Brava Energia S A S/Adr

Good afternoon everyone and welcome to 3R Petroleum third quarter 2023 earnings conference call. To start today's conference, we'll be showing a video of 3R Petroleum's main assets. The presentation and comments about the results of the company will be presented by the top management of the company. will 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 call is being recorded and will be available on the company's investor relations website, 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 company's presentation, and 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 these forward-looking statements. We will now begin the presentation with the company's CEO, Mr. Matheus Dias. Please, Mr. Dias, you may begin. Hello, everyone. Good afternoon and welcome to 3R Petroleum conference call to discuss third quarter 2023 earnings results. In the beginning, a video was shown in which you were able to see various images of part of the operating structure of the assets in our portfolio. On our end, I feel obliged to emphasize the pride and joy, given our relatively recent history, that these images represent for all the employees of 3R who have tirelessly dedicated themselves to the evolution and maturity of the company. Even more so considering the milestone of this quarter with the effective consolidation of our assets. As I've mentioned a few times before, this is a very important phase when we concentrate on the execution and constant improvement of the company. Very well, given this brief introduction, let's start the presentation, which, as usual, will be led by myself, Maurício Diniz, our Chief Operations Officer, and Rodrigo Pizarro, our CFO and IRO. Starting now on page three with an overview of the period, Considering what I mentioned before in this quarter, with the portfolio of assets that the company has, our main highlights are a record production of 42,700 barrels of oil equivalent day, with a share of oil already reaching almost 80%, as well as a record revenue of 2.4 billion BRLs, a significant increase over previous quarters. This evolution is a reflection of the materialization of the potiguar cluster and, in it, another relevant source of revenue, which is the mid-downstream business unit, due to the perceived operating improvement and consequently gradual growth in our oil and gas production, as well as due to the improvement in the pricing conditions of our commercial contracts. I would also like to highlight the significant EBITDA of Q3 of 829 million barrels, which represents an increase of more than four times compared to the previous quarter. Still on the metrics, which will be covered in greater detail by Pizarro, I would just like to highlight the lifting cost for the period of $18.6 per barrel, which represents another important indicator in the company's quest for efficiency. Once again, I would like to emphasize the structure of the integrated production chain at the Potiguar Basin with pipelines, industrial units and the private terminal, which provide the company with many opportunities for optimization, as well as commercial, operating and logistical flexibility. Lastly, on this page, there are two last important and relevant elements to mention. The company's issuance of an infrastructure debenture in the amount of 1 billion BRLs, which has a clear benefit for the profile and amortization schedule of the company's consolidated debt. and the publication of our first sustainability report using global standards as well as standards of the oil and gas sector. This is a very important step for 3R on our sustainability journey, increasing the transparency of our projects and initiatives. While at this point, I will ask Denise to present the main highlights of our operation during this period. Thank you, Matheus. Let's move on to the operational side, dividing it into four large blocks. Firstly, the Potiguar Complex, where we posted production of 25,200 barrels daily in the third quarter, and October's production was in line with this third quarter. In this area, it is important to highlight the production at Macau with a very significant evolution where we went from 4,300 barrels a day to 7,000 barrels a day now in October. In other words, a growing and constant production in this that was our first asset. In this area, we have all of the rigs operating as we had predicted with great activity in both drilling and workovers in the area. On the next slide, we see the production of the Bahia complex, the Reconcavo complex as we are calling it. There has been a constant increase in production over the course of each quarter, both in Rio Ventura and Reconcavo. With October's production being much more significant, than the production in the third quarter of 2023. In the area, we have six rigs in operation on work over activities. And in this last quarter, we will start the drilling campaign, depending on some licenses that are to be obtained from now until the end of the year. On the next slide, we see the production of Papateja cluster. We closed Papa Terra in December of 2022 and since then we have undergone various maintenance activities in the unit in the power generation unit. In maintenance of the offloading system in maintenance of power generation. And this maintenance has meant