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

[Interpreted] Good morning, everyone. We're just waiting for everybody to join us in the room. So once again, good morning, everyone. Thank you for waiting. I am Marilia, the Director of PetroReconcavo. We're going to start our third quarter seminar 2025. Dr. Jose de Mello Firmo is going to make the presentation. And then we're going to have a Q&A session with all of the Executive Board. So I'm going to ask you to send the questions together with your name and where you work so that I can ask the questions. This is being streamed through the Internet and then through the company's site. So I would like to say that all the declarations done during this video conference in terms of the business perspectives, projections and targets of the company. This is from PetroReconcavo as well as the information that the company has. And there are risks involved in future activities. So I'm going to give the floor now.

Good morning, everyone, and thank you for coming to the presentation of the results of the third quarter of 2025 of PetroReconcavo. This quarter was marked by a reduction in average production, devaluation of the dollar compared to the real, 4% and according to the average price of Brent. Although it increased a little during the quarter, it remained below $70 per barrel. These are the main impacts of these factors and the indicators of the period and the net revenue was BRL 786 million in the third quarter of '25, reduction of 2% in the quarter-on-quarter comparison. And in the accumulated amount 9 months, we achieved BRL 2.5 billion, a growth of 1% over the same period in 2024. EBITDA was BRL 350 million, a reduction of 6% with regard to the previous quarter. And in the accumulated amount of the year, BRL 1.1 billion, 7% less versus the same period in '24. Our net profit was BRL 122 million in the quarter, 49% versus the second quarter. And in the accumulated amount, the profit was BRL 588 billion, 45% over the same period of the last year. We have finished the period with a debt of BRL 1.5 billion, and that is equivalent to liquid debt over EBITDA, and Rafael is going to tell us about the financial performance during the period. The operational indicators of the company, the average production of the company in the third quarter was 26,400 barrels per day, 3% less than the second quarter of '25. The accumulated amount of the year is 27,000 barrels a day, which means a growth of 2% versus the same period of last year. We concluded the acquisition of 50% of the shares of midstream of Rio Grande do Norte and in October, we started to process the gas and sharing costs. This is going to bring great efficiency gains and monetization of the gas produced in the Potiguar asset. And finally, we celebrated a contract for the movement of a new terminal to be built and operated by Dislub in the Pecém port, establishing a structure dedicated to the production of the company that will allow the new commercial routes to be opened. And also there's a potential to reduce the discounts practiced in the sales operations in our oil. Operationally speaking, in the quarter, we had important technical advances in spite of the production challenges. As I said, the production presented a lowering of 3% compared to the quarter-on-quarter, especially because of the accentuated fall in the Tiê production. We mitigated this effect, and we finished the injection of water in the Tiê field, and the details will be on the next slide. In the Potiguar, the reduction was 6%, which partially reflects the end of the new completion of the perforated wells in the first quarter, and this initial completion was responsible for the incremental production captured in the previous quarter. And besides that, in spite of the stable interventions and workovers, the performance was lower than the previous campaigns, generating less incremental production and combating the natural decline of the assets. The workover campaign was reviewed and there's good expectations for the production of the last quarter. And finally, we concluded the first campaign, the evaluation of wells in the history of the company, confirming and validating the geological data and geophysical data previously identified and characterized in the producing zones, and this will be explored later on. In this slide, we bring a historical panorama of the