Enauta Participações S A : Conference Call Transcription 3Q22

Conference Call Transcript

3Q22 Results

Enauta (ENAT3 BZ)

November 11, 2022

Raquel Smolka:

Welcome everyone to another Enauta's 3Q22 earnings videoconference. My name is Raquel, I am part of the Investor Relations team and will be the host of this event.

Before we begin the presentation, I would like to make some important announcements. This event will be broadcast live with simultaneous translation into English, and the presentation will be 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. If you want to ask an audio question, please write your name and company in the Q&A field on the platform on the bottom of the screen. If you prefer to ask your questions in writing, please write your questions also in the Q&A.

Before proceeding, 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 not guarantee of performance. They involve risks, uncertainties and assumptions because 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 can 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 Paula Costa.

I would like to turn the floor now to Paula, who will make the presentation. Please, Paula. Go ahead.

Paula Costa:

Good morning, everyone, and thank you for joining us today in our video conference call. We are going to comment on our results for the 3Q22 and the 9M22.

I will start the video conference by commenting on our main highlights on slide 3. This was a quarter of great achievements, great progress from the operating point of view. We completed the scheduled shutdown of Petrojarl 1 without technical impediments and mainly without any accidents. It is always good to point out that safety is a fundamental pillar for the Company. With this, we are able to maintain the capacity to generate operating cash flow between the early production system, EPS, and the Full Development System, FTS, of Atlanta Field. Later, Carlos Mastrangelo, our COO, will provide more details about this progress, these advances that we had throughout the quarter.

This week, we also announced the start of drilling of the fourth well at Atlanta in the early production system. So we took advantage of a rig contract that we signed earlier this year before the rise in commodity prices. We took advantage of the same contract to continue the Company's operational campaign and the drilling of 2 more wells despite of the Full Development System. We also had very important achievements from the commercial standpoint.

I think the biggest highlight was the signing of the contract with Shell for the sale of oil for the entire period of the EPS. So a contract that runs until 2024. As far as the Full Development System is concerned, the work is progressing on time and on budget. We have already invested US$285 million in the Full Development System of Atlanta.

This is really our major project that is ongoing. We also had a significant reduction in our operating cost as of September. And we commented on this a little in the last earnings call that as of September, we would end the portion of the FPSO charter contract that is related to the Brent. With

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Conference Call Transcript

3Q22 Results

Enauta (ENAT3 BZ)

November 11, 2022

that, we have a reduction of about US$150,000 per day in our FPSO charter contract. This greatly improves the margins and the project's capacity to generate cash.

On the financial side, in the 9M22, we posted revenues 36% higher than the same period of the previous year. This is a reflection of the Brent price, the value of the commodity coupled with the increase in the Company's stake of Atlanta Field. Our EBITDAX was R$270 million in 3Q. So we ended the quarter with a cash position close to US$300 million, which gives us the confidence to continue the investments for the Company's growth. During 3Q, we also had other achievements that I think are worth highlighting. We were nominated among the finalists for the AMP prize for technological innovation.

The first independent company, the first independent Brazilian company to receive such a nomination. We joined the Bovespa BX 100 Index, which reflects the 100 most traded assets on the stock exchange, which once again reinforces our commitment to generate value for our shareholders in a sustainable fashion. We achieved the great Place to Work seal, which demonstrates our search for continuous improvement in our work environment as well as the appreciation of our employees.

I will now turn the floor over to Mastrangelo, who will comment on the Company's operating performance over these past 3 months.

Carlos Mastrangelo:

Thank you, Paula. Good morning, everyone. Moving now to slide 4. As Paula pointed out, this 1Q was a period of investments. We stopped production to do whatever was possible and what was necessary to be able to have operating continuity in the Atlanta project, so that the period between the end of the early production system, EPS, and the beginning of the Full Development System, FDS, would not have any interruption.

So the necessary services were done for what we call life extension. Out there at sea, which is not a simple task. It is rather complex. It's a confined space with many people on board performing several simultaneous services.

In the period of production, stoppage of downtime was done during the Winter season, which makes the interruption of activities even more complicated due to the operation of boats, vessels, helicopters.

But at the end of the day, I considered the operation a great success. First, because we did not have any accidents, which is a fundamental value in our operations. We were able to carry out all the services that were necessary to give us confidence that we will be able to extend production in the early production system until the Full Development System is in place. I will talk more about this later.

So this period brought this reward, this period of investments in the Atlanta project brought this reward of not having that production gap. That period of time without production between the end of the EPS and the beginning of the FDS in mid-2024. In addition, during this downtime, we expanded the treatment capacity of water produced by more than 30% compared with the capacity of the original project.

