Petrobras - Petroleo Brasileiro SA Q2 FY2024 Earnings Call

Good morning, and welcome to Petrobras' earnings call for analysts and investors. We are going to discuss our results for the second quarter of 2024. It's a pleasure to have you here. This event will be held in Portuguese, but it is being simultaneously translated into English. You may access the links to both languages on our Investor Relations website. You may send your questions via email, [email protected]. We have with us Clarice Coppetti, Executive Director of Corporate Affairs; Claudio Schlosser, Executive Director for Logistics, Trade and Markets; Fernando Melgarejo, Executive Director of Finance and Investor Relations; Mário Spinelli, Executive Director for Governance and Compliance; Mauricio Tolmasquim, Executive Director for Energy Transition and Sustainability; Renata Baruzzi, Executive Director for Engineering Technology and Innovation; Wagner Victer, Executive Director for Production and Processes; and William Francis, Executive Director for Industrial Processes and Products. We also have other executives from the company with us. We will begin with a video bearing a message from our CEO, Magda Chambriard.

Good morning, everyone. I want to thank the investors, analysts, and the entire audience that joined us today. Concerning the results of the second quarter of 2024, I can say that they were very solid and occurred as expected. A nonrecurring event, such as the tax agreement with the Ministry of Finance, brought significant advantages to the company and to the Federal Union that were recognized by the market. Moreover, the strong exchange rate volatility in the period with no impact on the company's cash flow or equity affected our internal accounting, impacting the quarterly results. Since our CFO, Fernando, will present our results in more detail, highlighting our free cash flow, net income, and the recurring and nonrecurring events that influenced our results, I will take this opportunity to talk about the future we envision for our company. Ladies and gentlemen, our top priority is to pave the way for Petrobras to be enduring and as relevant or even more so to Brazil than it is today. This will only be possible if we continue to grow efficiently and with profitability. This means that we must be agile with full adherence to operational safety, people, and established governance rules. We need to be agile in maintaining our track record of replenishing reserves while on the path to net zero; we seek more sources of clean energy. It's important to note that without the replacement of oil and gas reserves, Petrobras would be doomed to failure. All our achievements have been conquered through technological capabilities and our employees' firm willingness to overcome challenges and surpass the countless difficulties inherent to offshore exploration and production with safety and respect for the environment. These efforts culminated in the transformation of the pre-salt operation into undeniable wealth for Brazil. Ladies and gentlemen, although there are still exploration opportunities in the pre-salt and Southeast basins, we cannot forgo the responsible exploration of the Brazilian equatorial margin basins. It is essential for both Petrobras and Brazil that we obtain the license to drill exploratory wells. This is because if the potential of the area is confirmed, our society will see undeniable results in employment and income. In addition to the equatorial margin, we need to continue exploring the Pelotas Basin, another promising area in the south of Brazil. We're also looking for opportunities in foreign territories, especially in South America and the Atlantic basins of Africa. We recall that last weekend, we discovered natural gas off the coast of Colombia in a block with a high potential for new discoveries. Ladies and gentlemen, it is our agility and skills that will allow us to initiate production this year ahead of schedule at the FPSO Maria Quitéria, in the Jubarte field. We have excellent, highly profitable assets, and we will apply all of our expertise to generate more value for our governmental and private shareholders. Later this year, we will also initiate operations for the Rota 3 gas pipeline, increasing the supply of pre-salt gas to the Brazilian market. Within this context, we are attentive to opportunities for expanding the gas market, which include its use both as fuel and as raw material. We will seek to resume fertilizer and petrochemical operations, which add value to our natural gas production. Our long-term vision focuses on investments in E&P and the pursuit of diverse renewable energy sources. These two elements are essential to ensure the company's growth and profitability in the coming months. To our investors, we guarantee respect for business logic, transparency, and our governance, which is recognized as above average for companies in Brazil, including oil companies operating in our country. We guarantee capital discipline and controlled leverage. We ensure that we will do this by considering the investments necessary for the company's growth and the demand from state and private shareholders for dividends. We understand that in this way, we will be contributing to stimulating the country's economy and meeting the expectations of our shareholders. Lastly, I thank you for your attention and trust and emphasize that we are firmly committed to maintaining an open dialogue with transparency to demonstrate the relevance of the choices we will make to build an even more solid and profitable company. Thank you very much.

Thank you to Magda, our CEO. We will now begin our presentation on the results for the second quarter of 2024. Our second slide presents our usual disclaimer about forward-looking statements. We will now hand it over to our Financial and Investor Relations Officer, Fernando, who will continue. Go ahead, Fernando.

