Petrobras - Petroleo Brasileiro SA Q3 FY2023 Earnings Call

Good morning, and welcome to Petrobras Earnings Results Webcast for the Third Quarter of 2023. It's a pleasure to be here with you. This event is being held in Portuguese and it is simultaneously translated into English. Links to hear both languages are available on our Investor Relations page. We would like to inform you that all participants will be in listen-only mode during the company's presentation. After this introduction, we will have a questions-and-answers session, and you may send your questions to [email protected]. We have with us today Ana Paula Zettel, Executive Director for Partnerships and Exploration and Production Processes, representing the Executive Director of Exploration and Production, Joelson Mendes; Carlos Travassos, the Executive Director for Engineering, Technology and Innovation; Claudio Schlosser, Executive Director for Logistics, Commercialization and Markets; Maurício Tolmasquim, Executive Director of Energy Transition and Sustainability; Sergio Caetano Leite, Financial and Investor Relations Officer; and William França, Executive Director for Industrial Processes and Products. To start off, we will hear a message from our CEO Jean Paul Prates.

Good morning to all of you. We are very proud to present the results of the third quarter of our management. Petrobras has once again achieved records and significant figures which highlight the quality of the work being done. We broke our quarterly record for operated oil and gas production, reaching around 4 million barrels of oil equivalent per day, which represents an 8% increase compared to the second quarter of this year. Our results prove the high productivity of the pre-salt, these giants that collect exceptional results. Since December last year, we have already started up four new production platforms and we still have one more planned for the end of the year, with the start of production from FPSO Sepetiba in the Mero field. The installation of these five units in the space of 12 months is a major milestone. Adding 630,000 barrels to the company's oil production capacity. I'd like also to highlight the operational performance of our refineries in this third quarter. We had record utilization of our refining plants reaching 96%, the highest quarterly level in nine years, as well as a record production and sales of 10-ppm diesel. We continue to launch products with a lower environmental impact, such as the Podium gasoline neutral carbon, the first gasoline on the Brazilian market to have its greenhouse gas emissions fully offset through carbon credits and Cap Pro Ap, high penetration Petroleum Asphalt Cement with a high capacity for recycling aged asphalt. We also made progress on the plan to sell diesel with renewable content under the biorefining program of Petrobras with record sales in September. We closed this third quarter with a robust operating cash flow. The fourth highest in the company's history. Operating cash flow was influenced by the appreciation of Brent, higher oil exports, and sales of oil products in our domestic market. Our investments continue to grow and the company’s debt remains under control. And all of this was accomplished with total attention to people through actions such as the approval of the diversity, equity, and inclusion policy, published in September, taking another step towards becoming a benchmark in these areas, ratifying our relentless pursuit of a diverse, inclusive, and safe environment for all people. In October, Petrobras celebrated its 70th anniversary. And today, it is the largest offshore oil operator and one of the oil producers with the lowest emissions in the world. But we want to evolve even further towards a low carbon economy relying on partnerships with various companies and institutions. Looking ahead, Petrobras goals focus on the sustainability of the business and the world. The decarbonization of processes and products and the fair energy transition are a philosophy with which the entire company is in tune and determined to deliver. The results we have achieved and our ambitions for the future are only possible due to an extremely dedicated and skilled workforce, which enables us to guarantee the energy Brazil needs to continue developing. Thank you and have a good event.

We'll now start our Q3 2023 Results Presentation. And for that, I'll give the floor to our Financial and Investor Relations Director, Sergio Leite.

