Petrobras - Petroleo Brasileiro SA Q1 FY2022 Earnings Call

Good morning, everyone. Welcome to Petrobras webcast with analysts and investors about the First Quarter 2022 Results. It's great to have you join us today. After the introduction, a Q&A session will begin; you can send us questions by email at [email protected]. We also inform you that all executives are participating in the event remotely, respecting all safety protocols. Today, we have with us Jose-Mauro Ferreira Coelho, Petrobras CEO, Cláudio Mastella, Chief Trading and Logistics Officer; Fernando Borges, Chief Exploration and Production Officer; João Henrique Rittershaussen, Chief Production Development Officer; Juliano Dantas, Chief Digital Transformation and Innovation Officer; Rafael Chaves, Chief Institutional Relations and Sustainability Officer; Rodrigo Araujo, Chief Financial and Investor Relations Officer; Rodrigo Costa, Chief Refining and Natural Gas Officer; and Salvador Dahan, Chief Governance and Compliance Officer. To initiate, I'll pass the floor to Petrobras's CEO, Jose-Mauro. Please, Jose-Mauro.

Thank you, Carla. Dear shareholders and investors, good morning. I'm very proud to have the privilege to address you for the first time. This privilege comes alongside a key sense of responsibility towards all those who trust us with their investments, notably those seeking higher returns for their retirement accounts, including thousands of workers who used a portion of their state-sponsored funds to buy our shares, as well as large investors who regard Petrobras as a world-class company exemplifying a highly successful Brazil. First and foremost, I would like to recognize all efforts made by all of the company's employees and executives for implementing the strategies approved by our Board of Directors. We have successfully brought about a historical recovery in our financial situation, as well as in our image, reputation, and governance. Our distinguished standing in the corporate world reflects one of the highest financial debts worldwide. I am privileged today to oversee a solid and resilient company, thanks to the hard work of you all. Therefore, I would like to please you all once again: staying solid and resilient will be key to pave the way for an even better future. We will remain committed and focused on the strategies established in our strategic plan, with a special emphasis on developing our result-oriented assets, where we will deploy 13 of the 15 platforms expected to come online throughout the next five years. These new units will enable significant and sustainable growth in oil and natural gas production. We will also continue adjusting our portfolio to focus on assets where we have competitive advantages, and to divest out of lower return assets, or those that do not fit our strategy. We acknowledge that this investment process, besides enhancing our cash position, allows other companies to develop those resources for the benefit of the economy and Brazilian society. We shall also continue divesting assets that we consider non-core, coinciding with our trusted authorities' recommendations, such as certain refineries and natural gas assets. I must stress that we are not abandoning these segments. What we are executing is a natural portfolio adjustment, a regular process for a company our size. These initiatives will yield a more competitive, open, dynamic, and efficient market. We plan to invest approximately $7 billion over the next five years in the refining and natural gas segments, focusing on safety and operational and environmental efficiency. Speaking of efficiency, I cannot refrain from emphasizing that this will always be a lever for our operations. Therefore, we cannot stray from the market price framework, a necessary condition for wealth generation to attract investments and to ensure the supply of fuels that Brazil requires to import. I also want to highlight our commitment to energy transition, especially our net-zero ambition, with a timeline aligned to the Paris Agreement. We will continue being a relevant and profitable player in the oil and natural gas business, while not overlooking society's aspirations for a more sustainable energy mix over the long run. The first quarter results we are presenting today strongly demonstrate that Petrobras is a company of which our shareholders and the Brazilian public can be proud. A stronger Petrobras generates more value in its operations; therefore, it leads to higher returns for our shareholders, including, of course, Brazilian society. Petrobras today ranks among the largest taxpayers in Brazil, being a top taxpayer in various states and municipalities. In the first quarter of 2022 alone, we have paid $70 billion in taxes. These taxes facilitate more investments, economic development, job creation, and income generation. You can rest assured that we will work diligently to deliver even better results. Thank you very much for your attention. We wish you all an excellent day.

Thank you, Jose-Mauro. I now pass the floor to the Chief Financial and Investor Relations Officer, Rodrigo Araujo. Please go ahead.

