Enauta Participacoes SA

BOVESPA:ENAT3

Earnings Call Transcript 2021-Q3

[Renata de Andrade, executive]

Good morning, everyone, and welcome to Enauta's Third Quarter 2021 Earnings Results Video Conference. My name is Renata Amarante, and I am the Investor Relations Manager, and I'll be the moderator of this event. Before we start the presentation, I would like to make a few important announcements. This event will be broadcast live with simultaneous translation into English, and the presentation will be available on Enauta's IR website and also here on the webcast platform. [Operator Instructions]

Before proceeding, I would like to clarify that any forward-looking statements that may be made during this conference call regarding Enauta's business prospects, projections and operating and financial targets are the beliefs and assumptions of the company's management as well as information currently available. Forward-looking statements are not guarantee of performance. They involve risks, uncertainties and assumptions because they refer 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 can significantly affect Enauta's future performance, and may lead to results that differ materially from those expressed in such forward-looking statements.

Here, with me today, are our CEO, Decio Oddone; Carlos Mastrangelo, Chief Operating Officer; and Paula Costa, our Chief Financial and Investor Relations Officer. I would like now to give the floor to Paula to start the presentation. Please, Paula, you may proceed.

[Paula da Costa Corte-Real, executive]

Good morning, everyone, and thank you very much for joining us today in this video conference call to talk about Enauta's results. It's a pleasure to be here with you to talk to you about our third quarter results and the progress we make in the company during this period.

I would like to begin by presenting some of the progress of the past 3 months. And then I believe, are very relevant considering our main important strategic pillars. On the ESG front, I think it's important to say that Enauta's Board of Directors approved the management's variable compensation plan. And this plan includes not only financial and operating goals, but also incorporates goals related to ESG. This period, again, we approve the company's people and human rights policy, including training for our own employees as well as training for some of our most critical suppliers.

On the governance side, it's also important to say that we initiated the activities of the Internal Audit Committee. And likewise to support this committee, we introduced the management for internal auditing. We hired somebody with extensive experience in this area to assist us with internal auditing. And we do understand that this is a very important step towards enhancing the governance of the company.

And on the environmental front, we would like to highlight that in September, we signed a memorandum of understanding with a Malaysian company, Yinson. And this MOU determines that the engineering design for the adaptation of the OSX-2, we will apply all of the available technologies to ensure the lowest possible carbon footprint. And besides that, the fact that this is an existing FPSO. By this mere fact, this requires a simpler adaptation process with a lower carbon footprint when compared to a new unit.

Now moving on to our assets. The third quarter was the first time which Enauta had 100% working interest in Atlanta for the first time, and this happened in early June. Therefore, this is the first period where we report 100% working interest. And the field reached 19 million barrels produced in the field that was a landmark for the company. And we continue our activities towards the full development system and decisions. Decisions are expected for the first quarter of 2022. It's also important to highlight that, as I said before, in September, we signed the memorandum of understanding with Yinson. And now we are getting ready to negotiate a chartering and operation and maintenance contracts of this unit.

This is another important step for the company because it will allow us to expand our current oil production capacity, which is still limited today when you consider the EPS -- ERS. We will start drilling the first exploratory well in the Sergipe-Alagoas Basin in this fourth quarter of the year. And now we -- the only thing pending is the environmental license in order for us to start drilling. Another important point that I would like to stress is that the company remains very resilient to deliver growth and to pursue new opportunities. At the end of the quarter, our cash position was BRL 2.4 billion. We are reporting a net income of BRL 134 million in the quarter. And this result reflects the record revenue that stems both from the production and the fact that we are reporting 100% of Atlanta's production as well as the premium over Brent, because Brent prices were quite high throughout the quarter, in addition to a higher exchange rate when compared to the previous quarter. And so when we report the revenues in BRL in the results, these factors drive the numbers up.

Another important advance was the extension of Atlanta's drilling license that now also includes the other wells scheduled for the full development. To finalize this general overview, I would like to emphasize, the company continues to pursue M&A opportunities. And we also believe that the industry is in a very favorable environment to accommodate this growth. Well, in addition to the expansion of our portfolio, we continue to work on our assets continuously seeking to improve our operating efficiency.

Now moving to Slide 4. We see how the market scenario positively impacted the company's profitability. As I mentioned earlier, that was a period where we experienced a sharp increase in Brent prices and the maintenance of the exchange rate at a high level. And because of that, all commodities prices in BRL hit an all-time height. These factors led to a record revenue generation for Enauta in the third quarter.

