Brava Energia S A S/Adr

Good day everyone. Welcome to 3R Petroleum second quarter 2023 earnings conference call. The conference call and comments about the results will be presented by Mateus Dias, CEO of 3R, by the CFO and IRO Rodrigo Pizarro, and by the Exploration and Production Officer Mauricio Diniz. We inform that the simultaneous translation tool is available on the platform. To access it, simply click the interpretation button at the bottom of the screen and choose your preferred language. This conference is being recorded and will be available on the company's investor relations website, www.ri.3rpetroleum.com.br, as well as the presentation that we will show here. Please be advised that all participants will be in listen-only mode during the presentation. Then we will begin the question and answer session when further instructions will be provided. Before proceeding, we take this opportunity to stress that forward-looking statements are based on the beliefs and assumptions of 3R's management and on current information available to the company. Forward-looking statements may involve risks and uncertainties because they relate 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, the industry and other factors may cause results to differ materially from those expressed in such forward-looking statements. Now, we will start the presentation with the company CEO, Mr. Mateus Dias. Please, Mr. Dias, you may begin. Hello, everyone. Good afternoon. Welcome to the conference call of 3R Petroleum to discuss second quarter 23 earnings results. The presentation will start with me presenting the main highlights of the period by Maurizio Diniz, our Chief Operations Officer, who will share relevant operational aspects of the assets we have in our portfolio, and then by Rodrigo Pizarro, who will Detailed financial results and performance metrics of the company as well as information on our capital structure, cash position, hedge, and debt in general. To start on slide three, we have an overview of the period. The first highlight of the period and of extreme relevance to the consolidation of 3R's portfolio as well as being an important milestone in this phase of total focus on the company's execution is the conclusion of the acquisition process of Potiguar Cluster with closing on June 7th and start of operations by 3R on June 8th. In the ENP portion, with Canto do Amaro, Streito and Alto do Rodrigues fields, we started production at approximately 15,500 barrels of oil equivalent per day. And so far, with production increase within our expectations, we have reached an average production of around 17,000 barrels of oil equivalent daily. Another interesting element is the integration of assets in the Potigua Basin, which provides the company with operating and commercial flexibility, as well as greater control of cost parameters in a large part of the production chain. In this context, it is worth emphasizing the potential in several alternative scenarios of production, offloading, and logistics that this integration provides for 3R. Regarding the operational and production highlights of the quarter under review, the company reached an average of more than 28,000 barrels of oil equivalent per day, posting a significant difference compared to the previous quarter, up around 37%. This increase is significantly explained by the integration of the Potiguar cluster after the closing, but also by the operational evolution in all the company's other clusters. This can also be seen in the subsequent period. In July, the company already exceeded 40,000 barrels of oil equivalent daily in the average production for the month. It is worth emphasizing here the performance of Macau cluster, which has been gradually increasing its production by means of the gradual release of its pent-up capacity, as well as by means of interventions carried out according to our 2023 plan. while adjustments to its production infrastructure are still being made concomitantly. This has enabled a significant production increase of 65% when compared to January and quarter-on-quarter production increase has already exceeded 18%. Regarding the financial metrics, I would like to highlight net revenues for the quarter of 837 million BRLs with a consolidated EBITDA of 200 million BRLs. Please note that revenue posted a positive variation of approximately 46% over Q1. Again, due to the consolidation of our portfolio, the positive evolution of production, and certainly due to the start of refining and sale of oil products, EBITDA showed a more modest growth percentage-wise when compared to net revenues. in the period to refining and selling activity of oil products, an activity that is still very premature in the company and consequently with initial challenges, both commercial and physical challenges in the current structure, and partly due to the fall in Brent prices seen in the months of the second quarter. Lastly, still on the highlights, the company saw important progress in terms and conditions of sales contracts in all clusters of the 3R portfolio, especially in the unit values of the gas molecule, with the highlight going to Perua clusters and oil conditions at Papa Terra and assets of the Reconcavo basin, not to mention the Potiguar intercompany transactions. This is Denise. Thank you, Matheus. Let's move on to the operational information divided into the four areas where we operate today. Starting with the northernmost area, we have the Potiguar Complex. I would like to highlight that throughout this presentation, what we are calling the Potiguar Complex includes both the previous area, which we already had, and the current area that we closed in early June, which we are calling the Potiguar Cluster. We can see in the graph a very significant increase in production comparing Q1 2023 and Q2 2023. Part of this already comes from additional production since June, from