Brava Energia S A S/Adr

Good afternoon, everyone. Welcome to 3R Petroleum Second Quarter 2020 for Earnings Conference Call. The presentation and comments about the results will be presented by the company CEO, Matheus Dias, by Rodrigo Pizarro, CFO and IRO, 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 has been 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. Be advised that all participants will be in listen-only mode during the presentation, and then there will be a Q&A session when further instructions will be provided. Before proceeding, I 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. We will start another presentation with the company CEO, Mr. Matheus Dias. Mr. Dias, you may begin. Good afternoon, everyone. Initially, we would like to apologize for the delay in starting this call. Welcome to the earnings conference call of three, our petroleum referring to the second quarter of 2024. As mentioned, the presentation will be made by myself, Denise, COO, and Rodrigo Pizarro, CFO and IRO. To start on page three. We have the introduction with the main highlights, achievements and points that are noteworthy in the quarter. According to the material fact released yesterday, June 30th, the conditions precedent of Enalta and Maha were achieved, and today, the 31st, we concluded the integration of Enalta's shares by 3R as well as Maha Holding. Again, I reinforce the merit and the potential of this deal. Through a relevant gain of scale in an industrial environment of commodities puts the company at a level of greater protagonism among independent companies with a portfolio and level of production which are robust. It carries a number of opportunities of optimizations due to financial, operational and other synergies. This event represents a landmark among independent companies. We are very optimistic about the new potential of this new period that starts for the company. In terms of production, the company ended Q2, achieving an average production of 46,600 barrels of oil equivalent daily, which means a substantial increase year on year, but only 5% increase over the previous quarter. This increase had as main contributor Papa Terra cluster, which, still in a very intense phase of maintenance and workovers, contributed organically to this slight increase compared to the previous quarter, supported basically by the reconnection of wells to our production grid in the context of workover activities. It is worth noting that part of the increment recorded happened because of the process of compulsory assignment exercised by 3R Offshore, which is still being debated as a legal at the courts and in the process of formalization at the regulatory agency, given the continued default of the partner as part of the contract of the consortium. Regarding the financial performance, the company achieved 2.6 billion BRLs of net revenue, considering upstream and mid-downstream segments, which Pizarro will detail, and an adjusted EBITDA of approximately 850 million BRL, up 18% quarter-on-quarter. in terms of EBITDA margin and not considering intercompany and corporate eliminations, the upstream business unit posted 43.3% and the mid downstream 3.1%. Again, this will be explained more during the financial section. I don't want to give any spoilers to Pizarro's presentation. I also highlight A different level, an improvement compared to the previous quarter. Free cash flow generation of almost 600 million being also driven by an increase in the volume of products sold, given what I mentioned a minute ago regarding Papaterra context and strategy of managing. the inventories and working capital. From the operating standpoint, we highlight the initial drilling campaign started at the Potiguar and Reconcavo basins. highlight going to the campaign in Macau cluster that has a potential production per well, which is very relevant in the onshore environment of our portfolio and with an NPV per capex that is very advantageous in our basket of investments, which is very competitive. Lastly, I reinforce what I already mentioned, the completion of work over activities carried out at Papa Terra. Most of the wells of the asset are in production with new brand new pumps. Like also to mention that integrity and project and maintenance project activities continue according to the plan and the schedule. We still have the unit of maintenance and safety mobilized to complete the work and the scheduled downtime. which we have already mentioned previously. Given this overview, we move to slide four now, please. Here we have the charts showing the operating performance and financial performance of the company. As I said during the introduction, overall from the operational aspect, the result of Q2 was 46,000 barrels of oil equivalent daily with a slight increase quarter on quarter. Regarding the average oil daily production, the company achieved 37,000 barrels of oil equivalent a day, 8% up quarter on quarter. And this is explained, as I already mentioned, partly given the organic growth of Papaterra and also the compulsory assignment in the scope of the contract of the consortium. Regarding our financial performance, as already mentioned, I reinforce a 28% increase in net revenue quarter on quarter, which is justified in addition to external factors related to the Brent and depreciation of the dollar compared to the BRL. given the increasing production of Papaterra in upstream and in mid downstream, given the higher volume of sale of oil products, including a part of the inventory of the previous quarter, given the unitization of loads for batches that end up for offloads that make sense, considering MDO and bunker. In EBITDA, also increasing, we reached 850 million BRL for the same reasons, external reasons, Brent, Dole Internal, Papaterra Production, and oil byproducts in the mid downstream, but negatively offset by a higher lifting cost. which we can see in the right bottom hand corner. It increased to $22.6 per barrel of oil equivalent. This is because of workovers at Papaté, the compulsory assignment process, given the default of the partner, and a series of regularizations of environmental licenses in the Potiguara cluster. Moving to the next session, before turning the floor to Mauricio Diniz on slide 6, here we bring you the evolution by quarter of commercial metrics and conditions regarding commercialization of oil. In Q2 2024, the average selling price was $76.8 per barrel, or 90.4% of