Now talking about the operating performance on Slide 5. As I said before, this was the first quarter in which we recorded 100% of working interest in the Atlanta Field. And when we compare that to the same period of the year before, we increased our production by 90%, also driven by the increase in our working interest in the field. Our revenues also grew significantly year-on-year and this is supported by the highly favorable market environment as we saw in the previous slide, in addition to higher production levels, as mentioned before. We maintain our expectation in the Atlanta Field average production to 12,000 barrels of oil per day for 2021.

Moving now to Slide 6, we can see that our operating costs in the third quarter, like we said before, we have a relentless search for efficiency in our operations. This is one of the company's strategic pillars. This quarter when compared to the previous quarter, had an increase of $32 per barrel that we are reporting this quarter. This increase stems basically from 2 effects: Firstly, the increase in diesel prices and an increase in the FPSO chartering costs, which is also related to Brent prices. As a result, there was an increase in our operating cost with an impact on the lifting cost.

Moving on to Slide 7 now. And before talking about our financial results, I would like to comment on the Atlanta Field operation. As you know, the Atlanta Field has been on operation since 2018 in the early production system. The early production system is like a pilot product, a reduced production capacity, which is built to last for a while. And over this time frame, the company should gather the maximum amount of company on the field, productivity on the wells, flow rate of the oil. So once we have this information available, we can work on the best design possible for the full development system. It is in the full development system that we have the greatest Atlanta project. Once we have higher investment with more wells, a greater FPSO longer-term contract. So in order to make it happen as efficiently as possible, we gather information on this smaller system with the early production system.

Overall speaking, it's a temporary system. It is built to last for a while. And in Atlanta's case, it was extended more than originally expected. We postponed a decision to invest in the full development system. And owing to the crisis in 2020 and COVID-19 pandemic and changes that we had in the consortium, considering all that, we decided to postpone the decision to invest in the full development system. And as a result, the early production system was extended additionally.

Because this system is a pilot system and because we're still gathering information on the field, eventually, we have to cope with some constraints inherent to the system. For instance, please bear in mind that late last year, we had an issue of corrosion in the FPSO heaters. The problem was fully fixed in February and Atlanta's project resumed normal operations. And then we had some problems related to the pumping system. A couple of pumps were removed from the field to be repaired, and the pump under repair will come back in the first quarter of next year when we expect to have production in the field back to normal.

Our expectation is that until we actually have the deployment of the full development system, we might see some issues in production -- in the early production system precisely owing to the nature of the project in which we have the design. So we expect the full development system has a decision made early next year. And in this case, we would have -- or we would start operation in mid-2024. The early production system will be extended at least to 2023. And over this time frame, undoubtedly, because it is a cash-generation project, to the company, it's far more interesting. And by the way, we decided to continue to operate the EPS knowing that we might see some -- or have some fine-tuning to be made into the system. So we maintain -- or we stick to the same level of production within our expectations.

As for the full development system, we have a different scenario. For the full development system, solutions are considered for a 20-year production time frame. Eventually, we have a far more robust and resilient project suitable for long-term production. It's important to make this distinction and make it crystal clear that we collected valuable information from the early production system, and they will be addressed in the full development system, so we have a more robust product with the capacity to be there for a longer time frame.

Now on Slide 8. As we said earlier, this was the first quarter in which we recognized the full working interest in Atlanta with a significant positive impact on our quarterly results. If we consider this quarter, this asset contributed with 80% of the company's revenue. If you compare this quarter year-over-year, we see an increase of almost 200% in our revenues compared to the third quarter of 2020 and over 250% increase in EBITDAX also year-over-year.

Basically, this stems from the increased production or the increased working interest in the field. So increased volume of production at the company and also an increase in Brent price and also an appreciation of the oil at Atlanta, which today are sold at prices very close to Brent, when we consider delivery at the platform, including logistics cost. If we consider delivery in the refinery, there is a premium compared to Brent because it is a low-sulfur oil. The increased working interest in the field together with a strong increase in Brent prices, we have an increase of over 350% in the company's net income. So we are still being guided by our financial resilience, and that's what I'll be commenting next on the next slide.

The company closed the quarter with a cash position of BRL 2.4 billion. And we continue to see a strong cash position, a solid liquidity to capture market opportunities. And this quarter, we also had an important move over the year, in terms of having our cash denominated in dollars, we maintained an increasingly higher position denominated in dollars in order to maintain our financial capacity of the company in the long run. Today, we have approximately 40% of the company's cash denominated in dollars.

