Brava Energia S.A. (BRAV3) Earnings Call Transcript & Summary

[Interpreted] Good day, everyone. Welcome to the conference call to discuss Brava Energia's Third Quarter 2025 results. The presentation and comments about the results will be made by Brava's CEO, Décio Oddone; and other members of the management. There is simultaneous interpreting on the platform. To access it, you need to click on the interpretation button on the bottom of the screen and choose the language of your preference. This conference call is being recorded and will be available in the company's IR website, ri.bravaenergia.com, where you can also find the presentation that we will show here. [Operator Instructions] Before proceeding, we would like to inform that forward-looking statements are based on beliefs and assumptions of the Brava management and an information currently available to the company. Forward-looking statements may involve risks and uncertainties as they refer to future events and depend on circumstances that may or may not occur. Investors and journalists should take into account that events related to the macroeconomic environment, the segment and other factors may cause results to differ materially from those expressed in such forward-looking statements. We will begin the presentation by giving the floor to Décio Oddone. Mr. Oddone, you may proceed.

Good afternoon, everyone, and thank you for joining us for the release of Brava Third Quarter 2025 results. As always, we'll start with the traditional disclaimers and then move to the highlights of the period. In this first slide, we can see that we continue on the path of increasing production, cash generation and deleveraging. Production reached record levels, both onshore and offshore. Production costs decreased. Phase 1 CapEx for Atlanta is now behind us, and we continue to optimize onshore CapEx. We also executed efficient liability management, replacing more expensive debt and monetizing credits associated with the FPSO Atlanta. As a result, we reduced the company's cost of debt from 8.7% to 8.2%. We integrated Enauta Energy into the holding, which will allow us to capture important synergies. Normally, in the process of merger and management changes we experienced here at Brava, a turnaround process and the creation of a new culture takes some time and go through different stages right at the start as it happened between last August and September. We made the first changes to capture the most evident benefits of the merger between 3R and Enauta. A year after the start of our combined operations already with a better understanding of the organization, processes and people, it was time to make adjustments that would allow us to consolidate the culture and capture the benefits of the integration. That's what we did by carrying out a restructuring that reduced the number of statutory officers from 5 to 4 and simplified the management structure, eliminated one hierarchical level in the company, reducing the number of managers from over 90 to around 50. This has made our decision-making processes more agile and efficient. After this stage, we are now entering a period of cultural consolidation and enhancement. That's what we will be focusing on from now on. In the next slide, we can see the continued growth in production, which reached record levels this quarter, 92,000 barrels per day, 80% of which are oil. I'll now hand it over to Travassos and Boeri to discuss operations in more detail.

