As a result of the new production, we want to bring a new proposal in the way we can commercialize Atlanta's oil and complete -- conclude the deals in Uruguá-Tambaú, Parque das Conchas, and a new partner in Atlanta Field. Now I give the floor back to Decio, who will talk more about Enauta & 3R.

[Decio Oddone, executive]

We spoke about in previous events that the creation of a combined company of Enauta & 3R creates scale and diversification. The companies will be bigger. Among the largest and most diversified independent oil and gas companies, our portfolio will be more diversified and more resilient to cycles and investments in our industry. I'm going to show you, we'll have the ability to generate a significant amount in synergies, operational, commercial, financial and capital allocation synergies. Pedro has mentioned that we have been working at out to reach the cost of capital. We believe that the potential of this combined business will allow us to reduce that even further. We have an opportunity to develop new ventures. The company will have a much more diversified portfolio than we had at Enauta which was more concentrated. And we will leverage competitive advantages in a market which is clearly undergoing consolidation. We have a diversified reference shareholders base with potential to join global indices. And we will have the ability to have adequate capital allocation, considering payment of dividends and future growth expectations for the company.



Next slide, please. very quickly. This is what we see in terms of synergies in the deal. Synergies related to our debt, liability management, cost reduction, optimization. So, we can have an operating campaign in the commercialization and sale of oil, natural gas, oil byproducts when we combine production of both companies. This company has a great diversification of risks, the potential for growth in new businesses. The company will be more attractive in our relationship with the third-party suppliers, particularly in offshore operations where we have long lead times and delivery times. You have a greater potential of attracting and retaining talent at this company that is, in our opinion, doomed to be a great success. Lastly, before we move to the questions, I know we can't have a lot of questions. This is about our shareholders base, a diversified shareholder base with a high free float. It will allow us, as I mentioned before, to join global indices. In the participants will be part of the new 3R. This is what we had to share with you. I'd like to thank you for monitoring and joining Enauta since we went public in 2009, and we hope to remain partners in this new reorganization that will start operating tomorrow. Thank you very much.

[Operator]

We will now start the Q&A session for investors and analysts. [Operator Instructions]. Our first question comes from Luiz Carvalho with UBS. Please go ahead, Mr. Carvalho.

[Luiz Carvalho, analyst]

Hello, everyone. Good morning. Well, I'd like to congratulate you on closing or almost closing. And for somebody following the company since the IPO, I am very happy to see that there is a very promising next step. So good luck in this new phase. I would like to perhaps ask a couple of questions regarding synergies. You showed a very interesting slide that you had detailed before about each one of the verticals of those $1.2 billion that you expect to capture with a new company in the new structure. You could give us a little more color regarding the time line of these processes. I mean, what synergies can we expect along 2024 and 2025? That would be interesting. My second question is about the full development of Atlanta. We knew that some public agencies are in an operation a little out of the ordinary, both E&P and IBAMA. So, I'd like to know how is the plan going?



You mentioned that E&P will be giving you the licenses 2 weeks before. But if there's a delay, is there a plan B? How should we see this? And if I may, one last question. If you could give us an update on M&A, Uruguá-Tambaú and Parque das Conchas, there is something related to the abandonment of Parque das Conchas. Are you considering Peregrino? There was recent news about that case. So perhaps if you could give us an update on the M&A activities, that would be much appreciated.

[Decio Oddone, executive]

Thank you, Luiz. Thank you for the congrats. Indeed, getting the auto technical team did good work at Atlanta. It is not easy to deliver a production development project in deep waters on schedule and on time, especially for an independent company. I think Enauta was the first one to actually achieve that. So, Mastrangelo and his team are to be congratulated. We are very satisfied with the results. And I will start answering regarding the regulatory agency. Well, as you mentioned, we're practically ready to operate. We just need the operating license from IBAMA and the authorization from E&P, which are necessary from the regulatory standpoint. As regards IBAMA, we don't expect any complications. We just have to have their final visit to the facilities, to the FPSO for them to issue the operating license. And we believe that this will happen along the 9th of August. E&P has a process that requires authorizations.