Good morning. Thank you for joining the results webcast. As President Jean Paul Prates mentioned, this has been a record-breaking quarter for Petrobras, celebrated by our workforce, business partners, and society at large. We had a very strong quarter with an EBITDA of $13.6 billion, consistent net profits, solid operational cash flow generation, and free cash flow of $8.4 billion. Our net debt to EBITDA ratio reflects a return to society of approximately BRL56 billion, including BRL9 billion in approved dividends and BRL17.5 billion in other payments. We reached record production levels of 22.25 boed from gas. Utilizing our refineries effectively, we achieved a 96% efficiency rate, while our energy intensity stood at 101.7, with diesel S10 accounting for 62% of total sales. Additionally, pre-salt natural gas processing set new records. Other operational highlights include the Anita Garibaldi project, which reached peak production of 150 million barrels in a record time frame. We have effectively managed our carbon emissions index and updated our production forecasts accordingly. Our diversity policy is being consistently implemented, and we have strengthened our governance measures. Petrobras has become the largest developer of wind farm projects in Brazil, having signed a partnership with WEG to develop the nation's largest onshore aerogenerator project. As we transition from divestments to investment, we’ve made adjustments to our workforce, hiring approximately 270 new employees between July and September, and we plan to hire more. We also launched the Podium Carbon Neutral gasoline, allowing consumers to offset emissions through carbon credits. Despite achieving these records, we are navigating challenging external conditions, such as a 14% drop in Brent prices, which has affected all oil and gas companies. However, our EBITDA grew by 15% from the last quarter, demonstrating that we continue to expand in spite of these external challenges. While our adjusted EBITDA decreased by 22% when compared to the same quarter last year, Petrobras has shown resilience against market fluctuations. The EBITDA from exploration increased by 25% compared to the last quarter, while our refining and marketing segment, which is more sensitive to external factors, recorded a 32% growth with inventory turnover. Cash generation remains healthy, with a CapEx of $9.1 billion for the first nine months of 2023, reflecting a 31% increase from last year. This year, we anticipate investments around BRL13 billion, more than 30% higher than the previous year. Our debts are being effectively managed, currently at $61 billion and well within control. We initiated a share buyback program approved by our board, aiming to repurchase up to 157 million preferred shares, with 35% of that completed so far. Comparing net income between the second and third quarters, we see growth despite lower gross income due to external market pressures. We contributed BRL65.5 billion to society in taxes and dividends, highlighting our importance as a socially responsible company. We also approved BRL17.5 billion in dividends and completed a buyback of BRL974 million as per our policies. In conclusion, this record quarter underscores Petrobras' commitment to a more resilient future, with continued investments in traditional oil and gas sectors and emerging areas. Thank you for your attention.

Thank you, Sergio. We will now begin the questions and answers session. The first question we received came from Mr. Bruno Bontemari from Morgan Stanley. He's asking a question to Sergio. About potential extraordinary dividends for the 2023 fiscal year. What financial indicators will the company use to decide on this payment? Petrobras is working at a very low leverage level. Even when we look at the last 12 months to 24 months, it seems like the company's cash position is robust and could afford a dividend payout. So what should we expect for this year? Sergio?

Hi, Bruno. Thank you for your question. It's true the company's indebtedness is under control but it should fluctuate between BRL55 billion as an average level and BRL65 billion as the maximum level. As we published, we are currently at BRL61 billion. So that's BRL4 billion away from the upper threshold. Of course, we have amortization, we're paying interest rates for this debt consistently in the first nine months of the year, and until the end of the year we will pay more than what we paid last year. So our debt is under control, but we're not only looking at that, we're also looking at investment needs. We're looking at the external environment, the adversities caused by the wars, but we're not only looking at the quarter either. As you know, extraordinary dividends are usually paid out at the end of the year, and we're looking at the probabilities for the next two years, simulating several scenarios with different levels of confidence for each scenario. So we're being very cautious in our management to control our debt. And only by doing that and looking at our future investments can we look at this possible payout and then this can be approved.

Thank you, Sergio. Bruno has a second question for Ana Paula. The company posted robust results this quarter, which was a surprise. Internally, is your production performance also a surprise for the company? Would it make sense to think that the future production levels can have an upside bias? Ana?

Thank you for your question, Bruno. Good morning, everyone. Actually, it was not a surprise, we have a risk analysis for our projection considering units that have been implemented and new units, so we have a 12 month study in which we started five new units. We look at the risk factors that may affect our production. What we have seen throughout the year is that it's been robust and it's not been as affected by outside factors. Our production is at the upper threshold of our margin there. And this allowed us to review our production guidance. That was part of the materials fact that we had yesterday. So 12.8 equivalent barrels, so this is not a surprise as we can see, our production was robust but this was according to our projections. Thank you.