Thank you, Carla. Thank you, Jose-Mauro. Good afternoon, everyone. Thank you for being with us today and for watching our earnings call. We're very glad to present our solid operational and financial results for the first quarter of '22. We start with the significant event of the first oil from FPSO Guanabara on April 30, the first production system installed in the Mero field, which is expected to deliver promising prospects for the company's future. We are quite enthusiastic about the potential results that will arise from this new system. We continue prioritizing safety, a critical value for Petrobras. We are focused on reducing our total recordable injury rates per million man-hours and are pleased to report that our results are below our acceptable limit, even while maintaining the ambition of achieving zero fatalities. Unfortunately, though, we did have two fatalities in the first quarter of 2022, which serves as a reminder of the importance of making safety a priority. Our ESG agenda is actively progressing; we released our sustainability report in mid-April, focused on presenting the key market indicators that are most relevant, including the GRI and EPI metrics. We aim for the most critical metrics for the market while showcasing Petrobras' contributions to sustainability and the investments we make in social responsibility. Our strategy emphasizes positioning Petrobras as a low-carbon, low-cost major operator in the offshore industry globally. We strive for a low-carbon footprint portfolio by investing in solutions that improve energy efficiency and reduce emissions across our operations. We have a robust presence in Brazil's energy sector, contributing significantly to the country's thermal power capacity, while also investing in projects to pursue a cleaner energy matrix. We actively invest in reducing the carbon intensity of our products, promote R&D focused on low-carbon solutions, and engage in reforestation and forest conservation efforts through various collaborations in Brazil. On emissions, we persist in delivering our commitments for lower emissions. In the first quarter, we achieved emissions beneath our targets across upstream and downstream operations, demonstrating our serious pursuit of reducing operational emissions over a defined timeline. Our comprehensive carbon capture utilization and storage program is positioned as one of the industry's largest offshore initiatives in the U.S., with significant re-injection goals established. We remain committed to our social investments, having provided various donations, particularly in response to challenges posed by COVID-19 and environmental disasters in Brazil. We highlight our LPG donation program initiated in 2021, which aims to contribute BRL 300 million worth of LPG by the end of 2022. Moreover, our corporate social responsibility initiatives remain a priority as we continue fostering surrounding communities. The contributions from our tax payments to Brazilian society are substantial. Almost 60% of our operational cash flow returns to the Brazilian society, reflecting our commitment to value generation and delivery. In the context of governance, we continue to enhance our corporate governance practices. Our financial recovery trajectory is accompanied by solid governance advancement focused on improving our corporate reputation and streamlining governance structures. We have made significant strides in this area, having been recognized by various international and domestic institutions for the quality of our governance practices. Moving to our operational and financial highlights for the first quarter, we achieved various milestones, notably discovering significant oil in the pre-salt area at Alto do Cabo Frio Central, as well as starting the oil production from FPSO Guanabara, which we expect to ramp up significantly over the course of 2022. We recorded improvements in efficiency, with substantial reductions in well construction times. Our sales of low-sulfur diesel in Brazil hit a record, with our refineries operating at a high utilization factor of 91%, maintaining both safety and profitability. Overall, the first quarter displayed strong financial results, with a recurring EBITDA of $15 billion, operating cash flow of $10 billion, and free cash flow of $8 billion. In the first quarter of 2022, we paid BRL 79 billion in taxes and government take. The external environment saw higher crude oil prices, positively impacting our financial results despite the slight appreciation of the Brazilian real against the dollar. It is crucial to note, however, that while external factors do impact results, we continue to focus on creating value through operational performance irrespective of challenges faced. Thanks to our solid strategies developed over previous years, the company’s current condition is significantly improved in terms of financial health and operational stability.

Thank you, Rodrigo. We can now move to our Q&A session. The first question comes from Frank McGann with Bank of America Merrill Lynch. The first question is for Fernando and João Henrique. Given the strong global demand environment, does the company have any potential to increase output from short-cycle projects?

Okay. Good afternoon, Frank. Right now I’ll start, and then Fernando can complement. Petrobras remains committed to implementing the Strategic Plan 2022-2026, where we approved a CapEx increase for the upstream of 20% compared to the previous plan. This increase is in line with our strategy to maximize the value of our portfolio for deep and ultra-deepwater assets. Our production development cycle is a long cycle, based on a resilient long-term plan scenario, and I do not see relevant opportunities for immediate production from fields. The only opportunities are in drilling, but this is not significant for our overall production.

