Enauta Participacoes SA

BOVESPA:ENAT3

Earnings Call Transcript 2022-Q4

[Unknown Executive]

Good day, everyone, and welcome to Enauta's Fourth Quarter 2022 Earnings Video Conference Call. I am [indiscernible], the Investor Relations team, and I will be the moderator here. Before we begin the presentation, I would like to make some important announcements. This event will be broadcast live with simultaneous translation into English. And the presentation is available for download at the company's IR website as well as here in the webcast platform. [Operator Instructions]

Before proceeding, let me mention that forward-looking statements that might be made during this conference call relative to Enauta's business outlook, projections and operating and financial goals are based on the beliefs and assumptions of Enauta's management and on information currently available. Forward-looking statements are not a guarantee of success. They involve risks, uncertainties and assumptions as they relate to future events, and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors can significantly affect the future performance of Enauta and can lead results to differ materially from those expressed in such forward-looking statements.

We have with us our CEO, Decio Oddone; Carlos Mastrangelo, COO; and our CFO and IRO, Paula Costa.

[Paula da Costa Corte-Real, executive]

Hello. Good afternoon, everyone, and thank you for joining us in our video conference call today. It is a pleasure to be here commenting on Enauta's earnings in 2022.

Let's start with Slide 3. I believe 2022 was a very special year for the company, not only because of the financial results we delivered and the company posted growth of both revenue and EBITDAX comparing the same basis. But also regarding the execution of our organic growth strategy. I believe this was a year when we took important strides to evolve in our main organic growth project, which is Atlanta Field.

In Atlanta, I think we evolved in both fronts, both in the full development system, which is the major project for Atlanta. We started the year with the approval of the investment plan of the full development system. We acquired the FPSO signed contracts. And during the presentation, I believe we'll have an opportunity to see how we are evolving on this front. And also in the Early Production System, EPS, which is the current production system at Atlanta, and we had the possibility of extending the contract of the production unit for another 2 years.

This will enable the company to transition to the full development with continuity with no production interruption and generating cash. On the financial side, we ended the year with the issuance of debentures. We raised BRL 1.4 billion in debentures which optimizes our capital structure, which was one of the drivers of value creation that with an opportunity to deliver for Enauta. And in addition, it gives the necessary fundability toward the implementation of the full development system of Atlanta Field.

I will now give the floor to Carlos Mastrangelo, who will give you more details regarding our activities, both in the early production system and in the full development of Atlanta Field. Mastrangelo, over to you.

[Carlos Mastrangelo, executive]

Thank you, Paula, and good afternoon, everyone. This past year, I believe what was a game changer for the profile of the company, we got an approval for the full development system of Atlanta. And in good terms, maintaining all cost assumptions, deadlines and development. We evolved with the project according to the original estimates and plan along the year. We recertified the FPSO that is currently producing in the early production system so as to allow operating continuity until the arrival of the full development system, and we still maintained all production targets for the year.

I would also like to highlight that the strategy to develop with no prolonged interruptions from the early production system to the full development system is indeed a differential because the industry, oil and gas industry usually stops one system to start a new one. In our case, we managed to have the strategy that ensured continuity.

The decision to implement -- I mean, I believe we have to talk a little about the decision to implement the project. Well, this decision was based on lower operational risk with all the knowledge acquired about the reservoir. The field has been producing for almost 5 years. It has produced more than 24 million barrels of oil equivalent. And this brings great trust and reliability regarding the behavior of the reservoir.

On Slide 4 of the presentation that you see on the screen, we can have a good perception of the comparison between the EPS and the full development system. In addition to higher production capacity, it is important to highlight storage capacity in the early production system, or we currently have 180,000 barrels to store. And in the full development system, we have a storage capacity of 1.6 million. What does this mean? It means that when the offloading vessel arrives in a single transfer, we can build 1 million barrels into the offloading vessel. With that, we reduced a lot a cost that we call demurrage cost, the overstay of the vessel, thus improving the equivalent selling price of the oil.

Another great characteristic about Atlanta is the aquifer, which is very active. The water that sits below the oil layer, which maintains a quite well the pressure of the reservoir. This brings great value to the project because we were able to develop Atlanta Field without the need for injection wells. On the other hand, we need to have a unit with capacity to treat the water that comes with the oil.

The EPS is a capacity of 5,900. [ 100 ] that we upgraded to around 11,000. For the full development, we bought an FPSO that has a much greater capacity, 140,000 barrels of oil daily for the treatment of water produced. Other than that, we are implementing a more robust pumping system in terms of maintenance interval, expected maintenance in the early production system maintenance would happen every 1.5 years in the full development, we have a multiphase pumping system with a maintenance frequency that is much greater. It is expected to take place every 10 years.