Thank you, Décio. Good afternoon to all. I'll talk a bit about the results of our main offshore assets, Atlanta and Papa Terra. At Atlanta, during this third quarter, we saw an increase in production, mainly driven by the start of production of wells numbers 2 and 3 of Atlanta, but also by growth at Manati, as we can see in the chart on the screen. As a reminder, Atlanta is an asset that has not yet completed a year of operation. It is indeed subject to some operating adjustments, both in the FPSO and in the subsea system, but it is an asset that has been performing very well. No major surprises. We expect that by year-end, these adjustments will be completed, and we will begin cruising in Atlanta. Also in Atlanta, we celebrated one year of activity in Brazil without any lost time incidents. It was a moment of celebration for us since we did not separate good operating results from our safety results. This is a fundamental value for us here at Brava. On the next slide, well, I will return to Atlanta and talk a little about a topic that has raised some questions regarding Atlanta's BSW. But before that, I will talk a little about Papa Terra. We have maintained good operating result with record production in July. Actually, we just broke that record in October with average production exceeding 20,000 barrels at Papa Terra. This is a significant milestone as a result of the progress we have been making in our integrity recovery campaign. We have been following inspection recommendations and reinspecting cargo tanks with good results from these inspections. We have recovered some of the platform's original systems. As an example, we have the offloading system. For offloading, until now we used to use an ancillary system. What is this ancillary system? We had a host that floated next to the platform, which required us to maintain a boat, a vessel holding the hose in place. This brought an operational cost and greater security for this operation, greater unpredictability. We recovered the system and today offloading is done from the main system, which has reduced costs and increased the safety and efficiency of this operation. Very well. I'll now move on to the next slide and speak a little about BSW at Atlanta. You can see that we have 2 graphs on the screen. The graph on the left has this line and some blue dots. What is that? This blue line represents our model, our BSW projection in the Atlanta field. And the blue dots, well, they represent what we do, the measurement and analysis we perform at the field. So you can see that the model is very accurate. We can see that practically all the dots are on top of the line. This means that water production at Atlanta is exactly as we predicted it would be. So there's nothing different. I'd like to remind you, although you are experts on this subject, that this treatment requires specific treatment. This information needs statistical treatment to validate any trend assessment. I know that nowadays, you use AI to do this, but it is important to be careful here because the timing of this analysis is very important so that you can then determine a trend. But I really wanted to draw your attention to the graph on the right. I think this one is even more relevant to what I'm presenting here. The information on water produced or BSW reported to the agency, to ANP, which is the source of data that you use that you have available and therefore that you use is based on operational meters. Our memorandum with ANP determines that the information will be passed on from these meters. Operational meters do not have the same calibration requirement as fiscal meters, for example. This introduces uncertainty or inaccuracy in the data that is available there. This graph shows actual data on the difference between the water measured by these operational meters and on the red line, well above the water, the BSW result obtained from our analysis, which are carried out well by well. Well then, so that you can have the correct information in October, we began reporting the BSW data from our analysis to ANP. So this will give you a more accurate picture of the value of water or BSW at Atlanta Field. Okay. Well, these are the updates I have for you from the offshore operations. I am available for questions. And now I will hand over to Jorge Boeri, Onshore Operations Officer. Thank you.

Good afternoon, everyone. Well, in the third quarter, we achieved an average production of 35,000 barrels of oil equivalent daily. This is the highest production achieved in a quarter in our onshore operations, considering the moment we acquired all of our assets, which was in June 2023. This record mark is even more significant when we consider that we have not had any drilling rigs in our onshore operations since May and that we continue to reduce the number of workover rigs. We currently have only 5 workover rigs, 4 are performing abandonment tests and only 1 is performing CapEx. In addition to the 5 workover rigs, we have 2 more pulling rigs that mainly perform OpEx tests. Delving deeper into production. In the Bahia asset, we also achieved our record gas production in September as a result of operating improvements in our compression system and the good production results from wells drilled earlier in the year in the [CX] Field. In the last 3 months in Bahia, we have exceeded 1 million cubic meters per day produced. In Rio Grande do Norte, the positive impact of steam generation, improvements in the performance of secondary recovery at Canto do Amaro and increased gas production in Macau and Alto do Rodrigues were also fundamental to achieving production increases in a low CapEx scenario. We also continued with the implementation of pilot projects of nitrogen foam injection in the Fazenda Belém, Alto do Rodrigues and Estreito fields, which are leading -- which is leading to increased production. Although as they are still in the pilot phase, they have not yet had a significant impact on results. Also, at the end of September, we started a secondary recovery project at Salina do Cristal field, which is part of the Macau concession, where we expect to see an improvement in the field's oil recovery factor. Speaking of steam generation, we continue to make progress on our project. All 9 generators purchased in China and the United States are already in Brazil. 5 are already in operation and another 3 are ready to start operating by year-end, with the remainder scheduled for 2027. It is important to highlight that most of the CapEx has already been completed. Another key point -- fundamental point is that, as I mentioned, we are increasing our gas production, which is an essential input for steam generation. This allows us to have full control over steam generation costs without depending on the market price of gas molecules. In practice, this is a hedge for our main cost in steam generation. We underwent an audit by ANP. The audit covered the operational safety management system at all our fields in Rio Grande do Norte and Ceará. Initially scheduled to last 1 week, the audit was extended by ANP for another week due to the large number of facilities in these fields and ended up being conducted from September 29 to October 10. As a result of this audit, we decided to shut down some of our installations, representing approximately 20% of our production at these fields. Since taking over the operation of the fields, we have worked tirelessly to improve the safety and integrity of our facilities, which due to the divestment process of the former operator did not receive the necessary investment. Obviously, working with so many assets requires prioritization based on risk and production. That is why our most important assets, which account for 80% of production were not shut down because the improvement tasks had already been developed. Since the shutdown of the aforementioned facilities, we have increased the resources to resolve outstanding issues and resume 100% production by the end of the year. The CapEx we are currently executing was originally planned for 2026. So it does not represent an increase in our total CapEx. It is simply a shift forward from 2026 to 2025. In terms of order of magnitude, this CapEx represents about 3% of the onshore CapEx. Now I will not turn the floor to Décio.