development of the field of Tiê to better understand the current development plan. Before the perforation program the company has, the field produced about 2,000 to 2,500 barrels with 12 producing wells and 3 injectors. And in the second quarter of -- the second semester of last year, there was a new plan developed in Tiê. There were 5 new wells, doubling the production of the field in the first quarter of '25, as you can see in the graph. It is important to mention that the TIE-009 well was originally projected as an injector because of the identification of oil water contact below and what was modeled, and it was possible to anticipate the production of this oil for this reason. And with the increased production, we observed an acceleration in the depressurization process, and there was an impact in its production over the last few months. To mitigate these effects, they were already building and implementing the water injection project reservoir, and we completed 2 new wells and TIE-009 was converted back to an injection well. And in this way, in September, for the first time, the volume of injected water was above the volume of fluid produced, initiating the repressurization process of the reservoir. This process will reverse the tendency for decline, will increase the recovery factor of oil and gas and prolong the useful life of the field. And this effect should be captured over the next few months continuously in the next years of production in this field. We have concluded our first preparation and appraisal program of the deep wells of the company, and this is supposed to find the most efficient and -- most efficient way and that will bring the best value to develop our reservoirs over the next few years. We were successful in the perforation as well as the confirmation of the zones with a good hydrocarbonate saturation in the reservoirs. And these are significant resources that bring the opportunity of unlocking new relevant reserves with potential for increment in the production curve of the future of the company. In this quarter, we have already produced in Jacuípe 44 and Biriba 19. And in Biriba 20, after the evaluation of the deeper horizon, which is the Sergi reservoir. We in October in Água Grande -- in the Água Grande area, which is more superficial, we have started the evaluation of the area. These wells represent a great operational advance for the company, and there was a total CapEx of BRL 148 million, a great gain in efficiency observed to the first well in the perforation and completion phases. The initial production of the wells is still well below the potential of these reservoirs, and this is a cost and technology challenge for us that we are dealing with, and we are committed to developing the plan of being the pioneers in Brazilian onshore and conquering these new frontiers. The data obtained in this project is fundamental for the development of this plan that will enhance the economic capacity of these wells. There will be the adoption of new technologies that will reduce the perforation costs and revolutionize the designs of these completions. With only the 3 wells built, there's already a reduction in the cost of preparation, development, and completion of the wells. And we will keep this commitment for continuous search to get best economic efficiency in the development of these reserves. Besides that, in the month of October, we have our first horizontal well in the history of the company. This technical conquest has value not only because it is unheard of, and because there is a development of an internal capacity for design and implementation of a new frontier of technology in the construction of wells at PetroReconcavo. Today, we can say that we have the capacity to navigate horizontally in the reservoirs using our fleet of perforation probes, our directional perforation system, the LWD, log while drilling, our cementation, and simulation of the wells. And with the internalization of our RSO team, rig and services organization, the inaccessible costs of the oil operators in Brazil. It's a fact that production is not here yet, but these are important conquests that motivate us very much and make us determined to follow trying to grow production and reduce the cost of development of our reserves. And now I would like to give the word to Rafael to continue the presentation, and I'll come back at the end.

