Enauta Participações S A : Conference Call Transcription 4Q22

Conference Call Transcript

1Q23 Results

Enauta (ENAT3 BZ)

May 11, 2023

Alessandra Gadelha:

Good morning. Welcome everyone to Enauta's conference call. I will be the moderator of this event, and I am Alessandra Gadelha.

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 bottom of your screen. If you prefer to ask your question in writing, please write your name, company and the question using the Q&A button. If you prefer to ask an audio question, just write your name and company in the Q&A button.

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 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 can cause results to differ materially from those expressed in such forward-looking statements.

Today with us, we have our CEO, Decio Fabricio da Costa. Carlos Mastrangelo, Chief Operating Officer; and Paula Costa, our CFO and IRO.

I would like to turn the floor now to Paula Costa, who will start the presentation. Please, Paula. You may begin.

Paula Costa:

Hello, good day to you all. Thank you for joining us today in our video conference call to discuss the results of the 1Q23.

I believe the big highlight of the quarter was the completion of the drilling and the start of production of well 5H of Atlanta Field, which occurred on schedule. It started producing in the end of March, still in the 1Q, as was the Company's expectation.

In this quarter, we also had an important celebration. We celebrated 1 year of the approval of the full development system of Atlanta. We had the project approved in 2022. Soon after, we signed the main contracts to start implementing the full development system, or FDS. This project was expected to be implemented over 2.5 years, from the beginning of 2022 until mid- 2024. So we are almost halfway and it is very gratifying to look back and see how much we have evolved during this period and that we continue to evolve according to the main assumptions planned.

So I guess that in a minute, Mastrangelo will have an opportunity to give you more detail on our operational progress in the next slides. We also have some of the figures of the quarter. We are going to get in more details later, bringing the contribution not only at the operational side and

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Conference Call Transcript

1Q23 Results

Enauta (ENAT3 BZ)

May 11, 2023

production by the Company, but also the commodity price and its impact on the Company's results in 2023.

In 1Q, we invested US$107 million, practically all of that related to Atlanta, part of it going to the full development system and the drilling of well 5H, which is already in production as part of the early production system, or EPS.

At the end of April, we also had the Company's general shareholders meeting when we approved a dividend payout of R$0.15 per share, totaling R$39.5 million, and this amount will be paid on May 15th to Enauta's shareholders.

I will now give the floor to Mastrangelo, and he will give you more detail on the operating side of the Company and the evolution of our development system.

Carlos Mastrangelo:

Thank you, Paula, and good morning to everyone. The main event of this 1Q was the production start of well 5, the new well. We approved this well in December 2021 and completed it within the expected range of time and cost.

And the good news was that the performance of the well met our most optimistic expectation. We did not push the well to maximum production because the original project of 2014 did not consider the possibility of a well producing at such a high flow rate. So we start increasing the flow rate when it reached around 15,000 barrels per day.

And then due to an internal decision more due to the low durability of the subsea pumps, so we decided to reduce the flow rate to operate with a lower flow rate with a well producing about 10,000, 9,000 barrels daily. To try to get in line with the performance of the pump of the subsea equipment. I will talk a little bit more about these pumps in a minute.

As a reminder, this well was the first kingpin of 3 wells. We are now in the drilling campaign for the other 2 wells, which are expected to be completed by September. And when the FPSO optical development system arrives, we will have all of the wells ready to be interconnected.

Now moving to the next slide, slide 5, please. On May 2nd , we completed 5 years of operation at Atlanta Field. Production has now accumulated to over 25 million barrels. And what does that mean? The Petrojarl, which is the FPSO that is operating in the early production system is a very old system still in operation. It was contracted for a 3-year production with a possibility of operating for 2 more years. And we will be using it for a few more years, but it is a temporary system. The goal was to get to know the reservoir to have information to allow us to design an adequate system to develop the field.

To that end, this was a great success in terms of knowing what is needed for us to develop the field. We got all the main information about the excess water, the aquifer, which harm the early production system, but it's a bonus for the FDA. The other important and clear piece of information is that we need a robust pumping system with much wider interval for workovers than was originally planned.

