Petroreconcavo S.A. (RECV3) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for waiting. I'm Marilia, the Director of Investor Relations and we are now going to talk about the earnings release for the second quarter of 2025. We are going to have Rafael and -- it's the CEO, they are going to present the meeting today. [Operator Instructions]. This is being broadcast exclusively online and it will soon be available in our company website. I would like to inform that the presentation may contain statements and forward-looking information related to the companies that reflect the current vision and/or expectations of the company and the management regarding new business and forward-looking statements. Future results performance or achievements may contain words that may not be disclosed.

Good morning, good morning. Thank you very much for attending the meeting today. This is our second quarter presentation for 2025. As you could all see, this was a quarter that was very challenging in regard to the macroeconomic scenario with 10% drop in the average numbers before the valuation and the valuation of the currencies evolved. When we compare quarter-over-quarter, the difference is minus 6%, total of BRL 806 million over the period. The lifting cost is remaining stable when compared to the previous quarter. In absolute numbers, the lifting cost had a more reduction of around 2% when compared to the previous quarter with no effect in the dollar due to the currency exchange. For this reason, the EBITDA for the quarter was BRL 374 million with a reduction in 12% when compared to the previous quarter and when compared to the second quarter last year, it was minus 16%. The net income had an increase of 5% when compared to 1Q '25 and a 75% increase when compared year-over-year, totaled BRL 238 million. The net debt depicts debt of BRL 1.3 billion. The 3rd Debentures Issuance is of around BRL 500 million at a very good cost of 5.66% in the year. In regard to the operational aspects of the company, the production was 27.4 barrels per day pretty flat when compared to the previous quarter, but an increase when in comparison to the year -- the same period last year. The acquisition of asset was a 50% stake. And now in June, the company received the approval from CADE for the acquisition and paid additional 25% in the transaction. And of course, we started with the operation, we're gaining efficiency of the gas pipeline in June, generating additional income for the company. And last but not least, it's the fourth report of sustainability that we issued, which reinforces our commitment with the ESG goals. We are going to detail it further in the presentation. The average production for the quarter was stable when compared to the previous scenario, but we had some -- workover comparison totaled more than 16 projects delivered in the last semester. Now in comparison to the perforation and drilling activity, we had a result in the activity. 80% of all of the drilling happened for the first semester with 9 producing wells, 2 injection wells and one is at Sabia and one in Tie, and we've also started with the deep wells testing. The three of them are now under formation testing at the moment. It's important to highlight the first results with these deep wells. Of course, more and more, it is important that for 2025, the strategy is the development of such reserves. The deep wells have very good potentials in the 3P curve in our reservoir wells. These are for the expansion of what we have at PetroReconcavo. These reservoirs have been discovered by Petrobras and abandon due to cost limitations in the three drilled wells in the last months, our part of an appraisal plan that envisions to determine better asset for the company to have that producing in the next years. We were successful with these wells and with the confirmation according to the seismic interpretation that we have. An important part of the equation will be determined in the next month with the formation testing we are carrying out in each of these reservoir areas so that we can have the final answers in regard to the potential production of these wells and then further for us to be able to develop these programs in the next years. In the second semester of 2025, we are going to conclude another well in Tie and we are going to drill 2 horizontal wells, one in Potiguar and one in Bahia. It's important to emphasize that the same way we work with the deep wells, the horizontal wells represent an important technological milestone for the company especially because these metrics will maximize the contact with the company, and this is going to promote for a better draining area, and it's going to be good for the recovery of such reservoirs. The same way we've seen in other sedimentary basin in other parts of the world. In regards to CapEx and drilling for the next semester we can see that the last semesters had 307 million capacity increase when compared to the previous ones that had much less. BRL 509,000 million were destined for the reserves development accumulated over the year. In the first semester, we've invested 204,000 with 20 interventions per year and which we find adequately, we would like to maintain that for the next few months until the end of the year. Focus on immediate incremental activities would be the LTX for the dwelling areas in Forquilha keeping the strategy of expansion and secondary recovery for the company. BRL 204 million in recovery, BRL 84 million in deep wells drilling and BRL 120 million in the most traditional campaigns of drilling in the company. The development focus for this campaign were with Tiê and Sabia areas. The investment totaled BRL 91 million in facilities, which represent investments with asset integration, water injection and operational improvement. It's important to emphasize that BRL 37 million for the CapEx for the semester was regarding to the 50% of Guamare, the acquisition of 50% of the plant mitigation of delivery risks and better monetizing of gas. As far as risk is concerned, we believe it's an important part of the resilient plan especially because it involves air and the processing of everything that we have in the field. We are now going to share the cost of the air management, and this is going to improve the line for the future. The company will be able to monetize the CC5 through better cost contracts. I will now give the floor to Rafael so that he can wrap up the presentation.

