Enauta Participações S A : Conference Call Transcription 3Q21

Conference Call Transcript

3Q21 Results

Enauta (ENAT3 BZ)

November 11, 2021

Renata Amarante:

Good morning, everyone, and welcome to Enauta's 3Q21 earnings results video conference. My name is Renata Amarante, I am the Investor Relations Manager and I will be the moderator of this event.

Before I start the presentation, I would like to make a few important announcements. This event will be broadcast live with simultaneous translation into English, and the presentation will be available on Enauta's IR website, and also here on the webcast platform. At the end of the presentation, we will start the Q&A session.

To ask audio questions, please write your name and your company in the Q&A view on the platform at the bottom of the screen. If you would like to ask questions in writing, please write your questions also in the Q&A field.

Before proceeding, I would like to clarify that any forward-looking statements that may be made during this conference call regarding Enauta's business prospects, projections and operating and financial targets are the beliefs and assumptions of the Company's management, as well as information currently available. Forward-looking statements are not guarantee of performance. They involve risks, uncertainties and assumptions because they refer 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 Enauta's future performance and may lead to results that differ materially from those expressed in such forward-looking statements.

Here with me today are our CEO, Décio Oddone, Carlos Mastrangelo, COO, and Paula Costa, CFO and IRO.

I would like now to give the floor to Paula to start the presentation. Please, Paula, you may proceed.

Paula Costa:

Good morning, everyone, and thank you very much for joining us today in this video conference call to talk about Enauta's results. And it is a pleasure to be here with you, to talk to you about our 3Q results and the progress we made the Company during this period.

I would like to begin by presenting some of the progress of the past three months, that I believe are very relevant considering our main important strategic pillars. On the ESG front, I think it is important to say that Enauta's Board of Directors approved the management's variable compensation plan, and this plan includes not only financial and operating goals, but it also incorporates goals related to ESG.

This period, again, we approved the Company's People and Human Rights policy, including training for our own employees, as well as training for some of our most critical suppliers.

On the governance side, it is also important to say that we initiated the activities at the Internal Audit Committee, and likewise, to support this committee, we introduced the management for internal auditing.

We hired somebody with extensive experience in this area to assist us with internal auditing, and we do understand that this is a very important step towards enhancing the governance of the Company.

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And on the environmental front, we would like to highlight that in September, we signed a memorandum of understanding with a Malaysian company, Yinson, and this. MOU determines that the engineering design for the adaptation of the OSX2 will apply all of the available technologies to ensure the lowest possible carbon footprint. And besides that, the fact that there is an existing FPSO. By those mere facts, this requires a simpler adaptation process with a lower carbon footprint when compared to a new unit.

Now moving on to our assets, the 3Q was the first time which Enauta had 100% working interest in Atlanta for the first time, and this happened in early June. And therefore, this is the first period where we reported 100% working interest. The field reached 19 million barrels produced, that was a landmark for the Company, and we continue our activities towards the full development system. Decisions are expected for the 1Q22.

It is also important to highlight that, as I said before, in September we signed the Memorandum of Understanding with Yinson, and now we are getting ready to negotiate a chartering operation and maintenance contracts of this unit.

This is another important step for the Company because it will allow us to expand our current oil production capacity, which is still limited today when you consider the ERS.

We will start drilling the first exploratory well in the Sergipe-Alagoas basin in the in this 4Q21, and now we are the only thing pending is the environmental license in order for us to start drilling.

Another important point that I would like to stress is that the Company remains very resilient to deliver growth and to pursue new opportunities. At the end of the quarter, our cash position was R$2.4 billion. We are reporting a net income of R$134 million in the quarter, and this result reflects the record revenue that stems both from the production, and the fact that we are reporting 100% of Atlanta's production, as well as the premium over Brent, because Brent prices were quite high throughout the quarter, in addition to a higher exchange rate when compared to the previous quarter. And so, when we reported the revenues in BRL in the results, these factors drive the numbers up.

Another important advance was the extension of Atlanta's drilling license that now also includes the other wells scheduled for the full development.

To finalize this general overview, I would like to emphasize that the Company continues to pursue M&A opportunities, and we also believe that the industry is in a very favorable environment to accommodate this growth. In addition to the expansion of our portfolio, we continue to work on our assets, continuously seeking to improve our operating efficiency.