And what is happening is that they are in the -- out of the ordinary operation, they're taking 30 days to respond to any request from the industry. If that is over, we can have it in August. If they continue with this out of the ordinary operation, we might have some delay. You asked about our plan B. Well, our plan B is Petrojarl. We always planned for that since the beginning. And Mastrangelo mentioned that when presenting the video, we wanted to extend the lifespan of Petrojarl I. That was the goal, to have a backup system. Thinking about maintenance of production considering the regulatory setback or operational setback. They got no operational setbacks, but we still have a regulatory challenge ahead. It's something that we do not have control over. In June, when we had the downtime, it was going to be just a couple of days to make some adjustments at Petrojarl, and some of the lines, but we decided to extend the maintenance downtime, so that Petrojarl would continue to be an option or plan B, to maintain production until year-end. And that's what we did. We spent a little longer in the maintenance, but now we have more safety. If we have an issue, we'll have a backup until the end of the year. So that's plan B.



I'll ask Pedro to ask about synergies. But before that, I'll comment on M&A. Spirit renal is not in our radar. Uruguá-Tambaú, we decided not to acquire the FPSO, but we continue to talk with Petrobras regarding the acquisition of the 2 fields. And for Parque das Conchas, we are at a final stage of conversation with the other consortium members, Shell and NGC regarding the guarantees. But this is moving ahead fast. We expect the deal to have closing as scheduled, as Pedro mentioned, more towards the end of the year. And I'll ask Pedro to speak about the synergies. So, I won't be the only one talking over time.

[Pedro Rodrigues de Medeiros, executive]

Thank you, Luiz, for the question. As you can see, we try to divide this into 4 synergy pillars. The total estimate includes a very detailed action plan that has been agreed on and presented as part of the approval of the deal by the Board of Directors of both companies. The management of both companies have been working relentlessly in seeking synergies and delivery of these synergies. The main pillar in our estimate of $1.2 billion is linked to what we call capital allocation. This involves both the format of business combination and integration were not a participant is integrated to 3R originally. This will allow us to accelerate the recovery of a number of tax assets.



And number two, we have just completed 2 domestic bond issuances that were quite significant and enhanced, and strengthened our balance sheet, which is now very solid and liquid. And the driver behind these issuances is to have adequate liability management with a new integrated company starting in the coming days. But when we speak about timing of achieving those capital allocation synergies, it's going to happen fast. I would say that the probability that we'll fully achieve those synergies along the next months. So, in 2024 is quite high. If we look at the other categories, operating, operating costs and investments, the company is already working to implement and deliver a good part of the synergies. The action plan is drafted and you will be starting the execution as of tomorrow. Some of them are linked to the decision to invest in Phase 2 of Atlanta and the potential implementation of Oliva, and the expected campaigns for the offshore area. But they have Peroá and Malombe.



From that standpoint, I would say that in terms of timing, the likelihood is that we'll be able to materially deliver the synergies expected in terms of operating costs and investments in the next 6 to 12 months. At the commercial level, that's a synergy that should take a little longer to be delivered. Both companies today work with midterm contracts, partnerships and associations. And I would say that the expectation would be to have those delivered in 12 to 24 months. But it is a category that is contributing the least to these $1.2 billion. I hope I have helped.

[Luiz Carvalho, analyst]

If I may ask a follow-up question. I'm not sure it's addressed to you or this in terms of capital allocation. Given the time line of the synergies you mentioned, how should we think about the dividend policy of the new company? Because you're going to have a balance sheet that will be quite comfortable in terms of cash considering that these synergies do come forward. If you could give us some color on that, it would be interesting.

[Pedro Rodrigues de Medeiros, executive]

The reason the Board of the new company will meet for the first time tomorrow. It's going to be a meeting to focus on legal issues, but that's an important discussion we'll have in the beginning of the new company. We expect to have this decided very soon.

[Operator]

Next question. Leonardo Marcondes with Bank of America.