June 8th to June 30th. And part of this is the increased effective production that already existed in the old cluster. A much more significant production in the data that we disclosed yesterday of 25,200 barrels per day. I would like to highlight an observation in the bottom graph. Our production over the previous quarters, referring to the old potiguar clusters, so to speak. So this cluster used to produce up to 8,100 barrels per day in the past. With those works that we were carrying out with increased production, adaptation of the plants, there was this decline in production over time. And in these last three quarters, With the partial completion of these works and with increase in the number of rigs in the area, we have been increasing our production again, reaching 8,000 barrels per day in July, in line with that initial production that we had in the first quarter of 2022. And for this production increase, we had 10 rigs at work. Today, we already have 10 rigs in operation in the area, and these rigs worked on 75 activities. Of these 46 workovers, 10 pull-ins, which is that removal and placement of equipment inside a well, reactivation of 11 wells, and also important good news, we drilled eight wells in the area. in the production of these eight wells is in keeping with what we expected based on our reservoir studies. We highlight then that in the second quarter of 2023, compared to the last release of results referring to Q1, we increased production by two and a half times and production in July increased four times in relation to Q1 23. CapEx in this area. Investments were made both in the wells that I mentioned and in facilities. Those works and the continuation of those works that are still in progress and will be completed in the coming months. Our well drilling campaign was these eight wells that I mentioned earlier. Moving on to the second production area, the Reconcavo complex, here we reached in Q2 2023 7,400 barrels per day and in Q1 7,000 barrels daily. In other words, in the last few quarters, in all the previous quarters, we have been increasing production continuously. This is basically due this year to the placement and the work of five work over rigs that are working in the area. One more should arrive in 2023, still in 2023. And to date, we have made 38 interventions in the wells, 19 workovers, 14 pull-ins and five reactivations. With these interventions in these wells and some more facilities work, we reached $15 million of capex in Bahia. In addition, we are now forecasting for the next half year, for the second half of 2023, the arrival of two rigs to be drilling in the area. As for Papaterra, I wanted to start analyzing these graphs and explain to you comparing the one before the last and the last bars on this graph on the left. In the second to last bar, we see the first quarter of 2023 with 10,100 barrels per day, and in the second quarter, 13,000 barrels per day. In other words, production at Papaterra is also increasing over time. As we have said in previous meetings, in previous earnings calls, the work at Papaterra during this year is focused on improving operating efficiency, on improving the integrity of the unit. and in the integrity of the unit, we have worked on some important systems. And these main systems that we have already worked on are the generators, our offloading system, and also transfer pumps of the unit. And we have already achieved greater reliability in these systems. To be able to show this, we prepared this lower graph on the right side of the slide, where we show in the last 12 months of operation of the platform last year before 3R took over the operation, an efficiency of 22%. In the first seven months of 2023, we see operating efficiency of 57%. And with this work that we are doing to improve reliability, we expect to achieve this year by year end an operating efficiency between 60 and 80%, according to our forecast. And next year, as has already been said in previous meetings, we should have a boat, a floatel, stopped next to the unit where we will do more maintenance work. And then we should reach, after this intervention, an operating efficiency of 90% by mid-2024. Moving on to the next slide. In Peru, we also had some progress. We also had an increase in production over the last quarters and our working interest increased from 2500 barrels per day to 3200 barrels per day. the capacity of Peru turning that into cubic meters daily, the capacity of Peru to produce 650,000 cubic meters a day. And in Q2, we reached those 3,200 or 570,000 cubic meters per day. This production at Perua basically depends on sale negotiation, on the sale of Perua gas. And in the second quarter, we also signed a contract with Petrobras itself to treat our oil, freeing us to sell the gas to other players, to any other customer who wants to buy our gas. So this also improved the commercial side, the sales of Perua gas. To summarize our production, we achieved, along all quarters, an increase in production. This increased production. Well, in the second quarter of 2023, we reached 28,400 barrels daily. And in July, just now, in the production released yesterday, we were at 43,900 barrels per day. to 3R. 70% of this production is oil and 30% gas. in volume. Looking only at the oil part, the 34.6, we have in the lower left graph the production of all our assets, our fields, which we divided into these areas. I would like to highlight these 4.1 and 17, which are two values referring to our Potiguar cluster that was recently acquired. And then we ended the quarter, the month of July, with 34,600 barrels per day. And in the average oil production, 20 plus 29, that is 49% today, comes from our Potiguar cluster. Let me get the floor back to Mateus to talk a little about the mid and downstream. Thank you, Denise. Let me start with a comprehensive overview of the startup of our mid and downstream business