Petrobras 2Q:20 Earnings Call Transcript

(The Motley Fool, 1.Aug.2020) — Petrobras’s earnings call for the period ending 30 June 2020.

Contents:

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Operator

Good morning ladies and gentlemen. Welcome to Petrobras Webcast with Analysts and Investors about the Second Quarter 2020 Results. We would like to inform you that all participants will follow the transmission by Internet as listeners. After introduction, a Q&A session will begin. You can send us questions by email at petroinvest@petrobras.com.br.

Today we have with us Roberto Castello Branco, Petrobras CEO; Andrea Almeida, Chief Financial and Investor Relations Officer; Anelise Lara, Chief Refining and Natural Gas Officer; Andre Chiarini, Chief Logistics Officer; Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Officer; Marcelo Zenkner, Chief Governance and Compliance Officer; Nicolas Simone, Chief Digital Transformation and Innovation Officer; Roberto Ardenghy, Chief Institutional Relations Officer; and Rudimar Lorenzatto, Chief Production Development Officer.

The presentation will be available on our website and today, we will start by listening to Roberto with the main highlights of our results. Roberto, please go ahead.

Roberto Castello BrancoChief Executive Officer

Thank you, Carla. Good day, everybody. It’s a pleasure to talk to you. Well, the current crisis contains ingredients of important events of the last century, the Spanish Flu in 1918 to 1920 and the Great Depression of 1929 to 1933. Of course, both medical and economic science are much better equipped to deal with this type of event, however, even with that, we had powerful shock, powerful public health and economic shock suffered by the world. With steep recessions typically affect more strongly investments in the manufacturing industry. This time, it’s different. We face a non-traditional recession and it has hit more severely consumption and service. And service includes transportation service, which is the main channel of the shock on the oil industry. Last quarter was on the most challenging, if not the most, for the global economy in the oil industry, particularly April 2020 is a month to be always remember in the history of our industry, given the unprecedented strength of demand contraction, price collapse, and a spike in maritime freight price.

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Cash is all [Indecipherable] but now became God over the last few months. It was God to us. We are very happy to say that there was no cash burn. On the contrary, we managed to reduce net debt, operational cash flow reached $5.5 billion and free cash flow $3.4 billion. Given our liquidity position, we are able to start the prepayment of the revolving credit lines withdrawn in last March. It’s an important move. So it’s the restart of the leveraging process. It’s a movement to cut costs, interest cost to improve risk perception. And by the end of the day, the lines will remain available. So, we have liquidity out at our disposal. As an in a war, the unprecedented scale and speed of the global pandemic compelled us to move swiftly. We are working hard, fast and focused to be a winner. Our goal is to engineer a J shaped recovery. We are asking not only to survive in this short term, but to promote the structural transformation in order to try and generate value over time. The world is moving fast — was moving fast. But now it’s moving even faster is inspiring creativity and innovation in requiring a stronger release.

We see the crisis as an inflection point from which we must accelerate the execution of our strategy to allow Petrobras to turn the page have a long history of value destruction. We had more than 10,000 employees enlisting for the voluntary dismissal program up to 2,900 our regular left the company, 5,000 people will leave the company between August and December this year and the remaining 2,300 will live next year. In addition to that, 25% of the managerial positions were eliminated, who estimate the total savings can reach up to $1 billion per year. The company’s carrying out several other initiatives to diminish costs and to boost efficiency gains, administrative duties, which are now 17, will be reduced to a few the first quarter of next year. There is a sharp reduction in the number of extract rates, working out offs outside Brazil. Several efficiencies were already eliminated in the logistics business. And now, our focus there is on the optimization of inventories and the number of warehouse, a wholly owned subsidiary Petrobras is also embarking in a program to slash costs in efficiencies and to pursue a dramatically increase improvement in self service quality. This conserve nation is key to our future as an agile and efficient company. It’s running at fast pace in several corporate and business areas, projects addressing costs efficiency, greenhouse gas emissions and in operation safety. In order to support artificial intelligence, our high power computing capacity was multiplied by seven times in relation to what we have By the end of 2018. Our main innovation projects dedicated to lower breakeven price in the E&P business are moving ahead. We have several of them. EXP-100, PROD-1000, HISEP, it’s a very important project, PEP-70.

