Maha Capital AB (publ) (7M7.F) Q2 FY2025 Earnings Call Transcript & Summary

[Foreign Language] Roberto, nice to see you again. How are things in Sao Paulo?

Nice to see you again, Kaarlo. Things are very good here. Thank you very much.

Excellent. Yet another busy quarter. Please, take it away.

Thank you very much. So I will start here. Welcome, everyone, for our earnings presentation. So we will start here that we say that we are pleased to announce that now we are Maha Capital. This transition to Maha Capital marks a very important step in this new repositioning, evolving and transforming us into an investment platform. So we are very happy with this new chapter. I think we have here several things to talk about it, and I will walk through here during the presentation. So starting here with our main highlights for the Q2 2025, starting with Brava. Brava reached in Q2 around 85,000 barrels, which represents 21% increase if you compare to Q1 2025. And now after plugging 2 additional wells in Atlanta, they reached almost 91,000 barrels in July, which is additional increase of 6% comparing to Q2 average. Talking about Illinois Basin, we have a production of 258 barrels with a low OpEx per barrel of $17 a barrel. And regarding Venezuela, we are working as we speak in the call option extension. So we have more time to see how things will evolve between U.S. and also Venezuela. And as I was mentioning before, we changed our name into Maha Capital. This is a strategic repositioning for us to become an investment platform in the Swedish market. And now we just published a few weeks ago this partnership with Keo World. I'm going to tell and walk through about what is Keo, what we are trying to build with them and also talk about the revolving credit facility that we signed of up to $100 million. And we end up the quarter with a very solid $88 million of cash and liquid investment position. We also raised a subsequent event, a loan agreement of $12.5 million to work through in this Keo transaction as well. So now we are very focused on building this high-performance portfolio and commitment to value creation to our shareholders. Going to Keo update. I think we want to start here with the rationale behind this transaction. So looking into the GTC program, which I'm going to explain a little bit later and about this Keo partnership. In terms of investment thesis, we see a very solid business fundamentals with huge avenues and room for growth potential and also a high return profile of -- regarding this transaction. In terms of capital allocation, Maha still has the solid balance sheet. We are all the time working cash management and efficiency. And we have funding opportunities available such as syndication of this loan agreement, this debt facility that we created with Keo. So this reinforces the value creation opportunity to Maha with this transaction. So this transaction at the end of the day is very aligned with our new strategy direction and also reinforces our commitment to value creation. Talking about what is Keo GTC. GTC is the global trade card program, which is basically a combination of travel and entertainment and also B2B payment solutions into this credit card for corporate clients in U.S. dollars. So our partnership with Keo World is a fintech focused on credit, real-time payments and B2B solutions, which already operates in Mexico under an issuing license granted by American Express. And now together with Maha, we will fund the Keo GTC program, which I just explained. I will give a little bit more details on the specific products of the program. But the idea is to operate into a strategic partnership also with a leading U.S.-based credit card rail provider, offering basically U.S. dollar card solutions for our clients, but -- and starting the program inside Latin America. So just to give an overview about what is T&E solutions and B2B solutions. Basically, for the T&E, travel and entertainment, we have the physical cards where we can sell offer to the clients several types of products. So basically, when you see a management team, CEO, CFOs traveling abroad for corporate business, they have these credit cards where they can use to pay their air tickets, the hotel bills, also dinners, transportation and also have the benefits of using these cards and having benefits such as lounges in the airports. And also in the same T&E solution, we have the central bill accounts, which is basically a centralized credit card, so we can buy all the tickets and purchases inside our company and have better internal controls in terms of all these bills being centralized in just one vehicle, just one person, just one area. And also, we have here the B2B solutions, basically a physical card where the company can make corporate acquisitions with their suppliers and also a virtual platform where we can have a B2B payment ecosystem in order to organize better terms so the client can have almost an off-balance short-term debt product and solution. So I think here it is also important to show a little bit how a credit card work -- a credit card transaction works. so everyone can understand how we create value inside this business of credit card. So basically, we have 5 main stakeholders in each single transaction. We have the credit card holder, of course, which will buy something and pay later in up to 40 days approximately. We have