Petrobras - Earnings Call - Q1 2020

Transcript

Speaker 0

Good morning, ladies and gentlemen. Welcome to Petrobras webcast with analysts and investors about the 2020. We'd like to inform you that all participants will follow this transmission by Internet as listeners. After introduction, Q and A session will begin. You can send us questions by e mail, petroinvestepetrobras dot com.

Br. Today, us, Roberto Castello Belanco, Petrobras, Andrea, chief financial investment, refining, and natural gas officer Andre Barreto Quiarini, chief logistics officer Carlos Alberto Pereira de Oliveira, chief exploration and production officer Chief Digital Transformation and Innovation Officer Roberto Ardenghi, Chief Institutional Relations Officer Rugimas Lorenzato, Chief Production Development Officer as well as other company's executives. The presentation will be available on our website. And now we will start with Petrobras CEO, Roberto. Please, you can begin.

Speaker 1

Thank you, Carla. It's a pleasure to be here with you for to exchange some ideas and to disclose some information about our company. The world is dealing with twin shocks. On the one hand, we have the worst public health crisis since the Spanish flu one hundred years ago and a very severe recession, very severe and synchronized recession. Our lives and livelihoods are at risk.

At Petrobras, our number one priority is health, health of our employees and health of our company. To deal with the health threats, we launched several measures to protect our employees, including a massive testing. Up to today, we have tested twenty two point five percent of all employees and using home ops, reducing personnel at the operations at a level an average level of 50% of the total labor force at operations. In order to deal with the threats to our health, We are preserving our liquidity, have withdrawn revolving credit facilities and increased our total cash holdings up to billion dollars We cut capital expenditures by almost 30%, billion dollars and are pursuing a minimum reduction of our operating costs of US2 billion dollars We are developing several initiatives to do that. We organized under a liquidity committee that interacts with all operational areas of the company.

They are the sentinels of our resilience and recovery because we are not dealing with not only the short term, but accelerating the execution of the strategy that was put in place back in January 2019. In order to emerge from this severe crisis as a stronger company and able to generate a lot of value to shareholders. I said that we are executing several deep cuts in capital expenditures and operating costs. But we are doing this given the preservation of the safety of the company and our commitment to sustainability. Petrobras is executing its good corporate citizenship, helping the Brazilian society to cope with the threats arising from the COVID-nineteen virus.

We have donated PCR tests, 3,000,000 liters of fuels and several other medical and materials to public hospitals. We are helping with our scientists and our high power computers to develop research to related to the COVID-nineteen program. As I said, the status execution has been accelerated. Our commitment to maximize value through the increase in return of capital employed and reduction of cost of capital remains in place. We are proceeding a full review of our portfolio of project portfolio.

The competition for capital is was enhanced in order to have a stronger capital discipline in the scenario of lower price of oil as we are seeing in the future. We believe that the recovery will be slow and price will converge to a plateau of $50 per barrel in the future. So, we have to enhance the capital discipline to allocate capital on the most efficient way. Results will be shown later. Our divestment program remains intact, business as usual.

Of course, we may have some delays in the execution, but the main block of assets, the refineries, the process is going ahead with some delay, of course. But we do expect that by year end, have signed sales and purchase agreements with several players. Different from 02/2008, when we had a global financial crisis, now we have a global economic crisis. The central banks reacted very fast to inject liquidity in the markets. So, liquidity is not a problem, which facilitates the divestment program.

Well, having said that, I would say that we are confident that with the help of our professionals, committed with the company and high skilled people combined with world class assets will survive to this crisis and after that will be even stronger than we are now. We are very fastly learning the lessons offered by the crisis and this will be applied for sure in the benefit of lower costs and higher efficiency and productivity. Now, I pass to Carla to manage the conference.

Speaker 0

Thank you, Roberto. Now, we'll begin our Q and A session. The first question comes from Frank McGann with Bank of America Merrill Lynch. In refinery, are there any issues with the mixed products being produced with demand and some remaining strong and for this week? How do you adjust the production slate?

And the second question is what's the current expectation for crude oil output over the next few months and the remainder of the year? Anelise, would you like to start and then, Capo?

Speaker 2

Yes. Yes. Thank you, Frank, for the question. You're right. We have to, we had some issues with the mix of products being produced in our refineries in order to meet the difference in the demand.

That's why we did some adjustments in the operational side of the refineries in order to deal with these issues. Let me give you an example. For instance, in the FCC unit, we can adjust for certain percentage of production between gasoline and LPG. In this last weeks, we had an increase in LPG demand and a decrease in gasoline. So we adjust FCC units in all of refineries in order to meet this demand.

