Earnings Call Transcript - PBR Q2 2020

Operator, Operator

Good morning ladies and gentlemen. Welcome to Petrobras Webcast with Analysts and Investors about the Second Quarter 2020 Results. We would like to inform you that all participants will follow the transmission by Internet as listeners. After introduction, a Q&A session will begin. You can send us questions by email at [email protected]. Today we have with us Roberto Castello Branco, Petrobras CEO; Andrea Almeida, Chief Financial and Investor Relations Officer; Anelise Lara, Chief Refining and Natural Gas Officer; André Chiarini, Chief Logistics Officer; Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Officer; Marcelo Zenkner, Chief Governance and Compliance Officer; Nicolás Simone, Chief Digital Transformation and Innovation Officer; Roberto Ardenghy, Chief Institutional Relations Officer; and Rudimar Lorenzatto, Chief Production Development Officer. The presentation will be available on our website and today, we will start by listening to Roberto with the main highlights of our results. Roberto, please go ahead.

Roberto Castello Branco, CEO

Thank you, Carla. Good day, everybody. It's a pleasure to talk to you. Well, the current crisis contains ingredients of important events of the last century, the Spanish Flu in 1918 to 1920 and the Great Depression of 1929 to 1933. Of course, both medical and economic science are much better equipped to deal with this type of event, however, even with that, we had powerful shock, powerful public health and economic shock suffered by the world. With steep recessions typically affecting investments in the manufacturing industry. This time, it's different. We face a non-traditional recession and it has hit more severely consumption and services. And services include transportation service, which is the main channel of the shock on the oil industry. Last quarter was one of the most challenging, if not the most, for the global economy in the oil industry, particularly April 2020 is a month to be always remembered in the history of our industry, given the unprecedented strength of demand contraction, price collapse, and a spike in maritime freight prices. Cash was all [indiscernible] but now became essential over the last few months. It was essential to us. We are very happy to say that there was no cash burn. On the contrary, we managed to reduce net debt, operational cash flow reached $5.5 billion and free cash flow $3.4 billion. Given our liquidity position, we are able to start the prepayment of the revolving credit lines withdrawn last March. It’s an important move. So it's the restart of the leveraging process. It's a movement to cut costs, interest costs to improve risk perception. And by the end of the day, the lines will remain available. So, we have liquidity at our disposal. As in a war, the unprecedented scale and speed of the global pandemic compelled us to move swiftly. We are working hard, fast, and focused to be a winner. Our goal is to engineer a J-shaped recovery. We are asking not only to survive in this short term, but to promote structural transformation in order to try and generate value over time. The world is moving fast -- was moving fast. But now it's moving even faster, inspiring creativity and innovation in requiring a stronger release. We see the crisis as an inflection point from which we must accelerate the execution of our strategy to allow Petrobras to turn the page on a long history of value destruction. We had more than 10,000 employees enlisting for the voluntary dismissal program up to 2,900 our regular left the company, 5,000 people will leave the company between August and December this year and the remaining 2,300 will leave next year. In addition to that, 25% of the managerial positions were eliminated, we estimate the total savings can reach up to $1 billion per year. The company is carrying out several other initiatives to diminish costs and to boost efficiency gains. Administrative duties, which are now 17, will be reduced to a few in the first quarter of next year. There is a sharp reduction in the number of extract rates, scaling down outside Brazil. Several efficiencies were already eliminated in the logistics business. And now, our focus there is on the optimization of inventories and the number of warehouses. A wholly-owned subsidiary, Petrobras is also embarking on a program to slash costs in efficiencies and to pursue a dramatic improvement in self-service quality. This conservation is key to our future as an agile and efficient company. It's running at a fast pace in several corporate and business areas, projects addressing costs efficiency, greenhouse gas emissions and operational safety. In order to support artificial intelligence, our high power computing capacity was multiplied by seven times in relation to what we have by the end of 2018. Our many innovative projects dedicated to lower breakeven price in the exploration and production business are moving ahead. We have several of them: EXP-100, PROD-1000, HISEP, it's a very important project, PEP-70. Recently, as we mentioned in our report, we have TOTUS, the True One Trip Ultra Slender technology, which proved to be successful, reducing by 50% the cost of drilling and completing a well in the pre-salt. We took steps to order three new FPSOs, the first order of Petrobras in eight years. They will operate in the second stage of Búzios. One of them, the Almirante Tamandaré will have the capacity to process 225,000 barrels per day, which would be the largest oil platform in the Brazilian seas and one of the largest in the world. Our vessel program is well and alive, despite all the difficulties arising from the current global recession. In the year, it regenerated revenues -- cash revenues of almost $1 billion. The sale of the Rlam -- the Bahia refinery is moving -- is on track. And we expect to reach a final deal to sign a sales and purchase agreement in the near future, perhaps even during this quarter. We still face tremendous challenges in our journey to sustainable value creation. There was some improvement in the macro scenario. The oil economy seems to be reacting to the massive injection of cash by monetary and fiscal policies about US$15 trillion. Demand for fuels improvement. It allowed us to optimize the operation of the refineries. But we have to be very cautious because uncertainty still remains, making it very risky to make projections for the near future. We are pretty sure that higher prices will not bail us out. We must rely on our own efforts and we are doing our best to become a much better company to reduce costs structurally, to increase productivity growth and to deliver value to shareholders. As I said, at Petrobras there is no room for pessimism. We strongly believe that with courage, moderate optimism, and hard work we will win. We aim to -- we are engineering our J-shaped recovery and aiming to end up much better than in the pre-COVID-19 period. Thank you. I pass now to Carla Albano to conduct the meeting.

