Keo Capital AB (publ) (KEOC) Earnings Call Transcript & Summary

I'm Paulo Mendonca, Chairman of Maha Energy. I have here by my side, Kjetil Solbraekke, the CEO of Maha Energy. Today, we are very keen here to have scheduled this call. Thank you very much for participating today. We really wanted here to present the market, our view here in this business combination between 3R and PetroRecôncavo. We do see here this transaction as a very obvious transaction here in the capital markets. We look to both assets, they are basically the same company. But we have prepared here a short presentation, here to the market, in which we will talk to you all. We have here some 5, 6 slides to present to you. And we have a QR code here in the screen. Should you have any questions, please use the QR code and send the questions that we will try to address them after the presentation. Well, maybe following here the exact profile of the letter that we -- very proud here to send to the market. We do believe here that we have seen in the last 12 months a massive movement of multibillion dollars mergers and acquisitions. We saw Petrobras had pioneered. And we do believe this is a trend here for the short term. And we know that oil is a finite commodity and all the players will secure the best asset to produce them at the lowest cost, but at a greater efficiency. So here, it's all about scale with a lot of efficiency. When we look to Brazil, I think these dynamics are even more evident to the market. When we look here to the Brazilian onshore context, we see here that the onshore assets from PetroRecôncavo and 3R, they are neighbor fields. They use the same infrastructure. So they are basically twins here in this asset. And that's maybe the main pieces, which we believe this business combination is very evident and synergistic to the market. We do have a view that the market is not properly appreciating the value of 3R and PetroReconcavo and there are lots of opportunities here to be captured by these companies. The transaction that we're visioning here is really a segregation of the onshore and the offshore in which PetroReconcavo incorporates the onshore assets and PetroReconcavo issued shares to the shareholder of 3R. So on the perspective of the 3R shareholder -- or a shareholder that 3R has -- each share that the shareholder of 3R has, you will have a share of PetroReconcavo and the share of 3R that will have the offshore assets. We see here really PetroReconcavo being a big candidate for this substantial synergies. We do believe here that creating a leader onshore player with almost 80,000 barrels is the path here to create value to shareholders. And regarding the share ratio, we do see here, well, Kjetil likely have spent the last 5 years looking to onshore and offshore assets and in our view here, we do believe here there is a very fair share ratio, 50% PetroReconcavo and 50% 3R onshore. We will go through this in the next slide why we believe that. Well, after this carve-out, 3R listed will hold the offshore assets of Papa Terra and Peroá. Well, looking to these figures, we really see that it's the same asset, right? We go there to Potiguar, the assets are basically twins, they're neighbors, PetroReconcavo needs to use the infrastructure that 3R holds. In Bahia, very similar. Those assets are neighbor and have a very strong synergy between them. The creation of this onshore entity will really be a very large Latin American peer, having almost 600 million barrels of key reserves, combined production for 2024 of 80,000 barrels and EBITDA $1.1 billion with synergies. We do believe that there is the integration of the critical infrastructure including the terminal, the refinery and the gas processing plant. This is evident. So there is no need here for substantial investments. The companies would not have any bottlenecks. This is something that creates lots and lots of value. And of course, the combined operation increase a lot of production, a lot of scale, a lot of costs. I know that lots of the questions here will be related to the synergies. We will explain it in 2 slides below. Another evident synergy is also a better utilization of the rigs. You can create a window of rigs being more efficient, so you can avoid idleness of those rigs. And of course, these companies will show to the market a boosted balance sheet. I think those 2 companies will have not only the scale, not only the size, not only the efficiency, but a much more favorable leverage ratios in terms of net debt EBITDA, in terms of gross debt to NAV. Finally, resulting in better ratings and in better debt costs. So we're strongly convinced that is the natural path to create shareholder value here, the combination of the onshore business. Talking here about the combined portfolio. We are really talking here of a company of almost $2 billion of revenues, an EBITDA of $1.1 billion, 1P reserves of 458 million barrels, 2P reserves of 600. The current production of December around 57,000 barrels, production for '24 above 84,000 barrels; before '25, we really reach this 100,000 barrels. And also moving to this leverage ratio much more favorable to the company. It would create the second largest independent player in Brazil after PetroRio that made a fantastic job in its execution and basically the large independent company in the