What about commitments? Our estimated CapEx for 2021 is $40 million, and almost half of this amount is related to the Atlanta Field. For 2022, it is $105 million. Out of which, a bulk of it or $96 million, are related to early investments in the full development system, subsea systems and drilling new wells in the Atlanta Field. So it's important to make this take-home message. We are channeling the company's resources and funds mostly for assets under development and production.

Now Slide 10. This is the last slide. Now I'm coming to the end of our presentation by saying that in our opinion, our earnings support our ability to expand our business to keep on pursuing new opportunities. This is our focus to diversify our portfolio. So what we want is to increase our revenue, diversify revenue and generate value to shareholders. We believe we can do that as we've done over the years with the appreciation of our shares or even dividend payout.

We still have room to improve our capital structure. Today, the company's net debt over EBITDA ratio is very low. Our cash position has been very healthy over the year, and we believe we have a lot of value generation, so we can improve the capital structure, access the debt market and have the cash to be invested in new projects, always searching for gains in operating efficiency down the road.

So before we get to the question-and-answer session, I'm going to turn it over to Decio for a few final remarks. Once again, I thank you all for joining us today. I also thank Enauta's team for the quarterly earnings, and I hope to see you soon.

[Decio Oddone, executive]

Good morning. Good morning, everyone. I'm delighted to be here again joining this earnings conference call. Before we move to the question-and-answer session, I would like just to add Paula's presentation with a couple of comments. Firstly, our earnings results were good. We had a record revenue, and we were happy for having this early result. We know it's important to share the earnings as soon as possible. We began to implement the SAP -- deploy SAP, and it will be ready next year, and we believe we're going to greatly improve our reports. This will be more organized.

Last quarter, like Paula mentioned, we had problems with some pumps in Atlanta's early production system. But I would like to go back to this topic and share a couple of information. Like we said before, the early production system was built to gather information on the full development system. We collect very important information, so now we can work on reliable and robust project in the full development system. Like Paula said, we expected to be there for 3 years; however, it was so successful over this time frame, removing our uncertainties and confirming a lot of assumptions. And this is very important to make the full development system feasible. However, owing to the partnership and the collapse of oil prices in early 2020, and the exit of Barra Energia, as you know, it all postponed the decision-making process on the approval of the full development system.

We decided to be in the project late last year, it was the right decision. We know it generate values, and it will add even more value once we get into the full development system. And we've decided to maintain the early production system up and running because it generates value and cash. This is much better than just concluding because we just met the technical goal to gather information, but because it was considered to have a short duration brings consequences, the pumps that are installed in the project have an average time in between repairs of approximately 2 years. Historically speaking, that's the average.

The backups that were built considering a 3-year time frame, consider this average. In addition, the consortium status was not stable. We had arbitration with Dommo, Barra Energia trying to -- well, they had their own view of the circumstance as a company. So these uncertainties and disputes made the consortium last year when the early production system was approved -- did not approve the purchase of backups in addition to the ones that were already contracted. They could have more at that time, but it was not supported by the consortium. So I wish we didn't have to cope with these problems. However, we're better off with an early production system up and running, generating cash and production and just concluding and awaiting for the full development system to happen. We will keep on operating under the circumstances with the risk of having some shutdowns like Paula said. But in the full development system, we will look for another solution.

We're going to have more backup structure with the same type of pump or we're going to have another long-lasting but more expensive pump. We're going to work on this analysis, and we're about to decide until early next year, so we'll no longer have to cope with this problem once we have the full development system. Another comment has to do with our earnings. We posted very good earnings, but we also had an increase in the lifting costs. And this result basically stem from the higher oil price and the increase in the efficiency of the FPSO Petrojarl vessel. It is not common, but the contract we have with Petrojarl has a share of cost pegged to the Brent price. So if the oil price goes up, the chartering freight of the vessel operation also goes up. So because we had Brent -- a high Brent price this quarter, as a result, there was an increase in the FPSO cost.

And it also depends on availability. Availability was also increased with the repair of the heaters. You may recall that over last year, we had problems with the heaters like Paula said. We had to work to repair these 2 pieces of equipment. And this decreased the vessel's availability and, therefore, also lowered the rate we pay. And that's why now we can see a quarter in which likely oil was up and the vessel's availability went up. As a result, we had an increase in costs and also increase in diesel cost, which also has an impact on our costs. On the one hand, it's positive, increases our revenue, but also a side effect, which is an increase in operating costs, both for the vessel and the supporting vessels. By the way, about supporting vessels, we've been heavily working to lower cost. We also decreased logistics cost $3 per barrel by removing an expensive vessel, and we keep on working on measures to further lower costs.

