Enauta Participações S A : Conference Call Transcription 2Q23

Conference Call Transcript

2Q23 Results

Enauta (ENAT3 BZ)

August 4, 2023

Alessandra Gadelha:

Good day, everyone. Welcome to Enauta's video conference to discuss 2Q23 earnings. I am Alessandra Gadelha, the Investor Relations team, and I will be the moderator of this event.

Before we begin the presentation, I would like to make some important announcements. This event is being broadcast live with simultaneous translation into English. The presentation is available for download at the Company's IR website as well as here on the webcast platform. After the presentation, we will begin the Q&A session.

To ask a question, please use the Q&A button of the platform on the lower bar of your screen. If you prefer to ask your question in writing, please write your name, company and the question in the Q&A button. If you prefer to ask an audio question, just write your name and the company in the Q&A button.

Before beginning, let me mention that forward-looking statements that might be made during this conference call relative to Enauta's business perspectives, projections and operating and financial goals are based on the beliefs and assumptions of Enauta's management and on information currently available to the Company. Forward-looking statements are no guarantee of performance. They involve risks, uncertainties and assumptions as they relate to future events, and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors can significantly affect the future performance of Enauta and may cause results to differ materially from those expressed in such forward-looking statements.

Today with us, we have our CEO, Decio Oddone, our Chief Operating Officer, Carlos Mastrangelo, and our CFO and IRO, Pedro Medeiros. I would like now to turn the floor to Pedro Medeiros, who will start the presentation. Please Pedro, you may begin.

Pedro Medeiros:

Good morning, everyone. First, I want to thank you for joining this call to discuss our results of the 2Q and our future plans. We will have a brief presentation with the quarter highlights and then we will talk about our future plans and the development of our projects, and next, we will open a Q&A session.

Beginning on slide 3 and talking about the highlights in this quarter. We had several landmarks in the development of our projects. We have tested a new accumulation in Atlanta, Northeast in Atlanta field, and we have been able to confirm our original expectations that were originally conservative. So, this new accumulation has a potential of resources in place, exceeding 230 million barrels of oil. After this is confirmed by technical and economic studies, it may represent an important addition in Atlanta field.

Second, a very important landmark. To reduce risk and confirm our delivery, one of the main components in Atlanta field, our contract with Yinson, our charter agreement with Yinson exercised an option, and we will now begin our charter agreement for 15 years with an option of extension for another 5 years. This is an important landmark, showing that we are close to the completion of this equipment on time and on budget.

We have had changes in our management, relevant changes in our Board of Directors. We have 2 new investment funds with important participation, Jive Investments and Vinci partners and changes in our management. We had a general shareholders' meeting. We have elected 5 independent members on the Board, which adds more diverse talents and tools that will help the Company better allocate capital and expand in the near future.

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Conference Call Transcript

2Q23 Results

Enauta (ENAT3 BZ)

August 4, 2023

Talking about highlights in the 2Q. This quarter was marked by important landmarks related to production and oil prices. The has anticipated a scheduled shutdown for the 2Q because of a number of reasons. Our revenue was R$420 million, EBITDAX of R$319 million, and let me highlight the EBITDAX margin of 75.9%, quite high. We have kept enough cash to meet the investments in Atlanta field. And we are in line with the original plan in the development of Atlanta field with a total investment in this quarter of R$144 million in Atlanta. The project is progressing according to schedule.

Next, I will give the floor to Mastrangelo and we will continue on this presentation in the next slide.

Carlos Mastrangelo:

Thank you, Pedro. Good morning, everyone. I am going to provide general information on our operations and let me highlight Atlanta field. Of course, this is our main project being developed and from the beginning, when we started this project, we had a plan for first oil, which has remained unchanged. We are now one year for first oil as originally planned. We spoke about the 3Q of 2024. The original date was August 2024.

And we have maintained, we have kept the same date for first oil. And the current situation is shown on this chart. When we have a date, when we have a date for first oil, such as August 2024, and a budget for first oil, my goal is to start production on that date. This is my ambitious goal. I must work in such a way that I will meet the date. So, on that date, I will begin production, we will have the first oil. And the same thing about the budget.

We have lived through different moments, sensitive moments that caused turbulence in projects such as this one. And we have seen this effect in other projects where you run out of your budget or your deadlines. But our project has been progressing according to schedule. We believe we will continue to deliver according to the original plan for first oil.

For those of you who are not engaged in the project, an important landmark was the purchase of FPSO Atlanta by Yinson. When we think about risk reduction, we are not actually transferring risk. You do not have such a condition of transferring risk to another company. But what happened was that we went back to the original concept. And when I talk about risk reduction, it means that we have aligned our interests.

When you have a charter agreement only, the interests of your partner would be to deliver and perform because that is the common goal, that is the aligned interest. So that is why we talk about risk reduction. And beyond that, if that company is responsible for all the conversion and knowing their goal is to deliver on time, on budget and with the right performance to recover the investment, and then this company takes an initiative of exercising their option, well, this clearly shows that things are progressing as planned.