Another example concerns diesel and low fuel with low sulfur content. And sometimes, we can reduce the production of diesel and increase the production of bunker low sulfur oil. This is not an easy task to do, but we can manage some in the processing of the refineries in order to use different catalysts and other, other things in terms of temperature, pressure that we can deal with this, difference in the mix of projects, during this, this crisis. Okay?

Speaker 3

Hello, Frank. Regarding the expectation for crude oil output for this year and all and also for the next month, what we have been seeing is that the production for April that we have already realized, it's still in the same level of the first quarter, a little bit less than that because of the effects of the COVID-nineteen and also the effects of the reduction on the demand for oil. But the fact is that we have been having a very good operational efficiency. And we have to consider that now we have reduced the prediction due to the fact that we have the mothballing of the shallow water platforms. And also, we can have some effects regarding the people that we have on board and so that sometimes we have to reduce the efficiency of the platforms.

But the fact is that we are still maintaining the same goal, the same target that we have for the year, the 2,700,000 barrels of oil equivalent per day, plus or minus 2.5%. So the current scenario is we have a lot of uncertainties. It's difficult to forecast what's going to happen. But if we have the same pattern and we have the same efficiency that we have been having so far, we still are keeping the same goal for the year.

Speaker 0

Thank you. Our next question comes from Rodolfo Angeli from JPMorgan regarding storage. One of the key concerns in the sector is related to the available spare capacity companies have. How is Petrobras current spare capacity? The second question is regarding Chinese recover and export markets.

We've been seeing some high frequency data pointing to recovery fuel demand there, with utilization rates for teapot refiners also increasing. How did that reflected on Chinese demand for your crude? Karimi, would you like to start?

Speaker 4

Yes. Thank you, Carla. I'll start and then I'll pass it to Anelise to complement. So, Rodolfo, thanks for your question. I'll start by exploring our overall storage capacity.

In addition to available storage on our FPSOs, the storage on vessels performing our offloading operations, those are which are in transit. And then I'm not talking about any vessels hired by us to for just for floating storage. And also considering our relevant storage capacity in our refineries, we also have various terminals of our subsidiary Transpetro covering the whole country, totaling a very relevant storage capacity of crude oil. The nominal capacity of crude oil in our system is over 15,000,000 cubic meters. Also for storage capacity of fuel, we're talking about 4,700,000 cubic meters.

Currently, inventory levels of both oil and fuels are under control, and we have enough spare capacity. Over the recent weeks, we have managed to reduce inventory levels of gasoline, which are currently within the range considered ideal for us. With regards to crude oil inventories, we are operating within their ideal range, and we are also monitoring both the adequate load of refineries and also the export volumes to operate at the lower level of such ideal range by the June. We have recently revised down what historically were our ideal levels of crude oil inventories, so that we can generate even more cash during this crisis. We are pretty confident that if necessary, we will have the logistics boarding capacity to set even higher records in crude oil exports, at least 10% increase over the 1,000,000 barrels per day record set in April.

Our commercial team has been developing a long term relationship with Shandong refineries in China, where our oil has strong demand, even during the crisis because crude oils from Lua, Hirasema, Sapnio Ai and Buzios fields have the same overall characteristics of specific Chinese oils such as Changli, Kangkou 32 that are experiencing declining production. As we're starting to see a slow recovery in our domestic market and as we have been able to adjust the feed and product mix of our refineries to increase production of diesel, fuel oil and bunker oil, we are most probably going to have increased export volumes of those higher value added products, thus reducing oil exports, not due to demand constraints nor logistics constraints, but to generate higher margins. Having said that, we are not foreseeing oil production costs cut, sorry, due to demand constraints in the short term, and we are not facing any problems related to storage capacity in the near term. I'll pass to Andalise to follow on.

Speaker 2

Just a quick remark on what Andre said is that we don't see any issue regarding the demand of our crude oil, especially in China nowadays. I mean, if you have more oil to export, we'll be able to find a market for that. The main issue is the economics. Of course, we prefer to process this oil here in Brazil and to sell in our domestic market because of the higher margins. But what we see now is that the demand of fuel in China is ramping up very fast, and they're eager to buy more oil from us.

Speaker 0

Thank you, Annalise. Thank you, Karimi. The next question comes from Bruno Montal with Morgan Stanley. As we are now some two months into the crisis, can you comment on key lessons learned and how those might contribute to Petrobras emerging from this situation even stronger? Has the prices somehow accelerated any measures that we're considering to be implemented to make the company more efficient?