Another comment that I would like to make has to do with cash. We had our cash denominated in dollars gradually, and that's because our business is denominated in dollars. And it affects the cash profitability. When the dollar goes up, it's positive and it could be negative when the BRL is appreciated, but our business is pegged to the dollars. Acquisitions, oil sale is in dollars -- So we are gradually having Enauta's cash denominated in dollars.

Lastly, some comments on acquisitions. I'd rather not talk about specific projects in order not to generate expectations, which might not come true. But I'd just like to say that we keep on focusing on diversifying Enauta's portfolio. This is the main problem of the company. We are concentrated in Atlanta. And especially now that we have an early production system that has been extended and the full development system, which hasn't been approved yet. So we have to diversify our portfolio and have other assets which generate cash.

We analyze different projects, like I said, particularly involving Petrobras. And we also work on offers, which we believe have the ability to generate value to shareholders, but we realize that assets increase their value and there are offers that are high in our opinion. We have to buy to generate value. We have to be on capital diligence and not just buy for the sake of buying. This is the concern of the company's management. We are not being conservative. Oil is over $80, and we have to be responsible once we move into a great acquisition. We were involved in Pólo Bahia and Pólo Carmópolis. In Carmópolis, we had a single offer. And in Pólo Bahia, we had a partnership. Eventually, we decided to leave the consortium once we have the binding offer because the offer did not appear to generate the value we expected to be valuable in our opinion.

And we also were in Albacora, and Albacora last year, which was extensively discussed in the media, particularly the media specialized in the industry. We made an offer. And in Albacora, we were highly competitive Albacora Leste. We are very competitive, a limit of what we expected to be an offer to bring adequate return to shareholders. And we were ready for a follow-on in order to honor our offer. However, we were not selected to move forward. We keep pursuing actively other opportunities, Petrobras’, which are more scarce and also transactions with other companies. We can see moves of big companies with a new position and open the room for companies like Enauta. We'll be very capital diligent. We have high cash like Paula said, BRL 2.4 billion and we have plenty of room to optimize capital allocation. We have room for debt, and we also have room to go for equities and support another or more than one acquisition.

So we keep on being actively engaged in pursuing opportunities to diversify our portfolio. I have to admit that since I've arrived, we haven't managed to do that, but we'll certainly be successful. And we want to bring value to shareholders by appreciation our equity and also dividend payout. Dividends have been a practice at Enauta. At least, we have to meet $0.15 per share. And if we have more cash available, we can assess that up. But what we haven't managed to do is to diversify the portfolio, which is generating value to shareholders by having a diversified portfolio.

So this concludes my early remarks and our full team is now ready to take any questions you may have. Thank you very much.

[Renata de Andrade, executive]

[Operator Instructions] The first question comes from Luiz Carvalho from UBS.

[Luiz Carvalho, analyst]

Thank you very much for your very detailed information towards the end of your presentation. But maybe you could elaborate a bit more in regards to the diversification of the portfolio. Maybe you could talk about a 2-year period. In terms of the competitiveness of the proposals by Enauta, where do you think that maybe you were lagging a bit behind, maybe for reasons related to the company's cost or your perception regarding the future price of oil. I know that you cannot comment about the other companies, but you think that the other companies were more aggressive. Technically speaking, or maybe exchanging FPSO or changing the number of wells or maybe Enauta was a bit more conservative. I don't know whether this would be the right wording, but I just want to get a sense of what happened?

And now speaking about your portfolio, can you tell us a bit about what kind of assets you are looking for? Because as far as I understand, I believe, the focus is more towards assets already in production rather than exploratory assets. And a question to Mastrangelo, on the Atlanta Field, what are the main challenges today? At least if we look the next 12 months, towards the next 12 months, what should we expect in terms of having a very good visibility about the development of the full development system?

[Decio Oddone, executive]

Well, thank you. It's always a pleasure to talk to you. I've -- we've known each other for a long time, even before Enauta. It's always a pleasure to talk to you, and you know that. Okay, to be very, very direct, exploration is not in our radar. Enauta is not going to acquire exploratory assets. We will be very careful when we analyze our own exploratory portfolio. And we will be very responsible in terms of the way we use our cash in exploratory assets. We are not going to spend our cash to explore wells in frontier areas. But our exploratory portfolio is very robust with a very good capacity to generate value. And so we will just manage it in a very responsible way. We are about to begin a drilling in Sergipe-Alagoas. There is a large frontier already opened. The most important one besides the pre-salt.