Thank you, Firmo and good morning, everyone. The second semester for 2025, we had a net revenue of BRL 806 million, which represents a reduction of 6% versus the previous semester. This drop is due to the macro-economical scenario with a negative impact of 13% with 10% in Brent and 3% with the dollar. Apart from this, we also had an increase of 17% in the discount for the crude oil in our contracts. However, these effects have been partially mitigated and compensated because of 2 factors. First, we've billed 21,800 barrels from accumulated inventory from the first semester due to the stops of delivery from Potiguar and Clara Camarão. It's important to emphasize one important factor. It was a practical test of the evolution and effectiveness of this resilience plans that we have in regard to our storage and delivery. We had 2 idle moments in the refineries, but this did really mean that the production was interrupted. Another important aspect was the best use of the crude oil that was -- and the natural gas with Carnaúba. Another relevant point is that due to an increase of uncertainty in this scenario, we hired new hedge instruments for the crude oil protecting ourselves up until 2026, promoting better predictability and protection for the cash flow in the future. According to the production that we had for the second quarter -- second semester 2025, 20% of this is -- the production is hedged. With natural gas, 88% of the production is fixed or minimum price contracts, functioning with natural hedge and ensuring predictability in view of the variations of the brand. With all of these protections combined, 55% of the company is backed up according to the volatility of the brand. Now with regards to cost, in this quarter, we see stability in our lifting cost per barrel. This is a result of the reduction of the BRL 4 million which is partially offset by the depreciation of the U.S. dollar. As in regards to the royalties, we saw a drop in comparison to the previous quarter due to the dollar variation. The cost of midstream and the purchasing of gas results in a higher gas processing and transportation volumes and also reduced third-party gas purchases, which is a reflection in what -- in regards to the production of our plants in the center of Brazil. In regard to G&A, we had an increase, which is explained especially due to the seasonal effect of the distribution of the long-term incentives in the company. The registered EBITDA was BRL 374 billion, which is a reduction when compared to the previous quarter. Even though the macroeconomic scenario has been a problem, we still have good numbers for the EBITDA. We now analyze the cost per barrel, the netback for the second quarter. The net revenue, $56.52 per equivalent barrel considering our mix of product, 60% crude oil and 40% natural gas. The difference between this net revenue and the prices within Brent reflect the differences in price with the crude oil, the gas and the discount considering the merchandising and selling of these products. They are all calculated according to the whole volume for the quarter. We have gotten to a breakeven cash cost of $27.8 per BOE with a margin of $28.7 per barrel. When compared to the first quarter of 2025, whereas Brent dropped around $8 per barrel in the period, our drop was of around $4 per barrel only. In this quarter, we had a cash generation impact of BRL 66 million, impacted by the result of payment of the interest compensated by the derivative swap -- the swap of derivatives when comparing the semesters and quarters, of course, you're going to see the numbers are going to be jeopardized. But they are concentrated in the second quarter and fourth quarter of each year, and this happens yearly. The total CapEx was BRL 367 million, BRL 37 million refer to the payment of the first installment of the acquisition of the 50% of Brava and Guamaré. And the other BRL 330 million refer to the more traditional investments coming from the company, concentrating mostly on drilling for 2025, as mentioned before by Firmo. Now with this, we register a free cash generation of BRL 100 million negative. We have paid BRL 260 million in interest, representing $0.90 per stock per share. And apart from this, we have added to the repurchasing of the remaining shares. I would like to wrap my part by highlighting two important factors concerning our financial strategy. Our capital structure with low leverage and a lower and lower cost of capital. BRL 1.3 billion on debt with -- debt leverage over EBITDA in the last 12 months, which reinforces how strong we are and gives us a lot of resilience and flexibility so that we can make the most of future possibilities. Result of the debenture issuance has been decreased, especially because of the U.S. dollar denominated top at a cost of 5.66%, 5.66% per year. It's one of the lowest in the sector, and it's only comparable to companies that are much larger than us, which reinforces credibility of our company before the market and also the trust in our ability to generate cash in the future. And as a result, we are going to result the debt, which has been dropping consistently year-over-year, and we have now gotten 6.5% a year, and it's a benchmark for the company with the competition. The duration has been extended to 4 years with first amortization happened in 2028 which is going to allow for more financial flexibility with solid capital structure that is also going to be sustainable. I will now give the floor to Firmo again.