And the second question, has the company materially increased exports in oversupply oil market with higher transportation costs, how does the netback of exports compare with the netbacks of sales on the domestic markets for refineries? Roberto, would you like to start?

Speaker 1

Yes. I'll respond to the first question. Thank you, Bruno, for the question. Well, first of all, we learned the most obvious lessons. We will be able in the future to reduce travel trends, no need for many travels.

Home ops is being very successful. We have adapted very well to home ops. So in the post COVID-nineteen period, we see that very feasible to work with 50% of our personal involvement activities in home office that will save costs. We'll be able to leave several buildings, and this will provide us with significant savings. We learned also that home office has been very productive.

We have a very worked very intensively with home office. We and other lessons learned already learned during the crisis is that teamwork is was reinforced with an integration of corporate and business areas is being great. So several ideas has been raised to cut costs, to increase efficiency. This integration has been highly productive to us. This is a lesson learned.

Another lesson was shown in the increase of exports in the months of particularly in April, when we reached an all time high level exports of oil crude oil. This was feasible due to the stronger integration between logistics and marketing. And we are acquiring much more flexibility with dealing with the domestic market and international markets. This includes not only logistics and marketing, but refining and oil production. The integration of this added much more efficiency and we are able to discover new horizons in our ability to market and sell oil and fuels.

This is a short list at the moment, but I do believe that it will be highly it has a high potential to contribute to value generation over time. So, every crisis has two sides, a negative one and a positive one. We think that we are enjoying good lessons and extracting significant benefits from the positive side of the crisis. I will pass now to

Speaker 2

It's me, Roberto.

Speaker 1

It's for Amelise. Sorry, I forgot the question.

Speaker 2

Bruno. Just a quick comment on your question about the netback of export compared with the netbacks of sales to our domestic refineries. Of course, the netback of our domestic sales are higher than the netback of our export. But it has been like that since 2016 when Petrobras has a strategy to have this parity import parity prices for gasoline and diesel. It's an important pillar of our strategy to keep our company healthy.

And keeping that, having an import parity prices for our products in Brazil, we have a better, netback, for netback prices, margins. This is, this is also done even in this crisis when the import parity prices decreased. And some people, they didn't believe that we will follow this reduction in price, but we did. In the first quarter, you see a reduction in gasoline and in diesel in Brazil, around 50%. Not all this price went to the our vendors or post or gasoline offices.

But from Petrobras refineries, we achieved a great reduction both in gasoline and diesel, the tariff impact of the prices.

Speaker 0

Thank you, Roberta. Thank you, Annalise. The next question comes from Luiz Carvalho regarding our pricing policy. So oil dropped almost 70 percent in the low and Petrobras was able to pass through refineries close to 50%. However, pump prices dropped only 10%.

In addition, foreign exchange rates depreciated significantly recently. The question is, how much of a challenge will be to follow oil prices rebound and foreign exchange devaluation?

Speaker 1

Well, Luis, this is a frequent question, one of the most frequently asked questions. And, the experience is telling investors and analysts that, we are following, international price. We have no problem in following them. Of course, during a period, we are oil an oil producer. We are not an oil trading company.

If we we should follow international price at every moment, we have to put someone in front of a Bloomberg screen and adjusting price instantly. There's no purpose in doing that. We our pricing policy is to adjust to international price after the observation of the trends. It's much more than just having a clock to adjust every minute. And during the severe drop in full price, we are not driven just an explanation.

We are not driven only by oil price, driven by full price because they carry a crack spread, maybe highly positive, some case maybe negative. So in the downward trend, we tend to have price higher than the international price during some days. In upward trend, it's the contrary. We tend to have our price lower than international price during some days, but we follow them. You see an upward trend in gasoline price taking place since April 22.

And we made we have made two price increases, one of 12% and other one up 10%. If needed, if we think that's needed another price increase, of course, we'll go ahead with it. There are no problem at all. Carla, please.

Speaker 0

Thank you, Roberto. Our next question comes from Pedro Medeiros with Citi. Can you give more color on cost and expenses savings expectations for 2020? That's the first question. Andrea, please.

And then, Petrobras has been successfully narrowing the selling discounts of its oil exports relatively to the brand in the last quarters. Can you discuss how is the selling spread of Brazil oil exports behave relatively to the brand throughout the second quarter?