Good morning, everyone. It's a pleasure to have you here for a discussion on our results for the second quarter of 2024. As we just heard, we are on a path of growth. This represents our vision, and that's why our team, including our top management and employees, has remained committed to this journey to enhance our relevance in society and provide appropriate dividends and returns to all stakeholders and shareholders. Let's review our operational highlights, and I would like to emphasize a few key points. In the first quarter of 2024, we achieved the planned production for the initial two quarters of the year. Over the last 12 months, our oil and gas production increased by approximately 2.4%. The pre-salt's contribution in the second quarter of 2024 accounted for 81% of the company's total oil and gas volume, underscoring the importance of new production systems for our growth. Marechal Duque de Caxias has the capacity to produce 180,000 barrels of oil and compress 12 million cubic meters of gas daily. The FPSO Maria Quitéria arrived last Monday and will be redirected to the Jubarte field, where it has the potential to produce 100,000 barrels of oil and 5 million cubic meters of gas per day. Almirante Tamandaré in Buzios left the shipyard in July and is expected to arrive in Brazil later this year, serving as the first high-capacity unit for Petrobras, capable of producing 225,000 barrels of oil daily and 12 million cubic meters of gas, with operations expected to commence next year. All these units represent a new generation of more efficient platforms with a nominal capacity around 400,000 barrels a day, representing 15% of our current output. The outlook for the future is promising, allowing us to enter a new growth cycle. In refining, we maintained a high level of processing with an over 90% utilization factor, specifically about 91% in the second quarter, achieving the highest sales of byproducts compared to the previous quarter. Our performance in diesel, gasoline, and QAV reached around 70% of the total produced volume, reflecting our continuous efforts towards efficiency and versatility in processing plants. Another positive update is that processing plants are nearing completion. In August, we will reach a significant milestone by initiating the reverse pressurizing of the pipeline, balancing the pressure from both deep and shallow layers, now operational. We anticipate seeing the first commercial gas in the third quarter. The Rota 3 pipeline, including OPGN, is strategic for Petrobras and the entire country, processing 21 million cubic meters of natural gas and increasing the natural gas supply to the Brazilian market while reducing GNS imports. This will significantly contribute to the results we will present next. We have achieved consistent results with strong cash generation, reaching the lowest level of financial debt since the third quarter of 2008, 16 years ago. Our CapEx increased by 12.5% this quarter compared to last year. Later, we will cover certain events excluded from the first half of 2024, primarily related to accounting, which have minimal impact on the company's cash. Excluding these events, our net income was USD 5.4 billion, our EBITDA was USD 12 billion, and operating cash flow was close to USD 10 billion, consistent with the previous quarter. Additionally, we would like to note that this quarter, the ANSA operation resumed, enabling the reversal of an impairment loss. Regarding our societal contributions, we experienced a 24% increase in tax payments relative to the second quarter of 2023. It's crucial to highlight that over half of the company’s cash generation is being returned to society. In just the second quarter of 2024, we paid BRL 70 billion in taxes to federal, state, and local governments, marking a significant contribution to society. The following slide illustrates one-time events that affected this quarter, particularly our accounting results with minimal cash effects, as previously mentioned. In the second quarter of 2024, significant exchange rate fluctuations occurred, with the Brazilian real depreciating by 11% against the U.S. dollar, resulting in a negative impact of USD 2.3 billion. It's essential to understand that this impact arose from a dollar obligation among Petrobras entities and does not result in a true impact on our company; it is purely accounting. We also complied with a tax transaction widely communicated, leading to an expense of USD 2.1 billion, settling major legal disputes totaling BRL 45 billion. Economically, this was a favorable negotiation for our company, and other companies in our sector are joining this program. We recorded additional one-off events amounting to approximately USD 1.3 billion, culminating in an accounting loss of $300 million. Excluding these events, our net income remained at $5.4 billion, identical to what we reported in the first quarter of 2024. The subsequent slide indicates that we have achieved impressive results in EBITDA and operating cash flow. Excluding the one-off events influencing this quarter, our EBITDA reached $12 billion, consistent with last quarter. Operating cash flow was about $10 billion, also mirroring the previous quarter. We observed a considerable shift in the international market, with a 34% reduction in the diesel crack spread, dropping from $30 in the first quarter to $20 in the second quarter of 2024, per barrel. Our cash flow generation has remained stable, producing a positive cash flow of $9.1 billion and a positive free cash flow of $6.1 billion. This has sufficiently supported our investments and financial commitments. We also successfully paid out dividends. Throughout the quarter, as illustrated on the graph's right side, we allocated cash to dividends approved in the previous quarter amounting to around USD 7.3 billion, including share buybacks. Additionally, we made $2.9 billion in investments and settled lease and liability payments totaling $2 billion. Net financial debt amortizations were $700 million, while financial expenses accounted for $400 million. Our CapEx for the first half totaled $6.4 billion, a 12% increase from the previous year's first half. We expect to finish 2024 with investments between USD 13.5 billion and USD 14.5 billion, a rise of 7% to 15% compared to 2023. Importantly, this revision will not affect the company's production trajectory. Slide 9 discusses our financial debt. It has reached its lowest level since the third quarter of 2008. We are now at $26 billion, a reduction of $2.5 billion versus the previous quarter. Gross debt went down to $59.6 billion. Our cash position is robust and we have reached over $13 billion at the end of the quarter. We concluded the quarter with a spread to the U.S. treasury rate of 2.2%, the lowest in recent years, and an average debt maturity of nearly 12 years. The next slide shows our commitment to shareholder remuneration and financial sustainability. Our Board recently approved dividends and interest on own capital for the second quarter of 2024 of BRL 1.05 per share, which will be paid in two equal installments in November and December of 2024. Shareholder remuneration for the second quarter is BRL 14.3 billion, which includes share buybacks amounting to BRL 700 million and dividends plus interest on capital of BRL 13.6 billion. Our strong cash generation has allowed us to pay these dividends according to our current policy. The next slide shows an accrued vision for this half in which dividends exceed our results due to these one-off events that had a residual impact on cash. This has allowed us to comply with our shareholder remuneration as we have paid investments, taxes, salaries, and so on. We are using our capital reserve created in 2023 to ensure resources for dividend payments, among other things, helping to balance eventual gaps between cash and earnings. In 2023, our results were above our cash, which was enough to pay dividends and constitute a remuneration reserve. This half of the year, we had the opposite situation. So now we are using the reserve for what it was created. To speak in numbers. In the April General Assembly, we approved BRL 21.9 billion for this reserve. Considering we had BRL 27 billion and the available cash of BRL 20 billion, we are using BRL 6.4 billion from our remuneration reserve to pay dividends and interest on our own capital. The balance remains relevant, BRL 15.5 billion. We continue with the next and final slide. Here, we can see how we were able to achieve a total shareholder return above the majors. Despite these advances, we still have a gap on enterprise value to EBITDA. This is an opportunity for the company. We have to continue working to deliver value through growth and profitability with discipline, especially in capital and governance. We see many opportunities for Petrobras. We have profitable projects. We can expand our production, decarbonize it, and also provide more value to our shareholders and to Brazil. This concludes my presentation. I will now pass it over to Eduardo, who will begin our questions-and-answer session. Thank you, everyone.