that the units efficiency has improved over the course of each quarter. In October, we already saw the fruits of these initial maintenance activities. In October, we already achieved a number higher than that of the third quarter of 2023. On the next slide, we'll go into a little more detail about interventions that have been carried out at Papa Terra. These activities will be divided into the first phase, which we are doing now in 2023. This year, we are working on the unit's main systems. These main systems today include Power Generation System, the unit's boilers, the tanks and some of the main pumps. We are carrying out maintenance on all these systems in order to make the unit's operations more efficient and safer. An important point to highlight is in relation to the wells. That is to say, we are going to start changing the pump In those wells where the ESP, the electrical submersible pump of the wells, had a problem. So we are going to change those pumps. In these three workovers, first of all, we are going to work on Papa Terra 22, 17 and 12. And an important point is that next year we are going to start drilling new wells at Papa Terra. Pending the environmental license to be obtained. Another very interesting point at Papa Terra is that next year, we are also carrying out a major work over at the field. As well as continuing with the maintenance of these main systems, we are going to intervene with the so-called Flotel. A unit that we are going to locate next to 3R3. And in a campaign to last 3 to 4 months, we are going to carry out a major revamp of the unit, bringing greater efficiency. This is reflected in the lower right-hand graph, where we can see a systematic evolution in the field's efficiency. Our operating efficiency is currently between 60 and 80% and after this work over it should be around 80 to 90% operating efficiency the second half of next year. Lastly, now talking about the peruac cluster we've seen an increase in production over the quarters and this Q3. We had a reduction in demand, which the commercial team has been working to get back to that previous level. The field has the capacity to produce 650,000 cubic meters of gas per day. Complementing the production part in this last graph, we see 3 hours total production in Q3, which reached 42,700 barrels daily of oil and gas 80% being oil and 20% gas. In October, production is already a little higher according to this week's production report. So it's a little higher than in the third quarter. As for oil production too, we can see in the graph below, separated by the four areas we mentioned earlier, production of 33,800 in Q3, rising to 35,800 barrels a day now in October, 70% of which is coming from the Potiguar complex. I'm now going to hand over to Mateus to complement the mid downstream operational part. Mateus, please. Thank you, Denise. Let us continue to page 11, where I discuss two important groups of our initial activities in the third quarter at the mid and downstream unit in the state of Rio Grande do Norte. This period was marked by an intense agenda of maintenance in the essential units with a highlight to the downtime of the refinery. The main deliverable of this program being the increase in effective production capacity, bringing it to a level very close to its nominal capacity, as well as adjustments in the industrial plant that make it possible to process products such as NAFTA for blending with imported gasoline and specification of marine diesel oil.

Next, we are also carrying out a maintenance shutdown of the natural grass processing unit with the same purpose, that is to increase processing capacity. And lastly, and of great importance for the formation of batches of cargo and operating and commercial flexibility, we have the maintenance of the tanks in the oil storage area in order to meet the mandatory requirements and then also increase our storage capacity. It's important to note that these maintenance is carried out concurrently on the tanks that are currently out of the operation and in most cases done in a continuous basis. In terms of the business itself, The company has been working together with partners on commercial strategies and opportunities that could bring greater predictability to results in the medium term. Once again, I would like to emphasize that the integration of the commercial and logistics units with the oil and gas production facilities provide A great deal of operating and commercial flexibility, both in the best and worst market moments. On the next page, we have an important commercial highlight, which shows an evolution in unit pricing levels, as we can see when we look at both charts, both for oil and for the process gas molecule. Both cases reflect adjustments to existing contracts and also new contracts for a large part of our assets. There are some operating restrictions and some assets which we are working on right now, as already mentioned. And we do believe that after these adjustments, we will have even better contracts and greater access to markets. It is just worth noting that this quarter in Papaterra in particular, where we formed a batch for loading during a period of more or less 15 days to be loaded onto the shuttle tanker, the effect of rent brought benefits in the consolidated unit price