Speaker 5

Pedro. Thanks for the question. We announced the additional $2,000,000,000 reduction in operating expenses. And definitely, this is not everything that we are doing, but this is what we, up to now, are able to announce. A number, definitely, there are included many items.

I think the mothballing of the drilling rigs, the postponement of the negotiation in contracts that we are postponing, some payments. We started this discussion first in the postponement of payments. And now we are going to get back to the table and even connect it to the review of the portfolio. We will be able to renegotiate with the big again, always important to mention, we are going to focus on the big suppliers. But after the review of the overall portfolio, we might find other and additional cost reductions related to some of our contracts.

We continue to find to try to find cost have been talking about the adjustments of our health system. We are talking about adjustments to our overall structure to reduce costs related to personnel. We will be doing additional items, but up to now, we have the overall embedded into that additional $2,000,000,000 that we announced.

Speaker 2

Concerning the second question, Pedro, our you're right. We are selling our oil relative to Brent in a good margin the next quarters, but this margin has been reduced. In the first quarter. It was lower than in the 2019 because of the volatility of the oil price in the market. It affects also the premium of our oil.

And the surplus of oil in the market also is an issue. So if you in my opinion, the second quarter, you'll see the same behavior. High volatility of oil prices impacting our margins in terms of oil, but still keeping a positive margin, especially because of the quality of our oil. Okay?

Speaker 6

Just a little remark from what Andrea said is that our the CapEx cuts that we announced for 2020 will not affect the startup of the production system in the short term production, just to emphasize that.

Speaker 0

Thank you. We just received

Speaker 5

question.

Speaker 0

At this time, it's from Christian Audi with Santander. You had originally planned to reduce production by 200,000 barrels a day. But given rise in export demand, should we understand that the original 200 k cuts will no longer be needed? Chiarini, would you like to start? We also have another question from Cristian Audi to Andrea.

Could you please comment on the hedge accounting for the exports contracted for April to December? What level of exports are already contracted for this period and what products are involved?

Speaker 4

Okay. Thank you, Carla. Yes, we do not expect to have further cuts due to demand constraints in the production of oil. We are experiencing a very volatile and complex market dynamics these days. Our team is continuously monitoring and reassessing production levels, domestic sales, in order to define our, let's say, export targets.

That can vary over time, but we are not foreseeing, as I said before, oil production cuts due to, demand construction in the short term.

Speaker 6

Andrea? Okay.

Speaker 5

Fine. Talking about the hedge accounting, think it's important. We had an impact on the results as well together with the impairment related to the hedge account. So what happened, to explain in small words, we do have a hedge accounting, considering the future exports that we have or the exports we have for the future, being a hedge to our debt in U. S.

Dollars. Whenever we have a deep reduction in the price like we have right now, what is going to happen? The forecast of the value of our exports for the future, they are going to be reduced. So we will have less exports in value to be protecting the debt in U. S.

Dollars. That's exactly what happens. So it's what is and what we use to forecast the exports is definitely we have to prove or we have to use the past experience, to show that we will have volumes and not the price we have to adjust together with the price that we adjusted for the overall portfolio. We expect the exports to continue to be the way we have seen. Again, China has been an important, I would say, place after we see the China going back.

We saw higher exports as we released to the market. And we expect to continue to have that, but we don't forecast. It's not just these that we are forecasting for the hedge account. We have to prove looking to the past.

Speaker 0

Thank you. Our next question comes from Andrea Chaim with Itau. So in the last crisis, Petrobras took the opportunity to review several contracts. However, when looking at the current status of suppliers in the industry today, as an example, the rig services, many of them have not yet recovered from last crisis. In this regard, is there still room for further contract revision?

Is there anything that can be done in regards to FPSO leases? Pujumar, would you like to start?

Speaker 6

Yes. Andrea, Petrobras procurement area with the technical areas are at the moment under negotiation or ready with negotiation with the supplier. And we are already made progress in some areas. So far, we have made renegotiations movement aimed to adjust the cash flow for 2020. And we are now planning a new wave for negotiation to adapt the current contracts to the new market reality.

Rigs and leases at FPSOs are strategic services, and we are still studying in the detail to define some new objectives and negotiation strategies.

Speaker 0

Thank you. Our next question comes from Bruno Almorin with Goldman Sachs. What's the current level of utilization of Petrobras storage facility, both oil and fused? Is utilization still going up or it started to fall given the recent pickup in demands and oil prices? And there's also a second question.

Given the strong depreciation of the BRL, can you please remind us the impact of a 10% depreciation of BRL on your upstream EBITDA per barrel in The US terms, all else equal. So maybe, Chiari, would you like to start about the storage capacity?