the merchant, which is basically the store or the seller who is selling a product and receiving an instant payment. We have also here the acquirer, which is basically the POS machine, which is sending the payments to the merchant. We have here the card rail provider/network, which is the one that is processing every single transaction and confirming all the credit. And we have here at least the credit issuer, which is basically a fintech or a financial institution that is granting the 30 days, 40 days credit for the clients. So here, Keo is exactly in this structure being acting as the credit issuer. And we have here the composition of the value inside of this chain is based on the MDR, which -- what is the MDR? It's the merchant discount rate. So every single transaction that the merchant accepted, he is accepting also a discount fee on each transaction of an average basis of 3%. So a 3% discount on the merchant is what is going to pay the whole chain of the acquirer, the credit provider and also the credit issuer. So if we imagine, for instance, an amount of a transaction of $100, the credit holder will pay $100, which $97 after discounting 3% of the MDR, will stay with the merchant, $1.35 will stay with the acquirer, $0.15 will stay with the credit rail and the credit issuer stays with $1.5 out of this $100. So that means the credit issuer has an average basis of $1.5 remuneration to grant this credit for 30 to 40 days. And now talking about a simplified operational chart. Basically, what will happen is the following in a time line basis. The client will transact with the merchant and pays in the day that the transaction happens. In the next day, the rail will pay the merchant, remember, the 97% of the transaction. And after 4 days, Keo GTC pays the rail provider, the 98.7%, which is the reduction that we will stay after 4 days when the client pays 100% of the transaction to Keo. So that's the financial cycle. So basically, we are talking about financing our clients in 40 days and retaining this 1.5% of every single transaction. And how Maha intend to fund our loan facility we just released in the last weeks of up to $100 million. Basically, the idea is to leverage the credit facility by bringing senior lenders with lower interest rates, so we can enhance our yield total return out of this leverage structure. Okay. So going to Venezuela. So basically, as we mentioned in the previous quarter, we already concluded our business plan, which we signed during May, 2 years -- 2 months ago. And now we are handling operations with a minimum cost, which is basically just having our small office until we have more clarity on the license, and also to provide us these negotiations with PDVSA. And now we are working in the call option extension beyond November 2025 because we are still waiting, as everyone knows, our OFAC license to be submitted. So considering all these new milestones in Venezuela, Chevron having a second license to operate, we are waiting here to extend our option, so we have more time to have our license from OFAC and then we can start our project in Venezuela. Now talking about Brava. Brava released their Q2 last week. And the main message here is they are now in a lower leverage and higher alignment scenario. So if you see the production profile from the last quarter and also July, we can see here the very consistent increase in operational efficiency going forward. So after this turbulent Q4, we've seen after Atlanta starting to appoint these 2 new wells during April and also additional 2 more wells during July, driving here this huge increase from almost 70,000 barrels to 91,000 barrels. This is a very positive scenario going forward because now the company has already this diversified portfolio between onshore and offshore. And also they already has been working in reducing the execution risk and also transitioning into this new moment to lower and very marginal CapEx with focusing higher return investments and projects going forward. And if you see the financials, they presented the strong financials in Q2. If you see more than $500 million revenue, implying this $235 million EBITDA, which was stronger than was expected by the market and also around $238 million operational cash flow. As I mentioned before, now that they surpassed the most part of their CapEx related to Atlanta and Papa Terra, they will start deleveraging phase now going forward. They have also been working in liability management. So they basically refinanced their Potiguar debt facility, was around $500 million. They lowered their cost of debt from around 11% a year to around 8.7%, which brings a weighted average cost going from 8.7% in Q1 2025 to around 8.2% July going forward. So they are always working in this liability management towards their debt and their capital structure. And now the leverage is on the way. We've seen also in the last couple of weeks, the monetization of Atlanta receivables, which they are bringing now around $260 million positive cash flow inside the company. They, of course, will have some additional value to bring after the next 3 years, which is basically some positive effects in terms of tax structure, they are building this transaction. And by the end of the day, this company, if you analyze the second quarter EBITDA of this year, they will end up the year with around less than 2x net debt-to-EBITDA