We are just waiting for the operator to conclude the operators in the Santos Basin in a well that they are drilling for their pre-salt. And so we hope that we get all of the environmental licenses and the rig ready to operate. And we already have assets in the Petrojarl grid, and we are just evaluating what to do with these assets. There is no drilling in a near horizon, except for Sergipe and Alagoas. And we are now assessing what to do with the other assets that are part of the company's exploratory assets. And Enauta's focus is no longer in exploration. We just want to use our cash capacity. We want to use our debt capacity and our capacity to raise capital and our equity without limitations in order to look for other acquisitions. And we just made an offer for Albacora and Albacora East because that really needed a follow-on.

So maybe where -- probably where do you think we were not very successful? Well, we didn't take that operation, but maybe we were successful because we didn't get into any projects that cannot generate scheduled results. When we do an evaluation, and you all know, I mean I know this call has a lot of analysts. You have to look at the results based on your assumptions. You can be conservative or aggressive in your assumptions, assumptions of either price or your own resources, but one day, you have to foot the bill even to celebrate or even to be sorrow about it. I think a company that has been in this industry for many years, lead us to seek for new opportunities that we -- in a way that we will be safe enough to deliver what we want to deliver to our shareholders. That estimated value generation in the middle of the offering will be fulfilled because that's the way we want it to be.

We couldn't expect anything otherwise. We want to continue to deliver. Therefore, when you make an offer for an asset that is being really sought after in the market like this one, we have to take into account the future oil curve. I mean there is no mystery that. But it depends on the aggressiveness that you adopt when you calculate the future oil price, so there may be different views in this regard. And there are also other issues related to the operations, the production capacity of the asset and your own capacity to manage a very efficient operation. And there's no doubt in my mind that Enauta's capacities are absolutely adequate. We know what we're doing. So we placed our offers within the limits of what we believe could be reasonable without generating expectations that at the end would not be fulfilled.

So we want to generate value to shareholders through an acquisition. And so that 4 or 5 years from now, we will celebrate the acquisition rather than justifying to our shareholders why we were not -- they were not succeeded. And now I'll give the floor to Mastrangelo to talk about Atlanta.

[Carlos Mastrangelo, executive]

Thank you, Decio. Luiz, thank you for your question. Well, looking at the future and our challenges. Well, first of all, at the conclusion of this bidding process, our strategy was very good because we split it in 2 phases. Well, before sending the -- telling the market exactly all of the things that we wanted to ask during that bidding process, we had some reasonable terms in terms of the deployment of the full development. So with their feedback and the responses they gave us and all of the companies that would participate in the hiring process to convert FPSO, we got close to the end. We had an understanding agreement, a memorandum of understanding with Yinson. And the term that we deem to be adequate is, even more than adequate, we still have some lack there for the middle of 2024. Now we are entering a phase where we are receiving the proposals not only for FPCO (sic) [ FPSO], but also for the subsea system, vessels, installations.

And so we will consolidate all of the proposals to look at how consistent they are. And then after that, we will submit it for sanction in the first quarter of 2022. So the challenge now is to conclude the assessment so that right after that, we can start the full development. I think both Paula and Decio, they talked about the need to have a more robust system for subsea pumping, be it having a backup because one of the lessons we learned with the EPS is that we have to evaluate the best way to accommodate this need for greater -- to be more robust in the full development system. And so after that, the challenges go to different phases. There is a challenge during the construction and so on. So this is our view in terms of the full development.

[Renata de Andrade, executive]

Our next question is from Guilherme Levy from Morgan Stanley.

[Guilherme Levy, analyst]

Can you hear me? Hello?

[Renata de Andrade, executive]

Yes.

[Guilherme Levy, analyst]

I think my first question is more related to Atlanta's cost. I would just like to learn your view about how should I consider the daily CapEx for the next half year or maybe for next year based on that 420,000 a day that you posted for the third quarter, even considering the oil prices still escalating, which affects chartering and also diesel costs of the project. And my second question is a bit related to that first one. But looking at the pricing of the full development, do you have any indicative interval in terms of what OpEx would be during the full development system of Atlanta? And a third question is, if I may, in terms of the dollarization of the company, this level, 50% of the cash denominated in U.S. dollars, is this the ideal level where you want to be? Or should we expect any increases in that percentage?

[Decio Oddone, executive]

Well, thank you, Guilherme. I will give the floor to Mastrangelo to talk about Atlanta and then Paula can talk about the dollarization of our cash. So then I can rest a bit here.

