Brava Energia S A S/Adr

Good day, everyone. Welcome to 3R Petroleum First Quarter 2021 Earnings Conference Call. Today we have here with us Mr. Ricardo Savini, CEO, Mr. Rodrigo Pizarro, CFO and IRO, and other members of the management team. We remind you that at this time all participants are in listen-only mode. After the company's remarks are over, There will be a question and answer session when further instructions to participate will be provided. Should you need assistance during this conference call, please press star zero to reach the operator. I also inform that this conference call will be held in Portuguese with simultaneous translation into English. This event is also being broadcast simultaneously over the web via webcast before proceeding. Let me mention that forward-looking statements that might be made during this conference call relative to the company's business perspectives, projections and operating and financial goals are based on the beliefs and assumptions of the management of 3R Petroleum as well as on information currently available to the company. Such forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they relate to future events that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors may also affect the future results of the company and may lead results to differ materially from those expressed in such forward-looking statements. Now, I will turn the conference over to Mr. Riccardo Salvini, who will start the presentation.

Mr. Salvini, you may begin. Good afternoon. Thank you for joining us.

I am Riccardo Savini, CEO of 3R Petroleum. With me in this presentation of the first quarter 2021 earnings results We have Rodrigo Pizarro, our Chief Financial and Investor Relations Officer, as well as the whole management team. And we will be available to answer your questions at the end of the presentation. Let's start with the highlights of the first quarter 2021. Perhaps the biggest highlight is that we had our follow-on offer, our fully primary subsequent offer totaling 823 million BRL. There was a lot of interest by investors as we had a book that was more than three times oversubscribed. So we are very pleased with this follow on that was settled less than four months after our IPO in the previous quarter. And that gives us a lot of strength to our financial structure as Pizarro will explain later in the presentation. We also created a subsidiary focused on offshore operations in partnership with DBO Energy. And we will speak more about this during the presentation. And the first asset of this subsidiary controlled by 3R is the Perua cluster. And that's a highlight for the quarter. As we had mentioned in the previous call, we were about to sign the acquisition of this asset, and we did sign it in the beginning of the year in Q1 in January, and we acquired Perua Cluster, an offshore gas project in Espiritu Santo State with very attractive entry multiples for this cluster, adding almost 17 million barrels of oil equivalent of 2p reserves, proved less probable to the company's portfolio. And to handle these offshore challenges, we strengthened our leadership team quite a lot by hiring two executives from Petrobras, two executives who are very seasoned in offshore projects, as we have mentioned also. In the last call, we have Hugo Hapsald, our new corporate and gas and energy officer. He's highly experienced in oil and gas. given that he served as Petrobras officer in three different areas of the company. So we're very happy to have Hugo on board. And just a few days ago, we had the addition of Mauricio Tinis, our new chief offshore operations officer, as we will detail along the presentation as well. From the standpoint of performance, I will focus on Macau cluster. That's the cluster we've been operating since the end of May of last year, and we had a strong increment in production. In Q1, as you can see on the graph on the top right, we increased our production from 3,900 to 4,600 barrels on average in the quarter. We're very happy with our performance at Macau cluster. And linked to this operating performance with production that increased greatly, we also recorded higher revenues and EBITDA, as you can see in the company's financial performance in the two graphs also on the right. Our revenue grew almost 56% and EBITDA increased 57% quarter on quarter. Here on slide four, We show you our synergistic clusters. For example, the Potiguar Complex. What we are calling Potiguar includes three deals with Petrobras, Macau, Pescada, Arabaiana, and Fazenda Belem. And I'd like to remind you that the only one that we are currently operating is Macau Cluster. In Bahia, we have the Reconcavo Complex with two clusters. And I'd like to remind you that we're talking about sets of fields. So in Bahia, we are talking about two concessions, 22 oil fields, Rio Ventura Cluster and Reconcavo Cluster. And I'd like to underscore that in Rio Ventura, we are preparing and working hard to take over the operations in the coming weeks. All has been approved by the National Oil, Gas and Biofuels Agency A&B and we should take over Rioventura operations very soon. But the big news in the quarter is the signing of the contract for the acquisition of Perua Cluster from Petrobras. It's an offshore gas platform tapping the reservoirs of the Perua and Cangua fields. And we're very pleased