the average Brent price. In other words, a slight decrease over the previous quarter. Considering a higher revenue in Papaterra given the assignment process, because this is an oil with a greater discount than in other oils of the portfolio, the weighted average is pushed down. Regarding gas, we continue to be very competitive in monetizing the molecule but with a reduction compared to the prior quarter at a level of 11.7% of the Brent reference value. This is due to a reduction essentially in demand in the contract with the Disco in Paraguay and consequently of volumes sold. Here, basically, with a weighted average effect that is similar but opposite to what I mentioned for oil. The unit value of the molecule for Peter Weiss is the most advantageous for the company. And given this reduction in volume, so this reduces the value compared to the brand. Well, having said all that, I now turn the floor to Mauricio Diniz for the operating highlights of the company's portfolio in the second quarter of 2024. Thank you very much, Diniz. Over to you. Thank you, Matheus. I'm now going to provide some operating information by cluster, starting with the Portigua complex. is the old potiguar cluster that we had before with Macau Fazenda Belém and Areia Branca and the more recent areas Canto do Amaro and Alto do Rodrigues and surrounding areas. In the chart presented we can see the production progress of the whole complex quarter on quarter. We highlight two points. Increased production in Canto do Amaro, Amaro and Alto de Rodrigues 3.1 compared to the previous quarter. mainly due to workovers and pull-ins we are carrying out in the area. This was offset by a 7.9% reduction in the production of Macau given the temporary limitation of the water injected in the reservoirs with an effect on secondary recovery of the fields. In the end of July, there was a workover in some of the wells. Part of the water injection has returned and production is getting close to that of Q1. Another positive point in the quarter is the the resumption of well drilling in Rio Grande do Norte. Now we have two drilling rigs in Serra and Canto do Amaro. And for Q3, more towards the end of August, we'll have another rig operating in Salina Cristal. In the second quarter, 226 interventions were carried out, considering work-over, pullings and reactivations, 12 rigs working in the area. Regarding topside facilities, we can highlight in the Potiguar complex the completion of the installation. of electricity among the main Macau fields and the Guamare Asset. This allows us to reduce those instability electricity outages that we had before. the continuity of the process of recovery and relocation of the steam generators. And I'd like to remind you this project is divided into some phases. Some initial ones of relocation were completed, others are underway. An adaptation of the disposal and water injection systems at Canto do Amaro field. Next slide on Reconcavo complex. We had a 22% growth compared to the same period of last year and a 2.7% reduction quarter on quarter. And we can highlight some points here. First, the increase in the number of interventions of wells to exchange equipment. We also had a limitation in the volume of gas processed. given the capacity of our NGPU and also we had a lot of rain in this quarter which led to the closing of some wells for some periods and intermittency due to arrival at the wells and intermittent electricity supply. An important and positive point in the area was the start of the drilling campaign of wells in the C X field. We had activity in 38 interventions, workovers, holdings, reactivations supported by five rigs. We have a lot of work to recover integrity in the region of the recovery of the integrity of the collecting stations and pipes. Now moving to Papa Terra on the next slide. Here we can see the production in Q2 remained in keeping with the previous quarter. Here we highlight, as mentioned by Matheus, the gradual resumption of the wells 37, 17 and 12. As mentioned in prior calls, the two rigs that operate at Papaterra have been working in recovering the wells that had the ESP working for many years now. Now, six wells of the field are in operation. Of these six, four have undergone interventions and the pumps have been replaced. As Mathilde said, they're brand new, which will ensure good production stability in the coming years. As regards Papaterra 50, intervention has been completed. It should start producing in the coming days. With inclusion of this well, production at the field should be slightly over 20,000 barrels daily. We will probably be getting back to that level. But the other wells, 16 and 51, they did not undergo any intervention. There was no need to exchange the pump, but we have the pumps and the equipment ready in case of problems. As regards the platforms, we highlight the maintenance unit connected to the 3R3 platform in May. We have more than 200 professionals there doing a number of services to recover integrity of the unit. The number varies to 100, 150, depending on the activity we carry out. We estimate to finish it by September, but remind you that there will be a downtime of production now in the first 15 days of August. The offload system. Since the closing, we have been operating with a backup system because the main one was not operational. The whole system has been set up, tested and will be used in the next offloads, releasing the vessel that is all the time holding that reserve system. As for the tanks, we have capacity to offload 500,000 barrels daily. I'd like to remind you in the beginning of last year, whenever there was some instability, we had to stop production because we didn't have enough tanks in tankage to support production at the unit. We also highlight the overhaul of the generators, improving the efficiency of the unit. With that, the whole A unit is now more reliable, which has been translated into greater operating efficiency that we have recorded at the unit. As for the new well to be drilled, the rig is already contracted and we are just waiting for the environmental license to start. We have frequent meetings with IBAMA, the environmental agency. All studies were submitted. We had a last meeting just last week. and we should get the technical opinion in the next few days with some comments and the actions requested are being implemented. So we're just waiting for the license now. As for Peroa, on the next slide.