Operator, Operator

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

Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Officer

Hello, Frank. Thank you for those questions. Well, the expectations are that we will have less production in the second half than the production that we have been having so far. As we spoke in the last conference, we would have to adjust as the first semester concluded and now we are in the second half of the year. This will happen from September to November this year. We will be undertaking maintenance regarding the timing and scale around eight major shutdowns of 15 days; they are significant. One important thing to mention here is that we have already accomplished some activities related to those shutdowns, because as we had some interruptions in the production of those platforms. So, we took advantage of those interruptions. Today, 30% to 40% of the activity that we had predicted to do during those major shutdowns has already been completed on our three shutdown platforms. And this also explains the good performance that we have so far. So, in terms of maintenance that we are predicting for this year, we think that the output for the second half of the year will be lower but due to the fact that we will be conducting the maintenance.

Operator, Operator

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

Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Officer

Thank you for your question, Frank. Well, there will be no change in our strategy. The strategy remains intact. What we are doing is enhancing our criteria for project evaluation. We establish $35 per barrel of oil as the baseline for project evaluation. For instance, we announced previously that we would review at Búzios, and before that we estimated the breakeven price of all three areas of Búzios below $35 per barrel. So they were approved, and we are taking steps to start their development. What can change are some projects that are not as promising, which we will either cancel or resize, but there will be no change in our strategy. The five basic pillars continue intact, and we are just accelerating their implementation.

Operator, Operator

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

Anelise Lara, Chief Refining and Natural Gas Officer

Hi, Christian. Well, what we've seen is that after Western demand collapsed for crude oil and oil products during part of the second quarter, we are seeing demand recovering for all Petrobras crude oil exports markets, including Asia and Europe. You're right; over the past few weeks, China's market has experienced some impact from floods in the south of the country during July, which affected demand, but we believe this is temporary, and in general, it has experienced consistent demand for crude oil exports from Petrobras. Our low sulfur crude oil is very well accepted worldwide.

Operator, Operator

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

Roberto Castello Branco, CEO

Well, we didn't see any manifestation of no interest or lack of interest for our refineries. Of course, it’s not running at the original pace that we planned, naturally due to the global recession. The scenario has changed, and some of the potential buyers have asked for time to get new approvals from their Board of Directors or to restructure arrangements with their financiers. But as we see today, there has been no change in interest, and we expect to conclude the signing of the sales and purchase agreement in the next couple of months. We are confident that by the end of 2021, we will have closed all refinery sales.