Thank you, Fernando, and we'll start the Q&A session. I kindly ask each participant to ask at most two questions so that we can have as many participants asking their questions in the session as possible. The first question comes from Bruno Montanari from Morgan Stanley.

My first question is about the compensation to shareholders and thinking about a decision where we’re potentially going to be paying more extraordinary dividends. What’s the company’s perspective for the best moment to make this decision? Would you wait until the end of the fiscal year? Or could we think about payments after the closing of the first or the third quarter of 2024, where the cash flow must be very high? And concerning compensation to shareholders, the company concluded the pilot purchasing program. So what was – how successful was the compensation strategy? Should we expect maybe a bigger buyback program? And my second question is about international exploration. Could you talk about the strategic fit of potentially diversifying the exploration portfolio, such as, for instance, in Namibia's basins? And potential disbursements with these acquisitions, are they considered in the investment plan? This is because expenses with exploration are up to approximately $1.3 billion. This could be small vis-à-vis some opportunities that we can see such as the case of Namibia, for instance.

Thanks, Bruno. I think he mentioned some important aspects that we have to clarify. We’ve discussed a lot about that. So I’ll take the opportunity to clarify about how the reserve works. Having a reserve does not mean that we have cash flow. It’s an accounting reserve and they are different concepts in that regard. The reserve is an accounting provision associated with the allocation of profit in the fiscal years. We know that there is no perfect correlation between the generation of profit and cash generation. These can happen differently. Last quarter, we had a low profit, but we maintained stable cash flow generation. So I’d like you to understand that when you decide to pay dividends, whatever they are, we consider the company’s cash flow and the capacity to generate the flows in the future, not to the reserve. In 2023, Petrobras had more profit than what it paid in dividends, as I showed in the presentation, and that’s why it created a BRL 21.9 billion reserve and the opposite happened in the second quarter due to losses of the quarter because of exclusive items associated with a strong cash flow generation. We use the reserve to subsidize payments. By the way, I wish to remind you that this possible mismatch between profit and cash flow served as a motivation for the creation of the reserve in 2023. If we didn’t have a reserve today, it would be difficult for us to pay the quarterly dividends since our dividends amounted to BRL 27 billion and the profit was BRL 20 billion, a difference of approximately BRL 6 billion, and that’s why we resorted to the reserve. About the decision to use the reserve, it’s just natural to assess it when we approve the strategic planning; extraordinary payments depend on future cash flows and not the capital compensation reserve. Highlighting the decision to use the reserve yesterday will not affect our capacity to pay extraordinary dividends. About the buyback program, we have had no formal discussion about that. We completed the program in August at almost $1 billion, and what we’re doing now, I asked my team to assess the real effectiveness and efficiency of the capital for that operation. To your second question about Namibia, our intention is to diversify the portfolio and that’s key for the company's growth. As a reminder, according to the current strategic planning, we expect to reduce production as of 2030. I consider that far from ideal, and therefore, we need to make efforts in Brazil or in the equatorial margin in the Pelotas Basin or abroad to have an adequate profile for long-term production. And I want to emphasize that we’ll only enter into agreements at adequate prices; we want to generate value with our experience in deep waters. About the CapEx, as you mentioned, we have not published how much we have allocated for bids, etc. because that’s a business secret. But from a practical perspective, the lack of allocation will not prevent us from leveraging opportunities. We just need to keep the yearly budget stable.

Now Vicente from Bradesco.

I have two questions. We're now entering a period of higher demand for diesel. And apparently, Russia is prioritizing the supply of other markets. I think the shipments to Brazil are decreasing. What's Petrobras' strategy to supply diesel to Brazil in the third quarter? Are you going to work along with other importers or not? The second question, I'd like to understand, from a technical standpoint, what based the decisions to change the E&P agency? Can we expect anything different or the development programs, especially if we think about costs?