Production follows market demand. The camp can produce 600 cubic meters a day and it produced 500,000 on average in the last quarter in line with our agreements. The next slide. Here, we show production evolution considering the stake of triar in the acids. In the second quarter, we reach 46.6 barrels a day. Of those, 79% refer to oil production. And from that production, 69% comes from the potiguar complex. The growth in relation to production in the first quarter occur mainly in Papaterra, and through the incorporation, according to the amount already mentioned by Mateos, as demonstrated in the slides. And if you look at production, the fields that closed longer, I mean, with the best knowledge we have improvement in integrity and the excellent quality of our assets, all of that allows us to Continuously increase our production, promoting better results for our assets. And now we will talk about the financial highlights. Thank you, Denise. Good afternoon. We will now talk about the financial highlights of the company. Slide 13 brings our net revenue that reached a record number in the quarter, surpassing 2.5 billion BRL. This increase in revenue is related to increase in production, production and inventory of oil and byproducts and the effects of the depreciation of the USD and Brent. In the following slide, we present the upstream revenue per basin and the highlight goes to an increment in the Potiguar and Papaterra basins that since May it contemplates the stake of 85% in the asset due to the default of our partner. Slide 15 shows adjusted EBITDA of the company that was 850 million BRL in the second quarter with the increase in sales from Papateja whose EBITDA margin is slightly lower than the average of the company. There's a reduction in the combined EBITDA margin, something that that will certainly improve with the increased production and improvement in the operating efficiency of the assets in the coming months. Next slide, slide 17. Here we show lifting cost of the company. In the quarter, there was an increase in operating expenses and pulling campaigns. in replacement of pumping systems in important wells, as well as a non-recurring effect with expenses in the renewal and also environmental licenses. Once again, the increase in that ratio of oil with Papa Terra has the effect of weighted average of the lifting costs, something that tends to be lower after the Flotel campaign that is supposed to be concluded in September, as previously mentioned by Denise. In the following slide here, we bring the company's capex. We concluded the first half with over $500 million. Most of it allocated to the upstream segment with the construction and expansion of facilities plans. steam generators work over campaigns and in the drilling of wells, both onshore and also the assembly and preparation for drilling up the wells in Papatea, meaning that with the acquisition of pumps and equipment for the subsequent campaign that should be initiated this year. Slide 19, here we bring the capital structure of the company at the end of the second quarter. with an operating cash generation quite robust in the period after the optimization of inventories, reduction in working capital. We also increased by 1 million BRL our cash position vis-a-vis the end of the previous quarter. And by looking at our US denominated gross debt the second quarter, we stood at 1.5 billion, contemplating all the portfolio agreements with Petrobras. The following slide brings our hedge position. We have slightly less than 1,000 barrels hired in NDF with an average price close to $78.6 per barrel and about 6,300 collar contracts. and $91.6 and putting around $56.8. I would like to highlight that with the prepayment of time long recently concluded, we do not intend to do any more hedging in the company with creditors. And finally, the last slide here, we highlight the next steps of the company. And as presented yesterday to the market, we met all condition precedents for the merger of Enalta and Maha Energy in Brazil that have 15% of share in 3M offshore. And from now on, our focus will be in the integration of the companies and the strengthening of synergies and also in extracting the best possible value from this robust portfolio that now has a very significant scale, both offshore and offshore. We also have Papa Terra in Atlanta to be concluded in the next month and this will allow us to generate good cash and this will tend to reduce the level of leverage of the company as a whole. Onshore, the main results are linked to the drilling campaign in Macau, particularly related to the Serra field in the beginning of the ramp up of the steam generators in Estreita and Rodrigues in the Potigua cluster. We are very excited with the future. And finally, we would like to thank our employees and leaders who work diligently to help us conclude such an important phase of our trajectory. And also, I would like to thank our shareholders who have been with us for a long time. They trust us and trust our capacity to create value in the short, mid and long term for the company. And now we'll be proceed with the Q&A session. Thank you very much. We will now start the Q&A session. In case you have questions, please click in the Q&A icon that appears in the bottom part of your platform and type your question. Questions using the mic. Please click in that same icon and type your name and company or click and raise hand. Our first question comes from Vicente Falunga from Bradesco BBI. Mr. Falunga, you can proceed. Good afternoon, Mateus, Pizarro and Denise. First