Thank you, Ana. The next two questions will be asked by Vicente Falanga from Bradesco BBI and they're directed to Sergio. The first one is, does the company intend to publish in a strategic plan how much will be dedicated for M&A's and may this decision be out of the plans? Sergio?

Hi, Vicente. How are you? Thank you for your question. So we have been discussing this plan. As always, the new strategic plan for Petrobras is highly expected by the market because of the effects that it causes, so we truly are talking about this right now. A lot has been said in the press, but it's still an ongoing process. So it might change. We're in a stage in which we will be validated by the different executive managers, by the board, by the upper leadership. So this is something that is watched closely in the company. We don't have a full answer to your question yet. There are several possibilities, but we want to be in line with what I said before. We want to be transparent. We want to give predictability for everything that Petrobras does. So we want to give an idea to the market about what we're going to do. But the most important thing is to say how we're going to do the future mergers and acquisitions. As you know, these processes have their own rules. They're guided by confidentiality agreements. Not everything we want to do is allowed. So we need to be very cautious, especially because of strategic reasons, this is a part of the business that has a lot of competition, not only in Brazil, but we have competition from around the world. Petrobras works on a global stage and we can't simply say that we intend to buy something in this or that industry. But once the decision has been made, once we decided to propose an acquisition internally, then, of course, we're going to disclose this with every step. We have this obligation to publish relevant information to the market. So to answer your question directly, yes, we will make an effort to show what our budget is for mergers and acquisitions in our plan.

Thank you, Sergio. So Bruno's second question is, how do you assess a potential asset for an acquisition? What's that process like? And will you reveal that in your strategic plan?

Vicente, our process for acquisitions in general terms is broadly known by the market. We work with an investment and divestment methodology that is well known. There are different levels to each guideline. They have statutory committees that the company doesn't participate in, so we have executive managers who deliberate on that. So these processes are very transparent. We have a very solid governance that discloses all of these things. Of course, we can't disclose some aspects which refer to our competition, but this process of acquisitions and disinvestments are communicated to the market. So whenever we have a decision at our board, this is published. The Central Bank keeps track of this process at every stage from a proposal to a viability study with every step. This is followed by the Brazilian TCU, and this is online in systems shared with the Brazilian TCU. This process has been established in Petrobras for many years and it will be maintained.

Thank you, Sergio. The next question comes from Bruno Amorim, Goldman Sachs. The creation of the new reserves allows us to allocate 70% of the profit for the payment of dividends. What are the predefined criteria? If the cash will become a reserve or will it be extraordinarily distributed eventually? Sergio, over to you.

Hello Bruno, thank you for your question. The oil and gas companies have characteristics, companies that work with commodities have very specific characteristics in terms of how they define cash flow and net profits. They're not interconnected. We revise the asset values that have a direct impact on the assets and that will have an impact on the net profit. We could have a high net profit and not produce the same increase on the cash flow and vice versa. They're not interconnected, as you probably know. The reserve that we created is a reserve that's allocated. And that the creation of a reserve has a purpose. So the purpose of it is to equalize the payment of dividends. It's an evolution in Petrobras's governance in terms of maintaining the interests of shareholders, whether they're private or public. You can have lots of dividends on one year or a quarter, and you may not see the same effects in the next quarter, or you may see a variation between this supposed connection between the cash and net profit, and the shareholders may choose to allocate part of their dividends to this reserve. The resources that are in the reserve are allocated to the payment of dividends. So if it goes to the reserve, it will definitely go back to the payment of dividends. It's important to make that clear. Petrobras has a reserve for investments in capital and oftentimes in the past, the disclosure of this information caused a lot of buzz in the press. Many people would ask, well, will Petrobras retain the dividends and then reinvest them? The dividends are paid after the investments. Petrobras has a market reserve for that. It wouldn't be necessary to create a new reserve if that was the intention. The reserve is strictly allocated to the payment of dividends. That's a positive thing for investors and for shareholders. The dividend payment policy of Petrobras is linked to the cash flow. So we're going to pay the gross cash flow and deduct the CapEx. Over the rest, we apply the formula and our policy for dividend payments. So there is no direct connection. Other big companies in Brazil have the same reserves or companies abroad as well. This is a revamping of our governance and an additional care so that we have more predictability to the payment of dividends. We're reinforcing the predictability with everything we do in terms of providing greater transparency and trying to publish our resources allocated to mergers and acquisitions and payment of dividends.