Yes. What I can say is that Petrobras’s production growth is expected to raise around 20% over the next five years, primarily due to the startup of the 15 new FPSOs. In the short term, the ramp-up of FPSO Carioca and FPSO Guanabara will significantly contribute to production growth. We are advancing complementary projects under our strategic plan and will continue to monitor oil and gas market effects, considering any additional opportunities that arise as we finalize our plans.

Thank you, João Henrique and thank you, Fernando. The next question from Frank is for Rodrigo Araujo. Rodrigo, as inflation trends globally become more pronounced, are there particular areas where cost trends are particularly struggling?

Thank you, Frank, for the question. As João Henrique mentioned before in the Portuguese call, out of our 15 units that are coming online within the business plan, we have 12 already contracted, and we are strategically tackling critical resources in advance by entering longer-term contracts for crucial resources like flow lines and PLSVs. Some suppliers in the supply chain impacted by commodity price increases have begun discussions with us. However, we have not seen any significant impacts to date. Given our procurement strategy, we foresee navigating these challenges without major issues and do not forecast impacts on our business plan at this time.

Exactly, as we have a long-term plan, our projects are robust despite inflationary pressures. We feel well-prepared to face these challenges effectively.

Thank you, João Henrique. The next question comes from Vicente Falanga with Bradesco. Vicente Falanga sent us a message that I'm going to read for us. Congratulations on the excellent financial management and all the best to Jose-Mauro in the new endeavor. The first question is for Mastella. Has Petrobras been seeing more opportunities to export oil to India? What is the company's commercial strategy if China increases its oil imports from Russia?

Thank you for your question. Over the last years, Petrobras has been focusing on developing markets for Brazilian crude oils. We have commercial offices in Asia, Europe, and the USA to monitor market opportunities and optimize pricing for Petrobras crude oil. Petrobras maintains a solid and diversified portfolio of clients across geographic regions, which allows for rapid responses to market changes, like increased demand for Russian oil from China. While we do have established relationships with private and state-owned refineries in India and transact regular volumes, we assess pricing against alternatives to maximize our results.

Thank you, Mastella. The next question comes from Gabriel Barra with Citi. I'm going to read his message once again. Congratulations on the results and good luck for the new management. The first question is also for you, Mastella. We see the company currently trading at prices below the international parity for both gasoline and diesel. Could you explain Petrobras’s decision-making process regarding pricing?

Thank you, Gabriel. First, I want to emphasize that building international parity prices can depend heavily on logistics, scale, and specific market conditions. Though we regularly monitor and assess our pricing positions against international benchmarks, we do not react instantaneously to fluctuations in international market prices or the Brazilian exchange rate. Instead, we apply strategy in assessing our pricing framework harmonizing both factors to maximize profitability.

Thank you, Mastella. The next question, also from Gabriel, is for Salvador. Salvador, could you share the additional measures being studied or taken besides those already included in the bylaws and current legislation to strengthen the company's corporate governance?

Thank you, Gabriel. Good morning. We have several ongoing initiatives in this regard for the upcoming years. Firstly, we are focusing on the application of automation, artificial intelligence, and data analysis within our internal control environment to enhance the integrity, monitoring, and responsiveness of critical transactions. Secondly, while our original program was established to address fraud and corruption risks, we have expanded our focus to emerging risks aligned with our strategic commitments, promoting integrity and fairness within the oil, gas, and energy sectors. Lastly, we continue the process of revising and updating our governance policies, inclusive of a diverse Board of Directors and a robust committee structure to enable effective decision-making processes. Every critical decision taken at Petrobras must undergo committee review, ensuring that a single individual cannot dictate corporate direction. Our ongoing revisions and improvements are aimed at maintaining accountability and supporting the best interests of our stakeholders.

Thank you, Salvador. The next question comes from Lilyanna Yang with HSBC. She is pleased to see Petrobras delivering consistent results. The first question is for Rafael. Rafael, in our view, the tax regime is benign in Brazil. Are there any discussions or proposals by the Brazilian government or Congress regarding higher government take or a special tax to capture your windfall profits?

Good afternoon, Carla. Good afternoon, everyone. Thank you for being here and for your input, Lilyanna. Regarding your question, reflecting on recent fiscal actions directed towards solidifying Brazilian fundamentals, we have seen policies aimed at reducing inflation and attracting investments. I do not anticipate any movements from policymakers to increase their share in our profits, especially given that many nations during the energy crisis are looking to lower tax rates to support their sectors. My expectation is that we won't see any increase in taxes imposed on us.