Thank you, Firmo. Good morning, everyone. The total CapEx of the quarter was BRL 569 million, out of which BRL 260 million are regarding the acquisition of midstream assets in Rio Grande do Norte. But I will, in a simple manner, for now on call UPGN Guamaré. And it is important to say that at the end of October, we have the payment of about BRL 36 million that have to do with the remaining installment of acquisition. So, there's only the payment of the final 5%, and then we're going to have the real estate transfer over the next few months. With regard to the reserve development CapEx, we have finished the quarter with an investment of BRL 287 million, an amount similar to the second quarter of '25, however, with greater execution of workover projects and facilities, and a reduction in perforation. Accelerating the rhythm of execution of the workovers in the quarter, this resulted in an increase of 20% in this line of comparison per quarter. We have significantly reduced perforation as anticipated, and then the period of projects and the finalization of the injector well TIE-051, and the preparation of the first horizontal well in Sabiá, and the conclusion of the tests and completion of the 3 deep wells. Considering the recent worsening in the scenario of the oil price curves, the company has started a movement to readequate the execution of the rhythm of the investments. And we already have some measures in this direction, and we have 3 probes that -- workover probes from -- that we are giving back to third parties, and reduce the number of probes in the operation of 17 at the end of September to 14 at the end of October. So we estimate a reduced -- approximate reduction of 15% in the CapEx for reserve development for the last quarter compared to the two previous ones. In the third quarter of 2025, we have registered net revenues of BRL 786 million, a reduction of 2% versus the previous quarter. And this is mainly because of the macroeconomic scenario of devaluation of the dollar compared to the real and a 4% increase in the average discount of oil, reflecting the contract renovation effects of Remanso that started in September. These effect were mitigated with a 2% increase in the average price of Brent in the quarter and the revenues with the external services perforation for third parties and the selling of approximately 35,000 barrels of oil from the accumulated amount and -- together with Brava, as communicated before. With the objective of mitigating the risk of variations in the price of commodities, the company maintained part of its production protected through hedge operations associated to the Brent price. And according to the uncertainties and the worsening of the future -- price curve of oil, in October, we took the opportunity to hire new oil hedge instruments in the format of non-deliverable forward until the end of 2026. And summing up the hedge contracts of zero cost collar that already exists and looking at 2026, we have approximately 35% of the oil production protected by hedge instruments. In natural gas, 89% of the production has been hired with fixed price or minimum price clauses, working as a natural hedge and guaranteeing predictability of the revenues of gas compared to the variations of Brent. And combining these protections, about 57% of the total production of the company has been protected against volatility in the future Brent prices. This quarter, the cost -- total costs and expenses of the companies had increased 1% compared to the previous quarter. With regard to the lifting cost or the extraction cost, we had a 5% increase in the comparison between quarters, reflecting greater expenses with the integral assets and repairing of the wells. In the cost per barrel, there was a 12% increase due to variation of the exchange rate and the reduction in the production of the comparison versus the second quarter '25. In the royalties, we observed lowering of 12% compared to the previous quarter, reflecting the smaller average prices referring to gas, the exchange rate variation and the reduction in the production of Tiê and because there are different aliquots for each field. The midstream costs and the buying of gas have registered a reduction of 6% total, resulting in the reduction of the prices for the buying of gas from third parties as well as the costs in the processing, the flowing and transport because of smaller process volumes. I'd like to highlight here that since October, the costs related to UPGN Guamaré have presented a great reduction with a change in the modality of the services provided up to now. And there is a modality of sharing of costs from now on after the closing of the acquisition. And finally, the general and administrative expenses had a reduction of 14% compared to the previous quarter, reflecting less expenses with consulting companies and labor. The EBITDA registered was BRL 350 million, a reduction of 6% with regard to the previous quarter with the result of the effects already mentioned before. And this also impacted the EBITDA margin that was 44.5%. On the right, we have updated the analysis of cost and margin of the company per barrel based on the results from the third quarter of '25. The average revenue per barrel was USD 58.38, considering our mix of product, which is approximately 60% of oil and 40% of natural gas. The difference between the average revenues per barrel and the average price of Brent during the period reflects the differences in value between oil and gas as well as the discounts in the selling of oil. In terms of costs calculated based on the total volume produced in the quarter, we have come to a breakeven cash cost of approximately 29.1 barrels with the expectations of improving the reduction of costs in Guamaré. The margin per barrel was $29.3 per barrel of oil equivalent. And in this quarter, we had an operational cash flow of BRL 346 million with a positive impact because of the absence of payment of interest in the debentures during the period. The total CapEx was BRL 569 million, where BRL 260 million referred to the acquisition of UPGN Guamaré and BRL 309 million referred to the more traditional investments of the company that had a higher concentration with regard -- in the workovers over the quarter, as previously mentioned. Therefore, the generation of free cash of the third quarter, excluding the effects of acquisition of UPGN Guamaré was approximately BRL 38 million. In the financial aspect, the highlight is with the third emission of debentures that I will talk about now in the next slide. To conclude my presentation, I'd like to highlight the two essential pillars of our financial strategy, the maintenance of capital structure with low leverage and the continuous search for the reduction of our capital cost. Currently, our net debt is BRL 1.5 billion, representing leverage of only once with regard to the EBITDA of the last 12 months. This result shows the robustness of our balance, providing resilience and flexibility to take advantage of future opportunities. In the month of July, we concluded the third enrichment debentures in the amount of BRL 500 million, mainly directed to the reinforcement of cash for investment and the acquisition of new assets, especially 50% from UPGN Guamaré. This last amount presented a dollarized cost via swap of only 5.66% a year, positioning itself amongst the lowest in the sector and comparable to the companies with a significantly bigger size compared to ours. And this fact reinforces the differentiated credibility of the company in the market as well as the trust that our capacity for generation of future cash. As a consequence, we have been able to reduce the debt -- average debt cost that has remained consistent over the years. And with this new emission, it has -- this new issuing, we have reached the same 6.5% a year level, a reference in the peers of the sector. Besides the average deadline of the debt was moved about 4 years and the first amortization, it will only be in 2028, which strengthens our financial flexibility and guarantees a solid, sound, efficient and sustainable capital. Back to Firmo now.