Now, moving to slide four, we see how the market scenario positively impacted the Company's profitability. As I mentioned earlier, that was a period where we experienced a sharp increase in Brent prices and the maintenance of the exchange rate at a high level. And because of that, all commodities prices in BRL hit an all-time high. These factors led to a record revenue generation for Enauta in the 3Q.

Now, talking about the operating performance on slide five, as I said before, this was the first quarter in which we recorded 100% of working interest in the Atlanta field, and when we compare that to the same period of the year before, we increase our production by 90%, also driven by the increase in our working interest in the field.

Our revenues also grow significantly year-on-year, and this is supported by the highly favorable market environment, as we saw in the previous slide, in addition to higher production levels, as mentioned before. We maintain our expectation in the Atlanta field average production to 12,000 barrels of oil per day for 2021.

Moving now to slide six, we can see our operating costs in the 3Q. Like we said before, we have a relentless search for efficiency in our operations. This is one of the Company's strategic pillars. This

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quarter, when compared to the previous quarter, had an increase of US$32 per barrel that we are reporting this quarter. This increased stems basically from two effects: firstly, the increase in diesel prices, and an increase in the FPSO chartering costs, which is also related to Brent prices. As a result, there was an increase in our operating cost, with an impact on the lifting cost.

Moving on to slide seven now, and before talking about our financial results, I would like to comment on the Atlanta field operation. As you know, the Atlanta field has been in operation since 2018, in the early production system. The early production system is like a pilot product, a reduced production capacity which is built to last for a while. And over this timeframe, the Company should gather the maximum amount of company on the field, productivity of the wells, flow rate of the oil. Once we have this information available, we can work on the best design possible for the full development system.

It is in the full development system that we have the greatest Atlanta project, once we have higher investment with more wells, a greater FPSO, longer term contract. So in order to make it happen as efficiently as possible, we gather information on this smaller system with the early production system.

Overall, speaking, it is a temporary system. It is built to last for a while, and in Atlanta's case, it was extended more than originally expected. We postponed a decision to invest in the full development system.

And owing to the crisis in 2020 and covid 19 pandemic, and changes that we had in the consortium, considering all that, we decided to postpone the decision to invest in the full development system. And as a result, the early production system was additionally extended.

Because this system is a pilot system, and because we are still gathering information on the field, eventually we have to cope with some constraints inherent to the system. For instance, please bear in mind that late last year we had an issue of corrosion in the FPSO heaters. The problem was fully fixed in February and Atlanta's project resumes normal operation. And then we had some problems related to the pumping system. A couple of pumps were removed from the field to be repaired, and the pump under repair will come back in the 1Q22, when we expect to have production in the field back to normal.

Our expectation is that, until we actually have the deployment of the full development system, we might see some issues in the early production system, precisely owing to the nature of the project in which we had the design.

So we expect the full development system to have a decision made early next year, and in this case, we would have what we would start operation in mid-2024. The early production system will be extended at least to 2023.

And over this time frame, undoubtedly, because it is a cash generation project to the Company, it is far more interesting, and by the way, we decide to continue to operate the EPS knowing that we have some fine tuning to be made into the system. So we stick to the same level of production, within our expectations.

As for the full development system, we have a different scenario. For the full development system, solutions are considered for a 20-year production timeframe. Eventually, we will have a far more robust and resilient project suitable for long term production.

It is important to make this distinction and make it crystal clear that we collected valuable information from the early production system, and they will be addressed in the full development system. So we have a more robust product with a capacity to be there for a longer time frame.

Now on slide eight, as we have said earlier, this was the first quarter in which we recognize the full working interest in Atlanta, with a significant positive impact on our quarterly results. If we consider this quarter, this asset contributed with 80% of the Company's revenue. If you compare this quarter,

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year-over-year, we see an increase of almost 200% in our revenues compared to the 3Q20, and over 250% increase in EBITDAX also year-over-year.

Basically, this stems from the increased production, or the increased working interest in the field, so increased volume of production at the Company, also an increase in Brent price, and also an appreciation of the oil at Atlanta, which today is sold at prices very close to Brent when we consider delivery at the platform, including logistics cost. If we consider delivery in the refinery, there is a premium compared to Brent because it is a low sulfur oil.

With the increased working interest in the field, together with a strong increase in bread prices, we have an increase of over 350% in the Company's net income. So we are still being guided by our financial resilience, and that is what I will be commenting next on the next slide.