Vicente, you did a perfect analysis. We have a seasonality in the second half of the year, which is related to additional consumption of diesel, whether it is for crops in Brazil or due to stock formation in the north. So there is bigger pressure on diesel definitely. And about the supply, Petrobras is not the only company that supplies to Brazil. We have private refineries and petrochemical companies. We also have importers that operate in this market. In terms of planning, what we do is a multi-annual planning knowing there is a certain seasonality that recurs every year; our plan provides for a series of measures. The most important one is about the downtimes; we try to allocate them to periods where the demand is lower, like January, for instance. We also do active management of our inventories. So knowing about this demand fluctuation, we try to take advantage of our exports of byproducts to Asia. And using backward shipping, we also sent back diesel to replenish the inventories. And you talked about Russian diesel and its prioritization by the domestic market. We do not import diesel from Russia, so it will not affect our plans. We're fully prepared to cater to the demands of our customers. From the perspective of forming new teams in the exploration and production department, we have decided to replace some executive managers. But Petrobras has a very solid process whereby it educates and trains its workforce. Historically speaking, it has always trained excellent workers. The new director is one who makes decisions about the new management positions, especially the executive managers and general managers. She is a geologist with 40 years of experience and has participated in many discoveries of the company. The fact that the company selected her for this position indicates a wish to expand its portfolio of reserves. When she sets up a team, she chooses experienced professionals, mainly from the technical staff of the company. If we take, for instance, the two new representatives of deep and ultra-deep waters, one of them will remain in its position. Paula Marinho has been with the company for 20 years, and Cesar has been with the company for 22 years. Talking about exploration and production, there is an externally renowned geologist with 37 years of experience with the company replacing Bruno, who is also acknowledged in several areas. He's a professor in various departments and has 21 years of experience. We have another professional with 37 years of experience, and Bruno has 20 years of experience. Professor Eduardo, who has been working as a consultant to the presidency, has fantastic experience. He is a reference for the internal market and the foreign market. This is an extremely robust and solid team with professionals with long-term experience. Taking a parallel with the law of SAs in Article 17, they can occupy positions as directors or higher in any state-owned company in Brazil. It’s a very robust team widely discussed by Director Silva and President Magda. About Buzios, I spent this morning at our operations center. Currently, we have a platform with a program to minimize downtime, and we're producing thousands of barrels of oil and will reach record production exceeding 800,000 barrels. We expect to ramp up from Admiral Barroso, receiving authorization for additional production than the original project. With the arrival of Admiral Tamandaré, we will incorporate a platform to the Buzios system with a processing plant of 225 barrels. What's ahead of us is extremely promising, especially for Buzios. As soon as the platform arrives, we’re planning to initiate an internal motivational process to move towards 1 million barrels of oil in Buzios within a defined timeframe.

On to the next question from Pedro Soares, BTG Pactual.

I have two questions. The first question goes to Fernando. I think you were very clear when you explained that extraordinary dividends are not attached to your decision about them. Is not attached to the reserve itself, but rather the cash flow of the company in the context of what you forecast for investments. So maybe you could explain to us what you imagine for an ideal cash flow for the company since the $13 billion seems to be above or below so that we can have a better understanding of expectations for the extraordinary moving forward, given that your investments are apparently very well funded by the quarterly cash flow generation? And about production, I’d like to hear from you about the July production levels. We’re a bit in the dark as it were with the daily information from ANP and also how long it will take us to normalize and to return to normal in the exit rate for 2024. That’s it.

We are operating within our projected production levels and expect to maintain these levels up to the year's end at 3.8 billion oil equivalents. We have faced some challenges to our production forecast for July, including a few downtimes that have been postponed, specifically with the P74 and other incidents we are addressing. A downtime at Peak 38 was caused by an unforeseen issue, but we are actively working on recovery and anticipate returning to normal in about 30 to 45 days. We are also resolving a problem at P53. These challenges have been factored into our expectations, and we consistently operate within the margins of our business plan. We have a positive outlook for production not only in July but also for next year, largely based on insights from our risk department, particularly regarding the growth at Almirante Barroso. The arrival of Maria Quitéria to the Jubarte field is likely to accelerate progress in line with our business plan, as she is already on her way to the location in Espírito Santo. Admiral Tamandaré is also on the way, and we are committed to making every effort to advance our plans. While there have been some unforeseen issues, this is typical in our industry, and we are working closely with regulatory agencies to ensure safety standards are maintained.

Well, about the ideal or optimized cash flow. Thanks for the question. I think this is a discussion that at finance in the finance department of any institution, we’re constantly discussing. It’s a living organism that depends on the current scenario and the investment landscape, if you’re divesting or investing or going through a flat period inside the company; all of that interferes with the ideal cash flow size that we will attempt to achieve for the company, which we call an optimized cash flow. Of course, this is not an accurate number; we always work with a range, and we use every piece of information we have in terms of flows and strategic planning as an important input. This is what generates the biggest outflow. Operational resources also factor into this; we feed that into a modeling and add stress situation data, and its size needs to be able to support it to withstand high impact unexpected events. We’re talking about the tail of the curve statistically speaking, and these tests have been modeled robustly at Petrobras. When I came to Petrobras, I was dedicated to understanding that. I was happy about the modeling that we have, and it’s in the sense that we're trying to achieve that. The curve has reached 13.5%, and there were some points in the past where we reached 8 million. We have a metric we don’t publish, but we understand that optimization is not working 100% yet. By 2025, we’re going to get there.