[Leonardo Marcondes, analyst]

Hello. Good morning, everyone. I have 2 questions. First question is about M&A. This time, our focus on a specific asset. I'd like to know how you consider the acquisition of Uruguá-Tambaú now that you decided to discontinue the FPSO acquisition. So, do you still consider to be interested in buying these fields? And what are the alternatives you are considering in order to work on them? My second question is for Mastrangelo, benefiting from his presence with us. What is your vision about Papa-Terra? Could you tell us more about the qualities and the challenges behind this field, it would be very useful for us. Thank you.

[Decio Oddone, executive]

Thank you for being with us and for your questions. We are having conversations with Petrobras with the potential maintenance of this deal to buy Uruguá-Tambaú fields. We're analyzing, and we haven't come to any decision yet. We do expect to have it concluded for the next 6 months. No news yet about this question. And over to Mastrangelo to talk about Papa-Terra.

[Carlos Mastrangelo, executive]

For the moment, this is a note conference call. So, let me add to what you talked about synergies. In and out, right now, we are working in order to move forward with Olivas project, which is Olivas early production system. And Phase 2 of Atlanta considering the area in the Northeast, and 2 additional wells in Atlanta. When Pedro mentioned operational synergies, these gains are immediate. Decio said that tomorrow will be the first board meeting of the new board, and there is the synergy to work on one only a single campaign. For drilling purposes, for instance, in Brazil, the cost for the mobilization of a drilling rig is very high. You have to pay for mobilization, demobilization, hole cleaning, which is very, very high. And the more you dilute the fixed cost for a single campaign, that's an immediate benefit.



Papa-Terra has a huge oil volume and any increase in the recovery of the oil is tremendous. So, there is a potential for it. And leveraging with the synergies and working on multiple campaigns, workovers in Peroá, Oliva, Malombe, Atlanta. The benefit is immediate, like I said, in applications and leveraging all the activities. So, before we get started, well, that's all we can say right now. Thank you.

[Leonardo Marcondes, analyst]

Crystal clear. But if I may, just a follow-up question about Uruguá-Tambaú. So far, today, no alternatives for an FPSO considered by yourselves, right? Nothing along those lines.

[Decio Oddone, executive]

Like I said before, we are considering alternatives available to develop the field without FPSO Cidade de Santos.

[Operator]

Next question. Rodrigo de Almeida with Santander.

[Rodrigo Reis de Almeida, analyst]

Good morning, everyone. First of all, I would also like to congratulate you on the near conclusion, closing of the deal with 3R and also congratulations on full development system in Atlanta. We're almost getting there. So, now I'd like to focus on Atlanta, Oliva. And my first question is about how can we consider this rearrangement of connections considering that we consider Petrojarl, which could be until Q4, but considering that the second set of wells connected to the platform would be those wells coming from Petrojarl. So, how can we think about these second pair of wells? Are these the wells that would come later, just to have a better understanding of the operation in the future months, and also to work on a model and period with what will happen, match it to what will happen in Atlanta in the coming months. Still about Atlanta. Could you give us more visibility about Phase II, particularly when it comes to Atlanta Northeast. How do you envisage this step? I think we talked about it in the previous call, but any possibility of a new well in the region? And maybe an update on Oliva, it would also be interesting. If there is any interesting move in the last months in the project of this final phase of investment.

[Decio Oddone, executive]

Thank you, Rodrigo. We'll try to optimize the operation of Petrojarl with FPSO Atlanta. We'll try to do it as efficiently as possible. And Mastrangelo is going to give you more color and also talk about Atlanta and Oliva Phase 2.

[Carlos Mastrangelo, executive]

Thank you, Rodrigo. As we've planned before, Atlanta's full development system was designed in a way that gave us a lot of flexibility. Usually, all over the world, when you have an EPS, an early production system unit, you remove it for the full development system. In the past, we privileged the possibility to maintain, to keep Petrojarl not to have a significant interruption or downtime in production, which might lead to 8 to 12 months. So, we have independent locations. We have full capacity to operate simultaneously both units. But as you said, we gave more robustness to have Petrojarl potentially by year-end. If needed, we hope it's not necessary. So, what will happen next. Once we start up Atlanta in August, the vessel that is in charge of subsea installation and connection of the lines in the north area of FPSO Atlanta, we will consider and catch all pieces of equipment in 2 journeys. Most of the equipment is ready to be loaded for start installation in the south, and well by well, will be removed from Petrojarl and preparing it to be taken to Atlanta, more to the north.