The Company closed the quarter with a cash position of R$2.4 billion, and we continue to see a strong cash position, a solid liquidity to capture market opportunities. And this quarter, we also had an important move. Over the year in terms of having our cash denominated in USD. We maintain an increasingly higher position denominated in USD in order to maintain our financial capacity of the Company in the long run. Today, we have approximately 40% of the Company's cash denominated in USD.

What about commitments? Our estimated CAPEX for 2021 is US$40 million, and almost half of this amount is related to the Atlanta field. For 2022, it is US$105 million out of which a bulk of it, or US$96 million, are related to early investments in the full development system, subsea systems and drilling new wells in the Atlanta field.

So it is important to make this take home message. We are channeling the Company's resources and funds, mostly for assets under development and production.

Now, on slide ten, this is the last slide. I am coming to the end of our presentation by saying that, in our opinion, our earnings support our ability to expand our business to keep on pursuing new opportunities. This is our focus to diversify our portfolio.

So what we want is to increase our revenue, diversify revenue and generate value to shareholders. We believe we can do that, as we have done over the years, with the appreciation of our shares, or even dividend payout.

We still have room to improve our capital structure. Today, the Company's net debt over EBITDA ratio is very low. Our cash position has been very healthy over the year, and we believe we have a lot of value generation so that we can improve the capital structure, access the debt market and have the cash to be invested in new projects, always searching for gains in operating efficiency down the road.

So before we get to the question and answer session, I am going to turn it over to Décio for a few final remarks. Once again, I thank you all for joining us today. I also thank Enauta's team for the quarterly earnings, and I hope to see you soon.

Décio Oddone:

Good morning, everyone. I am delighted to be here again, joining this earnings conference call. Before we move to the question and answer session, I would like just to add Paula's presentation with a couple of comments.

Firstly, our earnings results were good. We had a record revenue and we were happy for having these early results. We know it is it is important to share the earnings as soon as possible. We began

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to implement the SAP, deploy SAP, and it will be ready next year and we believe we are going to greatly improve our reports. This will be more organized.

Last quarter, like Paula mentioned, we had problems with some pumps in Atlanta's early production system, but I would like to go back to this topic and share a couple of information. Like we said before, the early production system was built to gather information on the full development system. We collected very important information, so now we can work on reliable and robust projects in the full development system.

Like Paula said, we expected to be there for three years. However, it was so successful over this time frame, removing our uncertainties and confirming a lot of assumptions. And this is very important to make the full development system feasible.

However, owing to the partnership and the collapse of oil prices in early 2020, and the exit of Barra Energia, as you know, it all postponed the decision making process on the approval of the full development system.

We decided to be in the project late last year. It was the right decision. We know it generate values, and it will add even more value once we get into the full development system. And we have decided to maintain the early production system up and running because it generates value and cash. This is much better than just concluding, because we just met the technical go to gather information.

But because it was considered to have a short duration, it brings consequences. The pumps that are installed in the project have an average time in between repairs of approximately two years. Historically speaking, that is the average. The backups that were built considering a three-year timeframe, considered this average.

In addition, the consortium status was not stable. We had arbitration with Dommo, Barra Energia had their own view of the circumstance as a company. So these uncertainties and disputes made the consortium last year, when the early production system was approved, did not approve the purchase of back ups in addition to the ones there were already contracted. They could have more at that time, but it was not supported by the consortium.

So I wish we did not have to cope with these problems. However, we are better off with an early production system up and running, generating cash and production than just concluding and awaiting for the full development system to happen.

We will keep on operating under those circumstances, with the risk of having some shutdowns, like Paula said. But in the full development system, we will look for another solution. We are going to have more backup structure with the same type of pump, or we are going to have another long lasting but more expensive pump. We are going to work on this analysis and we are about to decide until early next year, so we no longer have to cope with this problem once we have the full development system.

Another comment has to do with our earnings. We posted very good earnings, but we also had an increase in the lifting costs, and this result basically stems from the higher oil price and the increase in the efficiency of the FPSO Petrojarl vessel. It is not common, but the contract we have with Petrojarl has a share of costs pegged to the Brent price. So if the oil price goes up, the chartering freight of the vessel operation also goes up. So because we had a high Brent price this quarter, as a result, there was an increase in the FPSO cost.

And it also depends on availability. Availability was also increased with the repair of the heaters. You may recall that over last year we had problems with the heaters, like Paula said. We had to work to repair these two pieces of equipment, and this decrease the vessel's availability, and therefore also lowered the rate we pay.

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