[Carlos Mastrangelo, executive]

Okay. I think we already talked about the operating cost as this is a charter unit and the charter agreement is impacted by the price of the oil barrel. If you take into account that going forward, we may have an estimate of Brent at that level, so maybe it will be maintained as is according to the leasing of the FPSO. Something that impacted a lot this quarter vis-a-vis last quarter, it was the operating efficiency. I think you might recall that both in the first and second quarters, there were losses in uptime capacity or the availability of FPSO, and that impacts the daily rate. This is a performance contract. And since the third quarter, there were some adaptations with higher water production, the production availability of the FPSO. So it was greater, and that's what we expect to happen.

More availability and logistics costs were also lower, but they were compensated by increases in the diesel price that impacts sea cost and also the FPSO operation because that also involves some diesel prices. And so if we look at diesel prices and the availability of FPSO being high during this period, so it's normal to expect some operating costs. On the one hand, this is good because you have increases in revenue at a higher proportion, higher ratio. I think there was another question, but maybe Paula can talk about the dollarization.

[Paula da Costa Corte-Real, executive]

Well, talking about our cash, the dollarization of the cash was something that was initiated in the second quarter of this year, pretty much. And I think it's pretty much in line with the company's strategy. We know that we have a very relevant cash position, and that has been the case for quite some time. Our industry operates pretty much based on the dollar. And so our intent is to use these proceeds to acquire new assets, and these assets are denominated in U.S. dollars. So therefore, it makes a lot of sense to move in that direction in order to maintain our funding capacity and our investment capacity. This is something that -- as you said before, this is something that was in our radar. So the idea is that we will do this movement throughout a time line.

But at the same time, it's important that we protect our capacity to grow our portfolio and to acquire assets and the development of Atlanta is a CapEx that will be dollarized. For the past 4 years, we have pursuing a policy of market risk that incorporates the exchange rate and commodities based on the oil prices. And usually, there is a line whereby the closest we are to the investment, the higher the hedging potential in comparison to other investments that are further away. So the clarity that this cash will be in its majority used to -- in the development of the Atlanta field is what led us to pursue the same direction. So in the long run, we may see higher percentages of dollarized cash.

[Decio Oddone, executive]

Thank you, Paula. Now Mastrangelo will answer the last part of Guilherme's question.

[Carlos Mastrangelo, executive]

Guilherme, we are precisely now in the conclusion phase of our negotiations, receiving all of the proposals. So I cannot tell you about our expectation now, but we hope to maximize the use of gas and minimize the use of diesel during the full development, so as to have a more resilient project and more resilient with an operating cost that will allow us to produce more at the end of the life span of the field. So for the time being, I would like to -- not to disclose anything for the time being.

[Guilherme Levy, analyst]

Perfect. And if I could just ask a last question. In your release, you talked about the anticipation of another well, which was supposed to -- was scheduled for 2022. Is it this well or maybe you're thinking about another one next year?

[Carlos Mastrangelo, executive]

It's the fourth well. It is the fourth. That's it.

[Renata de Andrade, executive]

The next question is from Leonardo Marcondes with Itaú.

[Leonardo Marcondes, analyst]

Can you hear me well?

[Renata de Andrade, executive]

Yes.

[Leonardo Marcondes, analyst]

Cool. Two points. In the release, in the earnings release, you said expect to drill the first well in Sergipe-Alagoas in the current quarter, but it also depends on environmental license. I would like to know if there is any risk of delay in this environmental license or if everything is as expected in terms of the time line of the drilling? And also, when do you believe that you may share with us the results of this drilling process in case it is successful? Just to give us an idea of the flow about Sergipe and Alagoas. My second question is about the extended capacity to treat the water in Petrojarl. With the first phase concluded or completed, what is the production capacity expected in the platform with the current water production in the field? And when do you expect to conclude the second phase? And what is the expected production capacity once the second phase is concluded?

[Decio Oddone, executive]

Thank you, Leonardo. First, let me answer about Sergipe-Alagoas. And then Mastrangelo can talk about Petrojarl. As you know, the operator in Sergipe-Alagoas is Exxon. It's a consortium: Exxon 50%, Murphy 20%, Enauta 30%. We have a cash call in the first well and those who are leading operations is, Exxon. We are partners. The information we got is that they are completing a drilling process in the pre-salt in Santos Basin. And then we have a lot of negotiations necessary to take the drillship to Sergipe-Alagoas for drilling purposes. And they include the environmental -- the final environmental license. We expect this process to take place within 2 months, so we can start drilling this quarter, which is our schedule. As for the result for such a big operation, it takes a couple of months, 2 or 3 months, that's what is expected for this well.

Now I turn it over to Mastrangelo to talk about water treatment in the FPSO.