Operator, Operator

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

Anelise Lara, Chief Refining and Natural Gas Officer

Well, this offshore gas pipeline system is an integrated system that belongs to Petrobras and some threshold partners like Shell and Rexco. We are finalizing the documentation concerning this integration system, the package of this system to be able to create a new company dedicated to operate and build new offshore gas pipelines. So, we believe that by the end of the third quarter, we will be ready to sign the documents. The next step will be to create this company. I believe that an IPO of this company will happen in 2021.

Operator, Operator

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

Anelise Lara, Chief Refining and Natural Gas Officer

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

Roberto Castello Branco, CEO

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

Operator, Operator

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

Andrea Almeida, Chief Financial and Investor Relations Officer

So Régis, thank you for your question. Actually, there is a process that we need to go through for the application process before we can start using those credits. This application process can take up to 90 days, so we expect that we will be using these credits over the next 24 months. It will be hard to utilize everything this year. We believe it's going to take up to 24 months. It will depend on how long it takes for us to be able to use the credits based on this process.

Operator, Operator

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

Andrea Almeida, Chief Financial and Investor Relations Officer

I will comment on that and then I'll pass to Roberto to add his comment. We are supporting this new gas law. We think that each day, it's the possible arrangements we could have here in Brazil regarding all stakeholders, all gas producers, gas transportation companies, distribution companies, and commercialization companies. The industry is very interested in the reduction of the gas price in the country. So when you see all these different players involved, this new gas law has a lot of advantages because it addresses the main issues related to the opening of the market. We will allow for new gas pipelines, transportation, and for consumers to have their rights to get gas directly from the market without having to pay distribution taxes. All these aspects will be vital in ensuring that the new gas market in Brazil will be open and competitive, and we expect price reductions across the gas market.

Roberto Castello Branco, CEO

I do agree with you. Brazil badly needs structural reforms, and this is one of the important reforms that is being launched. Open competition will benefit consumers, producers, and the Brazilian economy by attracting investments. We are transforming our role as we open room for all parties to transport gas, the gas pipeline. We sold TAG, 100%. We are selling the remaining 10% of NPS. We aim to sell TBG; unfortunately, the regulatory agency does not allow for a more significant reduction in transportation prices, which creates uncertainty about the assets. We expect these issues to be resolved. I hope the regulatory agency understands the importance of this reform and the significance of achieving lower gas prices, eliminating distortions that have existed for a long time in the Brazilian market. We are very positive about that.

Operator, Operator

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

Andrea Almeida, Chief Financial and Investor Relations Officer

Thiago, thank you very much for your question. It's hard to say because we still see a lot of volatility in the market, even though we know that currently Brent prices are around $40. So, definitely better than what we saw in the last month. But it's hard, and we still need to finish the review of our portfolio. What I can tell you is that achieving this by 2021 as we had expected before is very hard right now. So we are working towards trying to make it in 2022, but it will still depend on the portfolio review.

Operator, Operator

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

Roberto Castello Branco, CEO

Well, there is a traditional crisis cycle. When there is a recession, companies respond to the crisis. There is improvement, and in the later stages, there can be complacency. We are not addressing the short term only. We are focusing on the long term. Our goal is to permanently reduce our cost structures. We are focused on that, not just on prices. Even the voluntary dismissal program's effects will be felt much more next year and beyond, not this year. This year, on the contrary, we are making provisions to pay severance -- to compensate the employees that are leaving us. Many other initiatives are addressing significant gains over time. The implementation of digital transformation and the operations being developed will have effects from one to two to five years ahead. There will be no complacency as prices rise. Discipline is key; discipline in capital allocation and cost management will be established on a permanent basis, not just because the oil price collapsed. We do not expect higher prices to bail us out. We are fighting on our own.