Now moving to the next slide, Slide 5. We maintain the same original CapEx that was approved BRL 1.2 billion, of which BRL 350 million have been invested this year. There's one installment that is deferred, but 1.1 until first oil.

Now moving to the next slide. We have a schedule for the implementation at Atlanta. I think it's kind of tedious really because it's the same date since 2021. There have been no changes in the schedule. We are advancing in the exact sequence according to the original schedule, showing great alignment between planned versus executed. But I would like to highlight some important landmarks. We finished the engineering phase of the project. Now we are in the execution phase for delivery. But we started the drilling campaign of the wells that remain for this phase. The 3 final wells. And the first of these 3 has been completed. It is ready.

And in the month of March, we are performing the subsea interconnection with the platform to replace one of the wells that were connected to the FPSO. And this will happen now in the month of March. And in April, we'll handle commissioning and start-up operations to start production still in the early production system.

What else do we have here? The FPSO is expected to arrive by year-end and soon after the acceptances will have the preparation for connection and start up in mid-'24 next year. As regards the execution of costs and deadlines, like I said, we've contracted more than 90% of those through firm contracts with companies that have an excellent track record of explication and this mitigates a lot those overhead and delivery risks.

Now on the next slide, please. Another fact that was very relevant in 2022 was the approval of the Atlanta development plan approved by A&P, which includes an extension of the concession until 2044 another 11 years. That led to increased certification, we had a more than 50% increase, increasing reserves to close to 160 million barrels of 2P reserves, proved plus probable reserves. This is what I had. I now turn the floor back to Paula, who will present the financial highlights. Paula, please.

[Paula da Costa Corte-Real, executive]

Thank you, Mastrangelo. Now let's move to the financial part of the presentation. Let's start on Slide 8, talking about revenue, revenue tied with production of the company. This year, the company produced 6 million barrels of oil equivalent. Of these 6 million, 1.7 million were in Q4 2022. When we see a production increase in Atlanta Field, offsetting the production adjustment of Manati Field. With that, our 2022 revenue was about 22% higher than that of 2021.

And now moving to Slide 9. I will comment on the average lifting cost. Our lifting cost was $13 per barrel in Q4 of the year. We see on a drop in the company's lifting cost. And this is due to 2 effects. First, we had production increase in Q4. And second, we had a reduction of the operating cost itself, particularly due to reduced chartering costs. We had an opportunity in previous calls to explain that our chartering agreement for the production unit had a tranche of the chartering costs linked to the Brent oil price to the market price of the brand. And there was a contract cap for this additional portion related to the Brent price. Once this cap was reached, we don't pay this tranche anymore. With that, when comparing with the second quarter of 2022, we see a reduction of $150,000 daily give or take in the chartering cost of Atlanta Field.

Now moving to Slide 10. We'll speak about the financial performance of the company. Our EBITDAX in the quarter was BRL 464, up 7% over the same period last year when we compare on the same basis. Again, in 2021, we had 2 nonrecurring effects, which were important. The first in the middle of the year, which was a business combination when we took over the additional 50% working interest of Atlanta Field.

And the second was referring to a sale of assets that impacted the numbers of the last quarter of '21. To make these figures comparable to those of 2022, it is important that we exclude these nonrecurring events so that we can compare on the same basis. And so the EBITDAX brings us a 7% increase over the same period of last year compared with Q4 of last year.

The full year rebate tax was BRL 1.4 billion. And again, a 14% increase when compared with the same basis. Net income of the company in 2022, actually, in Q4 '22 was BRL 182 million, so up 10% year-over-year, again, excluding nonrecurring effects of 2021. In the full year, we ended the year with net income in keeping with last year's net income on the same basis, posting BRL 383 million of net income for 2022.

Now moving to Slide 11, I will comment on the company's cash position. We ended the year with BRL 2.4 billion in cash, and this was a year when the company made a very relevant investment. We invested $400 million in the Atlanta project. On the other hand, the main cash inflows in addition to operational cash generated by the company was due to the issuance of debentures, the debt, the issuance we had in the end of last year in the amount of BRL 1.4 billion. As part of our hedge policy and due to the fact that most of our future investments are dollarized, we ended the year with approximately 94% of our cash position pegged to the U.S. dollar.

Now moving to Slide 12. I will comment on the main achievements of the company in 2022. I believe that this year, and I stress that, it was quite a special year for our company in terms of executing our strategy and again, reinforcing our commitment to create sustainable value for our stakeholders.

