3R Petroleum Oleo e Gas SA

BOVESPA:RRRP3

Earnings Call Analysis

Brava Energia anticipates production ramp-up and improved cash flow in 2025.

During the Q3 earnings call, Brava Energia highlighted a strong focus on ramping up production from FPSO Atlanta and the Papa Terra field. With plans to connect six wells at Atlanta, production could reach approximately 80,000 barrels daily by 2025, driving expected EBITDA near $350 million. Management noted a significant reduction in capital expenditures (CapEx) is anticipated for 2025 as projects complete, allowing for better cash flow and potential dividends as leverage decreases to a target of 1 to 1.5. The integration efforts have already realized about BRL 2.3 billion in synergies.

Evolving Landscape of Brava Energia

Brava Energia is entering a transformative phase following its recent merger and operational consolidation. The leadership is focusing on optimizing core assets and minimizing operational costs to enhance profitability. To achieve this, they are conducting a strategic review of their asset portfolio, which may involve divesting non-core assets. While no immediate sell-offs are planned, the management's approach emphasizes operational efficiency and a streamlined portfolio.

Financial Performance Insights

In Q3 2024, Brava reported net sales of BRL 2.2 billion, split evenly between upstream and midstream/downstream operations. Adjusted EBITDA reached over USD 130 million, driven by robust oil production from their primary fields despite maintenance stoppages at key locations such as Papa Terra. The company continues to receive a significant portion, approximately 90%, of its revenue from oil operations, illustrating the integrated nature of its business in a volatile oil market.

Capital Expenditure and Future Outlook

The firm's capital expenditures are expected to peak as they finalize the installation of the FPSO Atlanta and re-establish production at Papa Terra. The preliminary guidance for future CapEx aims for a substantial reduction starting in 2025, aligning expenditures with operational cash flows. Executives projected a cash generation that would surpass their capital investments, establishing a favorable environment for deleveraging and potential dividend payouts.

Production Strategy and Efficiency Initiatives

Looking ahead, Brava plans to ramp up oil production significantly by integrating various operating fields. Specifically, they expect operational advancements at FPSO Atlanta to facilitate production from six wells, contributing to maintaining lifting costs below USD 18 to USD 20 per barrel. These efforts are part of a broader strategy to achieve synergies by coordinating offshore operations and logistics, thereby reducing operational expenditures.

Dividend Payout Considerations

The management envisions a target leverage ratio of 1 to 1.5 which would enable Brava to distribute dividends. The timing of these payouts will be contingent on achieving stable operational cash flows, projected to occur around mid-2025. In a favorable oil price scenario ($60-$70 per barrel), generating sufficient EBITDA (estimates reaching USD 350 million) will create a solid foundation for robust shareholder returns.

Risks and Challenges Ahead

Despite the encouraging outlook, Brava must navigate several challenges including production stabilization at Papa Terra and regulatory hurdles affecting new licenses. The operational landscape is affected by fluctuations in global oil prices and the associated costs of maintaining production levels across multiple locations. Additionally, the integration of new FPSOs into operational workflows presents a meaningful transition that management must successfully execute.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, everyone. Welcome to Brava Energia's conference call to discuss Q3 '24 earnings results. The presentation and comments about the results will be made by the officers of the company. We highlight that we have simultaneous interpreting available on the platform. To access interpreting, just click on the interpretation button at the bottom of the screen and choose your preferred language.

This webcast is being recorded and will be available at Brava's Investor Relations website, ri.bravaenergia.com as well as the presentation we are showing here. [Operator Instructions]

Before proceeding, let me stress that forward-looking statements are based on the beliefs and assumptions of Brava Energia's management and information currently available to the company. Forward-looking statements may involve risks and uncertainties as they refer to future events, and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should understand that events related to the macroeconomic environment to the industry and other factors may lead to results that differ materially from those expressed in such forward-looking statements.

We will now begin the presentation, giving the floor to Mr. Décio Oddone. Mr. Oddone, you may proceed.

[Décio Oddone Da Costa, executive]

Good morning, everyone. I'd like to start thanking all of you for attending this, which is the first conference call of Brava Energia. Well, you saw the disclaimer slide, which is well known to all. This slide brings the highlight of Q3 '24, but I'd like to say that we've been working together for only 3 months in this period. We adjusted the team. We had a 10% reduction in our headcount. We simplified our organizational structure, reducing the number of managers, and we restructured the company so as to reinforce accountability and to improve deliveries. We integrated our onshore and offshore operations. We have clear people responsible for the operating issues. We have somebody in charge of CapEx and investment. We also implemented the new brand and facial identity of the company.

We are rationalizing the portfolio. We plan to divest from assets which are not a priority. We post the decision to invest in the Oliva field, and we have also Uruguá-Tambaú acquisition going on. We continue to increase steam generation in Alto do Rodrigues. [indiscernible] responsible for the onshore operations will present that part. We continue to advance in integration and in capturing synergies brought along by the merger, as Pedro will detail in.

We completed strategic planning that we had soon after the merger, we defined the target portfolio and the target financial results of the company and an action plan with more than 130 initiatives to improve the efficiency of our operations and to align the different management of the company will need to be on the same page to improve results, and we started preparing to integrate sustainability report of the new company.

In addition to all that, we worked hard to get first oil at FPSO Atlanta and to resume production at Papa Terra in a sustainable way. But as we prepared the company to become a more efficient pragmatic meritocratic company that is able to reduce costs and get more value out of our assets. All of that has been done in an unfavorable environment, the reflection of a number of factors. Oil price has been oscillating. FPSO Atlanta is not in production yet, [ ANB ] scheduled inspection of the meeting system for the end of the month. In Papa Terra production was stopped for maintenance services and to guarantee the integrity of the FPSO as [indiscernible] will explain to us.

The results of this quarter showed the importance of a balanced portfolio. with the main offshore field limited production. Still, we were able to deliver good results and maintain a robust cash at the moment of elevated CapEx. CapEx will reduce when we complete Phase 1 at Atlanta as [indiscernible] will be showing you.