For that time, as we were in the early production system to operate for 2, 3 or 4 years, the system that had a durability of 2 years or less, 1.5 year, could be adequate. But for a full development system, we need to have a more robust system.

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Conference Call Transcript

1Q23 Results

Enauta (ENAT3 BZ)

May 11, 2023

More importantly, these 25 million barrels produced gave us an opportunity to get to know the reservoir well and to greatly reduce the reservoir risk, which is one of the major risks in the development of an offshore oil and gas production system.

All this gave us the confidence to stay the approval process of the full development system project in February of last year. But of course, with all of this, we had a production that is highly profitable. The generation of operating cash for the Company was relevant, and even more so now with the possibility of extending the early production system until the full development is operational. This gives an even more of an upside to the project to continue generating cash until the start of the next system.

Moving on to the next slide, we have here a comparison of size and magnitude between the early production system, EPS and the full development of FDS. Rather relevant. I'm going to highlight 2 differences. The difference in water treatment capacity, which is very limited in the EPS. There was no need for more than that. And in the FDS, the full development, this increases to 140,000 barrels per day of capacity.

Another very interesting and relevant difference is the storage capacity. The early production system has a capacity to store 180,000 barrels of oil, while the whole development system can store 1,600. Now why is that relevant? In the early production system, we take between 40 and 50 days to be able to fill a shuttle tanker. What does this imply? Or the implication lines in the cost of the oil. The price that we get paid when we sell the oil is impacted by these 40, 50 days of the merge of the shuttle tanker.

In the FDS, we are able to reduce this a lot to almost nothing. Transferring all the stock volume all at once. This alone may mean perhaps a plus of almost US$2 per barrel on the sale of the oil. That's a big difference between the early production system and the full development.

Let's go to slide 7, and I would like to highlight here the project schedule. We are strictly on schedule and on budget, according to the original plan approved. Unchanged since the beginning, since we started the bidding phase acquisition of equipment. We were expecting first oil in mid-2024. We are to this date.

We have gone through several phases. And we are still sticking to the original project. And without any changes, I can even say that we have gone through the critical phases that we are sensitive in other projects. I have been part of several projects, and they all have critical phases, which bring the risks of over cost of delays, project definition of project detailing, but we have already put all of these phases behind us.

So we are now at a much more advanced stage, and we are still on schedule and on budget according to plan with no changes until first oil. This project is a little different than usual because the critical system is not the FPSO. What restricts the start-up of production is those systems that I mentioned. So that we have a more robust development system.

The FPSO is not on the critical path of the project. When we approved the project back in February of last year, we expected to have first oil flu in mid-2024, more precisely by the end of August 2024.

Today, we already have a project in a very advanced stage. I can say that this schedule is very well adjusted, very robust and even with the possibility of heavy first oil a little earlier, but it is

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Conference Call Transcript

1Q23 Results

Enauta (ENAT3 BZ)

May 11, 2023

still too early to anticipate this. We should wait a little bit more. But I can say that the schedule is very much on track, very robust.

Another differential in a transition from an early production system to a full development is that the EPS is discontinued for the FDS to take over. Not in our case, although the EPS will remain. The early production system continues producing, the full development comes online and then the transition happens, without any interruption, which helps our cash flow.

On the slide, we even have a picture of the last subsea Christmas tree that was delivered. Equipment is being delivered, and we will start in August, the anchoring campaign. The whole project is unfolding according to schedule.

In relation to the CAPEX of the full development system, we have invested almost R$470 million year-to-date until March. In the bar chart on the right, you can see that the original contracted project value was around R$500 million, including the purchase of the FPSO. No changes to that so far.

And another important decision, let's remember that an important decision we had in February was to exercise a call option we had to buy the third pump because each pump handles 2 wells, and we had 6 wells. We were going to put those robust pumps 4 wells and the other 2 wells with how these would have these current pumps. So we decided to exercise the call option to have all wells with the same type of pump.