I have two questions to focus on. First, regarding internationalization, there has been a lot of discussion about licensing, and Magda noted the significance of the equatorial margin in Pelotas for the company. However, we are encountering delays in securing these licenses. Is internationalization considered a backup plan to address these delays related to Pelotas, or is it part of the company's overall strategy? If it's the latter, how should we approach this in the future? Second, regarding CapEx, there have been questions about the investment curve, whether there has been a reduction in the guidance for this year, and if this is due to a drop in production or simply that efficiency has improved over time. Specifically, with lower CapEx, should we expect this to be pushed to next year, or is it genuinely a result of efficiency gains? How can we accelerate that process in the coming years?

Thank you, Gabriel. Our plan last year was really $18.5 billion. Now it's between $13.5 billion and $14.5 billion, but it's still too early. We're still in the middle of the strategic plan, so it's early to accurately say what the final amount is going to be. What I can tell you is that we're going to try to deliver a CapEx that's realistic and provides growth for the company. Our CapEx for this year is higher than last year; certainly, the one for next year is going to be higher than this year's CapEx. I can guarantee that to you. We need our plan, and that’s what we are trying to do. But we need to have an efficient and effective CapEx that brings about an increase to our production curve. Now about the licensing, our strategy is to focus on the replacement of reserves. We've been declaring that President Magda since she arrived has been talking about reserves replacement. We are not comfortable with the previous strategic planning that shows a reduction as of 2030. We are trying to revert that. Every drop of oil matters to us. Therefore, we’re going to analyze any opportunity that is economically feasible. It needs to bring about generation of value to the shareholders. About the equatorial margin, of course, the fewer opportunities in Brazil means a greater need to go international. We will do that if necessary, with the purpose of catering to the domestic demand for electricity. We reinforce the importance of the equatorial margin. We'll move forward with the licensing process. It's a moment for exploration, not production, but our expectation is pretty high. We are optimistic about the exploration and believe we will have positive production and licenses. We also feel positive that we're very close to being granted licenses, optimistic as it should be, right? Victer, do you want to add anything?

Certainly, I’d like to add that last week we had a meeting and when we started talking about the behavior of CapEx versus the planned CapEx, we had this meeting and we opened the curve. When we analyze the CapEx, we can analyze it as a whole or for specific periods, including Buzios. We saw sometimes the physical progress is much higher than the current progress. Despite what Gabriel said, it could be seen as a gain of efficiency. So often, the CapEx being lower does not always represent a delay related to the process. There’s a way to recompose the acceleration of the CapEx. When we look platform by platform, we see the physical behavior of the platform. Of course, the deadlines are readjusted for each review of the business plan, but the physical behavior is above that of the financial curve. We’re always trying to have a physical behavior very close to the financial behavior, influencing future prices, etc. Director Renata can also maybe add something about the meeting.

Good morning, and I want to thank everybody that’s attending. As Victer said, the most important factor preventing us from realizing the CapEx was this mismatch between the financial payment with the physical milestones. We’re adjusting that, and it will not get in the way of the first period. Another thing that happened was that we postponed signing the contracts for the new projects that are outside of the horizon or the plan, only for 2029 and 2030, which will not impact the oil curve now. Another aspect impacting CapEx was that we have a pool of rigs catering to the needs of the CapEx and OpEx, and the allocation occurs by analyzing the best results for the company. We had planned much more specifically for CapEx, but there was an opportunity around wealth maintenance, and we could get more oil now. So we reallocated from CapEx to OpEx. Postponing the downtimes in refineries is another impact on the CapEx; at RNEST, we have construction works, which means we’ll have downtimes for RNEST. To avoid two incidences at the refinery, this downtime for RNEST was postponed to coincide with the beginning of construction works for next year. Those were the reasons. There is no impact on the oil curve for this year. On the opposite, we’re being able to anticipate Maria Quitéria, which is already in Brazil, gone through customs, and will likely soon move to its location for anchoring and line connections to extract the first oil. Almirante Tamandaré is already on its way to Brazil; we will make every effort to anticipate or move its production forward. That’s basically what I had. I don’t know if you have any more comments.

Thank you, Victer, and thank you, Fernando. Let's continue with the next question from Luiz Carvalho.

Congratulations on your results. I have a couple of questions. The first is for Fernando. Let’s go back to capital allocation. I’d just like to talk about rebalancing M&As. You’ve indicated a minimal cash position that you mentioned before and your gross debt is dividends. As Director Victer mentioned, the company has four units effective that will come online over the next months. The debt for them would need to go into balance. If the company temporarily goes beyond its gross debt limit set by the planned $65 billion, would it still be possible to pay dividends according to your 45% policy in the cash flow? How would that impact the possibility of paying out extraordinary dividends from 2023? My second question is about M&As. You’ve discussed this, but I’d like to ask about RLAM. So how are the discussions going for a transaction there? Would you intend to maintain controls? Would you see a possibility of having a minority stake? Would you wait for CADE approval? How do you deal with these M&A disbursements and the potential for dividend payouts?