ratio. So the leverage is on the way. Production is increasing. We have more efficiency. So I think now Brava is turning the page and going to the next chapter here of successful implementation and execution. Going to our Illinois-based asset. Talking about the production, we end up the quarter with around 258 barrels a day. We were mainly impacted during this quarter by a small flood we have during April, which has a temporary shut-in of some wells. And after we make the investment program in 2024, 2025, we're basically now seeing here the natural decline of these wells, which were expected for this type of basin. And we end up with a netback for this quarter of around $700,000, which is almost $30 a barrel netback ratio. And about our strategy on Illinois going forward, we are looking for investments to be made once oil prices rebound because remember, we are targeting projects with IRRs above 20% a year. And due to this low oil price environment, we postponed some of these new drilling programs so we can reassess in the next quarters. And now going to the financial highlights, starting with production revenue. So as I mentioned, revenue has this natural decline expected due to the nature of the unconventional and vertical wells in the Illinois Basin. As the oil price has declined, we have here in the revenue chart, the significant impact from $68.5 to $60.8 decline on the realized oil price, which together with the natural decline has created this around 30% decline in our revenues if you compare it to Q2 2024. Going to the next slide and talking a little bit about OpEx and netback. We have a very stable OpEx. Of course, considering that we are not doing significant investments of new wells and so on, we expect the OpEx to decline. We still remain with this OpEx per barrel in a very low -- around $70 a barrel range and a netback of around $30 a barrel, which has mainly been impacted by the oil price. Going to the next page, we are talking about EBITDA. So we end up the quarter with $1.5 million negative EBITDA and a net result of minus $20.2 million, which were mainly impacted by the unrealized loss of $18 million regarding Brava shares price. And just remembering, this is an unrealized loss, and we will still be exposed to volatility going forward, and this could impact the quarters going forward. Talking about our CapEx and balance sheet, basically, as I explained, considering the low oil price environment, we are postponing the decision on the new wells in our leases. So basically, this is why we have this very small amount in terms of investment in Q2. And together with that, we are also working a lot to reduce our expenses in terms of G&A. So if you can see the chart in the right side of the slide, we can see this trend of reducing G&A going forward. Basically, we have a recurring G&A of around $1 million for the quarter. We have also nonrecurring effects mainly related to the legal fees and things related to consultancy expenses of around $700,000, but we are working this headcount optimization, cost control initiatives and other legal and other expense reductions, so we can keep this trend and keep reducing G&A going forward. And our balance sheet highlights are basically we end up the quarter with total net cash plus liquid investments of $88 million, 0 debt and around $109 million total assets and $108 million in equity. And talking now about our cash flow overview. So we end up Q1 with around $106 million in net cash plus liquid investments, where around $90 million were basically Brava shares and around $15 million in available cash. If you see basically all the main difference here between Q1 and Q2 is this unrealized in Brava shares valuation. You can see we have a small negative operational cash flow, mainly impacted by our negative EBITDA, but we have also a positive income in terms of investment and also financing cash flows mainly related to dividends collected by GTB, our Bolivian Gas Pipeline, debentures with Brava offshore. And then we end up the quarter with around $88 million of net cash and liquid investments, where around $72 million were Brava share price and $16 million of available cash. And just for purpose of comparison, as we speak, now Brava has increased if you compare to end of Q2 and the $72 million is around $80 million as we speak. And now talking about our strategy going forward. So now we are starting to become a diversified investment platform. This transition to Maha Capital marks this important milestone. So we are focusing in this evolution into this investment platform. This transformation is totally aligned and committed with value creation and an ambition now is to pursue and look for high potential opportunities beyond traditional focus of Maha, which were just energy and minerals. Looking forward, we are very excited with Keo. We believe the credit lines are expected to increase and grow in the upcoming weeks with a view toward potential syndication of our loan with other investors. Together with that, we are still awaiting for OFAC license and also progressing in these discussions to extend our call option. Hopefully, I will bring more news on that in the next weeks. And we are still actively pursuing other business to bring to Maha. So with that, I conclude here my presentation, Kaarlo. I think we can open here for the Q&A section. Thank you very much for your time.