The results will improve quickly the imminent start of production of FPSO Atlanta, the resumption of production at Papa Terra and the completion of the acquisition of Parque das Conchas. Once that is behind us, we will start reaping the fruits. The ramp-up of the offshore production OpEx will drop back and will have a strong cash generation expansion and consistent increase in the remuneration of our shareholders via dividends.

The combination produced the company with a robust, diversified and integrated portfolio, more than 500 million barrels of proved reserves in addition to onshore, offshore production assets, midstream, upstream. This portfolio will allow us to grow in time. And we count on different assets at different maturity stages to have a focus and expertise in managing in these assets and especially to ensure the deliveries we structured the company with teams dedicated to upstream, both onshore led by [indiscernible] and offshore, led by [indiscernible] mid and downstream led by Pedro and exploration led by me.

Next slide. We'll start now with the operational highlights. We'll speak a little about production, and then I'll turn to our employees to detail. This slide shows the potential production of the company with both companies together in the first half of the year, we see that even with the early production system of Atlanta and its limitations, adoption of the combined companies got close to 80,000 barrels daily. In 2025, you're going to have the ramp-up of FPSO Atlanta as a result of other actions that we are taking.

Now I turn the floor to Mastrangelo, the evolution of our offshore operations. Next slide.

[Carlos Ferraz Mastrangelo, executive]

Thank you, Décio. Let's start with Papa Terra. On this slide, we have the maintenance time line to reestablish the systems to put Papa Terra back in operation, recovery of the power generation system. And before I get into details about Papa Terra, we have to understand Papa Terra as a whole, because you can understand what we are doing today in the whole context. The reservoir of Papa Terra has more than 2 billion barrels of oil in place. 2 billion, more than 2 billion barrels of oil in place. The recovery factor today is less than 3%.

So what does this mean? It means that we have to think about the future. What we have to do now to increase the slow recovery fraction. Any extra percentage means a lot of oil, and this is what we are envisioning for the future of Papa Terra, but we cannot think about the future if we don't focus on the present. So we have 2 phases here. What is being done today at a Papa Terra today.

We are working on the recovery and integrity of many systems. We were planning to have a certain sequence, but there was a change in the regulation, which prevented a joint operation. And we had a waiver to have people on board. But this change in the regulation happened some months ago. And with that, we could not prepare Papa Terra all over the future if we don't carry out these activities which were scheduled.

We are working to end this first phase of integrity -- work on integrity and the recovery of some systems. We get into the final stages of this now. We expect this first step or first stage to be completed in December, and then we'll have return of production. And then after that, we'll start working on Papa Terra of the future. A number of other actions to increase recovery fraction, for example, to have more wells, and I'll speak more about that later.

Another example would be to start having water injection to increase the recovery of oil in place. But in order to think about the future, we have to work on the presence, and we are working to resume production in the coming weeks in the month of December.

Next slide. Let's give you an update on Atlanta. Atlanta is a greenfield project. It is a big, big project. And in the bottom of the slide, we have the time line of the deployment of such a project, which is very challenging. You can see the capacity of deliveries according to the original schedule with all the wells drilled, the ones that were planned and drilled on time, installation of Christmas trees, installation of the multiphase pumping system, all of them have been installed. So the -- we are on schedule and more. We are on budget.

So what's happening. Now we already have the license granted by IBAMA, the operation license was obtained with all of the necessary requirements that we had. We have collaboration from ANP. They are putting a lot of effort to meet all of the power demands, even with a lot of work on their plate, but A&P is giving us a lot of attention. They scheduled the inspection of the metering system in the end of the month.

Alongside that, at the beginning, we had 70 conditions -- starting conditions. These are items that they observe could bring improvement in terms of safety and operations, and we are meeting those. We still have 19 conditions, which are practically met. We just have to get some evidence on board. And we're going to do this concomitantly with the inspection of the metering system in a couple of weeks. So our schedule with this collaboration with ANP and we value a lot of participation of the regulator. All of that will be finalized in November, and we'll be ready to start production.

More importantly, now we have a bigger portfolio of activities of projects so that we can increase our firing power in deploying what I said Papa Terra's future and the next phases of Atlanta. The Atlanta unit was pretty invested for new wells. There is no pre-investment to be made for the Atlanta unit. It's just about tiebacks. If we were able to deploy the whole project on time, but tie back us just to add a rig, the flow lines and connect them, I cannot give you a lot of color on this because we are just completing negotiations with some suppliers. But in about 2 weeks, you will be hearing from us about the signing of contracts of low and mid items for Phase 2 to add 2 more wells at Atlanta, 2 more wells at Papa Terra and possibly another well in Malombe.

All of that was only possible with the synergy that we have in this new company. It's not going to take too long. Maximum 2 more weeks, you will be hearing from us about Phase 2 of Atlanta and Papa Terra of the future.

Next slide. On this slide, what matters is BC-10 Parque das Conchas. We're getting close to the closing. There's very little to be done actually. Of relevance is that -- after cash flow, started in June of last year, actually July of last year. But this is very close to coming to an end and the rest -- and we have to gas platforms, a very similar one at. The operator informed this. Do they expect production return in the first quarter of 2025. And Peroá. Peroá is ready to produce more. It suffered a little bit because there was all over demand for gas. Uruguá-Tambaú, another portfolio of projects we have, we can be more selective and we are negotiating with petro products.

What to do with the SPA, the sales purchase agreement. And for Oliva, in comparing the assets, and it's worth investing and focusing. We decided to revisit the strategy for Oliva, and we decided to postpone the final investment.

And now I'll turn to Boeri to speak about onshore.