in relation to the price defined in the contract. I now hand over the floor to Rodrigo Pizarro, who will bring you the financial highlights for the period. Thank you. Good afternoon, everyone. Thank you, Matheus. We will now Talk about the company's financial highlights for the third quarter of 2023. On slide 14, we present net revenues with a significant increase compared to previous periods. In the upstream segment, meaning oil and gas sales, we reached 1.5 billion BRLs. In the mid and downstream segment, the amount was slightly higher, also close to 1.5 billion BRLs. And if we take into account eliminations through sales or intragroup transfers, the consolidated revenue was 2.36 billion, almost three times higher than in the previous period, reaching a total net revenue of almost 3.8 billion BRLs in the first nine months of the year. On the next slide. We highlight the distribution by basin and by product, especially the proportion of the potiguar complex with 58% of net revenues in the period and the weight from oil revenues in the upstream segment, reaching 90% of revenues, even though it represents 80% of production, as mentioned by Denise and Matheus. As we often mention, oil tends to bring in more revenue and margins than gas. On slide 16, we present the evolution of EBITDA, which was certainly the most important highlight of the period. Finally, after all the acquisitions, we were able to present figures compatible with average production of over 40,000 barrels reaching around 170 million US dollars in the quarter with an 11 percentage point increase in the company's consolidated EBITDA margin. Moving to the next slide, here we present the company's lifting cost. Although we saw a significant reduction in the third quarter with the entry of the Potiguar cluster, it is worth noting that we will have some expenses that will be incorporated in the coming quarters, especially in the Potiguar cluster. Even so, the company's goal is to maintain an efficient lifting cost of around $20 per barrel, which should be maintained until the third quarter of 2024, when the dilution of fixed costs due to increased production becomes even more relevant and most of these non-recurring costs relating to maintenance activities that were not carried out by the former operator will then have been completed. It is worth remembering that our lifting cost includes all logistical expenses up to the delivery of the final product to the consumer. On slide 18, we highlight the evolution of CAPEX with the mobilization of BRICS, intensification of drilling campaigns, recovery of facilities, and preparation for offshore workovers. CAPEX in the third quarter reached 85 million US dollars, totaling $116 million in the first nine months of the year. The highlight goes to the photos of the new wells at the Macau cluster and the automatic drilling rig also in operation at the Macau cluster, which has performed excellently drilling a new well on average every six days. More efficient than our internal planning and certainly a benchmark among internal operating companies. On the next slide, we highlight some aspects of the company's capital structure. We ended the period with $207 million in cash and a net financial debt of $1 billion. or just under $1.4 billion if we consider all firm obligations and earnouts relating to asset purchases. Another highlight is the company's leverage. We ended the third quarter with 2.1 times net debt to EBITDA, and if we analyze the quarter's EBITDA, In other words, a very balanced and comfortable level for the startup of the consolidated portfolio with the potiguar cluster already in operation. On slide 20, we show our hedge position at the end of the period with approximately 8,000 contracts signed of which around a third are NDFs at an average value of $80 per bear and two thirds are color type contracts with a floor of $55. Finally, on the last slide, as usual, we highlight what is a priority for the company in the coming months. We are committed to establishing commercial partnerships, both to better monetize our facilities as well as to better market our products. To this end, we have done our utmost to accelerate the MIDLET Stream Asset Integrity Recovery Campaign in order to increase our flexibility to allocate oil for sale or refining. In a few weeks, we will complete the scheduled maintenance of the Clara Camadão refinery, restoring its refining capacity to 40,000 barrels. We are totally focused on workovers and recovering the integrity of the assets. We already have the first rig mobilized, carrying out the first pump replacement activities, as mentioned by Denise, and we already have IBAMA's approval for the second rig, which will be assembled at TLWP by mid-December. Our third major focus is on the intense onshore drilling campaign, seeking to speed up the licensing process of new wells. We are very satisfied with our team and with the performance of the rigs that are in operation. And finally, on the financial side, we continue to monitor the market, seeking for opportunities to optimize our capital structure with a view to both increasing duration and reducing costs, as well as increasing liquidity without impacting the company's net debt. Thank you very much for joining us, and we will now initiate the Q&A session.

Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please click on the Q&A icon on the bottom part of the screen and type your question. In order to ask questions live, click on that same icon and state your name and company or click on the raise hand button. Please wait as we collect the questions. Our first question is from Monique Greco with Itaú BBA. Ms. Greco, you may begin. Hello, everyone. Good afternoon, and thank you for taking our questions. For starters, I'd like to congratulate you on the results. It's great to see the improvement on the operational data, so congrats on the good work. I have two questions. Starting with the last slide mentioned by Pizarro, the potential to monetize mid-to-downstream assets and creation of new revenue streams. You mentioned 47 million in this quarter from this monetization avenue. Could you share with us How much you expect from this revenue stream? How far can you get? What are the measures you were considering? Any bottleneck in addition to the integrity of the tanking or the oil storage? And if you have any partnership in your radar for mid downstream assets? That's number one. Second question. We're getting to the end of the year. In the beginning of the year, we have an important event, the reserves stratification. If you could give us some color regarding what we could expect, both in terms of addition of new reserves or changing the profile of the production curve or changing the capex profile, if you could give us some color regarding the new reserve certificate, it would be very much appreciated. Thank you very much. Hello, Monique. Good afternoon. Thank you for the nice words. We are very excited with the earnings of this quarter and thank you for the questions. I'll answer the first question and the second question will be answered by Pizarro. In regards to the potential of mid downstream services, indeed, we have been looking into this. Of course, in this quarter, very much due to the downtime of the refinery was a compulsory downtime from the standpoint of regulatory requirements. There was an increment in service provision because oil was not refined to commercialize oil products. In that regard, it was replaced by service provision by the whole structure, not just by the industrial unit, but also by the terminal. Our goal is to have a balance between the two. And now getting a little bit into the second part of your question, of course, we are considering partnerships. We are looking into what would be the best format. We are very happy to have more visibility in a shorter period of time than we imagined in terms of the partnerships. To understand in our mix of oil products where we can protect better to create a predictability of results and EBITDA that would be better. So in this way, we're moving forward well with the partnerships. And our goal is indeed to maximize and have some security in the sale of oil products. Now the service potential will work. Those moments when we might stop refining for maintenance reasons, as we mentioned, this is an asset that has a lot of flexibility. So if a market moment makes sense for us in a market moment, if it makes sense for us to hold back refining for a while, we'll offset that with service provision. So that's the strategy. There is another point. that moves hand in hand with the sale of oil products, which is service provision specifically at the terminal. At the terminal, we are considering potential lines with distributors in the imports of oil products. And this moves hand in hand with the sale of oil products. And it works as an upside, not just for the sale of oil products, but bringing oil and mix. And this is our goal in our strategy. And of course, we'll pursue the best monetization for the oil products. also protecting those that have a price in relation to the brand, which is lower. For that, partnerships are being very relevant for 3R. Now I will turn the floor to Pizarro to answer your second question. Thank you, Monique. The microphone is off. We apologize, but Pizarro's microphone is off. We apologize, but the microphone seemed to be off. Well, we've been focusing a lot in developing reserve certification by basin, as we mentioned, and as we did in 2023. And most likely the probable result will come between February and March of 2024. So this will certainly be taken into account already in the first earnings in the first quarter of 2024 already based on the new reserves certification. Regarding the potential, I think it is always important to underscore that our portfolio Exactly because of the size and the volume of assets that we have in onshore and offshore, our portfolio has a possibility to increment the reserves quite a lot. particularly when we assess the recovery factor already extracted from these reservoirs. In the potential for extraction, we currently have about 500 million barrels of 2p reserves and these 500 million take us to a recovery fraction. which is still very small and controlled, which means that we have a lot of potential still to increase this without necessarily having to acquire new assets, which is a big differential for 3R. Now, objectively speaking about next year's reserves stratification, it is not our intent to relevantly increase our capex. This will not Translate into a relevant increase in reserves. Everything will evolve in a controlled while balanced fashion for our capital structure to match the growth of reserves and CapEx evolution along the years