As regards to the environment, we were upgraded from Grade C to B in the carbon disclosure project, CDP. Enauta is the only Brazilian independent oil company to have a big gain in CDP. On the social front, we have the recognition of our employees, and that is very important to us as we achieved the great Place to Work certificate.

And as regards to governance, I believe we also had important achievements. We had an increase in the number of independent board members. So now we have more than 40% of our Board of Directors with independent Board members, which brings diversity to the collegiate. And we had the creation of the Financial Committee this year, 2022. The company had a total shareholders' return of 14.8% in 2022.

I will now go to Slide 13, and this is my last slide. We are getting to the end of the presentation. To speak a little bit about the strategic positioning of the company. I started this presentation talking about how the year of 2022 was special for Enauta. Not only because of the financial results that we are reporting net income of BRL 383 million, but mainly because this was a year when we could advance and achieve some goals of our organic growth strategy.

We've been working for a year in the implementation of the full development system of Atlanta. The project was approved exactly a year ago, and the project is moving ahead on time and on budget according to the original plan of the company. We were able to extend the FPL -- the ESP so to ensure operating continuity and cash generation for the company. Manati continues to be a project generating cash for the company and adding predictability to our operating cash flow.

And overall, we had an opportunity to optimize our capital structure, have access to the debt market and ensure funds that are so important for the fundability of Atlanta Field. On the other hand, we continue to build a more diversified portfolio. I believe M&A continues to be an important pillar for the company so that we can bring in new assets, revenue, EBITDAX increase so we can ensure a diversification for our portfolio. With all of that, we aim to be the main independent oil company in Brazil, ensuring a balanced portfolio with greater capacity to generate value.

I'll now turn the floor to Decio for his final remarks. And I'd like to thank you all for joining us in our video conference call. And I'll turn the floor to Decio for his final remarks before we open for Q&A. Thank you.

[Decio Oddone, executive]

Good afternoon, everyone. Thank you for joining us for those of you who are following our call. We show the numbers, the main highlights and figures in our operations. But most important, the good figures that we delivered in year 2022, which was excellent for Enauta in terms of production, EBITDAX, net income, EBITDAX margin.

We also had a very good year in terms of operating cost reduction. We say that chartering in FPSO with the end of that tranche related to oil prices, we also had improved efficiency at the company. We reduced the number of vessels, logistics, cost, so full of achievements over the year, and we're celebrating the fruit, but it was far more important because this year set the future of Enauta.

When I joined the company in late 2020, what we had was an early production system project to be discontinued now in May 2023. At that time, we were not confident about the continuity of production in Atlanta. We did not have a full development system project for Atlanta. And the future of the company was open. We had an exploration portfolio. But when it comes to production, the outlook was uncertain. So I would say that 2022, our major success at Enauta was set in the future and reducing uncertainty. We moved away from that phase in which we had questions about the future of the company. And like Mastrangelo put so well, we are now in the phase of execution of the project, which is ongoing. We had a lot of reduction in uncertainty and also lower risks associated to the company.

Fortunately, like we said before, we are delivering our promise. We are on time according to the budget, and we'll be working by mid-next year to deliver this project on time and on budget. Certainly, there are challenges ahead, risks, but we're getting closer and closer to achieve our goals. Like Mastrangelo said, the engineering phase is over. And this is a moment that we have more uncertainty about the future of the implementation, but this is about [ to where ]. We surpassed this, and now we are concluding activities of construction, adaptation and now we're getting to deployment.

Every day, we increase the chances of meeting our goals and delivering the project operationally speaking by mid next year. So this is the great news, the great achievement that we had over 2022, which is not reflected by the way, in the results of the full year, but will certainly be reflected in the future of the company and results in the future ahead. In addition, a lot of headway in governance, Paula mentioned a lot of topics. As a reminder, we are also in SAP management system. And we anticipated this announcement. We used to disclose everything by late March, and now we could anticipate it. That's something we had in mind in order to anticipate the news and results to the market for the year.

So now we move forward in a scenario that is increasingly better. We just completed the drilling process of the fourth well of the early production system to be used in the full development system to be connected in the early production system by April and for the first time ever, we're going to have operational redundancy of our operations, the EPS, which is a reserve pump. We worked a lot to improve the conditions of Petrojarl vis-a-vis our extension of the agreement that we achieved late last year, which was another achievement.