Recently, as we mentioned in our report, we have TOTUS, the True One Trip Ultra Slender technology, proved to be successful, reducing by 50% the cost of drilling and completing a well in the post-salt. We took steps to order three new FPSOs, the first order of Petrobras in eight years. They will operate in the second stage of Buzios. One of them, the Almirante Tamandare will have a capacity to process 225,000 barrels per day, which would be the largest oil platform in the Brazilian seas and one of the largest in the world. Our — the vessel program is well and alive, despite all the difficulties arising from the current global recession. In the year, it regenerated revenues — cash revenues of almost $1 billion. The sale of the Rlam — the Bahia refinery, is moving — is on track. And we expect to reach a final deal to sign a sales and purchase agreement in the near future, perhaps even during this quarter. We still face tremendous challenges in our journey to sustainable value creation. There was some improvement in the macro scenario. The old economy seems to be reacting to the massive injection of cash by monetary and fiscal thoughts about US$15 trillion. Demand for fuels improvement. It allowed us to optimize the operation of the refineries. But we have to be very cautious, because if the uncertainty still remains, it’s very risky to make projections for the near future. We are pretty sure that higher price will not bail us out. We must rely on our own efforts and we are doing our best to become a much better company to reduce on a structural way our costs, to increase productivity growth and to deliver value to shareholders. As I said, at Petrobras there is no room for pessimism. We strongly believe that with courage, moderate optimism and hard work we will win. We aim to — we are engineering our J shaped recovery and aiming to end much better than in the pre-COVID-19 period.

Thank you. I pass now to Carla Albano to conduct the meeting.

Questions and Answers:

Carla Dodsworth Albano MillerInvestor Relations

Thank you, Roberto. We will now begin our Q&A session. The first question comes from Frank McGann with Bank of America Merrill Lynch. And the first question is for Carlos. Carlos, capital, could you provide a bit more distribution about expectations for output in the second half of 2020? And the timing and scale of maintenance, how could this affect overall operating efficiency and unit costs?

Carlos Alberto Pereira de OliveiraChief Exploration and Production Executive Officer

Hello, Frank. Thank you for those questions. Well, the expectations are there to we will have less production on the second half than the production that we have been having so far. As we spoke in the last conference, that we would have to do as the first semester and now they are in the second half of the year. And that happen from September to November this year. We will be regarding the timing and scale will be around eight, software’s of 15 days, they are big, more or less. They are big software’s, but one important thing to mention here is that we have already done some activities related to those storage, because as we had some interruptions on the production of those platforms. So, we took the adventures of those interruptions. And then we made some activities. So today 30% to 40% of the activity that we have predicted to do during those stop the big stop, we have already done there our three software platforms. And also this explains the good performance that we have so far. So, in terms of maintenance that we are predicting for this year, we think that the output for the second half of the nation will be lower but due to the fact that we are going to do the maintenance the software, the big software that we have in the second half plan.

Carla Dodsworth Albano MillerInvestor Relations

Thank you, Carlos. The second question from Frank is Biofuel. Indications as to how the current review of the portfolio could lead to adjustments in the company’s strategy.

Carlos Alberto Pereira de OliveiraChief Exploration and Production Executive Officer

Thank you for your question Frank. Well, there is — there will be no change in our strategy. The strategy remains intact. What we are doing is to enhance our criteria of project evaluation. We establish as the baseline for project evaluation, $35 per barrel of oil. For instance boozes, we announced that the order to review at boozes and before that we estimated the breakeven price, all of them with three areas of boozes. They are below $35 per barrel. So they were they were approved. And we are taking steps to start the development. What can change some products that are not as good, we cancelled or to be redimensioned it, but there will be no change in our strategy. The five basic pillars continue intact, and they are — and we are just accelerating their implementation.

Carla Dodsworth Albano MillerInvestor Relations

Our next question comes from Christian Audi with Santander, and it’ for Anelise. Could you give us some color on how we were seeing demand for oil exports, especially in Asia and Europe? Has the demand from China remained stable over the past weeks?