[Jorge Boeri, executive]

Good morning. In onshore, we had a quarter marked by the start of the drilling campaign. In June, we drilled the first 2 wells in this quarter, we drilled 15 wells in Serra, Canto do Amaro and we had 108 workovers in addition to the 15 drillings. We are focused on improving uptime of drilling, workover and pulling rig by hiring rigs, especially designed for our operations. It's not the case of the pulling rig, which we recently started operating in Alto do Rodrigues, light weight, small rigs, especially designed for our fields. And we had a drilling rig to drill the extended ridge at Serra field, this rig has a working system that allows us to mobilize the rig from one well to another in just a matter of 12 hours. And we don't have to demobilize the rig for that.

So this is the kind of efficiency we are getting with resistant rigs. We are also planning to reduce the number of rigs to get to an adequate number for our planned activities. In the middle chart, we show you the performance of Brava in increasing production at the field when we moved from the former operator to Brava. If we compare the last quarter of the previous of the former operator versus Q3 of 2024, you can see that all of our fields saw an increase in oil and gas production with the exception of Alto do Rodrigues because that is a field with heavy oil. It is in a phase of reestablishing steam generation.

If you don't know Alto do Rodrigues is the Potiguar cluster, which started operating in June 8, 2023. In June 30, the steam generation system was discontinued. The field had 2 sources of steam generation, one that provided 80% of the steam, the rest was supplied by steam generators. After that date, we focused in the revamping and we managing of the steam generators that existed there and we are complementing steam injection by acquiring new steam generators, which are ready to start operating. Some of them are.

Moving forward. This chart shows the evolution of production of Alto do Rodrigues field, and straight field with the steam injection project, we see not only the evolution, but we can see a correlation of the curves in gray is for an operator, in green, Brava operations.

When we started operating the field, we can see a strong reduction in steam generation. That's because we have the term of -- so exit and after that date, we started again resuming growth in steam generation. And this will allow us to increase oil production at this field. With the new steam generators acquired abroad, 6 from China, 2 from the United States, of all of these 4 are in operation and started injecting -- will start injecting steam from November to January of next year. I think the remaining 5 are still in the final phase of construction, they will be ready to operate starting in August of 2025, so 9 in total. With that, we believe that we will continue to grow oil production at Alto do Rodrigues, just like we are doing in the rest of our part.

Okay. Now I'll turn the floor to Pedro.

[Pedro Rodrigues Galvão de Medeiros, executive]

Thank you. Next slide. Good morning, everyone here. I will speak about the results of trading and speaking a little about plans for the future. Q3 was strong in terms of realization of average spreads in exporting oil. And we are now working to take advantage of the materiality of our portfolio and possible synergies among the assets and diversification of the company to extract more value either expanding exposure to the margins of the chain. I'd like to highlight low sulfur bunker. That's a product that the company produces at Atlanta, a little bit at Parque das Conchas and also the product with the final specification produced at Guamaré, and that opportunities about optimization and logistic combinations, given the change will have in the inventory in the storage capacity of our platforms with the operation of FPSO Atlanta and revitalization of our ability to store and offload at Papa Terra platform or form larger batches for exports and new quality combinations to better serve the market.

In the gas environment, the trading margins remained stable despite a lower demand by the market. This was due to a slight variation in oscillation in the total production at Peroá field. Now you're working to diversify the base of contracts bringing Brava to new states of Brazil, new distribution companies and serving new clients on the free market and getting more value out of our gas infrastructure.

On the next slide, we have our synergy. With the merits that support the creation of Brava Energia, we had more than $1 billion in present value of potential synergies divided into a very detailed action plan, here divided into 3 main areas. First, the capital allocation, 2 operations, 3, trading. In the 3 months of the integration, we've done a lot in in the area of synergies. In terms of capital allocation, we highlight the creation of about BRL 2.3 billion in goodwill through the integration of Enauta Participacoes. The upgrade, we had Fitch and S&P rating upgraded Brava in all of its securities in the market. The inclusion of 4 subsidiaries starting a broad process of organizational simplification, which will allow us to expedite the recovery of tax credits for the combined company and the prepayment of BRL 180 million in debt that is expensive to the company in a process to start liability management.

On the operational side, as mentioned by Decio, we had a broad process to optimize our headcount, about 10% reduction in the headcount of the company. Consolidation of the air and sea supply logistics, particularly for offshore, integration of future campaigns, Atlanta Phase 2 new wells at Papa Terra, in the area of Peroá and Marumbi, as mentioned by Mastrangelo.

Regarding trading, integration of risk management, considering gas and power as well as the building of new commercial strategy for gas. As you can see on the right, we have a very detailed action plan that we hope will deliver a lot, and we expect to obtain all of these synergies in the next 12 months.

I now turn the floor to Pizarro for the financial highlights of the quarter.

[Rodrigo Lavalle da Silva, executive]

Thank you, Pedro. Good morning, everyone. We will now move to the financial highlights of Q3 '24. I'd like to highlight that the balances presented a pro forma heading in Delta and 3R numbers is the third quarter of 2023 for comparative. So starting with net sales about BRL 2.2 billion in Q3, BRL 1.5 billion in upstream and practically the same amount in mid and downstream with BRL 850 million in intercompany.

The biggest impact in the quarter were the maintenance stoppages at Papa Terra and this connection of the first wells that were connected to Petrojarl at Atlanta.

On the next slide, we show you we breakdown, the net revenues onshore and offshore. We can see volatility. We see onshore resilience and the impact of the offshore assets, as mentioned. Of the total, approximately 90% of the revenues correspond to oil. And in the year-to-date, evaluation of 42% relative to operations in the Potiguar Basin and 28% at Atlanta.

On the next slide, we present adjusted EBITDA of the company, even with restrictions in offshore assets, we achieved a little bit over $130 million in EBITDA in Q3, it's important to highlight the potential of the company comparing the first quarter and adjusted EBITDA even with just 3 wells in operation at Atlanta. I'd like to remind you, with the new FPSO at Atlanta, we are going to have 6 wells in operation.

On the following slide, we present the lifting cost considering the partnering of FPSO Petrojarl in Atlanta, we concluded the quarter with about $20 per barrel of equivalent oil. And excluding [indiscernible], it would be slightly below per $18 per barrel.