Thank you, Travassos and Boeri. So let's take a look at the financial highlights. Revenue remains at a high level, reaching BRL 3 billion or USD 561 million, all of this despite lower Brent and U.S. dollar quotations compared to the beginning of the year and also the fact that we had a quarter in which bunker prices were under pressure, affecting our average selling price. Another highlight is that we entered the fourth quarter of '25 with a high inventory position as we had a partial shutdown of the operations at the Potiguar cluster and we planned maintenance stoppages at Papa Terra and BC-10, which will impact production this quarter. These inventories can partially offset the impact on production for the period. On the EBITDA slide, we see another record of USD 238 million. Margins grew to 42.5%. Even a scenario of lower Brent prices, operating free cash flow improved both onshore and offshore, proves that the company is more efficient in operations and in CapEx allocation. Partially onshore, we changed -- particularly onshore, we changed our investment strategy and gained efficiency, maintaining an attractive price even while reducing CapEx. On the next slide, we see cost evolution. Improvement in production and efficiency is translated into a lower lifting cost, which this quarter reached USD 13.7 per barrel, including chartering costs. The highlight was offshore where costs were competitive and saw a sharp decline driven by Atlanta. In addition to the lifting cost, we also reduced G&A, which was below $3 per barrel. On the CapEx slide, we continue to see a downward trend even with the start of Atlanta Phase 2 which will lead to a significant increase in production starting in 2027. The main highlight here is the discipline in the onshore segment, which posted a 31% reduction. Now the next slide is the most important of this presentation, which shows the strength of our capital structure and the evolution of our leverage. Our cash position remains very strong, thanks to cash generation and higher EBITDA, the company was able to reduce net debt and significantly lower the leverage ratio. This ratio stood at 2.3x, a much more comfortable level than the 3.4x we had early in the year, showing that we are moving in the right direction. Now this slide shows that our cash position provides a good degree of comfort given the extended amortization profile of our debt. As for cash flow, we see a solid operating cash flow. The highlight was Papa Terra, which posted positive cash flow, reflecting the asset's improved operating performance. We also posted lower CapEx and abandonment costs. Considering all other effects, we generated free cash flow that supported both deleveraging and net debt reduction. As for hedging, we have a healthy protection position that should help us navigate the next 12 months with more stability. We currently have about 15 million barrels hedged through NDFs and 0 cost collars following the policy detailed on the slide. And to wrap up the presentation, I would like to say that we will move through the fourth quarter of '25 and into '26 focused on the main point of the slide, which is cash generation and deleveraging. To achieve that, we will continue prioritizing high safety standards and operating efficiency improvement. And to conclude, I would like to thank the entire team. We only came this far, thanks to everyone's hard work. And now we will open the floor for questions.

Thank you. [Operator Instructions] Our first question is from Vicente Falanga with Bradesco you may team.