Anelise LaraChief Refining and Gas Natural Officer

Hi, Christian. Well, what you’ve seen is that after Western demand has collapsed for crude oil and oil products during the part of the second quarter, we are seeing demand recovering for all Petrobras brass crude oil exports market, including Asia and Europe. You’re right, over the past few weeks, China’s market has suffered from impact from fluids in the south of the country during July affect the demand, but we believe temporarily, and in general it has experienced a consistent demand for crude oil exports from Petrobras. Our low sulfur crude oil is very well accepted worldwide.

Carla Dodsworth Albano MillerInvestor Relations

Thank you, Anelise. The second question from Christian is about our divestment plan. It’s for Roberto. Could you please share with us the latest developments regarding the sale of refineries? More specifically, has there been significant interest for all refineries at the price levels that you are aiming to sell them for?

Roberto Castello BrancoChief Executive Officer

Well, we didn’t see any manifestation of no interest or lack of interest for our refiners. Of course, the — it’s not running at the original pace that we planned as naturally due to the global recession. The scenario changes and some of the potential buyers asked for some time in order to get approval, new approvals from the Board of Directors, orders to restructure the arrangements with their financier’s. But we — as we see today, there was no change and interest is alive, we expect to conclude the sale — the signing of the sales and purchase agreement in the next couple of months. And we are confident that till the end of 2021, we will have the closings of all refineries for sale

Carla Dodsworth Albano MillerInvestor Relations

Thank you, Roberto. Our next question comes from Vicente Falanga with Bradesco BBI, and its for Anelise. How’s the process of unitizing the offshore gas pipeline tariffs? Is the company ready to IPO these assets in the second half of 2020?

Anelise LaraChief Refining and Gas Natural Officer

Well, this pipeline — offshore gas pipelines, as you know, is an integrated system. And it’s belongs to Petrobras and some threshold partners like a Shell, and Rexco [Phonetic] and Petrogal. And we are finalizing the document that consists this integration system, the package of this integration system to be able to create this new company that will be dedicated to operate and build new offshore gas pipelines. So, we are, as I said, in the end of these negotiations with partners. We believe that by the end of the third quarter, we will be ready to sign the documents. And then the next step will be to create this company. I believe that IPO of this company will stay for 2021.

Carla Dodsworth Albano MillerInvestor Relations

Okay. Thank you, Anelise. There’s one more question for you as well from the site. So the discounts of brands was quite elastic this quarter, around $5 per barrel. Should we expect this to return to more normalized levels in the third quarter of 2020 closer to $1 per barrel?

Anelise LaraChief Refining and Gas Natural Officer

Yes. Bruno, you’re right. Discount to Brent dated with which is the reference to the spot market has increased due to the demand collects during the part of the second quarter. When only Chinese refiners were purchasing crude activity. For the moment the buyer markets recovered in the other destinations. The discounts were significantly reduced, switching to premium. On the other hand, what we saw in this quarter is that the shipping rates, the freight rates were very high at the beginning, especially in April and mid-May, but now they’re back to normal levels almost around $2.5 to $3 per barrel from Brazil to China.

Roberto Castello BrancoChief Executive Officer

Important to add that our crude oil is traded at a premium to Brent. It’s not as at discount to Brent, given the the consolidation of its brand name in China, the preference of several Chinese private sector refineries.

Carla Dodsworth Albano MillerInvestor Relations

Thank you, Anelise. Thank you, Robert. So the next question comes Regis Cardoso from Credit Suisse and its for Andrea. It’s regarding discussing tax credits. So given the substantial gain on tax credits in second quarter 2020, about 17 billion, what should we expect in terms of use of these credits? This is the presence on the current assets implies realizations within the next quarter of the year.

Andrea Marques de Almeidahief Financial and Investor Relations Officer

So Regis, thank you for your question. Actually, there is a process that we have to pass through the application process, so as we can start using those credits. This application process can take up to 90 days, so we expect that we will be using this credits for the next up to 24 months. So it will be hard to be used everything this year. So we believe it’s going to be up to 24 months. It will depend on how long it takes for us to be able to use the credit or this process that we have to pass. But that’s it.

Carla Dodsworth Albano MillerInvestor Relations

Thank you, Andrea. The next question comes from Lilyanna Yang with HSBC and it’s for Anelise. Anelise, Petrobras working toward divestments in the gas midstream and downstream and bringing on more competition to the gas sector. Would you please comment on the positives and key challenges on the proposed gas law, which has been under discussion in the Congress for the past few years but has not yet been approved? Thank you.