Once we conclude all this campaign to remove the lines and full interruption of downtown Petrojarl conclusion, we would have either decommissioning or what we have been working towards preparation within 1 year for an extension, a more robust extension to be in the location for 3 years as early production system in Oliva. This adaptation phase and this time to adapt FPSO Petrojarl to Oliva is the time necessary for us to buy the lines, to buy the pumps and drill 2 wells in Oliva, 20 kilometers away from Atlanta. On our schedule, we will start Oliva in early 2027. But this campaign in Oliva is in sync with the campaign of Phase 2 of Atlanta. So, we have 2 wells in Atlanta, and the same drilling rig that works in the campaign in Oliva would be coming and going with Atlanta to start up slightly afterwards or nearly simultaneously with the other. So, this is the current strategy. In the current phase, considers a consolidation of our partners who are working with us. Oliva works with a slightly different model. This agreement that minimizes risks and also shared with partnering companies, the intention to have results as quickly as possible. We expect to have the approval of a project in Atlanta and Oliva, as you saw in the last slide in the fourth quarter of this year. I think I covered all your questions.

[Rodrigo Reis de Almeida, analyst]

What about Petrojarl in the sequence? Maybe you can get into more details.

[Carlos Mastrangelo, executive]

Right. If we assume that we started production in Atlanta, we will try to take Petrojarl as well as quickly as possible in order to have the mobilization in Atlanta. The resilience behind robustness, should we have any problem in a longer strike in E&P, the E&P that would postpone production. Then in Petrojarl, we've had the conditions, for instance, to keep it up and running as much as possible. Removing for instance, the smallest well with lower production and already adapting this well to deliver in Atlanta, in FPSO Atlanta. And with that, we can lead to the total completion of Petrojarl later on. So, in this case, the quicker curve in Atlanta would be faster than we anticipate in the transfer from Petrojarl to Atlanta. So that's the flexibility we have. And we might use it or not, depending on how the coming weeks evolve.

[Operator]

Our next question comes from Gabriel Barra with Citi.

[Gabriel Coelho Barra, analyst]

Hello, everyone. I will add to the team congratulating you on the deal. I think this was very emblematic. I've been following the company for a long time, and it's interesting to see this new path being worked on. Several changes or challenges ahead in several opportunities. I guess that you're going to have a lot in your plate. Many opportunities, a unique opportunity in the Brazilian market. And at the same time, one of the main concerns we have is related to focus. There are many projects, many interesting opportunities in the company that is going to be a cash cow. Now this was asked regarding dividend policy, capital allocation, et cetera, but thinking about low restrictions in the service industry. And then you have full capacity to deliver all the projects you want. How should we think about the new company in terms of growth vis-a-vis dividends? Because it seems that there is space for a reasonable dividend payout and with growth.



So, what should be the focus looking forward when you think about inorganic growth as well. So, if you could fit all of that into the answer, it would help us understand what the new 3R and Enauta the company will be like? The second point is regarding execution. It has been said that Mastrangelo is going to be the COO of the company for offshore. And I would like to know whether this has already decided. What's going to be the operational structure of the company? The onshore COO will respond report to Mastrangelo, 2 different departments, how this is going to be given the new complexity level, which again will bring you a lot of opportunities, but a lot of complexities and difficulties in execution. And lastly, regarding the contract with Yinson, we spoke sometimes about prepayment and perhaps sale of part of that contract for monetization. In this context in which you're going to generate a lot of cash, perhaps this was a possibility in the past or need in the past, perhaps now doesn't make a lot of sense. I'd like to hear from you. These are my 3 points.