onshore in Latin America. I think also in evidence, our point here to address is also that the increased liquidity in those 2 companies will have in the market. Those 2 companies will have almost -- if we do here turn over 2.2% of the [Indiscernible] almost $40 million of trading -- daily trading volume. And if we have a step up on that, will increase even further. One of the most important elements here of why -- also why this combination, we do see here attributes that justify that the onshore entity should have a strong premium over its peers by that. First, these companies will have a diversified production from several wells that display some stability. Those assets have -- will have a light and high-quality oil. They will have a full verticalized business model, not depending on third parties to leverage business plan. No bottlenecks, no additional infrastructure investments, massive potential synergies here to reduce the lifting costs. We are here in a very friendly jurisdiction when we talk about royalties. We have here royalties -- the onshore are almost below 10%, which is a very strong and resilient ratio when compared to other countries. We will have together an improvement in oil trading as we recombine the production mainly in Potiguar, larger volumes will lead to better discounts on the price. A very good, experienced team in this industry that both companies have shown to the market an efficiency here in assuming the operations from Petrobras. We also have here our SUDENE benefits that will result in almost 75% in reduction in income tax rate. And of course, as I mentioned in the last slide, is trading liquidity. So when we add up this diversified production, good environment for royalties, low lifting costs, these SUDENE benefits and better oil trading, we believe here that this company will have really the higher free cash flow per barrel that, in our opinion, should justify even at premium to its peers. I think those 2 combined companies do really present the market not only a better operation, a better balance sheet, but also today, I think we are all looking to cash flow generation. So this really creates a company obsessed, let me say it this way, in cash flow stream to the shareholder. Maybe already answer here one of these questions, we really see here today, as we mentioned, the 50:50 onshore at PetroReconcavo to $1.2 billion each, which lead to a combined equity value of $2.4 billion. And we strongly believe here an upside here of almost doubling the company, the market cap on a conservative approach, mainly comprised by 2 elements: the rerating of the shares. If we look here today, those 2 companies combined are trading below $6, $7 per [barrel to feet] and a discount may be almost 50%. If we look to some periods here, this really should have a rerating. And maybe wasting a little bit some times in synergies, we do have a view that the company has basically 4 elements of synergies. The first one is the most evident, when we look to the lifting cost of 3R, we will have a combined lifting cost for the onshore, almost $18. When we look here to PetroReconcavo, we are currently operating at $13 on an average year compared to the last quarter. I think Maha had a very good experience when they sold onshore assets to PetroReconcavo and Maha was operating those assets on a very low cost. If we look to the last balance sheet when Maha still had the production, these assets were being upgraded at sometimes even $4, $5 per barrel. So we do believe that this combined company reaching here the $13 that PetroReconcavo operates is something that is really conservative. We do believe that this $13 per barrel -- I think it's even conservative. The company should be pushing to operate it below $10. This was even what Petrobras operated and operated those assets. So we do believe that moving here from $18 to $13 per barrel is something that makes a lot of sense. I think there is a second element that is also very interesting here is really -- the PetroReconcavo will not need here -- will avoid here a substantial investments in infrastructures, mainly gas processing plants. So this will also raise here also a relevant buffer for the synergies. And the third point, when we look here to the CapEx, I think oil industry here suffered a lot about this price increase on the CapEx and we do believe here that having an efficient CapEx profile or not having rigs idle, this will also create here a very relevant synergies involved. And finally, these 2 companies will have a much better rating, a much better leverage ratios. And this would also take those companies to have a much lower financing costs. So when we hear today some of the peers in the oil industry having mid-single digits, and we look to the current cost of that of high single digits, we do see here also a very relevant, also synergy in terms of financing costs. So when we add up this migration to low lifting costs, reduction in financing costs. We have -- of course, let's remember that effective tax rate is not 34% as we have benefited this effective tax rate, it's much smaller. The avoidance of having new infrastructure on the optimization of CapEx, we did hear -- $1.038 billion which we are very, I think, happy here to see -- to hear the market, but we are really, really confident sharing this -- in this value.