Thank you, Sergio. Now we have 3 questions from Pedro Soares. The first one to Ana. Today, the company understands that E&P assets outside of Brazil that they're interesting. Does it make sense to say that we might grow to other regions of Latin America? If yes, where do you see the biggest opportunities? Ana, over to you.

Thanks for your question, Pedro. We're always monitoring the opportunities to explore both inside and outside of Brazil. And that is related to our participation in bids in other countries. In Brazil, Petrobras is the preferred operator of many companies. 70% of our production comes from partnerships. We have around 20 partner companies. So they also provide opportunities to explore abroad. We keep on monitoring these opportunities and we evaluate them. If we think that something is interesting to us, we submit it for approval. Of course, that's a strategy that affects our competitiveness, so we do not disclose our areas of interest. In terms of South America and Latin America specifically, we have a project of exploration in Colombia, which has been published in our plans. It's also our CapEx reserve project in our strategic plan. Thank you.

Thank you, Ana. The next question to Tolmasquim. Concerning the energy transition, Petrobras has been very vocal about the greenfield investments it will make over the course of the next few years. I'd also like you to talk about the brownfield project opportunities and companies that are already operating. In other words, are there potential target companies that might expedite the transition process at Petrobras? Tolmasquim, please.

Thanks for the question, Pedro. We're looking at three project categories. First, from companies that are already operating. The idea here is to have the partnership formed with an existing project. The biggest benefit of that is to immediately generate cash flow for the company and to bring renewable energy to our portfolio. We're also looking at, or more specifically, we are mainly looking at projects under development. Here we have two categories: projects that are at an advanced stage with environmental licenses, that are connected to the grid, and that are ready to be built, and other projects under development. Of course, the less mature the project, longer the construction time, but so is the upside. Our intention is to find a balance between operating projects, projects that are ready to start construction, and projects that are still under development.

Thank you, Tolmasquim. Pedro's last question goes to Sergio. The press has been talking a lot about litigation. What are the internal and governance-related projects at the company to approve an agreement about that? Is there any amount that you would consider to be unfair for this agreement, if it ever happens? Sergio?

Well, Pedro, it's important to say something. As you saw in the presentation, Petrobras pays taxes at several different levels, federal, state, municipal levels. It's common practice in our history to be in constant contact with the secretariats of finance. The national taxation system is full of different laws and regulations. For a company as big as Petrobras, it causes certain clashes or disagreements between interpretations, where the legal team and other teams will have different interpretations about the same standards. If that's the case, we try to contact the secretariat beforehand. It's been a historic practice at Petrobras to be in daily contact with the secretariats. Either we call them or they'll call us. We try to sort out this type of situation. At the federal level, there is a discussion chamber, which is not super legal, which is to say that for any decision, we might appeal against that decision. Petrobras understands that. It's always on the lookout for litigations or claims. It always attempts to meet all requirements while trying to save as much resources as possible. From this perspective, Petrobras analyzes if we will accept or propose an agreement. Any agreement entered into with any of the government levels, whether it is the federal, state or municipal levels, if it's proposed to Petrobras, these proposals are always analyzed by the Board of Directors depending on the proposal and legal and taxation teams. It's not a discretionary process. Actually, this word is never even heard at Petrobras. It's something that is constantly ruled out in any decision that the company makes. If Petrobras understands that there is economic and financial benefits to Petrobras, if the agreement creates a positive VPL, if the agreement will be entered into Petrobras, then we'll discuss it. There were many statements referring to BRL40 billion, BRL30 billion, BRL50 billion. Many things have been vented that I ended up giving up on watching the news about that. But I can tell you that, yes, that exists. There are discussions between Petrobras and the revenue service. They go through a first level of decisions. A recent decision was approved, providing more benefits to agreements. Petrobras analyzes if the VPL of the agreement is positive, whether it’s better to settle the amount, or if internal legal teams recommend that Petrobras initiates an appeal against the decision. There is no preset amount, but we might see small agreements at all levels, as long as it's beneficial to Petrobras.