[Decio Oddone, executive]

Thank you, Gabriel for the questions. Well, I agree that a diversified portfolio of the combined company is going to allow us to have a much more complex portfolio management than we had at Enauta, where our portfolio was much simpler. And initially, we will be dedicated to learning more about the portfolio of the combined company. We'll select the projects in which to invest. We'll be very pragmatic about it. Respecting capital discipline and capital allocation will be one of the first discussions with the new board. I don't want to get ahead of myself here and say anything that was not debated in the scope of the new company that has not started operating yet. I know that you have a lot of curiosity will areas, but it is important that we respect the governance. And the new company, the forming of the new company will be a company with no controlling shareholder, with no reference shareholder. So, this is a discussion we'll need to have as a Board to define the dividend policy and/or growth. We can clearly see that the company has the ability to pay dividends, the ability to grow as well. And this is what we're going to pursue.



You asked about the company's structure. Well, that is one of the themes that will be deliberated tomorrow in the first Board meeting of the new company. What we can say, what is public information that we're going to have 4 statutory officers. Myself, Pedro, Mastrangelo and Pizarro. And we're going to have another officer FTE responsible for own operations reporting to me because we work independently onshore and offshore, because we believe that we have to focus on both these activities, but this is still subject to review by the Board of Directors that will meet tomorrow. As regards to the contract with intend, I'll turn the floor to Pedro.

[Pedro Rodrigues de Medeiros, executive]

Hello, Gabriel. Thank you for the question and congratulations and good wishes. Regarding the structuring or recycling of capital, we continue to look into alternatives. They optimize the use of our balance sheet, having a good capital allocation so that we can continue to create value to our shareholders. It is important to highlight it. It is a condition precedent for the approval of business combination with 3R, the company organized a general meeting of debenture holders. And among the items of the agenda, there were some restrictions in terms of flexibility of options of the company in routes to recycle capital. These were voted and they were approved, thus widening the array of possibilities that the new company can pursue us ways to recycle capital.



It's also important to highlight that Enauta has just had 2 recent issuances of incentivized domestic bonds, 6 to 10 years maturities with a swapping. And Yinson also did it recently with a platform for another client in Brazil. And this counted on fees at market levels today, superior to the rates and the average cost of capital recently issued by Enauta. So, these divisions were fully swapped into dollars. So, I haven't got a timing to give you, but as soon as the FPSO starts operating the company, we'll have this operational asset. And as said, that will be in our operation, and so will start getting the proceeds coming from this funding. So, we'll be looking at this topic with a lot of attention in the next 12 months.

[Operator]

Next question from Bruno Amuri with Goldman Sachs.

[Bruno Amorim, analyst]

Thank you for giving me some space to ask question and congrats on the deal. I'd like to have a follow-up question regarding the production outlook looking forward. You kind of mentioned the scenario and the alternatives with possible delays in obtaining authorizations from the regulatory agencies. But perhaps you could help us quantify this trajectory from now to the end of the year in the next 12 months. Where do you expect production of the company to be in a scenario with and without IBAMA and E&P resuming the regular pace? So, that's my first question, helping us quantify thinking of Enauta stand-alone with a focus on Atlanta production outlook by year-end in the next 12 months? My second question is more structural. Mastrangelo kind of commented on Phase II of Atlanta, perhaps you could give us more color on Atlanta's Phase II and when should we start seeing CapEx being invested and impact on production?

[Decio Oddone, executive]

I'll ask Pedro to speak about production because we're always concerned about our guidance, right? So, I'll ask him to ask this question, production in the second half of the year.

[Pedro Rodrigues de Medeiros, executive]

Well, we don't usually provide the production guidance. As an example, recently, the EPS of Atlanta started operating again quite consistently. We are producing today more than 20,000 barrels of oil equivalent daily. We have scheduled with some degree of flexibility in light of the authorizations -- expected authorizations to start up the FPSO Atlanta. The expectation is that the new FPSO will start its operation with 2 wells. For a while, this production will count on a parallel production of the early production system of Atlanta. Depending on the authorizations being obtained, as Mastrangelo mentioned, it is possible that the early production system of Atlanta will be producing from fewer wells because the campaign to transport, to relocate the wells to the new FPSO will follow the original plan. We designed for that. We prepared to have this kind of flexibility along the way. So, it's very hard to forecast.