with the signing that happened in January of this year. Please go to slide five. As mentioned, we are creating now a new avenue of growth with the establishment of 3R Petroleum Offshore, an association between 3R Petroleum and DBO Energy. They are a Norwegian group, but their company is incorporated in Brazil. They are very experienced in offshore operations. So we created 3R Petroleum Offshore, to broaden our portfolio of offshore operation projects and concessions. We own 70% of this company and TBO, 30%. And the asset that we have in this subsidiary controlled by 3R Petroleum is Perua Cluster that is now owned 100% by 3R Petroleum Offshore. To lead this company, we brought in Mauricio Diniz, who is our offshore operations officer. He's highly experienced in offshore. He had many years of experience at Petrobras, where he led a number of areas, including project deployment, subsea operations. He was production assets manager. He was the logistics manager for the whole south and southeast of Brazil. And his last position at Petrobras was as health, safety and environmental officer. So he's extremely competent and we are very pleased to have Denise with us. Denise will be leading this offshore business unit or 3R Petroleum Offshore. And this company will have Actually, it already has a team fully dedicated to offshore projects. What I mean is today we have an onshore operations officer, Pedro Grijalva, and under him, there's the whole onshore portfolio and the full focus on onshore fields. And now we're putting together a whole new team. As we mentioned a few months ago, it's a new team to run the company's offshore projects. So all of those more classical offshore disciplines, such as subsea systems, logistics, drilling, completion of subsea wells, all of this will be handled by professionals who will be reporting directly to Mauricio Diniz. I'd like to remind you that this company, 3R Petroleum Offshore is an A operator It came from the old Ouro Preto, which was considered an A operator in Brazil. And we are sharing the whole administrative and financial support as well as part of the technical support of 3R Petroleum. So we are not increasing the overhead. We will be using our full corporate governance that we have at 3R Petroleum to support this offshore arm of 3R Offshore. And the focus of this company is very similar to what we already had, only now it has an offshore focus. But we have no exploratory angles in our project. We are focusing on production assets, trying to acquire these assets at very interesting entry multiples for our shareholder base. On slide six, very quickly, I want to talk about our reserves. The major change here, compared to what we have disclosed to the market previously, is that 3R used to own 50% of Peruá, and we now own 70% stake of Peruá. That led to an increase of our reserves. Currently, our 2P reserves, proved plus probable reserves, total 178 million barrels of 2P reserves. Looking at the graph, our biggest cluster in terms of reserves is Recôncavo with 61 million and then Macau with 48 million. And as you can see, we had an increase of almost 17 million barrels of oil equivalent of 2P reserves with the concessions of Perua and Cangua. So we have 178 million barrels of 2P reserves with a good part of that 130 million being proved reserves, which is the last risky category of reserves in the oil and gas industry. So we have today a very robust portfolio in terms of reserves and it is totally low risk. On slide seven, we see our performance at Macau cluster, which is the cluster that we are currently operating. You can see on the chart on the right, a significant production ramp up, and we're very pleased to report these results to you. I have also to mention that these operations are completely safe with no accidents, zero accidents since we started operating there in June of last year. Month after month, as you can see, our production has been increasing consistently. In March, we produced more than 4,800 barrels, which gives us an average quarter production of 4,600 barrels of oil. Here, we're talking only about oil, no gas. And this is a very strong increment, quarter on quarter. In Q420, we produced 3,900 barrels of oil at the cluster. And please note that we reversed a long quarterly downward trend that this cluster had. And now we have a production comparable to what Petrobras was producing back in 2017, before the field started showing that long declining trend. On slide eight, please. we see production at Macau, which is the cluster that we are operating. And here we have the company's consolidated production of the cluster that we operate, Macau, plus the clusters that are in a transition phase between signing and closing. You can see that in March of this year, we reached 17,500 barrels of oil equivalent in our consolidated production. The results of Macau cluster are the main promoter of this increased consolidated production. And in the pie chart, you can see that the Potiguar complex, which includes Macau, Pescada Arabaiana and Fazenda Belém clusters, already accounts for a little over 40% of our consolidated production. Reconcavo Complex in Bahia accounts for about 37%, including Reconcavo and Rio Ventura clusters. And Perua Cluster, the last one we added to our portfolio, accounts for around 22% of our consolidated production.