On the next slide, we show the CapEx distribution on an accrual basis in the period by activity and by assets. The higher financial volume refers to the submarine systems in Atlanta and the campaign to connect the 6 wells to the new FPSO, a relevant amount of this CapEx, about BRL 165 million is deferred CapEx from the multiphase pumps that will be paid over the next 12 years.

The following slide, we see the company's capital structure, concluding the period with $1.2 billion in cash and cash equivalents and $1.3 billion and financial net debt. Adding the earnouts, total net debt is $1.6 billion. It's worth noting that we have $395 million in receivables with intent which will be paid during the catering contract of FPSO Atlanta.

On the next slide, we see the cash flow and the position of oil by product in the company. It's worth noting that the operating cash was impacted by the production of offshore assets as well as delinquency and Papa Terra today with a debtor balance in about BRL 315 million in addition to the costs resulting from the transaction.

The entry of -- due to the sale of 20% stake in Atlanta was offset by the CapEx, highly connected to Atlanta as well as the payment of dividends and the amortization of the principal of some debt. So we conclude the quarter with about BRL 9.5 billion in cash.

As for derivatives, we have slightly more than BRL 6.7 million in contracts, BRL 565,000 in NGF concentrated in the next 6 months and more than BRL 6 million and the color format between $57 and $91 per barrel.

So I will turn the floor back to Décio for his closing remarks. Thank you.

[Décio Oddone Da Costa, executive]

So during this period since the beginning of the combined company in August, we've been dedicated to the planning and the priorities in the short, medium and long term. There were a lot of discussions. We had the cooperation of the Board, and I bring you a summary of our priorities and aligned between the management and the Board for the coming months and years.

Full focus on the short term to resume production at Papa Terra to have the port oil in Atlanta, and with that, the corporate optimization so that we can capture the synergies produced by this transaction and deliver these synergies to the portfolio so that we focus our activity in the most important concession for us. We have 20% of the concessions responsible or responding for 90% of the company's EBITDA, we have to rationalize the portfolio through partnerships and divestments and work hard in the improvement of our efficiency reducing cost and increasing free cash flow per barrel. This will be implemented with capital discipline, prioritizing the most profitable projects we've mentioned but a few examples of Pedro being made, would the objective to increase cash generation and return on invested capital. And with that, we'll be able to increase the payment of our shareholders through dividends or share buyback.

So what we saw today is so the work that's being done in the short amount of time since the merger, I think the presentation details the potential the company has, which is not reflected in the price of the pair that suffered with the uncertainties and frustration calls in recent months with the disappointment in the delivery of upward production. But this is about to change.

The Board and the management have developed a consistent plan and the priorities are there on the main to see the company in some years and they are aligned in their implementation of many Board members and directors are relevant shareholders of our company. 2025 will be a year to achieve results with a highly trained and able team that we were able to show with the implementation within budget of Atlanta, and we created the conditions for that with all of the growth potential that we foresee, we will start delivering consistent remuneration compensated to our shareholders via dividends and buybacks.

That's what we had to share with you in this presentation today. And now it's time to open for questions and answers. Thank you all for attending.

[Operator]

[Operator Instructions] First question Leonardo Marcondes, Bank of America.

[Leonardo Marcondes, analyst]

I have 2. The first about the asset portfolio Décio just mentioned, the optimization of the portfolio. I'd like to understand the plan for these assets that are not part of the company's core. So in that scope, I'd like to understand whether the divestment of partnerships should already start being entered in 2025 and whether or not it makes sense for us to be thinking that you may leave the Recôncavo Basin, which is where I understand you have the smallest assets in terms of reserve?

And my second question is about CapEx. I'd like to know whether you can break down the CapEx for us for next year so that we can understand a little bit better the company's cash generation potential for 2025. These are my questions.

[Décio Oddone Da Costa, executive]

Leonardo, I apologize. We could not hear your first question. If you can say it again.

[Leonardo Marcondes, analyst]

Yes, of course. It's about the asset portfolio to understand a little bit better what your plan is for the assets that are not part of the company's core. If you can talk a little bit about the divestments and the partnerships, the time line of that, if we could -- we should expect this for 2025 already and also whether it makes sense for us to think that you may leave the Recôncavo Basin, which is where I understand you have the smallest assets?

[Décio Oddone Da Costa, executive]

Well, we concluded now at the end of October, beginning of November, the strategic plan that we developed, and this plan indicates that if we focus efforts in the main assets, we will have an improvement of our earnings and the company's value. So we are moving in that direction, we'll be prepared for those operations, be it divestment of partnerships.

As for Recôncavo, there is no decision to lead the basin of Recôncavo or not. Our goal is to optimize our assets. And the different areas we operate. So there's no decision to leave Recôncavo but there are assets that Recôncavo and Potiguar that we are reassessing. So I hope we are able to start this process and have results quickly.

Your next question was about CapEx, right?

[Leonardo Marcondes, analyst]

Yes. If you can work on a buildup with us of what we can expect in terms of CapEx. The percentage of CapEx for each asset, more or less, just so we can understand the company's cash generation potential for 2025.

[Décio Oddone Da Costa, executive]

Well, now in 2024 especially this period of implementing Atlanta's Phase 1 product system, a big increase in CapEx that we expect to bring down over the coming months with the connection of the wells to a new FPSO. Our objective is starting in 2025 to have a reduction of CapEx to have a more sustainable CapEx that fits in our cash generation comfortably.

So I ask Pizarro to add to this information, we don't have that our final data. We're still working on the budget for the year. It's not finalized. And we also have to be cautious with the guidance that we may give to the market.

[Rodrigo Lavalle da Silva, executive]

Leonardo, as Décio said, we're working here in reassessing the company's CapEx plan. So of course, we have a breakdown between onshore and offshore. On offshore CapEx for the year of 2024, there will certainly be a significant reduction considering we don't have any well drilling phase for 2025, maybe at the end of the year, we'll start drilling but that is not planned for the coming 3 quarters for 2025.