Thank you, Rafael. The next question comes from André, and it's for João Henrique Rittershaussen. The business plan stipulated $8.8 billion in E&P CapEx for 2022, averaging $2.2 billion per quarter. What drove the $1.4 billion level of CapEx in the first quarter of 2022? Does the company still see the $8.8 million E&P CapEx for 2022?

Thank you, André. Our CapEx outlook for 2022 remains $8.8 billion. An increase in activity was already planned for this year. Additionally, we experienced some COVID-19 impacts in January, leading to postponements and reduced activity during that month. However, we expect to recover the spending levels by year's end.

I would like to add that the investment levels will increase throughout 2022, with significant milestone payments due for the Búzios field occurring this year, as well as the interconnection of new wells for the FPSO Guanabara.

Thank you, Fernando. The next question comes from Leonardo, regarding the recent changes in the domestic fuel market with large importers playing a more prominent role. In this new context, how does Petrobras evaluate its need to step in to contribute to total demand by increasing refinery utilization rates or considering imports?

Thank you, Leonardo. It’s true that distributors—both large and medium-sized—have recently augmented their import roles as opposed to solely relying on Petrobras. This shift emerged given the competitiveness in the national market, setting a new landscape. However, we are committed to fulfilling our contractual obligations and evaluating profitable business opportunities based on robust internal production, potentially supplemented by imports when necessary.

Yes, Mastella, I think you covered all the aspects. I want to emphasize that we are already operating at maximum levels within our facilities, accounting for safety, capacity constraints, and demand profiles. As of April, we reported approximately a 92% utilization factor, with similar levels observed in early May.

Thank you, Rodrigo and Mastella. The second question from Leonardo is also for you, João Henrique. What progress has been made on the new FPSO projects announced in the last business plan? Should we anticipate any reprogramming due to recent volatility in oil prices and inflation on onshore service costs?

Hi, Leonardo. Bonaparte started exploration at the end of April, and we remain on track to implement our plans for an additional 14 units by 2026. Eleven of these are under contract. For the units scheduled for this year, lifting activities are ongoing. We are consistently monitoring project costs and schedules to manage potential impacts. Currently, we have not seen any negative effects on our strategic plan released last year, as most of the contracts are set.

Thank you, João Henrique. The next question is for you as well. Given the contracts for production systems expected to start within the next two years, is there a mechanism to protect against higher costs related to current inflation?

Yes. Petrobras has a diverse supplier content mix, which assists in managing inflation effects on new bids. We are discussing with suppliers mechanisms to mitigate risks, especially given geopolitical influences, but we foresee no major impact on our upcoming projects.

Thank you. The next question comes from Luiz Carvalho with UBS. He also sent us a message regarding the results. Congratulations on the results and for dividend submission. The first question is for Mastella. On supply imports and pricing specifically, several agents in the industry have raised concerns about finding volumes in the international market while facing unfavorable import conditions. How does Petrobras perceive the supply to the country and how prepared are you for a potential supply challenge?

Thank you, Luiz. First, I want to clarify that the market is served by entities beyond Petrobras. Our operational planning accommodates our commercial commitments, consistently fulfilling them while remaining open to profitable opportunities. We recognize the current scenario and cautiously maintain a watch on diesel inventories and market volatility, arising from recent geopolitical events. We have fortified our trading companies abroad to proactively engage with the primary global markets, allowing us to anticipate risks and ensure competitive supply.

Thank you, Mastella. The second question from Luiz is for Rafael. Rafael, in the latest strategic plan, Petrobras announced a new governance structure to evaluate potential portfolio diversification. Could you update us on how these discussions have progressed? Is there a timeline for market announcements regarding this?

Hi, Luiz. Yes, you can expect formal updates on our evaluations by the end of this year following the approval of our upcoming strategic plan. This process will encompass decisions either to maintain our focus on oil and gas while incorporating responsible ESG practices or explore opportunities for diversification aligned with energy transitions. Discussions are underway within Petrobras, examining financial viability, technical feasibility, and cultural fit for potential new operations.

Thank you, Rafael. The next question comes from Bruno Montanari with Morgan Stanley. He also sent us a message. Thanks for taking my questions. It's gratifying to see the company adhering to its strategic plan and shareholder remuneration principles. His first question goes to Rodrigo Costa. Rodrigo, considering the recent global fertilizer price dynamics, would Petrobras revisit its strategy to completely exit this sector or reevaluate previous plans?