Now I turn the floor to our CFO and IRO, Rodrigo Bizarro. Thank you, Savini. Good afternoon.

Thank you all for joining us. Regarding our financial results, I stress that in our financial statements, we post only the results of Macau cluster and 35% of Pescada cluster. The remaining of Pescada cluster, as well as 100% of the following clusters, Rio Ventura, Fazenda Belem, Reconcavo and Perua, are in a transition phase from Petrobras. And I highlight here that our results were very positive on the back of increased production at Macau cluster already mentioned by Savini and higher reference oil prices. Our revenues increased by around 56% over Q4 2020 with a total of approximately 133 million BRL. As for adjusted EBITDA, We also highlight a significant improvement of approximately 79 million BRL with an EBITDA margin very much in keeping with previous quarters at around 60%. We recorded a lifting cost of $6.07 per barrel of oil equivalent at Macau cluster. maintaining the company's position as a benchmark when compared to other industry players. When we add the 35% working interest of Piscata, the consolidated lifting cost is $6.61 of a dollar per barrel of oil equivalent, which is also a very positive target. In Q1, we intensified our maintenance, inspection and repair activities of pipelines, measuring equipment and electric transmission lines, providing the system with greater reliability and uptime. As regards our capital structure, I highlight our cash position, cash and cash equivalents, which is rather solid. We ended the quarter with 721 million BRL, very much boosted by our follow-on offer settled on April 5th, reaching around 1.5 billion BRL. As for our indebtedness, I'd like to remind you that we have a debenture of $130 million for the acquisition of Macau cluster. And when we look at a corporate level at our obligations to Petrobras, we have about $394 million, referring to the acquisition of the five clusters that are in a transition phase, with $73 million in contingent payments, in other words, linked to certain conditions precedent. Speaking about abandonment, we have agreements to share abandonment costs with Petrobras totaling close to $190 million, which accounts for about 41% of the total value estimated by the company. Lastly, regarding our capex, in Q1, we spent approximately $2.46 million, approximately 37% of that referring to facilities. which includes both the water-oil separation plant, which has been built, and the increase in our capacity to treat water at Macau Cluster in what we called the bottlenecking in other presentations. Of the total capex, we also spent 55% for workovers, meaning Workovers at the wells to access new reservoirs and to close to cement reservoirs that have greater water production. And 7% goes to automation and control of the wells, which is one of the pillars of our successful operation. Now moving to the last slide, slide 10. Here we present a summary of the next steps in the execution of our investment thesis. Regarding this strategy, we have focused on developing our two growth avenues. The first based on the acquisition of producing assets with no exploration activity supported by strict financial discipline, which has allowed us to make acquisitions at very attractive multiples and parallel to that, to develop revitalization activities to capture synergies by creating clusters, as Savini mentioned a little while ago. Operationally, our priorities are related to activities which will allow us to complete the transition of Rioventura, Fazenda Belém and Pescada clusters, which are the three clusters approaching deal completion. We are very close, in particular, to take over Rioventura, in the next 45 days. And we are also prioritizing continuous improvement of Macau cluster with greater reliability of systems, maintaining costs under control and primarily focused on operating safety with very good and positive indices with no lost time injuries so far. Lastly, I'd like to highlight our EPC project to build a water oil separation plant, which is ongoing When completed, which should happen in the next 12 months, we will reduce by more than 50% the cost to process fluids, which today accounts for around 20% of our lifting costs at Macau cluster. As for ESG, the main highlight of the quarter is the selection and hiring of a company that will build and provide small thermoelectric plants, which will generate energy from gas in what we call gas to wire using gas that was typically directed to the flare or released into the atmosphere. In other words, we will have a significant reduction in gas emissions when this system is operational, which should happen within eight months. I also highlight that we created internally a multidisciplinary ESG committee that will lead the main work fronts and projects from now on. And my final comment on our financials. With the follow-on proceeds, we now have the necessary capital to complete the acquisitions that have been agreed and signed with Petrobras and consequently, we'll be able to implement Our Strategic Plan. We will also have greater cash generation when we increase production at Macau Cluster and with a continuous improvement in the oil price curve, the reference Brent oil price. And I also highlight that we are very much focused and dedicated to structuring a new debt to complete the acquisition of the assets in Bahia, in particular Reconcavo Cluster, which should happen by year end or beginning of 2022. To end, I'd like to thank all of you for participating in this call and we'll now begin the question and answer session. Our executive committee is all here to clarify any doubts you might have regarding our earnings results and this presentation.