Thank you, Sergio. Now, we have three questions from an analyst from Bank of America. The first one to Ana. How does the company see the different potentialities of the basins of the equatorial margin? Do you believe that the falls of the Amazon has more potential than the others?

Okay. So we have a robust portfolio. We have six blocks in the Amazonas Basin, in Amapa, in deep waters. We have two blocks and one assessment plan for the Para-Maranhao Basin. One block and two discovery assessment plans in the North Basin, and three blocks and one plan in the Potiguar Basin. We are very well positioned in that area. We operate all of these blocks, and we have a relevant amount for these investments for our 2023-2027 strategic plan. Our exploration team believes in the potential of this area, due to how close it is to Guiana and Suriname. But this needs to be proven through explorations in the region. We're waiting for IBAMA's position and obtaining a license to explore this area. That's when we will be able to know if there is potential and if it's commercially viable. So we need to wait to see how this portfolio will unfold to assess its potential. But once it has been discovered, we can imagine that it will become significant for the country, lead to regional development, and generate income for people.

Thank you, Ana. Here's another question about the asset, which was removed from the divestment plan. Do you expect to continue onshore developments in Brazil? Are there any partners to develop this asset? What kinds of contact does the company consider for this project?

Okay, so we had a change in our strategic direction in 2023. Our strategic direction so far had been deep and ultra-deep waters. Now, we're focusing on profitable assets. Based on this update, we are assessing our portfolio. That's why we published a conclusion for the divestment projects. Since they were profitable, they were maintained in our portfolio. Once we have them in our portfolio, we will try to add more value to the assets, that is, having complementary investments to extract more value from the assets. Partnerships have not been ruled out. 80% of our production comes from assets with partnerships. We have many partners in Brazil and abroad. We don't rule out any partnerships, including Manati in Bahia. This is an asset in which we have a 35% stake with partnerships with other stakeholders. Thank you.

Thank you, Ana. Operator, this is the last question to Travassos. How does the company see the platform supply market today, and how has that affected new contracts?

Good morning. Thank you for your question. We do see some significant movements in the FPSO's market and in the supplier market overall. We see a post-COVID effect of prices going up in our supplier market. We've also seen some changes to the market, which is transforming itself, looking towards the future with its own take on the energy transition. We’ve seen some mergers, some temporary scarcity that affect the second and third supply layers and there is also a difficult access to funding. All of these effects have reverberated across our projects. Naturally, we've considered them in our plans for the future. We're taking some actions to recognize the impacts of these effects on the ongoing projects. We've had to redesign and readjust our plans. Our main source of information has been the market itself. We have collaboration rooms and we actively listen to all of the feedback we receive, adjusting our plans to ensure that the process is competitive. We are currently looking at our strategic plan with 17 units across it. Five are in allocation and four are in production. We're interested in starting more this year. Nine are contracted and ongoing. Three units are still under auctions, showing a positive process. We really believe that we have a winner in this market. There are six units that are still looking at it. Three already have proposals. We've received proposals from the market on those. We have two units open for proposals. The main source of demand for FPSOs in the world is that it's a robust plan. Of course, we expect the market to respond, but we're paying close attention to this process, looking at this auction by auction.

Thank you, Travassos. Now we have a question from Rodolfo Angele from JP Morgan. I'll pass it over to Schlosser. Refinement results have been resilient with good margins. With the increase in production, we've seen that utilization rates have reached 96% in the third quarter of 2023 for Santa Maria. So what should we expect for this industry, considering utilization rates and sustainable margins?

Good morning, everyone. Hi Rodolfo. Thank you for your question. Although we see some volatility in the international market, our expectation is that margins for diesel will be sustained for the next months. Why am I mentioning diesel? Because diesel still responds for about 40% of our production of byproducts. So it's a significant driver for this market. Gasoline has international markets, which impact the next few months. But this is due to seasonal factors and they usually weaken as we approach the winter in the Northern Hemisphere. Our planning models and the economic utilization for the downstream do indicate that utilization rates for refinement will still be high. I'll pass it over to William, who will add to this answer.