of 2024 and 25. Thank you very much. This is great. Thank you, Matheus and Pizarro. Our next question comes from Bruno Montanari with Morgan Stanley. Your microphone is enabled. Thank you for taking my questions. I have two questions, one about the capital structure and one about mid downstream. In the capital structure, historically, the company was very active in both France, equity and debt. And some people were a little scared with a post accounting event. When you pay for potiguar and you don't have the operating result of the last 12 months. So the snapshot is not nice. The future perspective is much better. So I like to understand from you in a scenario where the oil price remains reasonably healthy in the range of maybe 60 to 80 dollars per barrel. Do you feel comfortable that 12 months from now, the company will not have to access new funding sources, either debt or equity? So I'd like to understand how You're looking at potential funding alternatives in the next 12 months. In the mid downstream, I'd like to learn more about service and refining, particularly in Q4. When you don't have refining, service provision, can it offset the operating result that you showed in Q3? I'd like to have some color on what to expect from the mid downstream unit because it's something new and it's kind of hard for us to model this until we learn more about this new dynamic. Thank you. Starting with the capital structure, it is not your intention to have any capital inflow via equity. In other words, it is not in our horizon, exactly in this range that you mentioned, $60 to $80 a barrel. We can even stress a little bit and even below these numbers, but it's not in our horizon to have a follow on deal for the company workflow injection. What we are working on, though, is in optimizing the data of the company. As you well said, looking back, leverage could seem to be high. But in Q3, I think it becomes very clear that the leverage of the company is very much under control. If we annualize this quarter, we are talking about an order of magnitude of two times net data over appetite in the most conservative way of calculating this. In other words, putting all or an out obligations with Petrobras, including those. Not necessarily in an extraordinary scenario, worst case scenario, we would be paying all these earn outs to Petrobras, but being conservative, we are at a very healthy level for the start of this operation consolidated with Port Igua cluster. What we intend to do, what we have actually been doing already, is looking for ways to optimize the debt in terms of cost, trying to lengthen the debt and reduce the cost of the debt. We normally think about dollars. We always try to equalize this, match this to our revenue, which is 100% dollarized. At the same time, as we pay, as we make payments to Petrobras in 2024, 2025, We will eventually have debts in correlated volumes. Could be a little higher, could be a little lower. In a way, as to not change the net debt of the company in 2024, we should pay to Petrobras between 100 and 120 million dollars. It would only be natural for the company to bring in a financial volume in debt that would be compatible to that. It doesn't change the net debt and it doesn't change the gross debt either. And this is the strategy so that we can have a positive liquidity, financial volume and cash, which are positive and compatible with our need for capex. Even in a scenario where the Brent price for whatever reason drops to levels of 60, 65, or even lower than the current curve. To your second question regarding mid to downstream, in Q4, as Matheus mentioned, we will always be pursuing a balance between what brings us the best return for the company. It's either service provision and we'll focus on selling crude oil to a trading company or to a Brazilian refinery. as is the case of what we've been doing in the last weeks and months and at the same time look at the right balance and the mix of products that we could get with refining activities and how commercial partnerships as mentioned by Mateus that we've been developing can add value to mid and downstream well will probably happen over the fourth quarters that will resume refining. The first refining unit has been completed successfully and eventfully and in a shorter period of time than expected in terms of ramp up of production and capacity of processing. The second one is at an accelerated pace. In the next two weeks, we'll complete the scheduled maintenance for refining. and in mid-December we'll be able to resume refining. What will decide whether in mid-December or in the beginning of next year is exactly the evolution of these commercial partnerships and our expectation they should move forward quickly enough so that we'll resume refining by your end. My expectation is that not necessarily with the service provision but translating into returns of mid downstream with the sale of oil products will achieve margins similar or even better than the margins seen right now. Of course, we always take into account market conditions, local market conditions, sale of gasoline and diesel in Brazil that can interfere, that can momentarily hamper that margin, but Please remember, our assumption is that we can provide services or sell oil derivatives. And by balancing this, we can add three, four, sometimes even five, six dollars per barrel to our production at Potiguar Basin with the mid downstream assets. And thank you for the questions, Bruno.