Thank you very much. Thank you.

Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please dial star one. If at any time you would like to remove yourself from the question in queue, please dial star two. Questions will be answered in the order in which they are received. We kindly ask you to take your phone off the hook when you ask a question so as to improve sound quality.

Our first question comes from Andre Achi with Itaú. Savini Pizarro, thank you for taking my question. I have two questions actually.

First, I'd like to understand if you can give us more color when you are going to complete the assets that you have closed and how are you preparing for that? Do you have teams? Do you have service providers to perhaps accelerate recovery like you did in Macau? So that would be my first question. I'll ask my second question after you answer. Hello, Andrea. Thank you for the question. Well, as Bizarro mentioned, we are in the final stretch to take over Rio Ventura cluster. The Agua Grande is the main star in the Reconcavo Basin, and we should be taking over it in the coming weeks. I mean, we've done everything we needed that was required by A&P, by the environmental agency. We just need two very simple permits And with that, we will come to an agreement with Petrobras when will be the right moment for the closing with Petrobras and A&P. So in the coming weeks, we hope to be taking over it. We're totally prepared for that cluster. We already have headquarters in the city of Catu. We have a team standing by. We've been working with Petrobras for quite a few months now for operating transition. So that's Rio Ventura. The other two clusters that we signed later, Fazenda Belem and Pescada Arabiana, for those two, our expectation is to have the closing in July or August. Particularly for Pescada Arabaiana, we are handling all the requirements and that involves environmental permits and approvals. But our planning is to take over the operation of both clusters between July and August. For the Reconcavo cluster, we'll probably take over in October. Well, that will be easier for us because we will have started with the operations in Rio Ventura Cluster. And I'd like to remind you, we are going to capture a lot of synergies when we operate the two clusters together with a total of 22 fields. But that should happen, Reconcavo Cluster should happen in October. Lastly, Perua Cluster, which we signed in January. For that one, the closing is expected. for the last days of December. That's when we should take over the operations of Perua Cluster in Espiritu Santo.

Perfect, very clear. My second question regarding M&As.

When we look at your discussions with Petrobras, do you have any expectations regarding the completion of some deals and for onshore? What about the process of your insurance assets?

As much as possible, whatever you can disclose to us. Thank you. Okay, let's start with Papa Terra.

We are at a final negotiation stage of the SBA sale and purchase agreement with Petrobras. So we're waiting for internal approval by both 3R and Petrobras. of the sale and purchase agreement for that asset. And we maintain what we shared with the market during the follow on. We are moving forward to complete with this acquisition, but we are always very cautious to mention something that hasn't been completed yet. So we are cautious, but we are very confident that we are prepared both 3R and Petrobras to proceed with the signing of this sale and purchase agreement in the next few weeks and more towards the end of the next month. You also asked about onshore processes. Now, here I can tell you very little, Andrea, because these are competitive processes. We have non-disclosure agreements signed with Petrobras. But what I can tell you is that we're participating in many processes with Petrobras, all at a binding phase. That's what I can tell you. There is none in a non-binding phase. Because either you are in a binding phase or you're out of the process. From the main clusters available to the market, 3R continues to actively participate and we are preparing to submit our final proposals to Petrobras, in some cases in the next few days, in other cases in the next few weeks.

Perfect. Thank you very much, Sabine. Our next question comes from Pedro Suarez with BTG Pactual.