unit, which is part of the perimeter of the Putihua Cluster deal. I'd like to start by listing some aspects of the structure comprised in the Guamare Industrial Asset . Firstly, this industrial complex carries with it units and systems that are part of the production chain of the Potigua cluster, providing interesting attributes to the company's maturity phase, such as greater control over direct production costs, commercial and logistics flexibility. has, in a summarized fashion, primary oil and gas processing units, an effluent treatment unit given the magnitude of the water portion in production, a refining unit with a nominal capacity of 40,000 barrels daily, a natural gas processing unit and GPU with nominal capacity of 1.8 million cubic meters per day, And there is also a private use terminal with two mono voice systems. One for oil products and the other for crude products, together with a tankage park distributed in the primary processing, refining and terminal units. Again, with a total capacity of 1.8 million barrels. Not naturally. As with all assets that we have taken over during this period of various acquisitions, some restrictions require preventive and corrective maintenance. This complex is not different. There will be a need for some scheduled shutdowns. to repair, to do preventive maintenance of systems and units within the refining complex within the NGPU and also to enable an increase in tankage, which still remains restricted in the terminal. As already mentioned, the integration promoted by the arrival of this asset and its processing and logistics units in 3R's portfolio creates an environment of independence and flexibility, which allows the company to have trade-offs between oil and oil products, which enhances our financial performance. This can be clearly exemplified at times when the crack spread which is the difference in the average reference price of oil products in relation to the brand when the crack spread is at high levels the company will certainly leverage the use of refining to produce oil products and the opposite is also true at moments when the crack spread is at low levels, the company will boost the sale of oil, either by exports or in the domestic market itself. Now, on the right side of the page, we have a summary of the oil products traded in this 23-day period in the second quarter, with a sale of approximately 110,000 cubic meters, or just over 680,000 barrels.

So as features of the refining unit itself we have a higher volume produced concentrated in the bunker which was exported in full although the intention is to expand access to the domestic market in view of the premium that exists for selling in Brazil when compared to exports. The mix of conditions that we highlight as oil and head consists mostly of a combination and mixture of crude products purchased from Petrobras at the time of closing, plus unspecified products originated by refining. As for the lighter oil products, we first have Jet Fuel as the only product 100% specified by the refining process of Plata Camarón, that is, which does not require any subsequent blending. In the cases of gasoline and diesel, for both, we depend on the import process to supply the market of Rio Grande do Norte and its surrounding areas. Gasoline, so far, is re-sowed directly, and low sulfur diesel is mixed with the diesel produced by the refinery to fit the final specification of the market. It should be noted that the refinery produces distillation nafta, which, after some facility adjustments that will occur during the month of August at the refinery, may be incorporated into the gasoline blend and be sold to the local market. Finally, still in June, the refining units were adapted for the production of MDO, which is low sulfur marine diesel oil, still of little relevance, as you can see in the chart, but which is opening the market for this product through the Guamaré waterway terminal, in addition to the delivery via the base of local distributors. Finally, on this page, looking at the coming periods, I emphasize again the importance of the terminal and its tankage park for business opportunities and possible partnership, with the potential to increase the flow of imports and exports of crude oil and oil products, acting as an effective logistics hub for distributors and for trading operations. On page 11, we summarized the commercial conditions that I mentioned recently in the highlights of this period. It should be noted that the commercial efforts are continuous and the company will constantly seek better ways to monetize its products within macro parameters as well as market demand conditions, logistics costs, among other variables. First, in a summarized way, in the Potiguar Basin, the integration of assets brought a substantial improvement to the unit price of oil conditions which can be used today vertically through the refining units or marketed directly with other customers. So to other customers directly using the private use terminal as a potential logistics gain. In the Reconcavo Basin, especially on the sale of oil, we have in the second quarter an average unit price of $2.7 per barrel. which represents a substantial difference from past quarters. For the next quarter, we will have another reduction, given that the new commercial conditions of the contracts side were in force starting at the middle of the second quarter. Another highlight now at 3R offshore is the Papaterra Cluster, which, since the beginning of operations under the company's management, has had several adjustments since the first lot, still on pricing dictated by the SPA. The average unit price indicator has evolved greatly since then, reaching in the quarter Brent minus $15.4 per barrel, which, as I exemplified above in Reconcavo, will still have a slight improvement for the next period, considering that the present contract was in force as of June