Of course, we used the downtime for several other things, including to make all the necessary inspections to meet the regulatory standards of the Ministry of Labor. So it's to avoid having another downtime down the line. Everything was done during this quarter. In summary, in a nutshell, this was an investment period in which we sacrifice a portion of the production time of the early production system in order to extend production during the full development of the field.

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Conference Call Transcript

3Q22 Results

Enauta (ENAT3 BZ)

November 11, 2022

Now moving on to the next slide, slide 5, let's talk about the Full Development System, FDS. We give you an update on the situation of the FDS, which is unfolding according to plan since the beginning. We have project approval in February, and the activities continue in a sequence as planned. And it's even a good moment to explain how it would be.

Now that we have this confidence to go ahead with the EPS, we can understand how this transition from the early production system to the Full Development System will play out. Well, today, we have a production system for the South Atlanta field producing with 3 connected wells. We started just yesterday, the drilling campaign of another 3 wells. And the first of the 3 wells will be used to replace well 3, which we stopped short time ago. This first well that is being drilled now will go into production in the early production system, completing 3 wells in the EPS. The other 2 wells will wait for the Full Development System to start operating later on.

When the full development is in place, it will be located more to the north with no interference between the early and the Full Development System. They will continue to work in parallel, simultaneously without the need to stop production in the early production system. With this, the wells standing by will be connected to the Full Development System. This will start production in mid- 2024.

The same vessels that installed these wells in the Full Development System, which will start production, will go further south and well after well, we will take them north until production in the EPS will stop and everything will be decommissioned.

That way, we can have a smooth transition between one system and the other with minimum loss of production during this transfer. So that is the plan. In this slide, we can see some photos of the FPSO in the dry dock, the subsea Christmas tree, which are the Vault that are placed on top of the well on the seabed. It has arrived for the next well. This is the rig a few days ago, passing through Guanabara Bay heading for the Atlanta location.

The main phase of the full development is here. We finished that initial phase of detailing the project. Now we are in the construction phase, in the execution phase for equipment delivery and assembly. So we have moved on to the next phase.

We have a management system that consists of committees, which we call steering committees composed of the CEOs of the main participating companies, and we also did a peer review to make sure that there is no disconnect between all of the stages, all of the phases in order to move forward with as little uncertainty as possible.

Now moving on to slide 6. Here, we have the distribution of CAPEX that was approved when the project was approved in February of this year. As I said, it is the same CAPEX, R$1.2 billion was a little over R$100 million deferred for further ahead during the operation beyond 2024. Of the rest, R$80 million is for the purchase of the FPSO and another R$420 million are needed to adapt the FPSO for Atlanta. If you think about this amount, it is a much smaller amount than usual. This is because the adaptations are minor, small, they are not significant interventions. There are just a few new modules, which is why we can implement the Full Development System in a short period of time.

The rest of the budget, around R$700 million refers to the drilling of the new wells, subsea equipment, lines, ESPs. And here, we are going for a much more robust solution in terms of reliability and time between workovers. We have much greater operating continuity. So this completes the remaining R$700 million.

Of this total budget, 93% has already been contracted. These are firm values. The remaining 7% refers to items budgeted, but items budgeted for the following phases, for the final phases of connection, installation, installation of the anchoring system, installation of the FPSO commissioning.

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Conference Call Transcript

3Q22 Results

Enauta (ENAT3 BZ)

November 11, 2022

So, these are the items that are still in the contracting process, but it is a very small one, which gives us great certainty regarding the project budget.

Now I thank you, and turn the floor back to Paul to present the financial results of the quarter.

Paula Costa:

Thank you, Mastrangelo. I'm going to move to slide 7 to comment on the Company's main financial indicators.

In 3Q, as we already had the opportunity to comment, we dedicated this quarter to the Company's investment in this journey of growth. So it was a quarter in which we somehow gave up on some of the production in Atlanta for a certain period of time so that we could remodel the FPSO and seek the recertification of the unit and would that have continuity of production until the Full Development System was operational and we could then continue to increase production at Atlanta.

Reflecting this, we averaged production of about 3,000 barrels of oil daily at Atlanta given that the field did not produce every day of the quarter. The field had some downtime, the main one being the scheduled shutdown for the works of the FPSO, which as I said, are extremely important for the Company's long-term financial viability.

At Manati Field production was about 15,000 barrels, which is more or less 7,000 barrels of oil equivalent, referring to Enauta's stake, given that we have 45% working interest of the field. This production also reflects some measure of reduction, a reduction in the demand for Manati gas. Lower production clearly has an effect on net revenues. So, when we compare, we also had a reduction in net revenue, which ended the quarter at R$167 million, R$15 million coming from Atlanta and the rest from Manati.