Thank you, Rafael. And just to wrap this up, I would like to highlight some of the most important advancements in our fourth sustainability report that was disclosed in June -- in June, July, which reinforces how much we want to be transparent and in tune with the ESG goals. We are resilient connected to the territories where we have our activities. We generate more than 20,000 direct and indirect job positions with 93% of our employees being located in the Northeastern region. We benefit more than 17,000 people. They are reached through our social programs with several activities in the area which represents a growth when compared to the previous quarter. These milestones. And among them, I can say that we have a project called Educar Pra Valer that happens in Bahia. We are also considered for certification of Great Places to Work. We are listed among the most pleasant companies to work for and we are in the top 10. It just comes to show how strong our companies are generating social economic development and generating job positions. Where? And this is happening in the Northeastern area of Brazil, which represents an important milestone. We are helping an area tackling social impact to be producing excellence and we are now transforming the reality of several people. Thank you. I will now give the floor to Marilia so that we can get to the Q&A portion.

Thank you, Rafael, Firmo. We are now going to start our Q&A session. [Operator Instructions] Considering the questions are very similar I will try my best to gather them. The first one is from [ Ricardo De Leon ]. And I'm going to probably answer more questions. In this semester, we have a more elevated CapEx due to the advancement of drilling of new wells. With this final drilling moment, what can we expect in terms of cash and FX for this year and also including [ Reno's ] question. How much should do you think you're going to spend in investments and total CapEx? Year-to-date, except midstream, how the certification and exploratory terms are going to be there?

Okay. Thank you for the question. I believe that what we wanted to give visibility to in this period would be in regard to the alternatives of cash allocation, capital allocation. We made a decision last year. That was last year, and we've included in this year, which was to invest in a project in which we believe. We believe the project to have a very good value for the company. And it's a project that we've been preparing for years so that we could be ready for it, which is the interims of the company into an area where we could dominate efficiency and factoring with gas here in Bahia with Miranga [ Profondo ]. This is a project in which we are looking for reserves that are out of 2P and some of them in 3P, so that we could enable the company for this future potential because it is going to generate a lot of value for the company. This is -- this was a strategic decision we've made, and this was included in the budget. Of course, we've been talking about this considering the market, and we were able to work with the first 3 wells in the first semester, and this caused a very good impact of around BRL 208 million for this CapEx. And of course, this CapEx is -- of course, I cannot call this one-off, but right now it is. It will really depend on the decisions we are going to make further on in regard to these reserves so that we can outline for the next phase. This is a CapEx that is not going to be part of the second semester. The development of Tie and Sabia happened in the first semester, and we are not going to have further drilling in those areas. We are done with Tie this month. And for the second semester, we are going to have a CapEx that's going to be basically a workover CapEx. We consider this to be an acceptable execution in the level we had envisioned and we are going to keep this for the next semester. And the traditional CapEx concerning integrity facility is what we are going to move forward with. My expectations for the second semester is that when we are done with this, we are going to have a CapEx that is similar to what we had last year. Last year, we spent about around BRL 950 million. And we discounted some millions and we are now going to have an outline that is going to depict the same thing for this year. But we expect to close CapEx in the same level we closed CapEx last year. But answering your questions, this discounts the midstream and the investment in midstream we had. But this is the expectations. We're going to generate cash, and we're going to have a lower level of investment. So this is the structure we are envisioning for the year, and this is what we've designed for our budget this year. And this is exactly what we are going to -- exactly what we are doing. Our intention here is for the second semester to have a much more reduced CapEx, especially because we are now done with several projects.