Maybe I could only add. I think in my 30 years as -- being president within Oil and Gas sector, especially in Norway, I have never see more obvious pace for taking out synergies. So I think there will be obvious and low-hanging fruit to take out significant synergies from day one. But I also think that in the long term, this makes so much more sense for the very brilliant management that we'll be able to have in these -- in the combined 2 companies to focus on creating more values. There will be more wells, more tiebacks, more barrels to produce at a much lower cost value than you would have otherwise. And now they can really focus just on that instead of focusing on discussing between themselves. I think it's a tremendous case, and I've never seen anything like it before.

No, I would agree that. Thank you very much. And I think here, everybody would -- when we look here to the fantastic job that PetroRio did, right? They really moved to a lifting cost of high teens to below -- to single digits. So I think here, the case is similar. I heard some of the market saying that PetroRio of the onshore, right? We should also be here looking that this cost per barrel should really go below 10. If we look everywhere in the world. Of course, [indiscernible] is not an example, but they produce a $1, $2 per barrel, but this company should really be having lifting cost below $10. And I think these operations synergies will push to this range. [indiscernible] any comment here? [Indiscernible] talk a little bit about the offshore.

Yes, we can -- I mean we really also always like the offshore part of this business, and I think there are any reason for us in the first place as DBO, we have been into this with 3R offer, was to see that also has a very interesting future. We are super enthusiastic about both the fields that are in the offshore portfolio, Papa Terra and Peroá, and I strongly believe that it needs a separate focus. I think that pursuing like in the onshore business, you are pursuing 20 barrels, 40 barrels, 100 barrels per day and in workovers and continuous efforts to be efficient to -- and the sum of all these wells makes a very interesting business. In Papa Terra and Peroa, it's very different. There, you are really focused on 4 new wells of Papa Terra, new working workovers in Peroa, to think each one of these workovers will significantly increase the production. So with those kind of assets, you spend more time in planning, and I think it is a challenge. And I think they have done well, but I think it is a challenge to plan both for onshore and for offshore at the same time because naturally, you need more time to plan for the offshore assets and to make sure that you don't get [ any cuts ] because you have a drilling rig. If you let the drilling rig wait a week or 2, it cost you $1 million per day. So that you cannot do. And I think in the onshore, you move the rig to another place, and you don't really spend any amount as such. So I'm very comfortable with the opportunities we see in Papa Terra. I think, my experience, I was the head of Equinor when we developed the Peregrino field, very similar reservoir as we have in Papa Terra. I think Papa Terra is slightly better. The oil is slightly lighter. But still now, we only have recuperated about 2.7% of the resources in Papa Terra. And the ambition is kind of with the current plan of 2P reserves is less than 10%. I think Peregrino had the goal of 17%, 18% recovery factor. And I believe that Papa Terra should be able to do even better. So I think there is a lot of potential in Papa Terra. There are several more targets to be produced. And so I look forward to see even more resources and reserves coming out of that, and we need to plan it well as I said, and I'm very confident that we can build an organization for the offshore assets that can deliver very, very good results over time. I also think there is additional potential in Peroa, which we have been working a bit on, and we look forward to continue that work in the new organization.

I think just to add here, one important element of Papa Terra is that we are offshore. We were very impressed with the production increase. We are very confident that this trend keeps on. And this asset is [Indiscernible] infrastructure. So this also allows the company to have much lower lifting costs. And when you compared to the offshore enterprise, they have daily rates so the fact that all the [operating infrastructure] is owned by the company also provides here very good downside protection to oil prices. Maybe moving here to the last slide. Really here see a very agile next steps, really want here to work with the Board. We are here to move forward in this path to really agree still in this first quarter in some share ratios and finalize negotiation of execution by the second quarter. Of course, this also has approval of authorities and creditors. But we do believe that the second quarter should be a very important milestone here for those 2 companies, and we see here a very beautiful story to be built and maybe the largest player in Latin America. But with that said, thank you very much for having your time here. Thank you very much. We will open here to some questions.

Thank you for the presentation. We are seeing a lot of questions here. I'll start with the question that asks how [Indiscernible] PetroReconcavo shareholders to receive the proposal. Have you had a chance to talk with them about this before?

Good question. As we said, we do believe that this proposal is very aligned with what PetroReconcavo philosophically believes. I think Petroreconcavo is a company that was conceived in the onshore business -- within the segregation of the onshore and the offshore, create this pure play of onshore, something that PetroReconcavo was always focused. We are very convinced that, of course, this is a deal where there are lots of moving parts, but we're very convinced that we will have a strong support from both shareholders of -- sorry, all the shareholders of both companies.

Thank you. Next one is how much of 3R debt and cash will be transferred to PetroReconcavo?

Perfect. I think in this transaction, all the upstream assets of the onshore, including the midstream and downstream would be transferred to PetroReconcavo and the gross debt of 3R related to the onshore would also be transferred to Petroreconcavo. This totals amount -- the gross debt that will be moving to PetroReconcavo is $1.4 billion according to the third quarter.

Great. Next one is what is the strategy for offshore? Would you consider an M&A view also?

Excellent. I think we do see and hear the market not receiving the value of the offshore assets of 3R. I think the last year was a very important year in which 3R assumed the operations with the assets really started showing its potential. I think when we talk about the onshore, I think it's really clear here this consolidation of PetroReconcavo and 3R onshore. For the offshore, I'd like to say that this movement is also very evident because we have lots of single companies with single assets on the offshore basins. That could also create here consolidation movement. Remember that the offshore, we also have -- and the market always likes to use example of PetroRio, but PetroRio really made a remarkable transaction when they merged over with the [Indiscernible] assets. So we could see there the magnitude of synergies also in the offer. We're talking about logistics. We're talking about supply vessels. So I think here, there is a movement for consolidation on the offshore. I think the market really wants to see companies with scale. So I think there is also a nice trend here in my opinion, on the offshore. We really see here very good companies with good assets and that could really make part of this second [Indiscernible] here of 3R to deliver the offshore. Kjetil, I don't know...

No. I think -- goes without saying, obviously, there are good candidates for doing consolidation in offshore. But I think if we now get strong support as we hope and expect from the shareholders of both PetroReconcavo and 3R, the focus will be, of course, to make sure that we do first the onshore and PetroReconcavo business combination. And then, of course, as soon as we see that is on a good path, we can start working also on the others. But I think now it's really about getting the support from the 2 companies' shareholders and start executing on what we are today going forward. And then we have plenty of time to look into the others.

Perfect. In the letter, you highlighted the [quality] of the company schemes. Do you consider promoting the swap of some -- or swap some crucial people between both companies after the consolidation?