Thank you, Luiz. It's important to clarify that ordinary dividends are mandatory. We have a policy that given the three conditions set, which are having a positive accumulated result, debt under $65 billion, and sustainability in the company, then dividends can be paid out. The policy is set by the CA. If we had excess debt, then we could look at it and see the company's cash conditions, whether it's a temporary situation or structural, and then we can propose payments. But Luis, I want to assure you that we don't expect our model, which is quite robust, even with random simulations. None says that we would go over $65 billion in debt. We feel very confident in saying no risk of not having ordinary dividend payouts. Regarding extraordinary payouts, we will need to study this during our strategic plan. That's when we'll have a better view of how much financing our investments require, our availability for cash, and how robust our risk models will be ensuring the company is sustainable.

Hi, everyone. This is William. Thank you for being here. Regarding our refinery in Bahia, I’m glad you mentioned its name because it’s one of the most significant refineries in the country’s history. We are in discussions with the group about a potential partnership. We’re not sure what percentage we would hold with RLAM. There’s also the possibility of building a biorefinery plant next to the refinery, which could be another partnership opportunity. For the refinery itself, we are completing our due diligence process, evaluating economic viability, integration, and synergy with our other refineries so that we can make a proposal for the group at the appropriate time. Our due diligence should conclude soon, and progress is looking positive. Additionally, I want to emphasize that it was the company that approached us with a potential joint business initiative. This means that various collaborative opportunities may arise. Nothing is finalized yet, and what’s important is to ensure optimal returns for our shareholders and effective capital allocation.

Thank you, Fernando. Thank you, William. The next question will be asked by Regis Cardoso from XP.

Hi, everyone. I'll start with a question on RLAM. What is the rationale for Petrobras to buy it back? Would you need CADE approval, considering that this refinery was listed as a divestment? I know that our refinery changed significantly. It was upgraded, so if you could tell us a little about what's changed, and there's also a green refining process that I think you can mention? Basically, I would like to ask about RLAM. A different question would be about the integrity of the pre-salt. There are some platforms in the Tupi and Sapinhoa fields that have been producing for more than 10 years. Can you tell us a bit about maintenance, system integrity? Have you assessed how much the utilization rate has changed, and what about maintenance or life extension?

Let me begin before I pass it over to Fernando. There was no material change; RLAM is working with the same hardware. There were some investments, but this was just regular downtimes. With the catalyst unit, that’s the conversion unit that reduces residue and increases high-octane gasoline production, and also early dredging in the channel would allow bigger vessels to come in, making the refinery more flexible. No significant change occurred; we continue with the same hardware. Concerning the rationale for acquiring RLAM, I can say that we are working with some synergy, not only integrating refineries, but also recognizing the synergy between petrochemicals and refining. Over to Fernando.

Yes, this synergy is essential to consider in our rationale. If these synergies are captured and we understand this is a good deal, we’re discussing a profitable business that will generate results and value for our shareholders. This is the goal since I was invited by Magda to start it. We’ve always been business-minded and of course focusing on social, environmental, and governance aspects. But if it makes sense, if synergies are captured if the right price is set, then why shouldn’t we do it? Any deal, if it has the right ESG aspects, the right pricing, and generates value for our shareholders and Brazilian society, we will analyze it.

Thank you for your question. I think that's a great question that allows us to explain a couple of things. Most of our production is in the pre-salt layer, so this concern about the future of the pre-salt is essential for the company, our shareholders, and the entire market. Pre-salt does not only contribute to the company's results but also to society and our shareholders with special participations and royalties. We have a very robust system to manage our reserves, the flexibility between the injection of air, excuse me, water, or gas, we're very close to the wells, but there are conditions that ensure this will continue in the future. First, you mentioned Tupi; we have very experienced partners. This discussion is happening not only within the company but with partners in this process; this contribution is vital. We’re reinforcing our teams with engineers; we have about 140 reserve engineers, and we’ve contracted 30 more engineers. They are usually the people who analyze this entire process and the entire lifespan. It takes about 10 years to train one engineer, and we’re investing to assess 4D seismic, the traditional 3D seismic analysis with the fourth dimension, which is time. This allows for better management of reserves. We have something unique to the company's history; we have two executive managers who are very experienced and are reserve engineers. One of them is the executive manager. The fact that we have a CEO who is a reserve engineer and has worked in regulations demonstrates how aligned our teams are in managing our reserves. I believe we have never been as aligned as we are right now. So I'm proud to say we have a close technical alignment, especially in this area, which is essential for the company's future.

Magda, this is William. I just wanted to add and say that she has a Master's in Chemical Engineering. In different areas of the process, we have a lot of requirements, and she is a very detail-oriented leader in her requirements. It's important because it drives teams and shows them that they’re supervised from the top. Recently, she visited our COE, our integrated operations center, and spoke to our representatives who are there 24/7. Each of our fields, our operations centers has an engineer on duty to manage that field and extract as much as we can. That will be the company’s future.

The next questions come from Caio Ribeiro from Bank of America.

Firstly, can you provide an update on Petrobras and the potential asset purchases in renewable energy? Has there been any change regarding the timing and scale of the projects? Additionally, Petrobras has a strong process for approving new investments, and there's evident interest in accelerating and increasing these investments. Regarding your strategic plans, do you plan to make any adjustments to this process, or do you believe the current process is ideal?