Atlanta is also with a decreasing CapEx level compared to 2024. Considering that most of its full development system has already been implemented in 2024, and we have remaining for the beginning of '25. Onshore, this assessment of the main fields that are in our portfolio, the dedication and reduction of the number of rigs in operation will also allow for a reduction in the total CapEx value.

So starting in 2025, definitely, we will have cash generation, of course, depending on the oil price conditions and so on, but we will certainly be at a condition with greater operating cash generation when compared to CapEx. So the difference tends to increase with free cash generation available for the payment of financial obligations as well as this deleveraging path that the company plans to follow in the next 12 months.

[Leonardo Marcondes, analyst]

That's very clear. If I may, just a follow-up, Pizarro just mentioned about the remaining CapEx for the system implementation, the full development system at Atlanta. Can you tell how much CapEx is still to be done until the first oil of the new platform? Is there any estimate or?

[Rodrigo Lavalle da Silva, executive]

What we can say, Leonardo is that we have $165 million of deferred CapEx for the multiphase pumps installed at the Atlanta field. This is already in our CapEx, but it's going to be for the next 12 years. And during the campaign to reconnect the wells that came from Petrojarl, but some remaining CapEx of these campaigns that including the PLC campaign or the support vessel that reconnected. So most of this CapEx will take place in 2024.

[Operator]

Next question comes from Bruno Montanari, Morgan Stanley.

[Bruno Montanari, analyst]

I have one follow-up and 2 questions. Talking about the recycling of our portfolio, could you just share with us the strategy in the company's mind for mid and downstream, especially within those options that you have to monetize that asset better, where is it headed? What's the direction?

My next question. One is about the priority. If we think about deleverage versus dividends, as Pizarro said, what's the sequence of events you start generating positive cash at some point of '25, deleverage. I'd like to understand whether that's more for the first half or second half of the year, what's your timing expectation? That would be very helpful.

And the second -- and the last question, you mentioned you expect to see a lifting cost reduction with the increase in production that makes total sense. But thinking about those $20.6 per barrel that you mentioned, if you could give us a range for where this lifting cost could be headed with the assets operating at full capacity?

[Décio Oddone Da Costa, executive]

So our intention, as I mentioned, is to focus on the most important assets onshore, seeking divestments or partnerships in the assets that are not a priority that also increase the attention of our teams and give focus to them, reducing OpEx, CapEx, there's a series of positive outcomes that will tap into. Midstream is important for us and downstream in the Potiguar Basin because it allows us to have adequate outflow of the production that's relevant there.

But we're not -- we're not considering divestment in the asset and partnerships maybe, we may develop in that region and downstream and midstream, maybe Pedro can give you more color. He's actively involved in these discussions.

[Pedro Rodrigues Galvão de Medeiros, executive]

Thank you, Décio. So Bruno, I think it's a great question. Just to put it into context, in the midstream today, the company operates a port terminal at Potiguar Basin. It operates and actively participate in the gas outflow process and the processing of gas both in Potiguar and Recôncavo Basin with our participation in the manufacture.

So there's more than 1,000 kilometers of pipelines, more than 10,000 cubic meters of gas processing capacity and a broad capacity to -- for the flow of oil from the Potiguar oil byproduct from the Potiguar Basin. So we're working on a strategy to extract more value from this position, either in an integrated or isolated way. There's a discussion ongoing with Petrojarl picking synergies in the Potiguar Basin, especially in the gas infrastructure available there at the basin and how this partnership can add value to both companies.

So we're studying and advancing in this product. We expect to have it concluded shortly. So about the capital structure and the leverage of the company Bruno, basically the process comes from the beginning of operations in Atlanta or the restart of operations in [indiscernible], the relevant increase in production that will occur between the fourth quarter and the first quarter of '25, which will continue in the second quarter of '25 with the entry of an additional 2 wells in Atlanta that were already producing at Petrojarl and net with the increase in production, as as you said. And during the presentation, we start to be at a production level that's a lot closer to the first quarter of this year and the around 80,000 barrels than we have in the current production.

So with that, cash generation also gets close to the fourth quarter of 2025, where we had $350 million EBITDA. So here, if we look back, we can reflect some of what the company will be in 2025. And the CapEx volume, as I said, is a lot smaller. So with that, we increased cash generation, increase EBITDA, then to reduce net debt and the company's leverage as a result throughout the year 2025. So it will gradually drop noting that we always look at the last 12 months, that's why this drop is not immediate.

If we -- on an annualized basis, we are able to see a faster protection of Petrojarl, but that will unfold during 2025. Naturally, we also generate income in our operation with the potential to pay out dividends already, even if it is at the minimum mandatory level in 2025 to get to the company's target leverage, we also have a plan to start evaluating the distribution of dividend based on the company's cash generation in 2025.

And I have to elaborate get closer to the target leverage that we have, we will be able to release and pay out more dividends to our shareholders. I'll ask Mastrangelo to complement the lifting costs certainly in Atlanta because as we have the ramp-up of FPSO production, as we mentioned in the presentation, since the fixed cost of the partnering and the operations already given the increase in production will reflect into a significant OpEx reduction in Atlanta.

[Carlos Ferraz Mastrangelo, executive]

Exactly, Bruno, if we look back, the early production system at Petrojarl had a production of 20,000 barrels or lifting cost net of the chartering was close to 1 decimal. But what do we see now looking forward? The investment has been made. So increasing the number of wells, we will dilute our OpEx and reduce our lifting costs. This is our intent, both Atlanta and Papa Terra.

And we also -- we will capture the these wells. This has not been captured yet and we intend to capture the synergies between the field when they operate simultaneously because one of our highest costs are logistics ones. For example, both the vessels, the vessels which are necessary in case we have an emergency oil spill. So today, we have individual plants. A fuel has its own independent logistics arrangement. So this will take some time. It will take some time for us to consolidate this into just one single plan.