of all, I would like to wish you a great success in the company's new phase. My first question is, I mean, I think the board is in the process of defining what will be the capital allocation of the new company. At least in our spreadsheet, the impression is that the company will generate a lot of cash in the coming years. But I would like to understand as much as possible, if you can tell us what is in the pipeline in terms of capital allocation? How can you can you pay good dividends? Clearly, the company has great potential without discussing the priority of the company, because I know you have to develop projects. And then my second question. Is that we notice. that you resume negotiations with PGN. We thought it was a very positive thing for both companies. I would like to know whether you envision other opportunities given your onshore and offshore portfolio. And if you allow me a third question, I would like to understand how was the performance of Papa Terra in July and what do you expect for this feud after these initial 15 days of production? Thank you. Thank you, Falunga. I will start with your first question that refers to the portfolio and the capital discipline of the company in relation to dividends or organic growth. Basically, today, the company has an increasing production level, both in terms of 3R and an ALTA. This new company will have a very relevant production volume with costs that tend to be lower once we reduce our fixed costs. And naturally, operating cash generation tends to increase. Cash position of both companies is quite robust. So on the 1st of next month, we start with a very healthy position of this new company, 3R Plus and Elta, and certainly our board will have a chance to discuss that in the next coming days. With a focus starting with defending, you know, I mean, dividends and also growth. Certainly this new company is capable of doing A little bit of both, both organic and inorganic growth, as well as dividend payout, which should be constant throughout the coming years. But this is something for the board to decide, and we will be able to give you more details in other subsequent meetings. In terms of PGEN, I will turn the floor over to Mateus, Papaterra, and Denise. Well, thank you. Good afternoon. Thank you for your questions. In fact, we resume conversation Now, we are having deeper conversation with Petro Recôncavo because a transaction of this magnitude, I think it becomes very clear to everyone, we all need a solution. I think a potential partnership in equity would be the best option. And now, giving you a straight answer, if we have other potential assets or possible ways to go, we understand that, yes, there are other avenues. And as we said, there is a mid downstream path where we could have a more robust partnership that could be potentially in equity, maybe with some distributing company or a trading company. Having in mind that all of this mid downstream part is not what generates the largest EBITDA margin. I mean, it plays an important role in the integration of the productive chain and logistics as well, which brings good benefits to our onshore composition, but in fact is mostly concentrated in upstream. So having someone that has there as part of its core business will certainly bring good benefits to this specific activity. There is also a portfolio analysis that was initiated at 3R in the upstream segment. We initiated that early this year and certainly this is a topic that will go on for a long time. I mean, we have to to evaluate the capex basket. Where do I locate things? And also look at potential assets that will become core for the company. Very, very small fields, for instance. And on on our side, especially onshore, we have about 60 concessions and 20 of them account for over 20% of reserves and more than 95% of production. Therefore, certainly we know that we do have very small assets that we either Dedicate a lot of resources and at the end of the day, we just go even. But certainly the study will go on and there is good potential to have someone that could be like a sale or a partnership in a different format that 3R could, you know, focus on its core fields. Thank you. And then I'll turn back to Denise to talk about Papa Terra. We started July with two other wells, 37 and 50. So 37 was put into operation throughout the month. I mean, production was between 16 and 18,000 in the beginning of the month. Well, we were missing Papaterra 50, which was under intervention. That was TLWP. This intervention was concluded. The well was ready for operation. Now, there is a downtime schedule for August 1st for two weeks approximately. And in this downtime, we intend to adjust two things. One is a pump and a heat exchanger to exchange the measurement system. Well, we anticipated that intervention, so we started Saturday and we should be concluded that between today and tomorrow. And then we will resume production and we will go back to Papateja 50 and we will just wait for better conditions to do that, you know, downtime that should be around August 4 or 5. So that's when we should have our downtime. Okay, OMS working in the area is having good results. We concluded the painting, we changed all the pipes, we cleaned the tanks, all of the generation part. So these OMS campaign of that maintenance unit should go on until the end of September. So by the end of August, production will go back to normal, meaning Papa Terra. around 20 to 22,000 barrels a day, approximately. Great. Thank you. Thank you once again. Wish you all the best. Thank you, Falanga.