This did not change anything because this was a contract provision of the product, i.e., the possibility of exercising the call option, only the deferred value after first oil changed. But until first oil, the value continued to be EUR 1.1 billion. With this, we are moving towards the full development system with an expected production and pumping system, or at least with a forecast of a much longer interval between maintenance stoppages if compared to the past 10 years. So it gives us much more peace of mind.

Now I give the floor back to Paula, who will present the financial highlights of the quarter. Paula, please.

Paula Costa:

Thank you, Mastrangelo. Let's move on now to slide 8, so we can see the main indicators of the Company this quarter.

In this 1Q, Enauta delivered 1.4 million barrels of oil equivalent. Most of it is related to Atlanta. We can even see an increase in Atlanta's production, a better operating performance in the 1Q23 year-over-year.

The next chart shows our revenue, which eventually becomes a combined effect of production, which increased vis-à-vis the previous quarter and the quotation of the commodity brand.

As you will see on the next slide, in the 4Q of last year, we began to see a drop in the flotation of Brent oil, which ultimately reflects the Company's revenue. Manati reflects the demand for gas, therefore, Manati's production and the contract price, which is adjusted every January. And this sees the annual adjustment was 4%.

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Conference Call Transcript

1Q23 Results

Enauta (ENAT3 BZ)

May 11, 2023

Moving on to slide 9, we can see the evolution of the Company's lifting costs. In this case, we have been considering the full cost, which includes chartering costs. Since the 4Q22, we have been reporting a reduction in such lifting costs, particularly due to a decrease in the chartering of Petrojarl unit, which is the FPSO currently in operation in the Atlanta field. And we can see the same effect in the 1Q23. So when we compare the operating costs in 1Q '23, with the 1Q22, we can see this reduction of US$130,000 per day in catering, that's leading to a lower lifting cost.

Net of chartering costs, our current lifting cost amounts to approximately US$16 per barrel in Atlanta. The next slide shows the evolution of the sales price, which, as I said in the previous slide, does reflect the quotation of brand oil. This explains the drop as of the 4Q22.

Moving on to slide 10. We can see the Company's EBITDAX, which totals R$341 million and an income of R$118 million in the period. Our income in this 1Q compared to the same period of 2022, increased by R$217 million. It's important to bear in mind that the 1Q22 was substantially affected by exchange variance as part of our foreign exchange hedge policy, a significant share of our cash is denominated in USD. In the 1Q22, the Brazilian currency was appreciated, thus negatively affecting our earnings in this period of last year. But looking now at the 1Q23, we can see an income of R$118 million.

Speaking of cash, slide 11 shows the variation of our cash position. At the end of the quarter, the Company's cash totaled R$2 billion, approximately US$400 million, roughly speaking, 80% of the total cash is denominated in USD. In other words, in line with the Company's foreign exchange hedge policy. As for the main variations, it's important to mention the Company's investment, mostly related to Atlanta's project.

Like I said on the first slide, US$107 million were invested this quarter, mainly in the development of the full development system, which is our major project in progress today, and the rest was invested in the drilling of well 5H, which started production by the end of this March. In addition, our cash generation amounted to R$217 million, operating cash generation, a total EBITDAX of R$217 million in the quarter.

Moving on to slide 12, I will briefly comment on the strategic positioning of the Company. And now it is a company that generates operating cash. As we saw before, the Company's goal is to use this cash to invest mainly in our project. Atlanta's full development system, which I believe is the Company's greatest avenue of organic growth. We keep on pursuing possibilities of inorganic growth, though, asset acquisition, M&A in Brazil and abroad, I believe the Company can be well positioned in this sector.

And I also believe that the Company is constantly trying to optimize its capital structure, either by financing a local currency or in foreign currency, the Company is always pursuing to improve and optimize its capital structure.

I will end my presentation here and give the floor to Decio, who will dive deeper into the Company's strategy. And once again, thank you all for joining us today.

Decio Oddone:

Good morning, everyone. Those of you who are following us today Paula and Mastrangelo have already given us a glimpse of our quarter and our earnings and results. This quarter has positive results.

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