Speaker 4

As I mentioned before, inventory levels of both oil and fuels are under control. And as we have enough spare space and we have been adjusting the production and also adjusting the feed of the refineries to adequately meet the demands of the internal market and exports, We don't see any problems regarding storage in the near term. In fact, the inventory levels are going down. Gathering inventory levels have been going down over the last weeks. And also, oil inventory levels are also going down, especially by the June.

But they are perfectly under control, and there's no concerns about that at the moment.

Speaker 5

Okay. Following up with the question of the impact of real dollar in our EBITDA, I have the number for the Petrofacao. And after the adjustment we made, we have for a $10 a change in real dollar. We have around $200,000,000 impact, positive impact on EBITDA. So we see that the further depreciation of the real that we observed in the not right now, actually, is going to further increase or improve our results in Petrobras.

Speaker 0

Thank you, Karimi. Thank you, Andrea. The next question comes from Liliana Young with HSBC. So please give us some color on demand for fuels, gasoline, diesel in April and May. Is demand in Brazil recovering fast?

Any estimates for the second quarter, third quarter and fourth quarter in terms of demand? Please, Anelise, go ahead.

Speaker 2

Hi, Heliana. In terms of demand for fuels, what we are seeing so far is that we had a huge impact in the April that we got a reduction on diesel around 50%, in gasoline 65%, in jet fuel 90%. And, even during the during April and now in May, we are seeing a recovery, especially in gasoline, but also diesel is getting better. So and other products also. Our main concern is jet fuel.

We don't believe that jet fuel could be recoverable as soon because of the international flights and all over the world. It's not only in Brazil. This will probably jet fuel the whole year. But diesel, gasoline, bunker, naphtha and other oil products, we are seeing almost a complete recovery in the third and fourth quarter. Okay?

Speaker 0

Okay. Thank you. Our next question comes from Vincentia Falanga with Bradesco. How are the conversations with local groups about the sale of refining going? With the exchange rate at six, does this impact the transactions?

Anelise, would you like to start?

Speaker 2

Well, we are talking with different players that, are interested in our refineries. It's not only local players, but also international ones. As I said, we see that the interest keeps is continuing. So we don't see any of the players saying that they will give up. It's a good sign.

And what we see is that we had to postpone the binding offers because of the crisis. And we hope that by the third or fourth quarter of this year, we could have the binding offers already presented So we can go on with the negotiations with the first player and sign the contracts in the 2021.

Speaker 0

Thank you, Anelise. And now it's our last question. Our last question comes from Barbara Halberstadt with JPMorgan. So this is for Andrea. What's the plan regarding the debt level?

Any liability management plans for the year? Is there any risk of covenant breaches?

Speaker 5

So thanks for the question. Regarding the debt level, we announced that we want so our goal for the year is to end the year with $87,000,000,000 total debt. If we can do better, definitely, we will look and try to do better, but that's the goal for the year. And the medium and long term, we keep the $60,000,000,000 That's the debt we believe is the one that Petrobras should have to be prepared for the volatility of any scenario, including the one we are just experiencing right now. Regarding liability management and, liabilities management, we will look for opportunities for to always, actually, this is always.

Now we are focused on liquidity. But if there is opportunity, if there are opportunities in the market to extend the firm of the debt and roll some of the debt that we just got, definitely, we will take, the opportunities. And the last point was?

Speaker 0

Regarding covenants.

Speaker 5

Okay. Covenants. And, the covenants we just have, the debt would be MBS with the financial covenant. There is the net debt to EBITDA of 5.5. We don't believe we are going to get there, but we have all the documents ready even to ask for waiver if necessary.

Speaker 0

Thank you all. At this time, our Q and A session is over. If you have any further questions, please send us an email to our Investor Relations team. And now Roberto will make his final remarks. Please, Roberto, go ahead.

Speaker 1

Thanks, Carla. I would like to thank you for your interest and attention to our video conference. As I said before, we are very confident on the survival and emergency of Petrobras as a stronger company. During a crisis, courage and optimism are key. And we have as our main allies in this process, highly committed people and highly commit highly skilled people.

And this combined with the world class with those world class assets we have, I am sure that Petrobras will continue to generate a lot of value to shareholders. Thank you. And I expect to see you soon in another opportunity.

Speaker 0

Thank you, ladies and gentlemen. The audio of this webcast will be available at Petrobras website. Thank you very much for your interest and have a great day.