Thank you for your question, Caio. As you know, we have two main types of investments, M&As and internally generated investments. Your question focuses more on M&As. When it comes to M&A, we're focusing on platforms; the M&As are currently much more connected to onshore wind power, albeit not exclusively. The idea is to have investment platforms. What are those about? They’re about finding large, experienced partners with a project portfolio that may be underway or even greenfield projects or projects under construction so we can establish a partnership. The idea here is that it’s 50% of Petrobras' participation and 50% from the partner, but that could be negotiated. To start this analysis, the Board of Directors must approve the analysis of this opportunity. They have approved five potential platforms to be added to the portfolio that amounts to more than 3 gigawatts in capacity. Our goal for the plan was to achieve a five-year period with 5 gigawatts in terms of renewable projects. One of these five platforms, after approval by the Board, we presented a non-binding offer; as is common with these negotiations, we did not execute the agreement with them. Now we have four being analyzed and under negotiation. I know that people expect us to communicate that, but it can only be communicated if we close the deal, and that will be part of the process, of course. In addition to the four under analysis, there are other big companies, and we're thinking about bringing them into the portfolio. The M&A model we're working on focuses on that, and in terms of organic investments or internally generated opportunities, we have a portfolio with four pilot projects and ten projects analyzed.

To move to the next question, we don't intend to make any changes to the methodologies or governance, as the President said, actually, we've been an example of governance among the domestic companies, and we intend to maintain governance as it is. It's robust and adequate. It provides robustness to our materials and possible scenarios. So we don't intend to make any changes to the governance at all. We want to keep doing what we're doing. What we did create at the company with the arrival of the new President is a department that seeks to improve interfaces across its departments. That’s our main focus. These interfaces and Victer is the officer in charge; he is Interim Director right now, and he is in charge of achieving this internal synergy. The interfaces need to be perfected if we want to generate the required speed and energy to expedite our plans in this growth trajectory so that there’s no drop in our oil reserves. I agree; the integration process is following strictly our internal governance principles. There are always opportunities for improvement in any organization, and that’s what we permanently try to achieve.

Next questions come from Lilyanna Yang from HSBC.

I have three questions, if you allow me. First, about the supply chain. Could you please share your perspective on the global supply chain and the need for local suppliers? What is Petrobras' role in developing the domestic naval industry and ensuring more efficient deliveries at fair prices? I understand the company's focus moving forward will be more upstream-centered. However, what are Petrobras' investment opportunities in downstream and energy transition? You mentioned fertilizers and electricity generation, but what about petrochemicals or fuel distribution? Additionally, do you see any need to change governance for the approval of acquisition processes, especially regarding the requirement for positive VPL for certain projects, considering Petrobras recently changed its internal regulation for the statutory committees that assist the administrative committee? Lastly, do you expect to issue debt in the future, or do you plan to maintain room on the balance sheet for debts associated with the production platform so that your reference cap of $65 billion in raw debt is not exceeded? Those are my questions.

Concerning local suppliers, first, I want to highlight that any company prefers to have local suppliers and suppliers close to them. This makes it easier to have relationships with our vendors and the possibility to be close to them. We intend to be closer to our suppliers and understand their needs and difficulties so that we can adjust our hiring formats to add more domestic vendors to our database. Of course, we must always follow our governance principles; it must be advantageous for Petrobras; otherwise, it won't make any sense. We will work on developing this supplier portfolio, as it’s favorable to have local suppliers. We’ve worked on the prequalification of certain suppliers, closely with Director Spinelli regarding governance aspects. We're trying to recover our market with different hiring strategies to allow smaller companies to provide smaller packages until they become strong enough for bigger projects in the future. So yes, we have difficulties with suppliers, which isn't restricted to Brazil but also with problems concerning suppliers abroad as well. Yesterday, I had meetings with the company to understand our suppliers' difficulties. After the war in Ukraine and with the conflicts in the Middle East, the number of purchases from their customers has skyrocketed. Other companies are having to develop their own infrastructure to support their demand since it’s not catered to by either Ukraine or the Middle East. The global market is quite busy, and in Brazil, we're trying hard to recover with suppliers.

That’s a very good question because after COVID, the crisis and the war in Ukraine had an impact on several suppliers that provided services, and the world started rethinking its global change, seeking lower-risk solutions for its supplies. The Brazilian industry is based on a principle created by a law from 1997, celebrated at the first auction from 1999 that we should focus on local content. This isn’t something merely up to the company; it’s regulated by law. Petrobras has been managing this effectively in production and development, observing local content in subsea activity. We have a competitive subsea industry. Last week, we discussed that with Renata and Sylvia to expand the production capacity of flexible lines and new technologies in Brazil. This is not just a requirement for us, but also a business strategy that major oil companies will adopt, especially in Brazil, where we have developed a competitive local industry over decades.

As for governance, there are no changes anticipated; we have robust governance processes. We want to find opportunities that present the right levels of return. We’re focused on the E&P area at the moment and those results will be used for the energy transition that we need in the future. It is important to prioritize capital allocation and continue our strategy.