only. It is worth emphasizing that the constant effort to increase tanking capacity remains and is vital for the formation of lots with greater volume and consequently to attract more advantageous commercial conditions. still on 3R offshore in the Perua asset, there's also a new commercial condition and contract structure in which we start to market full treatment gas at NGPU at the entrance of the transport pipeline for 13.5% of the Brent per million BTU. In relation to the past contract where there was a condition of sale before processing and to have the same comparison basis, The approximate price that we got pre-NGPU, the new contract, is approximately 11.5% of the branch per million BTU. Note that this new contract has a guaranteed volume of 400,000 cubic meters per day, which allows 3R to access the market and to work part of it in the spot market as well. Now we will enter the financial metrics session and I turn the floor to our CFO, Rodrigo Pizarro. Thank you, Mateus. Good afternoon, everyone. Let's begin the Q2 2023 Financial Highlight Session. On slide 13, we present the company's net revenues with a great evolution compared to the previous quarter as a consequence of the incorporation of the Potiguar cluster in our portfolio. The mid and downstream activities already mentioned by Mateus and the increasing production highlighted by Denise, which offset the reduction in branch prices. We started from a net revenue of 574 million BRLs in the first quarter to 837 million in the second quarter of 2023. As of this quarter, with the start of operation of the Potiguar Cluster, we will also report revenues and EBITDA by segment. We had 760 million BRLs of net revenues back to E&P, considering the intra-group revenues and oil management revenues referring to the transfer of oil between the fields of the Potiguar Basin for refining activity. In the mid-down segment, we obtained 265 million BRLs in revenues from refined products, LPG, and services. To reconcile with total net revenues, we must exclude the oil management revenues I mentioned and the intra-group revenues from one subsidiary to another. As an example, the sale of Macau oil to the Potiguar subsidiary. On the following slide, We break down the net revenues of the upstream segment by cluster, with the exception of the assets in Bahia, which had a slight reduction compared to the first quarter. All other assets had an increase in net revenues due to the higher volumes produced and better commercial conditions that were partially offset by the lower value of rent. In just 23 days of operation in the quarter, the Potiguar cluster represents 127 million BRL of oil management revenues linked to the sub-clusters Canto do Amaro, Estreito and Alto do Rodrigues. By product type, oil revenues account for 83% and gas, 17%. On slide 15, we present the evolution of the company's adjusted EBITDA in this quarter, reaching 200 million BRLs, with a consolidated margin of both segments and about 24%. If excluding the transition expenses related to the Potiguar cluster, we would have reached 224 million BRLs. Breaking down the segments, the upstream management adjusted EBITDA was 265 million BRLs, up the mid and downstream 4 million BRLs, and considering corporate expenses and intercompany results, we reconcile with the group's adjusted EBITDA of 200 million BRLs. On the next slide, we present the company's lifting cost. Even with the start of operation and several assets over the last 12 months, we present a very controlled lifting cost of $23.6 per barrel of oil equivalent. And it is worth mentioning that in this calculation, we excluded the gas reinjected or used in the operation to have a more conservative lifting efficiency metric. It is worth remembering that we have been operating Fazenda Belém and Peruá for about one year, Papaterra for only eight months and Potiguar for 23 days in the quarter. And in all cases, we have expenses and costs to adjust the collection, processing and storage facilities to more stable operating conditions and prepare to receive higher production volumes. In a cluster analysis, it is worth mentioning that the lifting cost of Papaterra at around 30 USD per barrel considers expenses and costs of maintenance activities to recover the integrity of the asset, as Denise has already mentioned, which could and should have been carried out in previous years by the former operator. The good news is that the hard work of recovering these systems is beginning to show signs of more stable production and an improvement in efficiency in recent months. As for the Potiguar Cluster, the increasing production of the Macau and Fazenda Belém assets has not yet been sufficient to make up for the higher expenses of the start of operation of the Potiguar Cluster. We also had, in the last 23 days of the quarter, the impact of a steam contract that was tied to the STA of the Potiguar cluster, which significantly impacted lifting costs at the cluster. This contract, which represented about 60% of the volume of steam consumed by the cluster, was not renewed and from July onwards the company no longer has this cost in its operating expenses and has begun to optimize the injection process with its own equipment. New systems are also in the process of being acquired. In Bahia this quarter, we had some non-recurring operating costs to restore integrity and prepare the offloading pipeline that connects the Renvolcavo Cluster to the nearest local refinery, which is Esalen, thus allowing a more efficient logistics and better commercial conditions for the sale of oil. Starting in July, we also began to reduce certain fixed costs for truck transportation and some operating expenses. Finally, in Peruá, with a stable operation and a higher production sold in the quarter, we obtain an excellent lifting cost below $6 per barrel.

On the following slide, we present the evolution of CAPEX.