Hello, Savini, Pizarro, and the whole team.

I also have two questions. The first is related to lifting costs and the renegotiation with Petrobras.

From what you wrote in the release, it seems that intentionally gas production at Macau has been below expected because it doesn't really make sense to maximize gas production there. But if you could give us some color on these negotiations. In a short term visibility, in your view, what would be a pro forma lifting cost for Macau cluster? In case you were producing what you could produce in terms of gas, how could you reduce cost or reduce operating leverage? I mean, that would be interesting for us to have more visibility regarding the cost structure for Macau. And my second question as a follow up on the first one regarding the operations that you are taking over Escadarabayana and particularly Rio Ventura, which is more in the short term. To expect a production ramp up in the initial months, to expect the ramp up would be close to what we saw in Macau. So the low hanging fruits of this acid would be as easy as, I mean, easy is not a good word, but would they be easy to capture as it was with Macau? Thank you. Pedro. Hi, this is Pizarro speaking. Regretting the lifting cost. We do see opportunities to reduce the lifting cost, particularly with the implementation of the gas to wire project. We expect to have a significant reduction in the power cost, the energy cost, which is one of the main costs in our matrix of costs. that comprise the lifting cost and another factor that we can reduce in absolute terms is the fluid processing cost. As I mentioned before, we have a water oil separation plant which has been built as we speak for Macau cluster within 12 to 13 months This will be complete and then we'll start separating water and oil internally. That will entail a significant reduction in that cost item. Altogether, both account for around 38% of our total lifting cost. The expectation is that in these two factors, we will have around 50% reduction each. Now, as for the UPGN, in practical terms for our lifting cost, well, naturally, we will have an indirect benefit in the gas selling price. This is the main aspect that we are so looking forward to and that we have been negotiating hard to have a contract for this kind of gas processing. Our expectation is that within three to six months, this process will be finished, perhaps even before. But that is our expectation, three to six months. Now, naturally, we do have some opportunities to put some wells into production to increase our gas production. Here, it is a little hard to speak about projections and forecasts. But again, we have to consider our stratification of reserves. But yes, we have a potential to increase gas production as soon as we have a gas separation plant and a contract signed so that we can sell our gas at more attractive prices to distribution companies.

As for Rio Ventura, I will turn the floor back to Savini. Regarding Rio Ventura, the answer is yes.

We have many opportunities similar to those at Macau to reactivate production and quickly. You see Pedro, we see this kind of opportunity in practically all of the clusters. I won't say all of them because of course there is always an exception to the rule. There's always one that is more complex, particularly offshore. in offshore clusters, but in all onshore clusters, we see an opportunity to quickly increase production as we saw in Macau cluster, very much in line with what we are doing at Macau.

That's very clear Savini and Pissarro. Thank you very much.

Ladies and gentlemen, as a reminder, if you want to ask a question, please dial star one. We don't have any more voice questions, so now the company will answer questions coming from the webcast. There's a question by Miguel. Hello, Miguel. Asking your question about Papa Terra, I think that Savini has mentioned that we are at a final negotiation stage of the sale and purchase agreement, SBA. We cannot disclose any more than that right now, but yes, we are interested in closing the deal as quickly as possible. We also have a question here about Perua. When we acquired Peruá Cluster, Peruá Complex consists of Marumbi, Peruá and Cangua. Both Peruá and Cangua are already producing through a fixed platform that was acquired together with the cluster and the whole pipeline that carries the gas, that outflows the gas is handled by this platform until the Casimbas Station. Together with this cluster, we had a field with an existing discovery by Petrobras called Malombe. And Malombe Field, given the Petrobras discovery, and given that we have the whole production plant existing there, we see the possibility of having a tie-back project. This is what is included in our reserves certification. We trust that the results will be positive given the high amount of 1P reserves in our reserves certification. So we don't consider this an exploratory field because there's already a discovery there. However, Petrobras has not issued a declaration of commerciality at the time when we acquired it, and we haven't done it either for strategic reasons. The right timing to put it into production will be the moment when we start seeing greater decline in the Perua and Cangua productions.