Our strategic plan for 2022-2026 does not include investments in the fertilizers segment. This sector is not aligned with our core business decisions. Regarding the Três Lagoas plant, we are working to finalize the current sales process as swiftly as possible. As for the Rnest case, we are engaging with antitrust authorities to synchronize our divestment timelines and make necessary updates to our strategies.

Thank you, Rodrigo. The next question comes from Rodolfo Angele with JPMorgan. He also sent us a message. It's uplifting to witness the results you've posted this quarter; from an operations standpoint, everything appears to be proceeding favorably. The company is healthy and generating considerable cash flow, as evidenced by your strong dividend announcements tied to shareholder value. His question is for Rodrigo. Given the large free cash flow and ongoing divestments, could you comment on potential utilizations of this cash or future dividend considerations?

Thank you for your question, Rodolfo. In terms of portfolio management, we have executed well thus far in divesting assets and our focus remains on world-class assets where we hold a competitive advantage. While we continue to direct 60% of our free cash flow toward dividends, the inflow from additional cash generation will primarily focus on supporting our committed investments. For the fiscal years 2022 to 2024, most investments are already in place, and we anticipate no significant changes or restrictions, leaving us with a strong position to facilitate dividend distributions.

Thank you, Rodrigo. The next question comes from Pedro Soares with BTG Pactual. He also sent us a message. First of all, I would like to commend management and the company for the complete transformation achieved over the past years. He has a question for Rafael. Rafael, you've mentioned the importance of improving Petrobras communication with its stakeholders, including society, for a better understanding of fuel pricing dynamics. Could you elaborate on how enhancing this communication may involve a more active role in engaging with government to seek solutions for price volatility?

Thank you, Carla. Thank you, Pedro, for your questions and for your comments on our strategic plan. Our communication efforts are primarily aimed at the general public to clarify our market price practices, as adhering to these prices is essential for mitigating the risk of undersupply, ensuring compliance with our laws and internal policies. We strive to provide transparency around our pricing mechanisms. As a listed company, we have a defined mission, and while we’re committed to offering insights and technical knowledge to policymakers, we maintain a strict separation of corporate objectives and public policy influences.

Thank you, Rafael. The next question comes from Christian Audi with Santander. He also sent us a message. I would like to commend you for your persistent free cash flow generation facilitating dividend payouts. His first question is for Rodrigo Araujo. Rodrigo, any updates regarding the sale of your stake in Braskem?

Thank you, Christian. We remain focused on divesting our stake in Braskem. We attempted to divest our preferred shares earlier this year, but market conditions were not favorable. We are monitoring the market and will act when conditions become more favorable, continuing to evaluate various options for divestment.

Thank you, Rodrigo. The second question from Christian is also for you. Could you provide an update on the refinery sales process, highlighting what remains feasible for 2022 versus 2023 and any changes to sales formats?

Thank you, Christian. We’re currently waiting on our antitrust authorities to finalize analyses for the LUBNOR and REGAP refineries, as we had made some advances on LUBNOR. REGAP’s process is slightly behind. As for the BA and PBIO refineries, we continue negotiations and assessing market conditions for relaunching those processes. We do not anticipate any major format changes for these divestments but will move forward when conditions are right.

Thank you, Rodrigo. The next question comes from Régis Cardoso with Credit Suisse. He also sent us a message congratulating you for excellent results, evidencing that effective professional management adds significant value to the company and society. His question is for Fernando. Fernando, what are the expectations regarding the timing for closing the transaction for the 5% stake purchase option exercised by the interested party, and what remaining conditions must be met?

Régis, we anticipate that this transition will close in July. The completion of this transaction is conditional upon approvals from the National Petroleum Agency, the Ministry of Mines and Energy, and the payment made by the buyer. Notably, this transaction is set to be effective from September 1st of the previous year due to prior agreements.

Thank you, Fernando. Thank you all for your participation today. The Q&A session is now over. If you have any further questions, please send them to our Investor Relations team. Jose will now give his closing remarks. Please, Rodrigo.

Thank you, Carla. Thank you, everyone, for participating in our First Quarter of 2022 Earnings Call. We are pleased with the operational and financial outcomes of the company. We intend to continue creating significant value through responsible investments and distributing the value generated from our efforts. Thank you for joining, and we look forward to seeing you next quarter.