Next question from Mr. Pedro Soares with BTG Pac-12. Mr. Soares, go ahead. Good afternoon, Matheus Pizarro and Denise. Good afternoon, everyone. I have two questions. My first, whether you could help us perhaps try to reconcile recurring generation of the company. I don't want this to be very boring, but perhaps you could speak about operating cash flow. It seems that there were some non-recurring impacts during the quarter. In the release, you actually mentioned some of the impacts. But perhaps it could help us understand that those $958 million that we see in operating cash flow, what should we consider recurring? Adjusting for abandonment, et cetera. And my second question is a follow up on the previous question. It's very clear. Now that these discussions of investing or paying dividends, that will be up to the new board of directors. But perhaps Matheus and Pizarro, you could speak a little about 3R. What is the cash position that you see is ideal to support organic growth of 3R as standalone so that we can kind of do our exercises of regarding the optimal capital structure looking forward. Thank you. Thank you, Pedro. Thank you for the questions. Let me start with the operating cash flow. We mentioned in the prior earnings call that in the end of the quarter, we ended with an inventory slightly higher than the level of the previous quarter, both for oil and refined products. Basically, we always have the inventory position at Papa Terra, the position of refined products, particularly bunker at Potiguar cluster. And depending on the moment, on the month and on the week, We have refined products which are acquired for blending. So it is natural that we should have an impact on working capital depending on the quarter. More and more we've been doing work, monitoring work to optimize working capital. Unfortunately now and fortunately in the second quarter we were able to maintain inventory slow. We still have a balance of oil and refined products. We make this very clear in the earnings releases. and in the income statements as well. We still have some oil and buy products, refined products in the inventory that could be sold. But of course, this matches the logistics of each one of the assets. But we had a better position in terms of inventory, cash flow, and working capital in Q2 compared to Q1. If we look at the company's EBITDA, we have slightly over $165 million of EBITDA for the company in the quarter. Net of taxes, we would have about 80-90% of conversion of EBITDA into cash flow in a more recurring fashion. So net of the working capital variation, we expect to be able to maintain a volume of working capital that will be closer to Q2. But again, it will depend on the moment, on the week. It is possible that we'll have a position slightly higher in terms of blocking more working capital if it is a very specific moment of buying refined products and increasing the inventories. I think that this is the answer for the first question regarding the second question. Indeed, the definition of the strategy, dividend policy, portfolio, organic versus inorganic growth, it will all be left for a second moment after the board deliberations. When we look at 3R standalone, the leverage target, as we have mentioned before, is between 1.2 and 1.8 net debt over EBITDA ratio. This was always our standard, slightly under two times. However, we always knew, and we always stress that with the market, that in certain moments after the start of the acquisitions and after a big acquisition, as was the case of Portugal cluster, that we would have a net debt over EBITDA ratio slightly higher, above two, because that's a moment when we're investing in recovery integrity of many systems. And that's when we're in a phase of increasing production. Only in a subsequent moment will we reduce fixed costs, reduce the lifting costs and see a better EBITDA margin of the assets. So this is a level which we see that is healthy for 3R and a minimum cash position that we always try to maintain. Looking at the mid to long term above $130 to $150 million. I'd like to remind you that we have an onshore and an offshore portfolio. If we had just the ownership portfolio, perhaps this level could be a little lower. I guess this is it. Matos, anything's right? No? Okay. Thank you, Pizarro. Thank you, Pedro. Next question from Gabriel Barra with Citi. Mr. Barra, go ahead. Thank you for taking my questions. I'd like to second or to stress what I said in the call of your new partner. Congratulations on the M&A and the merger of the companies. Perhaps one of the big questions we have regarding the thesis is regarding execution and considering a larger portfolio, the challenges that will come with this opportunity. Looking at this year in terms of production and what we talked about in the beginning of the year, it seems that production fell slightly below what we expected for this year. I do understand there were some setbacks. Several things happened. over the year, which kind of deviated a little the focus of the company, but I want to understand from you, how should we think about this? Is this the right diagnosis? Was this just a focus deviation or was there something, anything operational impacting? Also regarding production and how the IBAMA and AANP issues can affect the curve looking forward. What should we pay attention looking forward? Where and what fields would this, the AANP strike have a bigger impact? We'd like to understand that a little more. Also, we got the arbitration process. I just would like to get an update from you to understand the timeline of the solution, how long it would take to have a final arbitration or ruling, what the next steps are in terms of negotiation, et cetera. I just want to understand where we stand. These are my questions. Thank you very much.