And as regards Manati, the expectation presented by the operator of the field to resume the operation is until the end of Q3. We have an expectation that Manati will come back online, presenting consistent production, consistent with the numbers delivered in 2023. So, it's very hard to give a precise number. Coupled with that, we have the completion of Parque das Conchas underway that's pending authorization from the regulatory bodies. And the same goes for the partner at Atlanta with a 20% working interest. So, we're not providing specific production guidance, but these are the main drivers to guide your estimates along the second half of the year. For 2025, the company publishes has a recurrent fashion, the certificate of reserves, and that's the potential production of its field. And there is no change regarding these plans. These are officially published. You can access the Investor Relations website to have a reference.

[Bruno Amorim, analyst]

Perfect. Pedro, that's already very helpful. And I wanted to have a quick follow-up question. Let's imagine a scenario where IBAMA and E&P become hurdles, and you haven't got authorizations for the end of the year. That's the extreme scenario. Can you grow production, or in order to grow these 20,000 barrels daily, do you need authorizations for that? Atlanta Field specifically from now to year-end, if the new FPSO. Hypothetical scenario, you mentioned if the new FPSO does not start operating until year-end, the probability is that production will be lower because the schedule to move from the EPS to the new system, I will follow the plan.

[Decio Oddone, executive]

Okay. We are not considering, but Mastrangelo was telling me, we are not considering this extreme scenario. If I may add Bruno, this extreme scenario is not in our radar because we haven't got any condition spending at IBAMA. The whole signaling is that there's not going to be a hurdle for August. The remaining condition with E&P. Well, all of these are consolidated already. We know the requirement. So, it's just a matter of how long they will take to respond. With the E&P strike, this formal communication system, we take 30 days. So, 2 of those requests would take 30 days, and that would extend to September. But if they resume normal operation, these wouldn't happen. And there's no extreme scenario of not obtaining the licenses till the end of the year. And in Phase II, as you asked, the goal of Phase II is to maintain production at the FPS, maintaining the level of production for longer. But going back to the question asked by Gabriel and Pedro just reminded me, I want to add to the answer. Regarding capital allocation. In the second quarter, we bought more shares of 3R. So that's a move in terms of adequate capital allocation. I don't know whether Pedro wants to add to that.

[Pedro Rodrigues de Medeiros, executive]

The capital allocation and dividend policy will be discussed, approached and decided by the Board of Directors. Just as an illustration, among allocation alternatives for the company in the second half, we have free cash flow. A relevant part of it was reinvested in buying shares of 3R, 2.5%. So, this is an indication of how the company is navigating its capital allocation over time, trying to have a use of resources that is as efficient as possible.

[Operator]

Next question. Cardoso with XP.

[Unknown Analyst]

There are 2 topics that I would like to address. And maybe I know there are some restrictions about the post-integration process. But since it starts tomorrow, well, Decio, there will be a post-merger integration process. And I understand that usually, this phase entails a schedule with important milestones and a critical path. As external observers, we think about the performance of production curves and operational plans, and capture of synergies. Naturally, it entails the organization of the structure of the company, agreement, reorganization, suppliers. A number of things that I believe you have mapped before. So, all you can share with us to better understand the integration would be very interesting.



Now, my second question is about the arrival of FPSO Atlanta. What is necessary by IBAMA is an on-site visit. I would like to better understand the risks behind it. Do you know if IBAMA has been performing these visits with other operators or this activity could be impacted by the strike? And the second thing is about the critical path, E&P. Mastrangelo mentioned a response within 30 days. So, the worst scenario would be additionally 30 days as of August and a potential impact. But a strike was also considered in E&P, and I believe this would be outside the scope of 30 days. I would just like to understand what might happen in the future. Thank you.

[Decio Oddone, executive]

When it comes to the first question, we talked about synergies before and also about execution performance. I'm not going back to it right now. First thing we'll do is to understand the portfolio, the combined portfolio of both companies and assess the assets and work on an action plan. It would be too early to say anything. But undoubtedly, I can say, like I've said before, our main goal there is to perform and deliver results. And this goes through delivering Atlanta, and then next, delivering production in Papa-Terra and 3R fields in order to have a critical look on what we have in our hands and truly manage to turn the page and keep on delivering production for the coming years. So, the very first initiative on our end is to work on diagnosis, to plan our execution.

