Timeline
The merger between 3R and Enauta marks the largest Brazil-focused corporate merger since 2014, further consolidating the signs of an impending M&A wave in the country. This anticipated wave follows Petrobras' announcement early last year that it was halting divestments, which had been a key growth driver for regional independents.

Maha Energy, a shareholder in 3R, proposed merging 3R with another Brazilian independent company, PetroReconcavo, in January of this year by transferring 3R's onshore assets and around $1.4 billion in debt to the latter. The mooted transaction was, however, put on hold in April when Enauta proposed a business agreement for 3R to acquire Enauta that did not require splitting 3R's business or restructuring its debt. Before this proposal, Enauta had diversified its portfolio with multiple deals since December last year, making it a more attractive acquisition target. Enauta acquired Petrobras' 100% stake in the Urugua and Tambua offshore fields for $35 million (including $25 million in contingent payments) and a 23% stake in Parque das Conchas complex from Qatari state giant QatarEnergy for $150 million in December 2023. These acquisitions increased Enauta's production by over 15,000 barrels of oil equivalent per day (boepd). Enauta also sold a 20% stake in the Atlanta and Oliva offshore fields for $301.7 million to private US-based player Westlawn Group in March this year, strengthening its balance sheet and mitigating risk for a major upcoming project.

Deal terms and metrics
The merger deal between 3R and Enauta, for an enterprise value of around $1.38 billion, includes an equity offering of $1.22 billion, involving the transfer of around 213 million new 3R shares to Enauta and the assumption of $163 million in net debt as of 31 March 2024. The equity offer entails an exchange ratio of 0.809225, meaning each Enauta share will be exchanged for 0.809225 shares of the enlarged 3R Petroleum. Following the completion of the transaction, Enauta's shareholders will own approximately 47% of the combined company, with the remainder held by 3R's shareholders. Additionally, Maha has agreed to roll up its 15% holding in 3R Offshore, an 85% 3R Petroleum-owned subsidiary, in exchange for 2.17% shares in the combined entity.

Enauta's enterprise value implies an unadjusted production metric of $54,000 per flowing barrel of oil equivalent (boe), a reserves metric of $9.7 per boe of proved (1P) reserves, and $7.9 per boe for proved plus probable (2P) reserves.

Rationale behind the deal

1: Scale, growth potential and diverse portfolio
The merger will see the enlarged 3R becoming Brazil's second-largest independent oil producer, just behind PRIO. The transaction will increase 3R's production by 57% to around 70,000 boepd based on first quarter 2024 production, boost 1P reserves by 36% to over 541 million boe, and 2P reserves by 31% to around 734 million boe as of 31 December 2023. The enlarged scale will enable 3R to leverage economies of scale for cost savings.

The combined portfolio is expected to have one of the highest growth trajectories among independents in Brazil, with production reaching over 100,000 boepd in the years to come. If this growth rate materializes, the combined company's production outlook will rival PRIO's.

This growth will be mainly attributed to Enauta's Atlanta project, which is expected to reach plateau production of around 40,000 to 45,000 boepd by late 2025 or early 2026. Enauta is planning for first oil from its new Atlanta floating production, storage and offloading (FPSO) unit by the fourth quarter of this year, marking the entire development system for the Atlanta field. The start-up of the new FPSO will represent a significant step in producing more than a third of Enauta's reserves. The company expects to invest over $300 million in the project his year, which constitutes most of its capital investment guidance. The Oliva development will receive $20 million from this total. A final investment decision for Phase 1 of Oliva is planned for the fourth quarter of this year.

On the other hand, 3R has a more diverse portfolio, with both onshore and offshore fields. It extends from the northeast of Brazil, with the Potiguar and Reconcavo clusters, to the southeast offshore basins of Campos and Espirito Santo. Offshore, 3R operates the Papa Terra and Peroa-Cangoa projects and has the Malombe discovery, a gas field near the Peroa cluster. Onshore, 3R has over 50 field concessions divided into several clusters, with the largest field being Canto do Amaro, a mature field that has been producing since 1986. The company drilled the highest number of wells out of any operator in Brazil last year, totaling 62 new producer wells, and invested $325 million in 2023, with plans to continue this pace of investment to increase production.

Combining Enauta's offshore-dominated and 3R's onshore-heavy portfolios, the resultant company is expected to have a balanced and diversified suite of assets. In the enlarged 3R, onshore assets are expected to account for approximately 47% of production, with the remaining 53% from offshore assets. This is a shift from last year when nearly 70% of production came from onshore assets, making 3R the largest independent onshore producer in Brazil. Similarly, for 2P reserves, onshore assets will make up about 54% of the total of 734 million boe of reserves, with the remainder coming from offshore assets. Regarding the hydrocarbon split, liquid production is expected to constitute around 82% of overall output this year, while gas will account for 18%.

2: Synergies and deleveraging
Enauta expects the merger to result in significant synergies, primarily on the financial and fiscal side and partly on the operations and administration front. According to media reports, the merger could result in total synergies of as high as $1.5 billion. With the enlarged scale, Enauta expects the combined company's credit rating to improve, which would result in lower interest rates while accessing capital, ultimately resulting in cost savings. Additionally, financial efficiency, synergy in oil sales, liquidity gains on the stock exchange and the diversification of the fiscal exposure of the portfolio, considering royalties, special holdings and regional incentives, will also contribute to the overall synergies for the combined company.

Another area of potential synergies between 3R and Enauta is the gas market. The industry in Brazil has undergone significant changes since gas market liberalization in January 2022, with growing interest in providing gas to regional consumers. Both companies may be targeting a strong position in this sector, with Enauta already producing from the Manati, Urugua and Tambau gas fields and 3R producing from the Peroa field and the Malombe discovery. The combined infrastructure also helps the companies to position themselves – 3R has the Clara Camarao refinery, which has a gas processing unit. Included in the Urugua and Tambau deal was a 100-kilometer pipeline connection to the Mexilhao platform, which in turn connects to the Rota 1 pipeline. Urugua and Tambau are 65 kilometers away from the Atlanta and Olivia fields, also owned by Enauta. Gas production represented 16% of 3R's onshore production last year, with the figure for offshore rising to 25%, while gas production comprised 36% of Enauta's production last year.

Impact on Brazil's M&A landscape
The improved balance sheet and key financial metrics, along with growth through mergers and acquisitions, could further catalyze a consolidation wave in Brazil. This wave began as a viable growth option following Petrobras' halt in early 2023 of divestments, which had been a key growth driver of independents in the region. Besides 3R and Enauta, other top independents, including Eneva, PetroReconcavo and Seacrest Petroleo, are rumored to be in potential merger talks. This highlights a potential oncoming M&A wave in Brazil, with more consolidation expected to follow.

When comparing the countries of operation of companies headquartered in South America, it remains clear that there are other countries where the market is much more mature than in Brazil. The share of South American independent companies' production in Argentina and Peru is above 30%, while in Brazil, this figure is 6%. These markets have a more consolidated history of companies exploring oil and gas resources. The merger between 3R and Enauta would place it as the sixth-largest South America-based oil company, with the potential to grow its production beyond the 100,000-boepd mark. This indicates there is room for the Brazilian market to mature, and one way this could transpire is through further M&A activity.

Authors: 

Palash Ravi

Senior Analyst, Upstream Research
palash.ravi@rystadenergy.com

Flavio Menten

Analyst, E&P Research
flavio.menten@rystadenergy.com

Daniel Leppert

Senior Vice President, Research Director for Latin America
daniel.leppert@rystadenergy.com

(The data and/or forecasts in this column are Rystad Energy's, and the opinions are of the authors.)