Andrea Marques de Almeidahief Financial and Investor Relations Officer

I will comments on that and then I’ll pass to Roberto to add also his comment. We are supporting this law — new gas law. We think that each day, it’s the possible arrangements that we could have here in Brazil regarding all the stakeholders I’m talking about gas producers, gas transporter — transportation companies, distribution companies and commercialization company. So — and the industry that is very interested in the reduction of the gas price in the country. So when you see all these different players the — this new gas law has a lot — lots of advantages because it addresses the main issues related to the opening of the market. How we are going to give authorization for new gas pipelines, transportation, how will have the — free consumers the industry who have some rights to get the gas directed from the marketing spared off, having to pay the distribution taxes — integrated distribution taxes. All these aspects will be important to make sure that the new market, this gas market in Brazil will be open and could be a competitive and dynamic one and by doing that, we expect also that — price reduction in the gas market as a whole. Roberto if you want to comment.

Roberto Castello BrancoChief Executive Officer

I do agree with you. And it is, I think that Brazil badly needs structural reforms and this is one of the important reforms that’s being launched. Competition — open competition will benefit consumers, producers, and the Brazilian economy to attract investments as what you want is competition. We are transforming our role as we open room for all the parties in the — to transport gas, the gas pipeline. We sold TAG, 100%. We are selling the remainder, the remaining 10% of NPS. We are trying to sell TBG, unfortunately the regulatory agency does not allow more significant reduction in the price of transportation as we see and this creates a cloud of uncertainty about the assets. We expect these to be solved. I expect that the regulatory agency understands the importance of this reform, the importance of resilience to have a gas at lower price, eliminating distortions that existed for a long time in the Brazilian market. We are very positive about that.

Carla Dodsworth Albano MillerInvestor Relations

Sorry for that. Thank you, Roberto. Thanks, Anelise. The next question comes from Thiago Duarte with BTG Pactual. It’s for Andrea. So Andrea, considering the improvements in the oil prices in the last 60 days, and considering the current future curve, as well as the potential of cash generation, when the company believes it will be possible to reach the gross that target level $16 billion.

Andrea Marques de Almeidahief Financial and Investor Relations Officer

Thiago, thank you very much for your question. It’s hard to say, because we still see a lot of volatility in the market, even though we know, there is, at least, we see right now the Brent price is around $40. So, definitely better than what we see in the last month. But it’s hard, and we still need to finish the review of our portfolio. What I can tell you is that it’s going to be very hard to be in 2021 as we expected before. So we are working toward trying to make it in 2022, but still it will depend on the revision of the portfolio.

Carla Dodsworth Albano MillerInvestor Relations

Thank you, Andrea. The next question from Chad for Roberto. Once the price and demand scenario improves, does the resilient plan lose effect? Should we imagine that parts of the costs and investment postpones could be resume?

Roberto Castello BrancoChief Executive Officer

Well, there is a traditional crisis cycle. When there is a recession companies — or crisis companies respond to the crisis. There is improvement and the latest stage there will be complacency. We are not addressing the short-term only. We are addressing the long-term. Our goal is to reduce our cost structures on a permanent basis. So, they are focused on that, not to prices. Even they voluntary dismissal program, its effects will be felt much more next year and further on, not these year. This year on contrary, we are making provisions to pay the severance — to make the severance payment to the incentives to the employees that are leaving us, and many other initiatives are addressing significant gains over time. The implementation of digital transformation, the operations that are being developed, but they will have effects from one year or two five years ahead. And there’ll be no complicity as price rise. Discipline is key, discipline in capital allocation, discipline in cost management, and they are established on a permanent basis, not just because the oil price collapse. We do not expect higher price to bails out. We are fighting on our own.

Carla Dodsworth Albano MillerInvestor Relations

Thank you, Roberto. The next question comes from Bruno Montanari with Morgan Stanley, and it’s to Andrea. The oil market condition stabilized faster than many market participants expected. With that in mind, should we expect to see Petrobras further retain its revolving credit lines, and potentially resume the liability management efforts with gross debt reduction?