The plan to maintain the early production system produced and until the arrival of the full development system like Mastrangelo said, it's critical to lower the risk at the company and manage our cash. So this extension is another major achievement. Another very important move to lower risk at Enauta. And now with the fourth well and reserve pumps, now we become more resilient in production in the field. and we feel very comfortable compared to the scenario we had before, even though these risks are always present. Our focus continues to be on delivering the project on time, like we said, that's an operational challenge. And we keep our eyes open for M&A opportunities. It's important to have a diversified portfolio. We haven't managed to go on that move yet, but rest assured investors that we keep on working in this direction, nothing to be announced yet, but we are in this process of pursuing and putting into practice future opportunities.

So to conclude, I would like to thank everybody for what we delivered. This true physical and emotional delivery of all of us over 2022. We had a very demanding year and it took a lot of effort and dedication. Like Decio said, we needed solidarity from the whole group. And now we will continue in paving our way so that by year-end, we'll manage by early 2024. Have another conference call with you much closer to the delivery of the full development system and then positioning the company in a much better condition for the coming years.

So that's what I had. Once again, thank you for joining us today, and you'll be here to take questions or any questions that you may have.

[Unknown Executive]

First question comes from Gabriel Barra with Citi.

[Gabriel Coelho Barra, analyst]

Decio, Paula, Mastrangelo. I have 2 questions that I would like to address today. The first point, by the way, this is more for Decio. Considering the extensive experience he has with the years at E&P. So this year was perhaps emblematic, so to speak, in terms of regulatory uncertainty for the industry as a whole. If we consider investments in Atlanta and considering the last item mentioned by Decio about M&A processes, investment in the industry, I would like to hear more from you about the company's strategy down the road. What is expected to change? Do you believe this is actually one one-off move? Or have you ever considered something more structured when it comes to import taxes in Brazil and about the impact on the company.

Could you give us an overview of what you discussed in-house and conversations you had when you had access to the government to talk about this. It would be really helpful so we can better understand the current scenario.

Second point, about the same topic in the earnings release, one item that you mention has to do with the contract with Shell. You were discussing and assessing the impact on the contract. So I'd like to hear from you, perhaps, what is the possible impact and how or have you ever considered how to mitigate such impact in the company's income? So these are my questions.

[Decio Oddone, executive]

Thank you for your interest and your questions. Let's start from a macro view and then we dive into a macro and micro scenario. The import tax creation, well, is in the media, reactions, comments, analysis are everywhere. I also express myself to the press about this. I don't know if anybody saw it, but that was unexpected and very unfortunate because Brazil has the strong tradition to abide by agreements and very predictable. And this tradition to comply and be predictable was precisely which allowed after the crisis in 2014 and the resumption that was lag from 2017, that would allow us to be successful. I was very much exposure to international investors at that time.

I have no doubt to say, and I said it publicly before, by the way, that the fact that we have this tradition to abide by contracts was critical for auctions, particularly big pre-salt auctions to be successful at that time. And I used to hear from investors that not even the change and the amendment to the concession agreement and presold in 2010, not even that had amendments to the rules of the game or any tax change retroactively. So that's why we were taking it back by this measure that was announced this week.

And what we've heard and the outlook is that this is temporary, owing to the tax status. And also, we expect that companies, well, they can have high income owing to this high taxes. So that's something temporary for months. So we are working on this. And if this measure is approved, it will be for 4 months. And over this time frame, in my opinion, would be even worse for the country. And it would challenge heavy investments that are being made in Brazil or what we expect to have in Brazil to improve product or production, oil production.

So we expect to go over 5 million barrels per day. So I saw last year, higher numbers. But this is all a stake. And I believe the rationale in Brazil, as usual, will prevail. The expectation is that this measure, if approved, will last for 4 months, that's the expectation. And even sources of the Ministry of Finance are disclosing this to journalists. As for Enauta, everything is so recent. We were at a Board meeting 2 days ago on Tuesday, precisely approving the results that we'll try to discuss with you today when we heard about the news.

We don't have enough information. A&P is very simple, and it only talks about 9.2% import tax. No further explanation. We haven't seen any breakdown. So we continue to assess the impacts on Enauta. So far, we don't have anything concluded because the details of the measure have not been disclosed as far as I know.

That's clear. So about the contract as you and about the evaluation of a possible impact. Well, in our contract, we export to Shell, Atlanta's oil to Shell, and we are assessing the impact of this measure on our agreement. This analysis hasn't even started to tell the truth because we have no access to how this measure would apply. The only piece of information we have is that there is a provisional measure setting an import tax of 9.2% starting March 1, 2023.

[Unknown Executive]

Next question came in writing. Congratulations for the results. First question regarding for development. What is the deadline for the system to be able to generate 50,000 barrels a day? And can the fourth well start operating in March? Or will it start operating only in April?