[Carlos Mastrangelo, executive]

So 8,500, we already have this expansion. These activities in the ocean and particularly if you consider the pandemic and shipment restrictions, sometimes you need to have a wider range. But the second phase is currently expected to happen in October next year. We extended a lot from 8,500 to 20,000. That's the capacity we expect to reach next year in terms of water treatment. So what is this water treatment capacity? This is to release oil production for the maximum point of the curve with the 3 wells we have in the EPS in the Atlanta Field. So this schedule, in order -- well, we are going to learn more about it and have a more accurate schedule down the road. We are checking some activities in the ocean, but possibly extending the water treatment capacity in October next year. So in the final, over 40,000 with no restrictions at the end for the field. But that's our expectation. I don't know if I answered your question. Did I?

[Leonardo Marcondes, analyst]

Crystal clear.

[Renata de Andrade, executive]

The next question is from Christian Audi with Santander.

[Christian Audi, analyst]

Can you hear me?

[Renata de Andrade, executive]

Great. We can hear you.

[Christian Audi, analyst]

Renata. Apologize for the day. First of all, thank you for your early comments, particularly about the M&A process. That's really helpful. It helps us understand the company's mindset and everything you're doing. So thank you for being so transparent. I would like to focus on this topic. Considering the attempts -- the previous attempts, how do you feel now about new opportunities? How do you feel the market? Do you believe the market is getting a little bit warmer with more opportunities hitting up the same dynamics. Could you give us a glimpse of how you see the market in terms of opportunities? Is it changing as we get in 2022? I know it's going to be more complicated. There will be elections.

And secondly, Albacora and Albacora Leste, they are following -- they're going on with your competitors. But does that mean that this opportunity is really over or not necessarily? Petrobras is negotiating with another company, but do you think there is room and potential? And would you be interested? Or is the door closed, and let's move ahead into a different direction?

[Decio Oddone, executive]

Thank you. First of all, let's talk about concepts before we talk about Enauta more specifically. What we've been through in Brazil, and I really like to remind you of that, at first, around 2008 up to 2011, we had a first wave with the result of ANP's auction, the discovery of pre-salt generating the first Brazilian companies of expansion and production. Bigger companies like OGX, [ HD; ] and then Enauta, the last one to be in the IPO in 2011. At that time, there were opportunities. This was prior to shale oil. It was prior to the accelerated energy transition and before Petrobras started to sell assets. So the alternative at that time for companies was exploration, and exploration in deep waters because it was a new frontier. And that's where we had potential reservoirs to produce oil for more than $100 per barrel.

And Enauta was successful because with this strategy, it was the only company that survived in the original scenario with capital discipline, not wasting all the proceeds from the IPO, and now we have the capacity to invest. But this world has changed; precisely, in Brazil with divestment of Petrobras, opening opportunities for new companies to invest in exploration and production with a portfolio not focused on exploration because exploration is not for small or midsized companies. That's a game, particularly in deep waters, in pre-salt, for instance, with high production cost, this is for big players. These people dedicate part of the EBITDAX for exploration and their solid cash generation.

For those who want to be in exploration, you need solid cash generation, which is not Enauta's case. So we cannot be in exploration in deep waters. It's not worth the risk. That's why we have to change the strategic mindset when I joined the company and benefit from opportunities, existing opportunities owing to the interest of big companies, not only Petrobras. Companies that want to divest more mature assets and some of them focusing on energy transition assets and lowering exposure to oil and gas and selecting the oil and gas assets they will use and other companies in a more intensive manner.

Petrobras launched a number of opportunities in the market and the success of companies that worked on acquisitions early on increased the appetite for these assets. We can see competition was basically in Brazil, very little interest from abroad. Maybe one significant group, which made a proposal for big assets from abroad. But mostly what we saw were national entrepreneurs, some with foreign private capital, but domestic initiative and fully established companies in Brazil benefiting from this process. And particularly, over the last year, Petrobras' opportunities became shorter and grew in dimension selling greater assets or having clusters of assets like Carmópolis, which we were there in Pólo Bahia or Albacora and Albacora Leste. From the moment the process increased and the companies involved began to be successful, the interest increased. And at the same time, there was a very fast increase in oil prices.

Last year, we were level -- lower levels, $40 to $50, and now we are at the range of $80. So this increases the price of assets. And a lot of these actors, new players, these are new companies, new entrants, and they are funded by private equity, and they have time to exit these assets. So Enauta is not conservative, quite the opposite. Enauta made bold proposals for these assets; however, Enauta would like to be here for a long time. If we invest in Enauta's shares, you invest in a company of oil and gas exploration and production with a portfolio in exploration, which is balanced between the oil production and exploration chain. And we need cash, that's why we're focusing on the purchase of assets. And opportunities in production in the short and mid run like Atlanta that can produce slightly more than 50,000 barrels per day in 2024. No other company in Brazil has the same opportunity.