[Unknown Analyst]

What about Atlanta, like Mastrangelo said before.

[Decio Oddone, executive]

Well, actually, let me turn it over to him.

[Carlos Mastrangelo, executive]

You had a good interpretation is precisely what you said. We don't see any hurdles, any difficulties about this visit. And this is pretty much in line with the sequence for the operating license with IBAMA. As for E&P, owing to this move in E&P, and this 30-day time of response, you had a good reading. Our interpretation is that 2 interactions would be enough. Naturally, it would be very fast, even faster if the strike comes to an end in 1 week. But if that's not the case, not being the case, maybe 2 visits would be enough. We would have to monitor it closely. You mentioned the general strike that is scheduled for the coming days. This may impact the 30-day time frame. But this is limited. As far as we know, these will take only a couple of days. So, the global scenario, this is the picture of the circumstance.

[Operator]

The next question. Vicente Falanga with BBI.

[Vicente Falanga Neto, analyst]

Good afternoon. My first question, I would like to have more color on Westlawn. How can this company contribute in performance for the new company? And also, what's the reason behind the choice? Well, they were the buyers, okay. But what's behind that? Second question, Mastrangelo, I'm sorry to go back to this topic, but benefiting from your presence. You talked about Papa-Terra with a big potential as a reservoir. 3R was already emphasizing this. I would like to understand if it's possible to run this asset in a stable manner considering the infrastructure and the platform positioning on top of the reservoir, and considering maintenance that have been performed both subsea and also topside?

[Decio Oddone, executive]

Thank you, Vicente. 3R's call will be later, I guess, but let us try to answer your question. Westlawn is a company made up of veterans in the industry, people who have a long-standing tradition in the industry and also in Brazil in independent companies, U.S. companies. So, our industry production entails an association. Once you start a project, it's very hard to pinpoint a production and exploration project that from the start is not a fruit of partnerships. Atlanta is an example. We started with a partnership with Petrobras, Shell and other companies. And then we acquired it with Baha and OGX. And then owing to legal issues they left, and we had 100% of the asset in a development process. But this is not something conventional. It's always good to dilute risks and potential premium as well.



Westlawn embarked later on in the project when we're already moving forward in the development project, and the price to be paid is what we see. In addition to winning the process of being awarded in the entry in Atlanta because we had discussions with other companies, they add this expertise that we value so much, and we can and will adopt it. For instance, the development in Oliva and other opportunities that we have in the ranks fence of Atlanta. And we do not exclude having them as Partners and other future initiatives in the new company. Mastrangelo, would you like to add anything about Papa-Terra.

[Carlos Mastrangelo, executive]

Vicente, I cannot disclose much. We'll have to wait a little longer, at least 1 day to talk about the new company. But I can tell my feelings about it. When I joined Enauta, well, you mentioned many things about Papa-Terra. And when I joined Enauta, Atlanta also had its challenges. Working on a project like this at that time was a huge step, but we were confident and we move forward. And you mentioned a list of items, important items behind these challenges. Just like I saw in the past, for each one of them, I envisage opportunities for the future.

[Vicente Falanga Neto, analyst]

Thank you very much. Looking forward for the company's ramp-up.

[Operator]

The Q&A session has come to an end. I would like to turn the floor to Mr. Decio for his final remarks.

[Decio Oddone, executive]

Very well. Thank you very much to all of you for joining us in this video conference call. Like I said, this is the last conference call of Enauta, as Enauta. And I hope to see you in the future video conference calls of the future company. Pedro, Mastrangelo and I, hope to be present. Thank you very much. Again, I apologize for the slight delay at the beginning, and thank you very much.

[Operator]

This video conference call has come to an end. We would like to thank you all for your participation, and have a great day.



[Statements in English on this transcript were spoken by an interpreter present on the live call.]