[Decio Oddone, executive]

Well, congratulations for me, but Mastrangelo will answer the question.

[Carlos Mastrangelo, executive]

Okay. Victor, regarding well, the FPSO comes with capacity of 50,000. Now as regards the wells, will complete the drilling campaign of the last wells and they will all be producing for the full development. And when the FPSO arrives, all of the wells would be open to production would be capable of producing. So that's the simple answer. We'll connect them one by one. And then we have to transfer production from the early production system to full development, but in principle, all wells would be able to produce.

And the second question was -- what’s the second question? Regarding the drilling schedule, if there's any possibility that we will start operating in March rather than in April. Well, I guess, I kind of answered that, the well was drilled, is complete, is ready to start production. So what are we doing now? In the month of March, we'll handle the interconnection with the platform. Once this is done in April, sometime in April, we would have a startup of the well.

Now your question specifically, whether we can bring it online earlier in March. Well, when we talk about offshore, it's difficult to say because it's offshore, it depends on the sea conditions. It is possible, but we are considering April. It will depend on sea conditions. And surprisingly enough, this year, our summer is very atypical. We've had very bad sea conditions during this period, but there's always a chance, but we are considering production start-up in April.

[Unknown Executive]

Thank you, Mastrangelo. Next question from [ Carolina ].

She says, with the freezing of Petrobras divestment and back that's conscious live in the market, what would be the next big asset aimed by Enauta when Atlanta full development system is ready.

[Decio Oddone, executive]

Well, we continue with our M&A activity, seeking potential synergies. When the plant enters production, I hope we'll get an opportunity before that actually. Negotiations in Brazil are not limited to Petrobras and [indiscernible]. There are a number of other opportunities out there that can arise. I believe that we will deepen the consolidation process in Brazil. We can even consider assets abroad, Mexico, for example. We're not actively seeking that, but it's not totally out of the radar. But the short answer is that we don't have anything to announce at this point.

[Unknown Executive]

Thank you, Decio. [Operator Instructions] Next question also received in writing from Gustavo Allevato.

Congratulations on the results. Could you comment if the agreement signed with Shell at the end of the year maintained a maximum discount of $1 per barrel with increased production, does this condition remain?

[Decio Oddone, executive]

Again, I will get the congratulations and say that the contract is slightly different than this one. There is no longer this discount of a maximum of $1 per barrel, which I think that Paula can answer in more detail.

[Paula da Costa Corte-Real, executive]

The last contract signed with Shell. So it's the oil produced by Petrojarl since January 2023. The discount is confidential in the contract. I would say that FNF will be contract delivered at the FPSO. So all logistics costs are incurred by Shell. They don't really -- they're not incurred by us. And in the FPSO, we have a price close to the brand, but contract details are subject to a confidentiality agreement. A nondisclosure agreement.

[Unknown Executive]

Thank you, Paula. Next question in writing by [ Bernardo Sales with Model Capital ].

He says results on my end 2 questions. Given that in the quarter, part of the G&A increase was justified by the expansion strategy. Could you elaborate on how the company is being structured internally to seek portfolio diversification.

[Decio Oddone, executive]

Again, thank you for the compliment. We've been structuring Enauta to set the right conditions to move ahead with the Atlanta project. the closer we are to first oil in the full development system, the more prepared we need to be in terms of personnel and teams. Our next step is to start hiring and training the operational staff that will be responsible for activities in the FPSO Atlanta. This is also reflected in the company's structure, which becomes more complex, I mentioned we now deployed SAP system in the company in 2022. This gives us more [ 60 ] security in terms of management of contract, inventories and payments. We have also been reinforcing our M&A team. We need to be more restorative in our M&A activities. But the truth is that not in 2022 is very different from now in 2020. And I hope that now that 2023, 2024 will be even more different and we are getting prepared for that.

[Unknown Executive]

The Q&A session is coming to an end. And I'd like to turn the floor again to Decio for his final remarks.

[Decio Oddone, executive]

Once again, we had a great year in 2022. But more than that, this brings an outlook for even better years ahead. So that was the main achievement by the company last year. Our current responsibility is to keep on working to deliver the promise to deliver the full development system on time mid-next year and to diversify the company's portfolio. These are our 2 major goals for this year and next year. And all the company's efforts and the management effort will be moved in that direction. Thank you all for joining us today. Thank you for your interest in the company. And I hope we can see each other again in our next conference call in May. Thank you very much. Thank you for your attention.

[Unknown Executive]

Thank you. This concludes our video conference call. Thank you all for joining us today. Have a great day.

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