And with some potential to generate value in exploration in Sergipe and Alagoas, for instance, the oil that becomes mature has to be discovered. So exploration is at the source of the chain of exploration and production value creation and it cannot be balanced in a small company's portfolio. So that's what drives our planning and our view. We want to be this company in the Brazilian market. When we go back to 2010 or 2011, at that time, all that market was focusing was in exploration value, so much so that the companies that bet in exploration, including Queiroz Galvão, they were successful in their IPOs, and they were recognized and acknowledged by the market. Today, what we see is that the disappointment at that time with the collapse, OGX and everything that followed in the market and the repositioning of major, now for independent companies operating in Brazil with national domestic capital, what the market is recognizing is mature field operation.

And I also admit that to Enauta we have low-hanging fruits, value generation, the ability to recover and have more capacity from these wells. The discovered oil tends to be less expensive. And we have plenty of opportunities for lower exploration cost and a company like Enauta is fully prepared to do that. In Atlanta, we managed to do companies, things that major companies didn't do with a successful drilling as PA in Atlanta, the EPS in Atlanta was successful. So we do have a track record. And we want to launch this value proposition, which is integrated in exploration and production. Solid cash generation, we want to increase production and success in exploration. We hope to have it in Sergipe in the first drilling action. So this brings an avenue of value generation that is unprecedented in the Brazilian market. Companies that are successful today are absolutely focused on the opposite of OGX, which is mature field operation, the acquisition of mature fields already producing or almost getting into production. So that's our view. And this is what sets our steps.

If you have this view and you have a long-term view to deliver the value that you're promising to your shareholders, acquisitions should be made at an adequate value. I joke, we have this mad capital discipline that has to be respected. Could Enauta have bought one of these assets? Yes. By increasing a lot the offer. We went to the limit of what we expected to be reasonable for the value generation we want to deliver to shareholders. And that's what we will continue to do in further opportunities. We still have some remaining Petrobras’ opportunities. And you asked about Albacora Leste and other processes by Petrobras, the answer is, it is not concluded. It's a long process with multiple steps. We saw in Albacora and Albacora Leste, how it works. There is speculation in the market. I don't know if it's true or not. But there is speculation in the sense that we could have made the best offer in Albacora Leste in the first part of the bidding process. Petrobras had a rebid.

I don't like to talk about this information, but I'm just saying what is already public, and there was a rebidding process. And apparently, this rebid process will be the last phase. And we lost because competitors were more aggressive. I already told you about our motivations. Have they signed the contract already? No. So Petrobras still has to do through the negotiation phase of the agreement in order to get to the signing process. According to Petrobras' rules, if the contract is amended significantly, and it happened before, then this process will come back to a final bid. And this could happen. And after that, we also have the full negotiation phase until the closing of the process. So Petrobras' process are very long.

What we expect to see down the road is an accelerated consolidating process in the company. Many companies compared to Petrobras for 2 or 3 years now are coming in. And we also have new entrants. Many of them already are investors that are pursuing a way out by selling or IPO or reverse IPO. So the consolidation process will accelerate from now. And Enauta is a player that is keeping an eye on this.

[Christian Audi, analyst]

It was a long explanation. It was very helpful.

[Decio Oddone, executive]

Did I miss anything?

[Christian Audi, analyst]

No. Perfect. Perfect answer.

[Renata de Andrade, executive]

The Q&A session is concluded. All of the other questions we received will be answered by e-mail. Now I'll turn the floor to Decio for his final remarks. Decio, please.

[Decio Oddone, executive]

Thank you all very much. I think this was a very good earnings release call, we had the opportunity to talk a lot. I've been with the company for more than a year. And now I know I'm very knowledgeable about what the company intends to do. We see some good opportunities going forward. And as we said before, we are making progress. We are focused in approving the full development system because this will certainly give more clarity to all of us in terms of generating value for the company once the full development is in place, but we want more. We want to acquire assets to be a part of the consolidation process in the Brazilian market. And by the same token, we want to build a more -- prepare portfolio to generate value to our shareholders throughout the entire chain. And I'm sure we'll get there. So thank you all very much for joining us today during this more than an hour.

[Renata de Andrade, executive]

Enauta's video conference is now concluded. I would like to thank you all for joining us, and have a very good day.

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