With this, we'll have the synergies of operating 2 fields concomitantly. So this will reduce our operating costs, and this is just one example. Also, diesel consumption at Papa Terra. This is already in our plan for Papa Terra today, maximizing the use of gas to reduce diesel consumption because diesel is a high-cost item today at Papa Terra.

Automation that with this, we will contribute to reduce our emissions. So you see a number of actions that we are planning for the next phases to reduce our operating cost and with a higher production, will reduce the lifting costs and we'll enjoy the synergies to reduce our OpEx.

[Operator]

Next question from Pedro Soares with BTG Pactual.

[Pedro Soares, analyst]

I have a follow-up question about cash generation. I think that you were very clear about the expectation of generating cash in mid of next year and operating cash above the level of investments, which will allow the company to deleverage, but perhaps you could give us more color regarding the oil price that you're using for this assumption?

And the second question is regarding dividends. Given the stage of the operation, and a series of operating priorities that you still have for the short term. My question is, you mentioned a target leverage that would allow for dividend payout. What are you envisioning as a target leverage so that you can pay dividends above the minimum required? These are my questions.

[Décio Oddone Da Costa, executive]

Well, to be objective, something we haven't decided yet. Well, conceptually, we expect a leverage of 1 to 1.5 with an oil price of $60, $70. This is what -- these are the assumptions we are discussing at the management, so we can think about paying dividends to the shareholders. And I think that we can get to these levels very soon.

In terms of cash generation, Pedro, it is exactly the range that we are working with in our projections. In other words, in a more optimistic scenario, close to $70 in a pessimistic scenario. We are simulating cash generation at $60 per barrel. Now we intend to have an operational cash generation that will exceed the volume of investments in our CapEx.

[Pedro Soares, analyst]

Okay. A follow-up question then -- thank you, Pedro. Can you still hear me?

[Décio Oddone Da Costa, executive]

Yes, we can.

[Pedro Soares, analyst]

If I may complement, Décio just mentioned, levels of $60 per barrel, and the operating cash flow would be exceeding the investments. But do you understand that deleveraging if prices stay at these levels, do you think that deleveraging will need to rely on some divestments by the company or not?

[Décio Oddone Da Costa, executive]

Petro, all have been working with is to optimize the portfolio. And the main effort is to simplify the operation of the company. They have resources coming from divestment of smaller assets, this is not very significant. We do the possibility of divesting some of the operations, perhaps at a greater scale. But this is not the base case.

We understand that it is totally feasible to reduce the company's leverage gradually along 2025 even without divestments. Just to give you an example, one more time. If we annualize the first quarter, we have EBITDA above BRL 1 billion. We have a financial net debt, including our amount of about BRL 1.6 billion. So leverage is already very low. Even if we consider the production situation of the first quarter, what changes from the first quarter to the end of 2025.

We'll have FPSO Atlanta in production, have a 20% reduction given the sale to Westlawn, but that's a positive balance. And we are at a very final phase of approving BC-10, will start having 23% working interest of that field. So it's a new production increment. And lastly, we expect start-up of operations at Manati, greater stability of production at Papa Terra, increased production mainly in the Potiguar Basin and particularly in onshore. So it's all about increasing production, reducing leverage, having the possibility of thinking about share buyback and dividend payout for 2026 in a more significant way.

Pedro, the reason why we are rationalizing the portfolio is not to get proceeds, but to optimize the portfolio and focus on our core activity and increasing efficiency. It's about fine-tuning. It's not because we need to proceed.

[Operator]

Next question from [ Elena Kelm with XP ]

[Unknown Analyst]

I'd like to know about your challenges. We understand -- they do you want to focus on Papa Terra and first oil of Atlanta for now. But I'd like to hear from you what are your main concerns you have today? What can go wrong? What should you focus on? Is it a licensing lack of inputs in the market, something related to the assets themselves that could be concerning? What are your concerns?

And my second question is about the reserves certificate. I don't know where you are in terms of the reserve certificate. What changes should we expect in terms of investments, development of reserves if there will be a change of focus from onshore to offshore and what to expect from the production trend?

[Décio Oddone Da Costa, executive]

All right. I spoke about the priorities, and you yourself mentioned them, or very short-term focus will be on the main catalyst we have to increase production and cash generation, i.e. FPSO Atlanta is starting up and then ramp up of production at FPSO. We struck with 2 wells along 2025 production will count on 6 wells, and then Papa Terra resumption stabilize in production at Papa Terra as Mastrangelo decrease in production at Papa Terra, have a big potential lift more oil from the Papa Terra reservoir. But for that, we need to get ready. We need to be prepared and understand the reservoir better.

You asked about the difficulties in what can go wrong. Well, right now, we are living through a moment where we have the consequence of some delays we had given the circumstances that happened in the country in the last half year. And we are overcoming that. You have imminent return of Papa Terra and imminent startup of production at FPSO Atlanta. So we had a difficult period exactly when we were integrating both companies.

In addition, we are looking at a period of oil price oscillation. Looking forward, you asked about the upcoming challenges and what worries us. Well, what we are living today is a situation where -- at this moment in time, we see the maturing of a number of oil producing projects in Brazil as a result of decisions made in the past, which are materializing now.

In the last 6 to 8 months, we saw the simultaneous arrival of a number of platforms and FPSOs to increase oil production in Brazil. And this overall led the regulatory agency and IBAMA and they need to get the licenses and authorizations by ANP. We had a number of FPSOs arriving in Brazil in recent months, they were fighting with us for the resources of the regulatory agency. That is a concern looking forward because as we continue to move forward, with the next phases of production at Atlanta and Papa Terra, we will need to rely on the part of the regulatory agencies to continue to give us environmental licenses and production license. We started really at Atlanta at a very favorable month.

And all the procedures unfolded really well and fast for the licensing of Atlanta. Never did we have a problem with that. We had the standard operation by ANP. Now with the simultaneous arrival of FPSOs in Brazil but brought some difficulties. So looking forward, we expect that the regulatory agencies will strengthen their ability of work. This is important for activity for the creation of value in Brazil, something else. Unlike what we had when we approved and developed the Atlanta FPSO project and the 6 wells connected to the FPSO.