So we had a reduction of revenue from Atlanta, Manati on the other hand, revenues grew about 1.5% year-over-year. Despite a lower production contract adjustments for the price of gas from Manati ended up providing this revenue above the same period last year. When we look at the 9 months of the year, revenues were R$1.5 billion, up more than 30% of the same period last year. We have brand appreciation in this period besides the increase in and out a stake of Atlantic field. We currently hold 100% of Atlanta Field. EBITDAX in 3Q was R$47 million.

So once again, lower than the accounted for in 2021, a reflection of all the work that was done this quarter, enabling the recertification of the unit and extension of the contract. Year-to-date EBITDAX on a recurring basis was up 15% over the previous year. It is worth remembering that the 9M of last year were impacted by the business combination. When we took over an additional 50% stake of Atlanta field in the middle of last year. This had effect on the result and effect on EBITDAX, which makes the basis not directly comparable. Net of this result, we clearly see an increase in EBITDAX the 9M22 when compared to the same period of 2021.

3Q net income was R$19 million, a reduction of 86% over the same period last year. In the 9-month comparison, we ended 3Q with R$200 million. In the year 2021, it was also impacted by the same nonrecurring effect of the business combination. So, when we exclude this nonrecurring event, net income for the 9M was very close to the same period last year.

Now, let's move to slide 8 and drill down a little bit more into the field operation. On slide 8, we can see that OPEX had a significant reduction, decreasing from US$39 million to US$20 million when we compare 3Q22 with 3Q21. This reduction is mainly the result of the captivation of costs incurred during the scheduled shutdown, considering, as we have already explained, considering that this is the investment made for future production of the field, the costs related to this period are capitalized and therefore, do not impact the OPEX.

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Conference Call Transcript

3Q22 Results

Enauta (ENAT3 BZ)

November 11, 2022

On the other hand, we can see that the average sale Brent is still at very favorable levels above the historical average, which makes this project once again a strong cash generator. We had an important reduction in operating costs as of September, we had an opportunity to comment on this in the last earnings call.

The FPSO charter contract had a portion that was related to the brand. So with the higher brand, we had higher trade costs and when Brent fell, this cost of charter was reduced. However, this additional portion had a cap of maximum value in the year-to-date.

So that once the cap is reached, this installment is no longer due, and we do not have to buy this additional amount and we reached this gap in 3Q. In September, we already had this reduction of US$150,000 daily, which represents more or less half of the charter value of the FPSO. We have already incorporated this reduction. It is valid until the end of the unit's contract until the end of the early production system. Without this additional value, we will have an additional cash generation in the project.

On slide 9, you can see our cash position. We ended the quarter with R$1.5 billion in cash. So I think we have, once again, a very sound balance sheet to continue to invest and drive growth for the Company, to continue with our business plan with our growth journey.

During this period, we made investments of about R$464 million. The vast majority of this related to the Full Development System and a little over EUR 100 million were related to the early production system, mainly to costs incurred due to the scheduled shutdown in the works of Petrojarl of the FPSO related to recertification and extension of the unit's contract.

As part of our hedge policy and given that a large part of our investment is dollarized, the Company has, today, more than 90% of its cash in dollars. This has an impact on the result. So, this quarter, we had a positive impact from the exchange rate variation. The rest of the cash will be invested in conservative instruments in BRL. This generated for us a financial income of a little over R$20 million in 3Q.

Moving on to slide 10, I will comment a little bit on our strategic positioning. As mentioned, 3Q was a very important quarter for the Company. Although we had an impact on our results due to a reduction in production, 3Q was a quarter to invest for growth and to build the future of the Company. We had to stop production to do relevant works on the vessel, on the FPSO, which allows us to follow this path toward recertification of the unit and the subsequent extension of the contract. Once again, this creates this operational bridge between Atlanta's early production system and the full development, which is the big project of Atlanta.

So I think that having had success in this scheduled shutdown, having been successful without any technical impediments, without any accidents. All this was super relevant for us to continue building Enauta's growth.

We are very diligent in managing our assets. So we are always seeking greater efficiency in the Atlanta operation. Already in 3Q, we posted an important reduction in Atlanta's OPEX as a result of the FPSO contracting mechanism and chartering costs of this unit, which will lead to a higher cash generation for the asset.

We remain very focused on the implementation of the Full Development System. So the fact that we continue to advance on schedule and on budget. I think these are very important achievements for the Company along this path, and we keep working to optimize our capital structure to have a robust capital structure. We continue with a strong balance sheet to continue these investments, the Company's growth and to continue to execute on our strategy.

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