I'd like to refer back to the topic of the last question and connect it with maintaining the gross debt within limits and liability management. I'm referring back to whether Petrobras should be more active in bonds to roll out the debt bank that’s expiring. Are there any studies to manage this for your gross debt? Also, I’d like to understand your thinking when assessment M&As; are there any M&As that could bring gross debt into the company? For example, RLAM has corporate tax numbers that have some gross debt between $5 billion and $6 billion. How do you assess this kind of M&A that includes significant gross debt on your balance?

We’ve given details on ideal cash levels. This is approved according to our strategic plan and the needs we may have for financeable projects. I usually work with minimal cash for good projects generating value for our shareholders or need to distribute this as ordinary or extraordinary dividends. Cash in the company has availability costs, and we seek to use it wisely. About issuing debt, extending debt or advance payments; our managers have been seeking opportunities, and they're celebrated for it. They’re looking for chances that would make our debt come to the lowest level possible. We present the best spread in government bonds in recent years, part of our daily work. Our idea is to continue being efficient and recognized in the market.

I'll ask a single question. I know we’ve been here for a long time. I just want to refer back to dividends again. We’ve mentioned several things here, but I want to understand if I got it right; what I heard from you is that extraordinary dividends will be based on perception and the company's cash generation, including CapEx and strategic plans. If we generate way more cash than expected, that could be a situation where we would have the space for extraordinary dividends. Is that a possibility?

A decision on extraordinary payouts, as you mentioned, will depend on our future cash generation possibilities and our current cash, considering our investments and our strategic plans. If we find cash above what we need, I want to stress that we do things by the book. Idle cash in a company has a cost, and we aim to be more efficient. Extraordinary payouts can happen if there's availability or the possibility, the right strategic plan reflects on our short term and thus we can take those values soon. That means we haven't ruled out an extraordinary dividend payout for 2024.

I have two quick ones. First, referring back to the potential M&A with RLAM. You mentioned that you might see some synergy in these assets to what you do. If you could give us some more details on that; what synergies do you believe can happen? Would it be upstream with the current refining structure that you have? What is your current projection for next year? Licenses have been delayed by Ibama; how much does that affect you for 2025? When will Ibama go back to its regular pace so that we don’t see any impact on your 2025 production?

Regarding RLAM, there are several synergies I can speak about; an example is Reduc, which has synergy with Braskem exchanging raw materials. At RLAM, there’s also a synergy with Braskem and actually, more than that, a logistics synergy inside Petrobras. When we had RLAM, we leveraged synergies in exchanging byproducts during downtimes to avoid leaving markets without supplies. There are many different synergies across the refineries among other synergies. Regarding our future projections, I’ll pass the floor to Fernando.

The question about Ibama is significant. First, I want to highlight the efforts of Director Clarice and her team, which I’ve been monitoring closely. The licensing process has a robust, competent team. President Magda recently had a meeting to expedite licensing issues, especially for the equatorial margin, which is something we need to achieve. The licensing authority has been working normally, and we will continue collaborating with them in H2 for the next years. Yesterday, we were told we were granted the license for the Anita Garibaldi FPSO, which was among our liabilities. Director Clarice was working on it, but Sepetiba is still pending. We also received important authorizations, including the expansion of Almirante Barroso production capacity. Yes, there has been an impact, but it has been absorbed by our margin, 2.8 billion barrels of oil equivalent. We expect Ibama to resolve issues soon, not just affecting Petrobras but society since if a field isn’t working, you delay royalties to the federal government to the states involved.

As you probably know, Ibama has been working since January this year to navigate the strike. Throughout this period, Petrobras has been granted 25 licenses and authorizations, including eight related to production. This is the result of closely managing the process with Ibama. The new proposal submitted to Ibama has been approved by nine major groups inside the organization. We expect a strong return to the regular pace, which will be great for Petrobras and the production chain of Brazil.

Thank you, Clarice. Now Monique Greco from Itaú BBA.

I’m going to ask one question since it’s pretty late. It’s a follow-up to Tolmasquim's answer about the gas policy. We’ve been seeing statements in the media about perceptions of high gas prices in Brazil and expectations for structural reductions. What has the company been doing, and what can we expect to see included in the next business plan for initiatives towards lowering gas prices, such as increasing supply and beyond Rota 3 involving reducing reinjection levels, searching for new sources of supply in Bolivia, or rediscussing tariffs offered to partners? What of these initiatives are being discussed internally, please?

That’s a great question. First, let me say all changes to gas prices are based on the gas cost of opportunity, especially to structurally reduce gas prices by increasing supply. You can do that by increasing domestic supply, which is the case of Rota 3. We have more than one possibility for imports; gas from Colombia is a route. Since Colombia imports gas, it’s unclear if we can import it from them, but it’s possible. Also, there’s Bolivia, which has reserves, so that depends on discovery and production. Another route is Argentina, which is promising in terms of potential since we have a pipeline connection there. We have to complete the investments being planned in Argentina. Argentina has the world’s second-largest shale gas reserves. So, I see these two possibilities for lowering gas prices: raising internal supply with Rota 3 and perhaps importing gas from Argentina. I’d like to add that we reduced gas prices significantly last year by more than 25%, due to Brent price reductions and better structures providing competitive gas.

Thank you, everybody, for attending today. This concludes our earnings call. If you have additional questions, please reach out to our Investor Relations team. Thank you and have a great day.