Well, thank you, Roberto. And as always, we received a fair amount of questions ahead, and there are coming in questions as we speak. So I thought I will structure this like general questions, and then we can touch upon Brava, Venezuela and then we can end on with Keo. So basically, you changed the name and I quote as a pivotal step in strategy repositioning. So how will that affect your acquisition -- strategy, sorry, focus on shareholder value and the dividend policy? I know there's 3 questions in one. But just touch upon those.

Perfect. Well, so the rationale behind this transition. So Maha can be an investment platform, and that means we can look for several accretive and interesting opportunities, not only focused on oil and gas and minerals such as Keo. So when you look for this type of opportunities, we are seeing here also opportunities to bring cash flow operational assets that instead of deploying a huge amount of CapEx, we can already bring a new project, a new company, a new asset, which is already performing and being a cash flow generator since day 1. So that's the type of profile and the opportunities that we want to bring for Maha structure.

And any comments on future dividend policy?

I think we will probably need to reassess this dividend policy. Of course, our Board is totally aligned on generating value and pursuing the opportunities to bring dividends in the short term as well. And of course, this is our intention going forward.

And when it comes to, well, let's say, increasing the portfolio here, would we expect more acquisitions in Q3, Q4? Or is it steady as you go?

I think now we are focused on Keo. I think we'll have to work on execution. But of course, we will be alert in other opportunities. So we don't want to give here any expectations. We will be totally alert if there is any opportunity across ourselves in this next quarter or so, we'll be totally here prepared to analyze and see if it is such a good opportunity or not and in parallel, executing here Keo transaction.

Okay. So I'll jump into Brava here. Will Brava retain its onshore operations? Or will there be a divestment there?

No, I think that's a question up to Brava, right? But we've seen here some news in the papers. But I think now thinking deleveraging, thinking in this mixed portfolio between onshore and offshore, in my opinion, makes sense to keep the assets. But of course, this is a company's decision, it's up to them to decide on it.

And here is more a statement rather than a question, but I think it's worthwhile highlighting because Brava substantially increased its production and now very close to the 100,000 barrels that -- barrels of oil equivalent, I should say, that you have been talking about. But we haven't really seen anything in the share price. Any comments around that?

Yes. I think in terms of execution, they are performing 2 quarters very well, right? I think we just saw that in the chart showing the production, not only of Q2, but also July after adding up these 2 new wells in Atlanta. But I think there are 2 things here basically that is not supporting the share price increase. The first one, I believe, is the oil price, which has declined from around $75 to almost $65 now, right? And this -- if you compare to the other peers in Brazil, they also suffer in the same period as Brava. And also, if you look for the debt market in Brazil, the interest rates are here 15%. So part of these investors in Brazil are now shifting their capital in the fixed income and so they can have this 15% with 0 risk, if we can say that. And then waiting for this improvements and also this deleverage going so they can move back to equity markets. And this is not only for oil and gas, I believe, but also for the whole capital market as a whole.

Thank you for that. And then let's jump into Venezuela here. There is a lot of comparisons with Chevron and Venezuela. And you have stated that you target an agreement like the Chevron ones. And I'll just read one question here. Do you have a similar setup as Chevron in Venezuela where you can claim oil for debt?

Yes. That's the idea. We are pursuing the same model where we can act even though being a minority shareholder in the JV, we act as the operator. That's the most important thing to do because we can have the controls in terms of business plan and also financing and also the cash flows. This is what we are pursuing. Of course, these negotiations is not in the same path and time that we want to do, but we are also still waiting for OFAC license. And OFAC license is something that is not in our control, right? We are still waiting this policy between U.S. and Venezuela takes some conclusion and takes some place. And so considering this not clarity on timing, we are negotiating with Novo Nordisk extension, so we can have more time to exercise a call option and have more time to wait for OFAC license.

So we have a couple of questions regarding the time line here. But basically, it's just wait and see. Is that the right way to interpret this?