Thank you for your question Rodolfo. Thank you, Claudio. It's important to highlight, as Claudio said, that we're receiving many demands in logistics, which is quite good. We've been able to meet this demand with high utilization rates, as Claudio said. Our prediction is that, considering seasonal effects for the next quarters, for the fourth quarter and the first quarter of 2024, this demand will remain strong. We're working to ensure that we will continue to have good utilization rates. We're reinforcing our asset management tools. We're making strong effort in downtimes, so planned downtime, so that we can have the best maintenance level for our equipment, our reactors, and our pipeline systems, aiming for the right level of quality and good operational availability. In the last two quarters, we were able to increase our rates with very good yields. So it’s important to highlight that our utilization rate is going up. We're producing diesel and aviation fuel. Good expectations are in the pipeline, ensuring high demands for our logistics and utilization areas.

Thank you, William. We have two questions from Monique Greco from Itau BBA for Schlosser. Schlosser, in the last weeks we saw a significant reduction in international refinement margins, especially for gasoline. How has that reflected in the company's strategic management? Is there any space to see interest rates reflecting the international market?

Thank you for your question, Monique. You're asking about how we monitor our commercial strategy? I’d like to underscore that one of our commercial operations’ core values is to mitigate the volatility seen in the international market. That includes foreign exchange rates and the price of fuels for the Brazilian market. Right now, we're seeing high volatility. This is being caused by several factors, including uncertainties on supply and demand for fuels. We have some data on the Chinese economy raising concerns. We also have geopolitical conflicts that affect us, alongside production cuts in Saudi Arabia and Russia, which create pressure on the supply side. It's complex to monitor. We're always keeping our eye on that, and this reflection is seen in our commercial strategy. You asked specifically about gasoline. The end of this cycle is allowing us to reduce prices in October. Given the high level of volatility, we're still looking at the fundamentals of the market. If gasoline prices go to a different level that is structural, we'll analyze it and readjust our internal prices to maintain balance. We can't give you details on what these readjustments will be, though. Thank you for your question.

Thank you, Schlosser. So this is another question from Monique about imports. We see that there was a reduction in volumes of diesel imported. Will this affect refinement? How should the company view this for the future?

Certainly the increase in the production of byproducts at our refineries, this production increase follows certain quality standards, which are for the production of diesel. That led to the reduction of imports. About the future forecasts, the decision to import is a result of a complex operational planning involving several departments. We use computing tools just like every other competitor does to maximize the value of assets. These plans consider factors like seasonality of demand, availability of our logistic assets, and the stock levels we’re exposed to, as well as market expectations. That is our position.

Thank you, Schlosser. Gabriel Barra from Citi has three questions. The first to Ana. Could you give us more information about the discussions with the environmental authorities about the development of the Amazonas Falls? Is the project in line with the pre-salt project approval? When can we expect the company to produce the first oil? Thank you.

Thank you for your question. We're well-positioned at the equatorial margins, especially at the falls of the Amazon. In our latest discussions, IBAMA denied our request to drill at Morpho. We appealed this decision and in August, it was determined that an environmental assessment is not necessary to issue an environmental license for these areas. Since then, as the conciliation process is ongoing, we are working to resolve disagreements to secure the license for exploratory activities. At this time, we cannot estimate investments. I can say that our business plans allocate $3 billion for drilling 16 wells in that area. Once we receive a decision from IBAMA, we will be able to proceed and provide more information about our operations in the region.

Thank you, Ana. The second question from Gabriel to Sergio. According to the news, there is a discussion about the sale of Braskem that may be completed before Q1 2024. We've seen some integrated oil and gas companies trying to find a way out from this in the long run. From the company's perspective, would it make sense to have control over Braskem, or should it continue to be minority shareholders? Can we expect this to be completed before Q1 2024? What do you expect from a new partner in this business? Sergio?