Operator, Operator

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

Andrea Almeida, Chief Financial and Investor Relations Officer

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

Operator, Operator

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

Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Officer

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

Operator, Operator

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

Andrea Almeida, Chief Financial and Investor Relations Officer

Thank you for the question. Again, it's hard to know what the net income for the year will be. As you know, our dividend policy triggers higher dividends whenever we reach the $60 billion gross debt thresholds. Regarding net income for the year, due to the impairment impact we had in the first quarter, it will be very hard to say if we will overcome that and return to the policy levels, but if that happens, we'll have more. It’s just hard to say right now, so just reaffirming that the trigger for higher dividends will be the $50 billion gross debt.

Operator, Operator

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

Andrea Almeida, Chief Financial and Investor Relations Officer

So, yes, we don't want to keep the level of cash as it is right now. If volatility goes down, the objective is to go back to the levels we had before the crisis, around 5.5. If we reach those levels of cash, that means that we would have the committed bank facilities available again. So it's a combination of the cash level with the insurance available, if any event occurs, and as you know, we can draw down on them again if needed. We do have goals to reduce growth that until the end of the year; we are at $91 billion. Right now, the goal is to end the year at $87 billion. If we have extra cash and a volatile market, we may be able to do even better than that. But it's hard to say right now. I would say that for sure, liability management programs will be implemented to reduce the cost of debt. I think that's the overall, and if everything goes even better than what we see right now, we might see better results, but it's hard to predict at this point in the year.

Operator, Operator

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

Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Officer

Well, we are now facing some changes regarding the oil price. We still have in mind to return to the same production levels that we had in 2019 in the Campos Basin of almost 1 million barrels per day of oil, but we will only do that if it truly adds value to our portfolio. Due to the lower price of oil, we are testing all the projects and verifying their resilience. What I can anticipate is that the great majority of the projects are indeed very resilient in the face of lower oil prices. The main aspect here is not only the economics of those projects, in fact, but the financial aspect is what we have to check our cash generation and also the management that we're going to implement. We need to examine the entire corporate portfolio. These are the considerations we are reviewing right now. The economics, I think that they are good, but the financial perspective requires a few more months to assess the whole picture of the company. As Andrea has already mentioned, we will see the speed and the velocity of the projects, the types of investors we are going to engage, and that includes the Campos Basin as well.

Operator, Operator

Thank you, Carlos. There's another question for you also from Bruno. How low can the pre-salt lifting costs go? Can FPSOs with a capacity greater than 160,000 barrels per day drive even lower lifting costs?

Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Officer

Well, what we have been doing regarding the lifting costs is that we want to continually reduce them, especially when we add FPSOs with greater capacity. For sure, the expectation we have is that we will see lower lifting costs in the future. I think we will also see that when we look at the general picture, not only the pre-salt lifting costs. We are taking out some aging platforms and replacing them with modern ones, like in the Marlie Field, for instance, or when we are divesting from the fields we have in shallow waters, and also offshore. When we examine the overall picture, our expectation is to reduce the lifting costs for the company.

Operator, Operator

Thank you, Capo. Our last question comes from Rodolfo Angele with JP Morgan, and it's for Anelise. China was a key market during the quarter, and we are seeing some independent refineries operating at very strong utilization rates. How has Chinese demand grown for Petrobras? What are Petrobras' expectations for Chinese demand growth in the second half of the year?

Anelise Lara, Chief Refining and Natural Gas Officer

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

Operator, Operator

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

André Chiarini, Chief Logistics Officer

Rodolfo, thank you for your question. I know there's a lot of anxiety about the numbers for next year, but we still need to finish the fourth-quarter review. What I can confirm is that there will be some FX impacts in taxes as we mentioned before because we do have 60% of topics that are indexed to the real. We might have impacts from FX if we compare to last year's numbers, but what we can confirm is that the focus will continue to be on ultra-deepwater; they will continue to represent the biggest portion of our investment. Again, our focus will be on world-class assets that have a breakeven below $35 per barrel, as Roberto said. So I think on that side, the strategy remains the same; we will concentrate on higher return assets. That is what you will see in the coming CapEx announcements whenever we have the new numbers.

Operator, Operator

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

Roberto Castello Branco, CEO

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