The movement of the industry was different than we had availability of equipment, and availability of services. This increase in production in Brazil and increased demand is stressing the supply chain. So recently, we have faced some difficulty in contracting apartment and services quickly. So these are difficulties that we might face in the future when we increase our CapEx activities in Papa Terra and Atlanta.

Regarding stratification, we are working to update the recertification of our 2 operations, both onshore and offshore with a combination of 3R and other assets, which now became Brava. We don't expect great changes in certifications in the coming months.

[Operator]

Next question Tasso Vasconcellos, UBS.

[Tasso Vasconcellos, analyst]

I'd like to go back to the discussion of dividends. The first question, if you can share the rationale behind the payment of BRL 90 million, BRL 100 million now this quarter, with the pro forma that of this 9 months of this year, the company had a loss of BRL 100 million. So I'd like to understand the buildup and the timing of advancing this payment?

And my second question on the same topic, can you give us more detail on how this agenda is in terms of management and Board, the priority, the discussion. And if there's any discussion to change the frequency or how the payments will be made with a different payout or something more related to cash flow? And if you allow me a third question, maybe at the opposite end of this discussion, I'd like to try and get your new Décio and Pizarro. Whether this is a discussion that should be taking place right now? Or if it would make more sense to leave it for 2025 after the resumption and after capturing most of the synergies?

[Décio Oddone Da Costa, executive]

The dividends that you mentioned, the BRL 90 million were dividends from 3R that were paid out now was this pertaining to the previous year, so Tasso, that's the minimum mandatory required by law that refers to the previous year. And the planning of this payment was the -- it had been planned for the third quarter of 2024. So it was nothing extraordinary.

As for the future, I mentioned here that we concluded the strategic plan for the company's coming years. It was done in cooperation with the Board and the management. And of course, when you plan for the short, medium and long term, you have to get things organized. So all of this discussion occurred with that in mind.

So I think the -- for medium- and long-term priorities, as I suppose, and the long-term aligned with the Board's guidance and what we're going to do in the management. So this issue of capital allocation payment of dividend potential buybacks were part of this discussion. They must be part of the discussion, and it was important for us to be able to prepare.

So at the time that this is a possibility to happen, we've been -- we've discussed it. So that was a goal. We did all of this work in the planning and based on the Board's guidance, they gave us the -- addition of how to steer the company in coming years, even including the CapEx plan, right?

[Operator]

Next question, Pedro Gamma, Citi.

[Unknown Analyst]

Basically, 2 follow-ups. One about leverage. I'd like to understand how it would work when you get to the closing of BC-10, if you can open the results of the EBITDA, whether it could happen on that leverage? And the second point is what's the strategy for you with the close of FPSO Atlanta, if you want to do it on the short term or if it's more for '25, '26?

And the second question is about the shape of production for '25 in the year, we'll see FPSO Atlanta ramping up production. We'll see Papa Terra already operating. But how does it work for the increase in production in Potiguar? And what do you expect as an output of production for 2025?

[Décio Oddone Da Costa, executive]

For leverage, BC-10 is a transaction that was carried out by Enauta in the past. And we haven't had the final ANP approval yet. We are about to get it. And once we do we will be able to recognize results from the July for 2023. So all of the production and the resulting EBITDA of BC-10 since those days will be recognized for Brava for covenant purposes. So that helps in leverage for covenants.

And we're always discussing the best way to address the receivables that we have for FPSO Atlanta, [indiscernible] dedicated to that as well. So I'll ask him to give you more color, so that you have more details.

[Pedro Rodrigues Galvão de Medeiros, executive]

As as you said, all of this cash generation is something that will be calculated for covenant purposes. So BC-10 really does help considerably for the reduction of leverage. As soon as we have the closing on the assets. As for the receivables from into, the $395 million that I mentioned, we've been working with potential strategy to monetize those reports. Obviously, always evaluating total cost and the benefit of bringing a reinforced cash position for the company.

So all of that has been worked by many departments, in particular, the financial and legal departments to evaluate some of the potential ways we can partially monetize that credit, a series of potential designs, and we're looking at the best timing and the best proposal to bring this in.

As for the production that you also asked, during the presentation, we showed some numbers, also some numbers in the first quarter of last year, which are a good proxy of the company's potential for 2025. As I said, we have the restart of Papa Terra, the ramp-up at Atlanta, the effort we're making in Potiguar. We have respect them to accelerate this, but you can get an idea with the information that we are conveying.

[Operator]

Next question from Rodrigo Almeida, Santander.

[Rodrigo Reis de Almeida, analyst]

I have some questions. Perhaps let's start with what Mastrangelo mentioned. You mentioned the possible campaign in the future. And I'd like to ask a couple of points so we can get prepared or you announce this possible campaign. First, looking at the status of licensing for these assets, about list what is necessary, both for Papa Terra, not much there, but looking at Malombe and what can require environmental license for drilling at Atlanta?

And equipment, equipment for the wells or rigs or necessary vessels to carry out this campaign? And what is the status in this process of acquiring equipment services, et cetera. But we can learn a little more.

My second point regards the onshore lifting costs. I want to understand what we can think in terms of trajectory of lifting costs, perhaps already thinking about first and second quarters '25 when we have this team project operational in Rio Grande do Norte. And I got a question from one investor. He asked me to ask you he wants to understand whether there is a strategic plan to be announced to the market formally. I imagine that he is expecting something similar to what Petrobras does for the market.

[Décio Oddone Da Costa, executive]

Your question is linked to what Elena asked regarding our concerns related to licensing and suppliers. I think that we have been working well in that regard. As relates to environmental license in the ring fence of Atlanta, Atlanta and Oliva, we have licensed to drill a large number of wells. So that is not a difficulty for us today. Papa Terra and Malombe? Yes. We filed for a license and get authorizations. The authorizations we still do not have. And again, we have those for Atlanta.