Hello, Gabriel. Thank you for your question. Petrobras and the oil industry as a whole, and more specifically, Petrobras values petrochemicals. This isn't something new. Internal monitoring and sharing of information about future possibilities is occurring internally at Petrobras. This led the administrative council to approve the integration of petrochemicals into the business chain of Petrobras. Guidelines state that Petrobras should assess its investments in petrochemicals. We have a significant position in the petrochemical industry through Braskem. For this reason, and because we believe in the future, we see greater resilience in the medium and long term in the petrochemical industry at the expense of gasoline. So yes, the growth of petrochemicals is relevant for Petrobras. Regarding the offers posed by Braskem, you can see that so far the proposals have been non-binding. There have been two or three non-binding proposals made about the acquisition of the Novonor share. They inform the banks and Petrobras as the business partner, then a proposal is made to Novonor. The decision to sell or not is not with Petrobras. Petrobras has a tag-along and a selling preference if it deems that the price is fair. The administrative board's approval is in line with our monitoring of the petrochemical industry in Brazil and abroad as a potential grower for our business. Decisions may not conflict with Braskem's selling or may further reiterate the decision to purchase Braskem. Petrobras is currently doing due diligence. Proposals made are non-binding and if they become binding, Petrobras will have to make a decision since it has the right of preference in the purchase or sale. We have a powerful and updated refinement firm. The integration with the petrochemical industry often occurs directly at the refinery level. Braskem is a shortcut, but it's not the only potential solution for Petrobras. I need to make that clear.

Thank you, Sergio. Gabriel's last question goes to Travassos. The oil and gas industry has been constantly concerned about inflation and investment costs. The market is tight for the acquisition of new rigs, ships, and platforms. How can we find a balance? Can we expect to see the company investing again and capitalizing on these assets? Over to you, Travassos.

Thank you for your question, Gabriel. The market is quite upset when it comes to escalating costs. We've defined our strategy on a case-by-case and proposal-by-proposal basis. Our intention is still one of diversifying. We do that in the FPSO, subsea lines, and systems market. In that market, we acquired these components, and in the rigs, we work with freights. These are temporary demands for rigs. We have no intention of purchasing the rigs but keep monitoring the market and entering into contracts that are more advantageous to us, reducing the risk of operators and contracts where we guarantee demand and can flexibly use the rigs. That is how we've been dealing with the tightness of the market.

Thank you, Travassos. The last two questions come from Luiz Carvalho. The first one goes to Sergio. If the company generates cash in excess of the reference cash flow that's been defined, what are the policies? Dividends above the policy, at which point of the list of priorities does the company think about finding a balance between distributing dividends, as it did in 2023, as opposed to the new reserve? Sergio, over to you.

Thank you for your question, Luiz. As I said in some of my previous answers, we should consider that there might be a lack of connection between net profit and cash flow. The reserve is built based on cash flow. The cash flow is not directly related. We need to consider this lack of connection, because the reserve was created to guarantee dividends, resolving problems with cash flow and net profit. The guidelines state that we have to maintain a strong and robust balance across all levels, assets, liabilities, indebtedness, maintenance of the net assets of shareholders, and whatnot. So the first guideline for the generation of cash is to reinforce our balance. This will help ensure the company continues to grow as a key part of Petrobras' culture. We look at cash allocation from a value-creation perspective. This will keep happening. We'll keep focusing on generating value. Cash has to be allocated wherever it adds more value to the company’s portfolio, including oil, gas, and energy transition. Dividends are important, as one reason the company exists is to compensate its partners. There are others too. The decision to create the reserve indicates that Petrobras is still committed to meeting its requirements. The generation of cash flow intends to create dividends as well. The creation of the reserve was meant to add transparency and rule out possible impacts in adverse scenarios.

Thank you, Sergio. The last question goes to Tolmasquim. In addition to offshore wind, does the company see itself as a producer of biofuels, whether it is in ethanol or biodiesel? What about new biofuels like SAF and renewable diesel? What are the company's ambitions given Brazil's excellence in producing sustainable biomass?