Exactly. We are going to wait this development between U.S. and Venezuela and how U.S. will grant the licenses to non-U.S. company and to U.S. companies like Chevron. In the meanwhile, we will have almost 0 cost in the structure because we are basically negotiating the same type of contracts like Chevron has with PDVSA and we will be awaiting OFAC license. That's a major key milestone here for us to exercise the call option.

And the last question on Venezuela will be your call option expires in November. And do you think you will have everything in place until then?

For sure, we are pretty advanced. I think we will probably have more updates to our investors in the next couple of weeks.

So let's jump into Keo and wrap this up here. Keo credit facilities, as I understand it, is estimated to USD 100 million. Would you have any expectations regarding, let's say, commitment year-over-year for next year and the coming year? Should we divide that into, let's say, $100 million by 4 for 4 years? Or how should we look upon that?

Yes. We will talk about what will be the business plan or the expectations. I think in terms of the business plan, the company, the program expect to increase pretty fast. We are seeing here a potential use of this full amount of the facility in the next 12 months or even less. And the idea -- and maybe anticipating here some of the questions, and the idea, even though Maha's commitment is up to $100 million, we are working here hard to find other investors to syndicate a huge portion of this facility. So basically, I cannot give here an idea of how much we are going to syndicate. I can say it will be a significant amount. So in a way, we can use our balance sheet in a very intelligent way to better allocate our resources in this structure.

So if I continue with that question because we have a couple of questions regarding the dedication here. But basically, if you get a third party involved here, would you increase the credit facility? Or would you decrease your exposure to Keo?

No, that's a good question. We can do both. But the idea is to reduce our exposure. So basically, the idea here is on top of the $100 million, we find investors to reach this $100 million together. And the idea is to bring also senior lenders, which will have priority in terms of collateral, but they also will have lower cost of debt, so we can benefit from this positive spread between the 12% interest rate for the loan agreement with these other senior investors. So then we can increase our returns on that. But if this product increases more than or needs more than $100 million, I believe we'll be in this moment where we can find other senior lenders and cheapest debt structures to leverage even more this Keo GTC structure.

And I have to expose my ignorance here. Have you published any expected return on investments in Keo? And also, have you discussed officially any expected credit losses as an average?

Yes. So taking consideration the low agreement, the expected interest rate is 12%. This is what we have considering the $100 million facility. But of course, if you bring a substantial amount of a senior lender with low interest rate, lower than the 12%, all this positive spread goes into the subordinated quotas. So that's the idea. We can't have here -- we cannot bring right now these percentages and these expected returns, but the idea is to enhance our own yield in this transaction. That means higher than 12% a year. And sorry, what was the second question, Kaarlo?

Basically, when it comes to credit losses, would there be any, let's say, expected average going forward?

No, perfect. So this portfolio presents a historical very low default ratio. If you see numbers in the sector, in the whole broad sector is below 0.5% in a transaction percentage. And we expect to work to be even less because we are talking here about very high credit profile companies with major or parent companies in the U.S. with branches spread Latin America. So in terms of quality, our very high-quality clients, we are having here conservative credit limits and risk concentration. And also, we have here sometimes the enforcement of these potential agreements in the U.S. So it's a robust and very defensive type of structure where we think we can have very low default ratios going forward.

So you're pretty comfortable with the expected credit losses there. And just a final question here. When it comes to the syndication of the loan and you referred to senior lenders, would we have any time line? Could we expect that in Q3 or tomorrow or before the end of the year?

No. Hopefully -- I hope to bring more news in the next couple of months.

So what you want us to -- well, what you expect or want us to look for is perhaps a syndication of the loan and maybe if the opportunity is there, more deals.

Exactly. I think we will have some further news in the next couple of weeks. Of course, we will work also in working here in a new communication with the market only about Keo transaction. So in the next couple of weeks, probably we'll have more news also regarding the extension of call option in Venezuela.

Okay. Right, Roberto. Thank you for that. Very interesting. It will be fascinating to follow NewCo as it were and speak to you later. And a special thanks to everyone who's put forward questions and questions during the broadcast. Thanks, and see you later. Bye.

Thank you, Kaarlo. Thank you, everyone. Have a nice day.