So let me talk about some other important landmarks on this timeline. Well, 5 has already resumed production. This is one of the wells that will be transferred to the FDS. Then the other 2 wells were now concluding drilling in September. Until September, we will have concluded wells number 6 and

7. So then all wells will be ready to be interconnected and for the transfer of Atlanta full developed system.

We have also anticipated the installation of the anchoring system. We have already purchased all the equipment. The equipment packages are being delivered. We are now in the final phase of equipment delivery. We will receive equipment to be prepared to go subsea. And in September, we will have the logistics for the anchoring system. And when the new unit arrives next year, we will have all the anchoring ready, and then we will be ready for wells interconnection.

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Conference Call Transcript

2Q23 Results

Enauta (ENAT3 BZ)

August 4, 2023

So this is the current status of the Atlanta system. One of the critical equipment is the subsea pump, the multiphase subsea pump, and it will be delivered by the end of the 1Q24, to be installed in the 2Q24. It would start operations immediately after that.

On the next slide, you see pictures of some of the equipment, production lines and umbilicals that are possibly coming to Brazil by year-end. On the right-hand side, you have subsea equipment. We call it the Christmas tree. We have received all the Christmas trees that were manufactured here in Brazil. They have been installed at the bottom of the sea. And we continue receiving and installing the equipment.

Next slide, please. I would like to speak about the early production system. We began operations in 2018. Our goal with the early production system was to know more about the reservoir. The operating time was 3 years. We have attained our goals. We have been able to reduce the risks of that reservoir by collecting more information. We now have the information needed. We have information about the aquifer. We know we will not need water injection. We know the quality of the oil that will flow without any problems. There is no solid deposition on the line. There's no sulfur. The fact that we will not have to inject water will avoid sulfate issues in the future. So, we have already mapped all of this information during the 3 years of early production system operation. And this was our goal. We wanted to have the most information possible until we had Atlanta full developed system, the FDS.

The project began in 2021 for Atlanta FDS. After that, the plan has been delivered. And because we had an early production system, the pumping system had a life between maintenance of approximately 2 years. We have detected this was not the best pumping system. That is why in the FDS, the pumping system was designed specifically for Atlanta. It's a multiphase pumping system using different types of fluid.

And so the fact is that we began to face electrical issues. The electrical components of the early production system pumps began to have issues. This equipment operates at the bottom of the sea. And there was a very short interval for the scheduled maintenance. The Company responsible for this system decided to use a different type of electrical connectors, but the performance was no good.

So they moved to the previous electrical connectors. But anyway, this is an early production system, while we wait for the Full Development System when we will have more stability in terms of performance.

We have just finished the general maintenance. We had the scheduled shutdown of Petrojarl I FPSO. It is in use for longer than it was originally planned, and we are waiting for the FDS next year, which will have different pumping system. It's a multiphase pumping system, using different types of fluid. The average time between failures would be approximately 11 years or more, and there are 80 units such as that one installed worldwide. So, it's a very different system.

On the next slide, in the beginning, I spoke about the acquisition of FPSO Atlanta by Yinson, which was the original charter model. And because of the trust we have on the performance, this was an option we gave them, and now they decided to exercise this option, bringing a lot of value to the project.

The contract is for US$2 billion for 20 years. First, we have 15 years with an extension, with a possible extension of 5 years. And in terms of financing granted to Yinson, financing for 15 years independent of our contract, the charter contract we have with them.

On the next slide, you can see the original budget approved, and it has remained unchanged. This is the budget we have. We still must do another US$500 million to first oil. The CAPEX is US$620 million. So that is why I feel confident to say that we will begin operations in August, and this is our top CAPEX.

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Conference Call Transcript

2Q23 Results

Enauta (ENAT3 BZ)

August 4, 2023

Next slide, please. This is just an overall picture looking at the whole Atlanta cluster and what it involves. So, the early, early production system, we are calling it the pilot system here, the system we now have, the volume of retrievable oil, talking about certified oil and the certification dates from December 2022 and what we have around these wells that we are currently evaluating.

Now, Oliva Field, approximately 22 kilometers of aquifer, and it has resources in place of approximately 350 million barrels. We have been conducting an evaluation, a technological evaluation now for about a year to develop the Oliva field. We have finished a seismic evaluation, and we are now conducting exploratory studies. And I can tell you that next Monday, we will already have a manager for Oliva, a manager responsible for that field so that we can move on with this project, move on with the studies for the development of Oliva.

Now, Atlanta Northeast. I think Pedro has already mentioned, we have a pilot well in Atlanta Northeast, and we have been able to confirm resources in place of approximately 230 million barrels. And it is great because there is a connection to the main field, and it provides flexibility for us to use the same system with minimum investment to be able to use these additional resources that have been confirmed by the pilot well.