Thank you for your question, Luiz. Brazil has a gift of producing biomass very well. We have available land, abundant sunlight, and water. So we really are the country of biomass. It makes sense for Brazil, especially Petrobras to be in liquid fuels because we have logistics for that. We're looking at this entire chain. We're examining how consumption occurs and how biofuels can fit there. In transportation, we're looking at renewable biodiesel, which uses a 5% mixture of plant-based oils. This requires very little investment, producing high-quality products—diesel grade similar to oil-derived diesel. In aviation, we have plants dedicated to use 100% plant oil for aviation fuel. This is significant because from 2027 onwards, the aviation industry aims to decarbonize, creating a huge market shortly, where Petrobras is well-positioned. In maritime, we also have opportunities. A ship operated by Transpetro is using a 24% biodiesel mix, achieving good results. Regarding biomass, we can also talk about replacing some petrochemical products. The Riograndense refinery in southern Brazil uses vegetable oil to produce substitutes for petrochemical products. This makes a lot of sense. I'll pass it over to William for more detail.

So, Luiz Carvalho asked the question, right? Thank you. Professor Tolmasquim's answers were great. I'll just add, along with the energy transition area being led by Professor Tolmasquim, we have three important fronts. The first is biorefineries. We have three plants producing or processing R5, renewable biodiesel. In Kubaton, it was the first one. This week we're starting operations with Replan. By the end of December, we'll also have Reduc, providing a capacity of 10,000 cubic meters a day. As Professor Tolmasquim said, we have a plant in studies in Kubaton where we'll implement hydro-refineries, completely plant-based to create our diesel and SAF, which aligns with international regulations. In refineries, we had a test with our Braskem partners in the Riograndense refinery, processing 2,000 tons of soybean oil. We're producing some byproducts there that are plant-based, particularly green Nafta and green propane. With this test, we’re talking to a few partners to set up a biorefinery by the end of 2026. In energy transition, we aim for energy efficiency programs to reduce carbon footprints for our refineries. We work with international consultants analyzing many companies. We're using artificial intelligence in this program. Additionally, we plan to improve energy quality for our power production, far more refined than gas in economies like Brazil. We aim to include photovoltaic generation, with initial studies ready for the first half of 2025. We're studying to have net exports of energy. We’re also looking at replacing gas in hydro-refineries by utilizing green hydrogen instead. We're in discussions with several international technology firms to move in that direction. This is a fundamental development. An agreement with Unigel aims to produce green ammonia through green hydrogen synthesis. We’re in an NDA phase, so details can't be shared yet. This outlines our energy transition initiatives.

Thank you, William and Tolmasquim and everyone who participated. This concludes our questions-and-answers session. If you have any additional questions, you can send them to our investor relations team. I will now hand it over to our Investor Relations Director, Sergio Leite, who will give us his closing remarks.

Thank you to everyone who sent us questions. It's very important for Petrobras to receive questions from analysts, answer them and understand what needs to be clarified for you. We’d also like to thank our fellow Directors who participated in this webcast. As a closing remark, Petrobras is still growing, solid, and has provided robust results. It grew during the second and third quarters and continues to offer solid results. Comparisons are always pertinent and help our management team. The team that organized this event deserves congratulations: accounting, risks, and everyone involved has provided a lot of information to the market. We must be careful when drawing comparisons. If you look at the same company in different strategic moments, those comparisons require some attention. During the same quarter last year, the company was reducing its investments and concentrating on exploration and production. Right now, we're considering our resiliency for the next 70 years. We hope to deliver value to our investors for that duration. Petrobras's growth in market value right now reflects our strategy and the team's deliveries. We're growing 75% of market cap, about 8% in the first nine months of the year. This growth is based on strategic changes requiring discounts. We had a re-election, and the team changed. It's expected for the company to experience fluctuations as expectations for the new management evolve. As the team and strategic drivers become clear and risks are reduced, the company is usually valued correctly. Despite adversities, reduction in Brent, crack spread, and 7% foreign exchange effects, our gross income is rising, our EBITDA is increasing, and we're reaching record production levels. We're providing value to our investors. Thank you, and as per usual, I recommend buying Petrobras shares. That's the best thing you can do. Thank you, and have a good day.

Thank you, Sergio. This concludes our presentation. It's already available on our Investor Relations website. This webcast will soon be available there as well. Thank you, and have a good Friday.