Thank you, Rafael. So this was also an important period with advances in governance and the initiatives regarding sustainability for the company. In partnership with CNI, a program that I was able to participate in the launch, it's called Women in Oil and Gas, talking about technical training of women to act in the energy sector, the objective of stimulating productive inclusion and to also have a greater female representativeness in the technical areas. The first group has 30 participants have already started their activities and this will be concluded in 2026. We also have the  Viva Sabiá project in two new communities with installation of 45 new Bioágua or Aqualuz systems, benefiting over 500 people directly and 2,900 in education and agroecological assistance actions. In the pillar of governance, we have our ethical and conduct code, restating our commitment with the evolution -- continuous evolution of the best practices and the ecosystem of integrity of PetroReconcavo. Thank you very much. I'm going to now ask Marilia to coordinate our Q&A session.

Thank you, Firmo. Thank you, Rafael. And I'd like to say that the questions can be sent through the [icon PNR] and I'm going to select the questions so that we can start. So the first question is from Monique from Itau. So about the recent learning that you had with the perforation of deep wells, what paths do you think are possible to improve the economic accumulation in these activities? Is there a solution with a lower CapEx? And what are the possibilities in this opportunity?

So over here, maybe I have the opportunity of bringing the perspective with a little more detail talking about the project that we have this year. So this year was a year of planting the seed, and it's also a year of very strong investment by the company in a project that is supposed to enable for the company reserves, known reserves that were developed and they were bought and we have a potential. There is a horizon. And today, in Brazil, in the condition of supply chain in Brazil, there is no capacity for it to be economically developed. And in terms of PetroReconcavo over several years, over the last five years, there's verticalization and integralization of technologies in the company. And this is possible to be done in Brazil at very similar costs and especially in Canada and the U.S. So this is our objective. And this is a year to test the first steps of this objective. And once you acquire this preparation capacity in the work that is highly specialized, and the costs that are not possible to be developed here in Brazil, and then we did the first step in the search. And the first outcomes, they show that we are already at a level which is completely different from what Petrobras has faced 10, 20 years ago, as I said before. So wells that were perforated months before and over here, they were perforated in 5 weeks, 5.5 weeks. And that's already a great advance. And it's not enough yet for us to be able to have a robust development investment plan and with a very short term over the next few months with these. What we did this year, what we did in terms of the subsurface and the quality of the hydrocarbonates, the composition of the hydrocarbonates, the pressure of the reservoirs, which is what we have from Petrobras and also validating that we have a way to be able to find efficiency. The cost that is necessary to perforate and develop these fields in large scale this is still not available, and it's going to be developed from now on. So this project is extremely important. It was one that we were aligned this year, and this is according to the long-term development process. So I'd say that over the next few years, I have seen that the drilling of the company, the drilling of the campaign the company has will be adjusted to be able to adapt to this new reality so that we can use this in the deeper wells and also in the conventional reservoirs that we have. So the horizontal drilling that we started in October and the deep wells, there is the function of enhancing what you're asking for. So there is a new investment level for us to be able to produce oil and gas at a much lower cost. And it's not only the cost we're talking about, there's also the fact that these reservoirs are reservoirs whose permeability and porosity are challenging. So there's technology and -- that has to be developed and tested, but we're bringing this to Brazil. We're bringing the state-of-the-art in terms of technology for this to be used. And this is also developed and implemented. It will be developed over the next few years. So definitely, our campaign, they have invested a lot, and this was absolutely important for the campaign over the next few months. So you asked me about the breakeven. I think it's still too early to estimate costs. And what we have to find is maximization in productivity of each well. And at the same time, we mitigate and minimize the cost of production, not only production, but also perforation and completion of these wells. So it's an equation that is still being developed. And just like we are not going to continue this investment immediately, it needs to be developed and the business case, let's say, will be developed over the next few months in the company.

Okay. The next question is from Regis from XP. The drilling campaign with good saturation of hydrocarbonates, just like you mentioned, we -- these new zones should not contribute in the short term in terms of production. Is there a sufficient pipeline to reverse the decline in production in these new zone -- without these new zones?