We are thinking that Mastrangelo can detail this. We're thinking about carrying out an integrated campaign to -- into other synergies of contracting equipment and services. So we can do simultaneously 2 wells at Atlanta, 2 with Papa Terra and possibly 1 well at Malombe.

As we were saying Phase 2 of Atlanta and the Oliva project, we took advantage of some letters of intent for the project to ensure we would get the equipment for these wells. If we had not done that, these wells would only be drilled way ahead because today, the market of equipment for deepwater wells very much stress for the big investments we made in Brazil. So we could benefit in these projects that we were considering. So to to work on these wells at both Atlanta and Papa Terra. I think Mastrangelo can detail this a little more.

[Carlos Ferraz Mastrangelo, executive]

Rodrigo, I think you kind of covered the items, not the lead items, are the critical ones to implement a project, the rig, the Christmas flow lines for all these critical items we have contracts signed for or ready to be signed, and that's why I cannot give you a lot of detail at this point. But in a couple of weeks, you will be informed of the details so that we can start the campaign the end of next year. With this wider portfolio of drilling, we reduced quite a lot the cost of a daily rate of a rig, for example.

In addition to mobilizing, demobilizing and cleaning the hoses for 1 or 2 wells, we can now dilute among many, many wells. So we are contracting these long lead items to start the campaign in the end of next year. And at Papa Terra, this is on the way. This has been started at the time of New Year, we had filed for the license for 2 more wells. And at Atlanta, as you mentioned, in the recurring fence, but to have license to drill 12 wells. We've drilled only 6. So this is not critical in terms of getting a license from plan, of course. So we do need some approvals, but it's not a critical thing to start the drilling campaign at Atlanta.

What's missing? Well, to have all these long-lead item contracts signed, we intend to have them all signed. They were derived from the letters of intent for the drug campaign of Atlanta plus Oliva. This is a big plus in terms of overcoming this market restriction that we have right now with many simultaneous activities going on. The market is overheated. But still, be able to have the campaign starting at the end of next year in December of 2025.

The lifting cost for onshore, I'll ask Boeri to mention and Pizarro is planning a Brava Day. That's when we can communicate a plan to the market during our Brava Day, the lifting cost? Hello, drift lifting costs for onshore. As I mentioned, we are adding steam injection in the heavy oil fields. And this increase in steam production will lead to an increased oil production and consequently, a dilution of the cost, that's not the only thing. We're developing an efficiency plan that's to mention that this.

We have a number of actions for improvement at Brava. A number of those initiatives are related to onshore. These actions are being developed by our team. They are being monitored by the management and by the Board of Directors. I mentioned in my speech that we are contracting a pull-in -- right pull-in rig with a much lower cost than a conventional pull-in rig that we use in Brazil. And it is a lot more agile for the operation. So it's a mix of actions that we are developing aiming to maintain our lifting cost at an acceptable level and obviously, in a descending curve.

[Operator]

Next question from Gustavo [indiscernible]

[Unknown Analyst]

My first question is about cash generation this quarter. When we look at the cash generation, excluding the receipt from [indiscernible], we see that there was a strong cash consumption. Part of that you explained is CapEx. But we can see that the operating cash generation apparently was affected by the working capital. Could you explain the working capital dynamic and what we can expect for Q4?

My second question is about leverage. Leverage go close to the level of 3x, 2.7 in the end of Q3. Could this have any implication if the net debt over EBITDA ratio exceeds 3x in Q4?

[Décio Oddone Da Costa, executive]

Thank you, Gustavo, for the questions. In this quarter, indeed, we had a high CapEx, both at Papa Terra, we had a flotel that had a production stoppage that require the CapEx and we had the peak of installing FPSO Atlanta, and that led to a CapEx impact. And -- despite the offshore production reduction, we were able to maintain a healthy leverage level in the quarter.

Looking forward, we expect the situation to improve. We have BC-10, as Pizarro mentioned, BC-10 will improve our leverage in terms of the covenants, and we are working to have these operations approved as soon as possible. I think Pizarro can give you more color on what to expect in the future.

What we see is a continuous deleveraging process for the company as we resume and increase production and as the costs are being reduced. Pizarro?

[Rodrigo Lavalle da Silva, executive]

Well, particularly regarding cash generation, as we mentioned, we did not have the payment of the installment referring to the 37.5%. And in all the expenses, cost and CapEx related to Papa Terra. Of course, that obviously impacts the operating cash generation. We had some operational restrictions, which end to be mitigated in 2025, we tend to see production increase in some assets. We also had dividend payout. We had the amortization of some debt and still our cash position showed a slight negative variation quarter-on-quarter.

Although we still have a very robust cash position. We have $1.2 billion in the cash position of the company, which gives us a lot of comfort, a lot of liquidity for the coming years. For work at our debt obligations along 2025 and '26, they are much lower than the size of the cash position of the company. As regards to leverage in Q4, we'll go through a period which is a little more sensitive regarding the company's leverage. Like to remind you, we always look at the last 12 months. If we annualize or if we look forward, we'll always be in a better position.

And we are working hard so that we can have alternatives. So we won't get to the cap of leverage of some of our debts. I have a number of debt at the company. Some of them nothing to speak about in terms of the covenant. We would have no risk in terms of getting to this limit established in the contract. For the other debts, we have some alternatives. For example, BC-10 which is something that will reduce leverage quite a lot.

So this is not keeping us awake at night, but we have been working hard so that we can act quickly in terms of leverage and covenants. Thank you.

[Operator]

The questions and answer session is now closed. We would like to turn the floor to the directors for their closing remarks.

[Décio Oddone Da Costa, executive]

Well, thank you for your presence and your patience. It was an interesting conference call for all of us. It's the first by Brava. And I hope the next one that will be for the fourth quarter of this year, we can already be here discussing within some of the results that we talked about this 1.5 hours that we spent together. So thank you all very much, and see you next time.

[Operator]

Brava Energia's conference call is now closed. We thank you all for your participation. Have a great day.