First of all, I would like to thank the company for giving us a very thorough information on BSW and for sending the correct data to ANP. So for us, this transparency is very important. My 2 questions relate to that topic. Travassos, our understanding is that maybe this cut in water until a certain point should be seen as something positive. Could you talk a little bit about that? What is the water cutting limit that is considered to be healthy? And what can ensure in your reservoir models that BSW will evolve or whether there is any risk that the water will start isolating the oil and getting in the way of permeability. Should we be concerned about that or not? My second question, in some previous conversations, I had the feeling that the choices as pump models had been probably “some peculiar choicesâ€. In addition to all of the explanations you gave me about BSW, maybe not. Maybe the choice of that particular pump has been assertive given the volume of liquids that you have to move. I just want to understand if that is the case and what is the volume of liquids that the pumps are absorbing today and up to what limits that volume could go up if necessary?

Thank you, Vicente, for your question. But before sending that to Travassos, I think we chose a more agile presentation just to be more efficient. I would also like to say that Luiz Carvalho will not be here on the other side because next time, he will be here with us. And -- but for the time being, I'm here to make up for him. And I will just ask you to shorten your presentation or your questions to resume your questions to two. So we give more people the opportunity to ask questions. But the choice of [NPP] was a correct choice. These are very efficient pumps, very robust. They -- they allow us to see that we are working with state-of-the-art pumps and the performance of the pumps have been very, very good. Atlanta’s Phase 2, we did not choose the same pump because the wells are further apart. And since we already have the guarantee of 3 pumps and they are over performance, then we chose a different solution. And now we're seeing the good results coming from our choices. So Travassos will elaborate further.

So thank you for your question, Vicente. In fact, your second question was already answered in terms of the NPPs. But speaking about water and the guarantee that at a certain point, the water will not isolate the oil. This is the advantage of adopting an anticipated production system. For 3.5 years, we worked with that just to be sure that we have an adequate model to distribute the water. So this is a certainty we have giving all the information that we were able to collect from the anticipated water. You talk about emulsion and in fact, this is an important point. At a certain moment, we will break that with the increase in BSW. We break the emulsion, and on the contrary, we hope that there will be an improvement in the operating results since the pumps are free. So we will decrease the intensity of the pumps, and this favors the production given the fact the FPSO is more than prepared to deal with that produced water. And thank you for the comment. We will be adjusting it. I mean data from October are already up to date in terms of the water produced. And you will see that the BSW is much lower than the one that was reported through the meters. So once again, thank you for your question.

Next question from Milene Carvalho with JPMorgan.

Congratulations on solid results in terms of delivering cash generation and consistent production. My first question has to do with Papa Terra. We're advancing with the licensing of wells 52 to 53. And I'd like to understand what is the expectation of contribution until the end of the year? I'd like to understand the contribution and timing of this project. My second question is about Jubarte. We saw Petrobras announcing negotiation. And I would like to understand how the negotiation is advancing on your side?

Let me answer about Jubarte and then Travassos will speak about Papa Terra. The BC-10 operator Shell, and they are the ones conducting negotiations with Petrobras. Conversations are ongoing to define compensation for all reparation for the best production in the unitization agreement. We haven't got any definition of when this will be concluded. And for Travassos, Papa Terra can you comment on that?

Well, to speak about Papa Terra and taking the opportunity to speak about the campaign there, we have planned a drilling campaign that is absolutely in keeping with the plan. We received approval to clean the rig. The rig is scheduled to be mobilized now in the second half of December. So it's aligned with the [indiscernible] is the start of drilling in the first half of February. And as regards to the expected production, well, it should start in the second half of 2026. This is what we're expecting with those 2 wells. I'd like to remind you that with this integrated campaign, we drill and complete the 2 Papa Terra wells, and then we move to Atlanta.

Travassos, I'm sorry, just to understand. What is the expected production from each well by the end of 2026?

Milene, I cannot answer your question on purpose because we want to avoid giving you a guidance. And that's why I didn't say it. What I can say is that all is in line with the expectation, and we should be starting production in the second half of 2026.

Next question from Pas Vascon with UBS.