That's a great question. Thank you. Definitely, the proof of this is that we have maintained a stable production year-on-year. If you look at our production this year, it is slightly higher than the average production last year. It's 2% above. But in the market, we had a better production. And this shows that what we're doing is a balance between investing in what's conventional and investing in what we're calling the future in a way that is financially possible, that is financially correct for the company, obviously, but maintaining the balance of not investing and only placing the production of these new horizons as a solution for the company. So, the equation of generation of the value of the company is made up of two things, and we were successful this year. We were able to have -- we were very daring in the investment of this horizon in the future, but maintaining perforation and maintaining the drilling, sorry, and we were able to maintain a stable production and even with growth potential. The wells that were perforated, there are two that we have production for. And of course, it's below the reservoirs and what they are able to produce, but they are in production, and this is what PetroReconcavo was definitely feeding and this is what is being used. But the horizon is much bigger considered to what we were able to do with these drills this year -- with this drilling this year with these wells. And our work, the work of the whole team over here is to exactly balance this equation of not losing the long-term view and not allowing this to be used. They built something that was absolutely unique in Brazil, and it's the capacity of developing these reserves and inaccessible to any other operator here in the Brazilian market.

The next question is from Gustavo from BTG Pactual. Can you give us more details about the drilling of the first horizontal well, if it was in line with the company's expectations, what are the lessons learned? And what can we say for the future?

Well, thank you, Gustavo. It's a little early to talk about this well now. What I can say is that what I defined is that we were able to not only build the geomechanics inside what we developed, we were also able to work on services in the industry. And this was a technology for many years, it was absolutely exclusive, and only the large service companies had it. We were able to internalize it, and we use it in our reservoir. And that is something extraordinary in a company from Brazil, and it's not only a horizontal well, but we also put this well inside the reservoir -- the horizontal reservoir. So that's an extraordinary technique for us, and we also have this built until the end. Now the interesting part is the technology. All of this technology is absolutely proven in the world. And then this was not horizontal. So, just like the horizontal well, it depends a lot on how that reservoir, as we adapt to the technology to that reservoir. And in the short and long term, we can also see how the -- how this horizontal well will be simulated in the best way and how it will be able to produce more. And this is what we're going to see over the next few months. And then in terms of stability -- technological stability, and the use of what we did, and I would say that this is typical successful work. 80% of the time was spent on planning and 20% in the execution. And the execution came out exactly the way we planned it and it was very successful. I don't like to talk about the success of wells until we have months of production and everything, but definitely, success it was built. It was a success in terms of the development of this kind of technology at a lower cost. So this is the equation that has to be validated over the next few months.

Next question is from Milene from JPMorgan. The water injection project, how is that going to affect the fourth quarter production?

So, it is a development, the injection of water. One of the most difficult things for you to foresee in the short term is how this is going to work in each of its wells. So it is absolutely well known, the modeling in the short -- in the medium and long term. But we know about the projection, but we have no doubt that, that injection, that system that was designed, is going to bring value, and we're going to be able to maximize the recovery of this reservoir. However, it is very difficult to talk about how long it takes, what is going to happen, how much depressurization happens, what kind, and if it's going to be harmonious, if it's going to be different according to the reservoir. Our expectations are that, obviously we're going to be able to stabilize the decline of Tiê. And we are not going to observe over the next few months, any kind of negative surprise. This is within our expectations. So there's the expectation that the production will go up again. And I can say if that's going to happen this month. I can't tell you if it's going to be this month or next month. But based on the experience of how this sort of project works with water injection. The expectations are that stability will come back, and there will be positive outcomes in the short term. We don't know. That's not the view of this project. The view is that in 2025, we started a process that did not exist in the field as soon as it began to be produced. So, the last decade in the production of Tiê, we didn't have the sort of production. So we installed it now. And then it's going to be a time of turnaround in the production with water injection. And for the first time in history, we're going to repressurize, and the repressurization will bring a lot of value in the medium and long term. That's the design of Tiê, and these are our expectations for Tiê.

The next question, I'm going to change the topic. We're going to talk about the lifting cost now. So the question is from Tasso. Even though the production, could you give more details about the costs from now on? Inflation of the highest cost could take the lifting cost structurally to amounts that are above the historic amount in a scenario with lower production. I'm going to ask Rafael to answer this just to bring his perspective for you to give more details.