Andrea Marques de Almeidahief Financial and Investor Relations Officer

Thank you, Bruno for your question. We definitely want to reduce and to repay the committed bank lines to the end of the year if everything continues like we see right now we don’t know. Again, we just know that the scenario can change. So if this does not change, we want to repay the committed bank facility until the end of the year. And in terms of that reduction growth, that reduction, as I mentioned, the goal is to finish the year at $87 billion. And if the market allows us we will always try to reduce it further. So liability management will come back. Definitely, that’s the goal, as Roberto said, our pillars stayed the same. And the cost of the — reduction of cost of capital is one very important feeler. So if we can reduce the total level of debt and reduce the cost of debt, that’s the focus. That’s what we’re going to do.

Carla Dodsworth Albano MillerInvestor Relations

Thank you, Andrea. The next question comes from Andre Hachem with Itau and it’s for Capo. The agreements over the COR surplus volumes with the Chinese NOCs was expected to occur during the second half of 2020, could there be any set back in that regards due to the crisis and travel restrictions?

Carlos Alberto Pereira de OliveiraChief Exploration and Production Executive Officer

No. Thank you for the question. Well, we have all been facing some challenges due to the effects of the COVID-19. But so far as I have mentioned, there is no change in our targets to close the deal — to the close the co-participation agreement on December 2020 this year as we have planned since the beginning. So things are going good.

Carla Dodsworth Albano MillerInvestor Relations

Thank you, Capo. The next question comes from Luiz Carvalho with UBS and its to Andrea. Andrea, can you share more thoughts on dividends for this year due to the impairments and visibility toward the second half of the year.

Andrea Marques de Almeidahief Financial and Investor Relations Officer

Thank you for the question. Again it’s hard to know what will be the net income for the year. As you know, our dividend policy will trigger higher dividend whenever we reach the $60 billion gross debt. Regarding the net income for the year, because of the impairment impact that we had in the first quarter it will be very hard to, I would say, to imagine that we will overcome that and come back to policy but if that happens, we’ll have more. It’s just hard to say right now and just reaffirming that the trigger to higher dividends will be the $50 billion growth.

Carla Dodsworth Albano MillerInvestor Relations

Thank you, Andrea. There’s another question also from Luiz for you. So now that we’re axing the COVID crisis, what would be the ideal cash position for the company? And also any plans about potential debt buyback to reduce the financial costs even further?

Andrea Marques de Almeidahief Financial and Investor Relations Officer

So, yes, again, we don’t want to keep the level of cash the way it is right now, if volatility goes down, the objective is to go back to the levels we had before the crisis that was around 5.5. And if we have the levels of cash, that means, that we would have the committed bank facilities available again. So it’s a combination of the cash level with the insurance available, if anything happens and we — as you know, we can drawdown them again, if needed, if something any event happens. So we do have goals to reduce the growth that until the end of the year, we are at $91 billion. Right now the goal is to end the year at $87 billion. And if we have extra cash in — if we have, let’s say, a last bullet volatile market, we may be able to do even better than that. But it’s hard to say right now. So I would say that in then for sure, liability management programs will be there to reduce the cost of debt. I think that’s the overall and if everything goes even better than what we see right now, we might have better results, but hard to say, at the middle of the year.

Carla Dodsworth Albano MillerInvestor Relations

Thank you, Andrea. The next question comes from Bruno Amorim with Goldman Sachs. And it’s for Carlos. Carlos, can you please update us on the plan to curb declines in production in the Campos Basin. So he wants to know about capex recent achievements and plans for upcoming years?

Carlos Alberto Pereira de OliveiraChief Exploration and Production Executive Officer

Well, we are now facing some changes regarding the oil price, we still have in mind to return to the same levels of position that we have on the 2019 in the Campos Basin of almost 1 million barrels per day of oil, but we will only do that if it really adds value to the our portfolio. So, due to the lower price of oil, so we are testing all the projects and checking if they are really resilient. And what I can anticipate is that the great majority of the projects they are very resilient to lower oil price. So the main the main aspect here is not only — is not the economics of those projects, in fact, but the financial aspect is what we have to check our cash generation and also the management of that that we’re going to do and we have to look at the whole portfolio of the company. So those are the things that we are checking right now. So economics, I think that they are good, but the financial perspective and it will take some a month or two months more to see the whole picture of the company. As Andrea has already mentioned, and see what we are going to do with the speed and the velocity of the projects, the shape of the investors that we are going to have. And that includes the Campos Basin as well.