My first question is about dividends. The current company policy is 25% payout of net income. And based on net income of no adjustments that you presented this year, this would give us something close to BRL 500 million that could be announced. I understand that this can still undergo some adjustment. This amount is not written in stone. But my question is Décio perhaps that the company could think about adjusting this policy so that you could have more flexibility in capital allocation whether you understand that this is the moment to start thinking about some kind of more robust distribution of dividends to shareholders. And the second question Décio, your opinion, your view of the company looking forward after these recent changes in the management reorganization of the positions. Do you expect any adjustment in the strategy or positioning of the company looking forward? These are my 2 questions. Thank you Travassos.

All right, our strategy has not changed. Our focus is to deleverage the company. 2026 is a year where we have committed CapEx with the 4 wells that we will be drilling 2 in Atlanta and 2 in Papa Terra. So there will be a significant reduction in CapEx in 2027. Situation will be a lot more comfortable in terms of cash generation. So as regards to dividends, well, this is a discussion that really depends on the Board of Directors and on the shareholders' meeting. Eventually, this will be debated. The strategy, like I said, has not changed. We are working to generate cash, to deleverage the company. And in 2027, we're going to have a company with a more robust position, a stronger cash generation. And then we will be more prepared to discuss dividend payout, share buyback, capital allocation and all of these themes. Over Q4 and 2026, our focus will be in cash generation, deleveraging the company and a successful execution of the 4 wells at Atlanta and Papa Terra and the operation of our current assets.

Our next question from Gabriel Barra with Citi.

I have 2 questions. I think my first question is I would like to hear from you something related to oil discount this quarter, which I think it was slightly higher than last quarter. I don't know whether this was a one-off situation. So if you can tell me a little bit more about the commercial strategy of the company? And what would we expect in terms of the discount going forward in terms of trading price? And the second question on dividends. And as you just said during your presentation, the company is deleveraging at the moment, which was already expected. Looking at the company's strategy today, I think the trend is to continue on this track. But how fast do you think this avenue will be? And also looking at hedging going forward, what should we expect in terms of deleveraging pace until next year, just so I can fit into this debate about dividends. This will be the first step before we get into the subject of dividends. I think these are my points.

Well, thank you, Gabriel. On the discount note, we have sales agreement, especially with Atlanta. And so they are reference to the bunkering in Singapore. And what we've noticed in recent times, it was a whole set of factors that affected the bunker price in Singapore. And what factors am I referring to? So bombing of Russian refineries that increased the offer of fuel oil, and there was a large refinery in Nigeria that had problems producing diesel and they are producing more fuel oil. And this oil thing or what happened in the sea also contributed to that. So it was a whole set of measures that brought prices down. As we see in previous quarters, that was a set of measures that helped the bunker price. We didn't sell at a premium the same oil. So this is a market condition. And we think that with time, things will get back to normal. In terms of dividends and the speed of leverage -- deleveraging the strategy doesn't change. I already mentioned that. We will continue to focus on deleveraging and efficiency and operating delivery in all of our operations. The level of deleveraging or the speed of this deleveraging will certainly depend on the price of oil throughout the years, but it will not be a major deleveraging due to the CapEx that is scheduled for 2026. 2027 certainly will be very different.

Our next question is from Bruno Amorin with Goldman Sachs.

I know that you will not give any production guidance. But if you could tell me in quantitative terms, the trajectory of our production going forward. Does it make sense to believe that there will be a short-term gain of the wells that are yet to be connected in the short term? So maybe from then until the end of next year, we will see stable production or maybe slightly lower once you start delivering the new drilling campaigns more towards the end of next year. Does it make sense for me to think about the curve going that way?

Well, before I give the floor to Travassos, we hope to see some recovery in our production coming out in the next few weeks until the end of the year. Throughout next year, we don't see any new event regarding increased production. We will work with the current infrastructure. So there might be a decline in production through time. But by the end of next year, we will start operating the Papa Terra and then Atlanta wells, and then we will see an increment in production, but that will be by the end of 2026 and early '27. Now Travassos.