And I will answer a question by Victor Pereira with Iridium. A question about recovery factors at Macau.

Victor, you see, what we are doing now is reactivating the wells, opening reservoirs with already drilled wells. And normally, technically speaking, this is proved reserves. Two PE reserves will start draining those when we activate the drilling rig and when we start the drilling campaign that we are planning to conduct in 2023. Right now, we're considering the possibility of bringing it forward to sometime in 2022. We are conducting technical studies for that. I'd like to remind you that our strategy is to take over the fields, Get to know the reservoirs better and organize our databases. And only after do we design the drilling campaign because we need to be assertive there. So to be reserved naturally in a development plan, come at a second stage as you observed yourself. And there's another question about Papateja. whether we are going to be more efficient than Petrobras management. That's hard to say, Victor. As part of a development plan, our business plan includes a development plan of the current operator, Petrobras, together with Chevron. And our studies are still too preliminary to affirm anything.

What I can tell you is that we'll try to do better than Petrobras. Henrique, hello, good afternoon.

You asked about potential synergies between our clusters. I think the best example is Rioventura and Reconcavo. In these two sets of assets, we are going to have one single operating base, a base that we rented. It used to belong to a big service provider in the region. And we're going to have the same mainstream suppliers. So the company that does operation and management will be the same. The company handling transportation will be the same. The company that supplies chemicals will be the same. So we have gains of scale with all of these suppliers. And internally, we have a very diluted general and administrative expenses because The operations manager is the same person. The main coordinators of the operations will be acting as one. And these are practically neighboring fields. So it's almost as if we had one single cluster in operation under the same team. So we cannot really precise the exact percentage, but we can affirm that something between 10-30% synergies can be achieved with this cluster structure. We like to stress that reserves certifiers normally do their analysis independently. They don't include synergies when they conduct a reserves certification in a given location.

Pedro DeMarco, you ask about

We are in a process of structuring a debt with many financial players. We are discussing both the structure, cost of debt, and maturity of the debt. And naturally, we have the possibility of handling a bigger structuring, perhaps involving a corporate debt that would be sufficient for future refinancing of the existing debt. for the acquisition of Macau cluster, but it's all being discussed. We are at a final phase to get a rating and very soon we hope to inform the market more precise data on this process. But our expectation is that we'll have a much lower cost than the debt we obtained for Macau, because that was a totally different context, as you all know. And to answer a question by Diogo Ferreira, he asks about the status of the Albacore process. And Diogo, just like I said before, we cannot talk about active M&A processes through your spread of a consortium with other companies. We are not even the operator. What I can tell you is that we are in a binding phase, just like in all other investment processes by the company. We have your question by ideas on opportunities beyond the Petrobras divestment program. Yes, there are assets both in Brazil and abroad that are for sale. Especially in Brazil, there are some onshore and offshore opportunities that we are looking into, reassessing those. We cannot give you any more detail on that. We are at a very preliminary and incipient phase, but as soon as we have more relevant information, we will inform the market. You have another question about the possibility to enjoy a Sudanese tax benefit in other clusters. And yes, we're working hard to potentially get that tax benefit for the other assets. But there's a peculiarity. We can only submit a request after the revenue of that specific set of assets is already allocated in our financial statements. So just a few months after we take over Rio Ventura, we will submit the request to Sudan in Bahia and so on and so forth. Also for Peru, although it is an offshore asset as it is connected to onshore through pipeline and the condensate gas and oil If the selling process happens on ship, we can also get the Soudani benefit given that the municipality where we sell is a municipality served by Soudani. So yes, our expectation is to replicate the Soudani tax benefit to all six assets, the six clusters that comprise our portfolio. We are now closing the question and answer session. I would like to turn the floor to Mr. Riccardo Savini to proceed with his closing statements. Go ahead, sir. I just want to thank all of you for joining us and for your interest in 3R Petroleum. I want to stress that we continue to work hard. We have a lot to do and we are very excited and dedicated to enjoy many of the opportunities ahead. Thank you very much to all of you. This concludes the conference goal of 3R Petroleum for today. Thank you very much for your participation and have a good day.