Carla Dodsworth Albano MillerInvestor Relations

Thank you Carlos. There’s another question for you also from Bruno. So how long can the pre-salt lifting costs go? Can FPSO with capacity greater than 160,000 barrels per day drive even lower listing costs?

Carlos Alberto Pereira de OliveiraChief Exploration and Production Executive Officer

Well, what we have been doing regarding the lifting costs is that we want to reduce them more the effect when we add FPSO with greater capacity for sure, the expectation that we have is that we will have a lower lifting cost in the future. And I think that, we are going to see also that when you look at the general picture not only the pre-salts lifting costs, as we are taking out some prediction platforms that they are old and substituting them, replacing them by all the platforms that they are new like in the Marlie Field, for instance, or when we are divesting on the fields that we have in the shallow waters, and also offshore. So when we look at the whole picture, our expectation and that’s what we are doing — that’s our job it’s reduced the lifting costs of the companies for sure.

Carla Dodsworth Albano MillerInvestor Relations

Thank you, Castello [Phonetic]. Our last question comes from Rodolfo Angele with JP Morgan. And it’s for Anelise. China was a key markets during the quarter and we are seeing some of independent refineries operating at very strong utilization rates. How Chinese demand for Petrobras grew? What’s Petrobras expectations for Chinese demand growth in the second half of the year?

Anelise LaraChief Refining and Gas Natural Officer

Rodolfo, what I can say is that, China’s appetite for pre-salt is strong. As you know, the import a huge amount of crude oil and we see that China’s demand will continues to grow. So I’m sure that, if you have more oil to sell, they will — they will be a buying that. Our question here is, what is most valuable trade off produce oil products to sell in Brazil and even abroad or export crude oil? We have these options, right? And our decision is always based in the economic side, which is the best that brings the brand for Petrobras and we take this decision based on these economic parameters.

Carla Dodsworth Albano MillerInvestor Relations

Thank you Anelise. So the final question from Rodolfo, it’s for Andrea. So Andre, can you comment on what to expect in terms of capex? Ballpark figures for 2021 in the coming years, what will be the focus of the investment program?

Andrea Marques de Almeidahief Financial and Investor Relations Officer

Rodolfo, thank you for your question. I know, if there’s lots of anxiety about the numbers for next year, but we still need to finish the fourth quarter review. But what I can confirm and definitely, there will be some FX in taxes as we mentioned before, because we do have 60% of topics that are rial. So we might have impacts on FX, if we compared to last year numbers, but what we can confirm is that the focus will continue to be on ultra-deepwater, they will continue to represent the biggest portion of our investment. And again, the focus will continue to be on world class assets that have a breakeven below $35 per barrel as Roberto said. So I think on that side, the strategy keeps the same, we will be focused on the higher return assets. And that’s what we — you will see in the — in the coming capex announcements whenever we have the new numbers.

Carla Dodsworth Albano MillerInvestor Relations

Thank you, Andrea. Thank you, all. At this time, the Q&A session is over. If you have any further questions, you can send it to our Investor Relations team and we will be glad to answer. Roberto will now make his final remarks. So, please Roberto.

Roberto Castello BrancoChief Executive Officer

Thank you, Carla. I would like to thank you for your attention. It’s our goal to maximize transparency and to improve our dialogue with the global financial community. And we keep making efforts on — breathless efforts to create sustainable value over time, is our main commitment to you and to all — to Petroleo Brasileiro employees and all stakeholders, create value on a sustainable basis with safety, respecting the environment, focusing also on ESG. I look forward to see you — to meet you or even better to see you in person in the future. Have an excellent weekend and stay safe and healthy.

Duration: 46 minutes

Call participants:

Roberto Castello BrancoChief Executive Officer

Carla Dodsworth Albano MillerInvestor Relations

Carlos Alberto Pereira de OliveiraChief Exploration and Production Executive Officer

Anelise LaraChief Refining and Gas Natural Officer

Andrea Marques de AlmeidaChief Financial and Investor Relations Officer

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