In addition, we have Atlanta W, some, call it, Atlanta down because it's south of Atlanta, and we are conducting a valuation of possible resources there. So, this is an overall look of Atlanta.

Let me now give the floor to Pedro. Thank you.

Pedro Medeiros:

Thank you, Mastrangelo. Going back to the highlights of the quarter. I guess, this quarter had several significant events, and I would like to break them down in order to give you more color about the robustness of the Company and also the trajectory to deliver Atlanta's project as we speak.

On the left-hand side, on the chart, we can show the evolution of the Company's production in Atlanta and Manati fields since early last year. You can see this quarter was affected revenue-wise by a reduction in our production owing to a management decision to anticipate scheduled downtime in Atlanta from August to May.

So it was very successful, and the management decision was based on the search to prevent the economic impact for temporary import tax in the oil industry. And this impact, at the Company level, it was close to US$3 million, an effective result, considering we had all the items ready for the downtime and it would happen according to original schedule right after the completion of the import well.

Number two, production was also impacted by a temporary stoppage of the pumping system. Like Mastrangelo said, we are in the final stage to recover and to resume production. And revenue at the same time was affected year-over-year by an oil price that is way lower. Seasonally, we had an impact over the 2Q in oil prices compared to last year in the 1Q, which was partially offset. By the way, this is not so visible yet, but we had a positive effect related to our offtake oil agreement, which was extended. And Atlanta oil was awarded vis-a-vis brand. There is a premium price in the international market.

On the right-hand side, we can see that despite matters related to production this quarter, as I explained before, when it comes to the reservoir, we can see a very positive progress. This shows something very important to invest in Atlanta's full development system for mid next year. This quarter, we had the entry of well 5. This well, we wanted to test and confirm potential yield, and it was potentially higher in terms of early productivity, 15,000 barrels, a level that, for economic reasons, is very significant, showing the robustness and soundness of Atlanta's field. And

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Conference Call Transcript

2Q23 Results

Enauta (ENAT3 BZ)

August 4, 2023

eventually, it showed average productivity while our equipment was up and running, extremely positive yield, which is a good sign of what we expect to deliver once we have the FPSO Atlanta and permanent equipment for 15 to 20 years as the field develops.

Next slide. The second item that I would like to highlight this quarter, well, the idea behind the potential operating leverage of the Company, not only recovering production, but also the delivery of FPSO Atlanta. On the right, you can see on the chart that this quarter, despite scheduled maintenance, we managed to maintain very significant discipline when it comes to manageable operating costs. This is a snapshot of our progress of our cash OPEX, including charter in U.S. dollars. As you can see, we had significant progress combined with our charter contract and all logistics used by the Company contracted for Atlanta field. The level of cost is very flat and stable over current quarters at lower levels compared to last year.

Number two, here, we show how Atlanta's net revenue was the main driver to lower revenue year- over-year, mostly affected by the drop in oil prices, which tend to recover in the following quarters.

Next slide. Coming to an end, a brief conclusion, showing how interesting it is to think about Atlanta's project. If you notice, despite this quarter affected by production downtime and lower production, like I said before, we had an EBITDA margin of 76% approximately, which is very positive. When combined to the message of operating leverage shown in the previous slide, we expect to see very solid margins once we resume production and deliver FPSO Atlanta.

Next slide, please. Last but not least, just some notes on the financial soundness and the Company's liquidity as we navigate on the delivery of the Atlanta project. By the end of last year, the Company issued two series of local debentures. One is institutional and the other was incentivized. The deals were very successful, and the costs associated to these issues is around USD plus 8% with a very competitive cost.

The Company shows a very solid balance sheet, net cash in essence, and we are showing you a little bit of what our capital allocation trajectory, and it is all about, with more efficiency expected for the next 12 to 24 months. Starting next quarter, we will show you a change owing to Yinson exercise of option with Atlanta FPSO and part of financial engineering involves funding around US$329 million.

Here is an asset that, over time, we expect to find more efficient capital allocation as phases and risk stages of the project are fulfilled. We have financial commitment that are long term and beyond early production of first oil for mid-2024. And the Company maintains a hedge policy for price and exchange risks. This is very active, particularly when it comes to navigation and cost of delivery of our main project.

Today, please note we have more than 1.3 million barrels that are hedged for the next half of the year and also for early 2024, priced US$65 per barrel showing an important assurance policy in our liquidity and our financial robustness to perform the project and exchange exposure is back to the dollar, owing to the nature of the Company and the activity of our investment and our results.

Next slide. Having said that, I give the floor to Decio Oddone, our CEO for the final remarks before we open the Q&A session.

Decio Oddone:

I apologize. I was muted. Our office in Rio is in Cinelândia region. And since yesterday, people are celebrating. They are singing happy birthday all day around, and we have this background noise. So this is not Enauta's celebration. Our anniversary was in June, but this is a background neighborhood noise in Cinelândia where we also have the House of Representatives in the city.

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