The production was recovering in December all the way to April and then it plateaued. What is the perspective in regard to the production for the next quarters and for 2026?

Our expectation for production is the following. We had outlined and talked about 10% for the year. Obviously, when we get to July, the average is around 4%, our expectation is lower now. The projects in the equation, see according to what we've been discussing for PetroReconcavo, it's understood and well discussed. First important factor that we consider especially from last year on is to reestablish the execution of the company. We had an execution of our workover in the well service that definitely needed a more -- a bolder system for capital allocation, planning and a system that could bring us to the level that we have finally reached this semester. So to be able to repair everything is what we wanted. The workover with a capacity to evaluate and recover capital was one of the most important achievements we had. This brought us to a level in which production was stabilized and through projects like Tie or other projects, we could have the production growing. Second part of this planning was in regard to the production work time or resilience. We had to ensure that we didn't have a long shutdown in any of the fields of operations. This is one of the most important topics we've been working with, especially last year. I believe that the decision making in regard to the gas streaming and the decisions just like Rafael said, storage, for example, and other investments we had and we had to adapt. We believe we are in a production level that is much better than we had before. However, we still have some difficulties, as you have seen. In regard to, for example, Remanso although we only had a stop over an idle 7 days, A&P replied to it very fast to the limitations that we had. Of course, the idle moment was short, but we had an impact. Then we have other small impacts in production that we need to address. My expectation says that well, we have achieved the level of growth we were looking for. It happened and it happened in a more harmonic way and a more predictable fashion too. This was the maximum we could grow back then, but we grew solid and very balanced. And this is what we envision for the future. Still, of course, we have several projects to be in production, but we would like to keep on working on this in regard to our expectations. Of course, we don't have that 10% expectations anymore, but we do have a maintenance and production for the next semester. And we have expectations of designing this equation for next year and communicating to you when the budget is approved for the year before the Board.

[ Conrado ] from Safra. Could you please talk about what caused the difference in cost and deadline in deep wells? Are these questions okay, to be addressed? What about the learning curve? Should we think of effective cost and deadlines for this type of cost. And another question on the way, what is the budget for the future? And what can you say about the findings?

Good question. I will be very careful to answer this question. I cannot talk about future of this type of development. Although this development is not exploratory, these are reserves that Petrobras had before. These reserves have very -- a much smaller level of knowledge than the ones that we drilled 15 years ago. There is a difference in -- we call this appraisal in the industry when we have a discovery, but we have to understand this better. This is a process we are working on, especially with the deep wells. Of course, these processes demand a learning curve. And the first well is never going to be a reference and this is not going to be any different. As we are drilling and as we find things out, we had a very good performance in the last well, for example. The cost of these wells today has no relation with reality of the cost of these wells in the future. Of course, we have to design the way the industry does. For example Tie, we started drilling Tie in the middle of last year. And this year was the best cost we had when we look today and the past. When you have a drilling campaign, we have the objective of looking for these efficiencies. But with efficiencies in the wells, they are relevant. We can drill these first wells, for example. And it was much easier for us now than it was before in the past. Some of them took months and these ones took us weeks, 6 weeks. So the constant challenge is to determine the design for the future. So you asked for the design for the future, the answer is we do not have the definition not so now. We have relevant work to carry out for the next month. This is for us to understand the potential of these wells. And at the same time, we need to outline a plan for the future. And this plan is going to be designed after the drilling is done. And last year, remember, when we told you, we are going to drill deep wells, and we are going to drill horizontal wells. And this means that the bucket, the dedicated CapEx bucket for the company would have 2 different components when compared to the previous components because they are not conventional wells, you see. This is going to be an equation that is going to, of course, we are going to give transparency on what we do, but we have to keep on balancing investments because they are absolutely necessary for the development of the current reserves and the capacity that we have on the Brazilian onshore, which is unique, developed with years and years of dedication, especially with the verticalization of our services so that we can be able to drill efficiently in comparison to having that done by third parties. So today, our CapEx are like this. For next year, we don't have any CapEx allocated for this, but we need to finish the assessment of these wells. And then we outlined a deep well drilling for the future. We need to work on it before. Of course, this is very relevant for the company for decision-making here with the management and the Board. This was a year in which we had to understand these horizons. Deep wells are done with. We're now going to the second part which is the execution of these horizontal spaces, and they do depend on the productivity and the cost and everything that is involved. Of course, in a simplistic way, we can say that without using new technology and using the technology available in the world, we can completely transform the development of our reserves at PetroReconcavo but mostly this is what we include with cost allocation.

[ Eduardo Moniz ] from Santander. I would like to better understand what challenges for the production increase. So we started operating in the end of July. I'd like to know when it's going to be actually producing. And another question that I have here has been already answered. I would like you to tell me better what track you're talking about.

One of the techniques that we use and dominate, I can say, was the side tracker technique. It's a technique that can be discussed here, but it's the use of ready dwell -- and ready well and we use this well in a different way to improve production and collection. We started with Tie with one well, and it worked really, really well. And then we had working -- we had some work on sidetracks, and they are producing really well. I can say that this is one of the best wells we have in production. If this is the question, we are producing really well. From the production challenges, I tried to bring the components to discussion, but for mature wells, we can say that we can operate reserves. Excellence in operation, excellence in production, that is operating all projects, and we have a pool of very rich projects. And we have to operate this full the best way possible. We need to be compliant with them and apart of this learning as we work with this pool. Production of time being worked in a way so that the reserve knows what has to be done, and we are able to implement recovers and work services and drilling so that the production can be or not and actually not be impacted by external problems and not ending up in any idle situation. We have to tackle situations in which we'd not refrain the production from growing. Last year, we started increasing our production, but we are still far from having it all reserved as far as problems are concerned. We still have some difficulties, as you have seen in what we reported last month. There are several operations in place. One of the most important ones that are now in place are the ones in Tie. So before drilling, we had to implement the injection part in Tie. Would you like to talk about Tie? I think you have more authority to talk about this.

Thank you, Firmo. I will switch to English. The initial drilling results as we have to you and you've seen in the past, has been very, very positive. And as we look through the long-term sustainability of that reservoir we need to migrate rapidly into pressure maintenance and sustainability of that reservoir as well as implementation of secondary recovery methodologies there that will maximize our reserve recovery, ensure long-term production from both of the main reservoirs in that field. This is -- this is a practice and an ability that Petroreconcavo has had during its entire history. And we have done this repeatedly over the last 25 years in multiple reservoirs and in multiple fields where we have initially had strong success in finding pockets of oil and optimizing the existing production and then following up with intensive water injection, repressurization and the ability to maximize the reserve recoveries in these reservoirs. So Tie is in that process, and we have strong convictions that it will work as well as it has in other fields and reservoirs that we have in the area.

Just to add to it Tie in June, we got to the injection level so that we would really deliver everything that was designed for Tie's development according to what we said in the previous last quarter. We see that we are delivering a little by little according to plan so that we can maintain this project sustainable. Our equation is an equation of understanding of each of these reserves, the understanding of the execution of such tasks and our ability. I cannot find a better word than ability to work -- to use with you. We are at a level in which we are able to deliver in a reliable fashion month-over-month. And I think that this is the secret of success. This is what we've been implementing. I've been here for 18 months with the team, and this is what we've been pursuing, and we now see the results. Of course, the expectation is that this is only the beginning of this process. A process of transformation that is going to allow for future growth that is going to come bold for the company.

Next question is from Monique from Itau in regard to workovers. There has been an intensification of workover with a much larger impact programs. In regard to development CapEx, the result -- has it been reflecting in the semester or you're expecting this to be reflecting in the next quarter?