Earnings Call Transcript - PBR Q4 2020

Operator, Operator

Hi. Good morning. Welcome to Petrobras Webcast with Analysts and Investors about our results on the Fourth Quarter 2020. We'd like to inform you that all participants will follow this transmission by Internet as listeners. After introduction, a Q&A session will begin. You can send us questions by e-mail, [email protected].

Roberto Castello Branco, CEO

Hi. It's a pleasure to meet you. I'm very glad to present an outstanding performance of Petrobras in 2020 last year. Since the first day when I started with Petrobras, we launched a strategy with five strategic pillars complemented by two important instruments; cultural transformation and digital transformation, and a new style of management, more informal, more dialogue, more transparency, data-driven decisions and a lot of energy dedicated to the business. Last year, we faced the impact of the COVID-19 pandemic in our store shock, a negative shock on the oil industry reducing price to as low as $19 per barrel in April, even a negative price for a short period of time, high inventories and demand contraction across the board. But at that time, we promised a G-shape recovery meaning that we're aiming to end up better than before the COVID-19 crisis, and we did it. We delivered on our promise. Petrobras today is much better than it was in the past. We managed to reach an all-time high production of oil and gas, an all-time high oil exports, and all-time high exports of fuel oil. And alongside this, Petrobras had a very strong cash flow generation with an operational cash flow of $28.9 billion and a free cash flow of $24.1 billion if we include our revenues from divestments, about $2 billion last year. Costs were cut across the board in the operations and in corporate activities. Efficiency gains were realized through digital transformation which was accelerated as well as the status execution. We enhanced our information technology infrastructure and created excellent centers. We used internal startups to find very fast solutions for some problems; this is working very well, agile teams. Our research center was revamped; today, it's much more integrated into the company with a vision not only of technology but also of economics. There is a saying that you can't ignore economics, but economics will never ignore you. Sooner or later, if you ignore economics, you are going to get very negative consequences for yourself.

Operator, Operator

Thank you, Roberto. The Q&A session will begin. And the first question we received comes from Frank McGann with Bank of America Merrill Lynch. So, before going through Frank’s questions, he sent a message to Roberto and the management team, that I’m going to read now. First, I would like to thank you for your openness, transparency and directness in what has been a transformational period of restructuring at Petrobras. So, Frank's first question comes - to Andrea. So Andrea, with stronger oil price environment, that seems to be more sustainable than previously expected. How do you see potential for achieving some of your targets for debt reduction sooner than expected?

Andrea Almeida, CFO

Frank, thank you very much for the question; this is a very good problem to have. So, if we always have the problem of having prices higher than expected, I believe that's the easiest thing to do. But as we always mentioned, we had two things that we were lagging behind compared to other major oil companies. One is the leveraging, and second is dividends. So, if we really have a better scenario, and if we are able to get to our goals, and the most important one is the total debt of $60 billion, faster, I believe it will be important for these two important goals, because we will be in a much better situation related to the cost of capital and to the total debt of the company, and we would be able to pay even more dividends to our shareholders. So, I believe it's a good problem to have, and if we can do it faster, we will. But prices are volatile, so it's very hard to say that these prices are going to be kept. And that's why we kept our long-term pricing for Brent at $50 per barrel. But thank you for the question.

Operator, Operator

Andrea, he also has a second question that’s also for you. So, also could this means about higher prices than expected provide an opportunity to increase investments in pre-salt or other projects beyond what has been planned until now?

Andrea Almeida, CFO

So Frank, we did a revision of our portfolio at the end of last year when we presented the new plan, the 2021 to 2025 plan. And that revision was based on a resilient figure for our breakeven. So, we said that we just want to invest in new projects that have a breakeven below $35 per barrel. So, this is a very strong guideline. We will keep that, doesn’t matter what the scenario is. And actually, when we did the revision, we already changed a little bit the prices. So, I expect that we will see what is going to happen, and maybe at the end of the year, we have another revision. But as we have a very strong and very important guideline that is really to have resilience, have projects in our portfolio, I don't expect big changes. But I'll pass the word to Capo if he wants to complement.

Carlos Alberto Pereira de Oliveira, CFO

Okay, Andrea, thank you. Well, as Andrea mentioned, all projects in our portfolio are resilient to Brent at $35 per barrel, and that's our goal. We always check the projects that are resilient to this price. But if the price in the future, as they were saying, confirms to be higher than the price we estimate in our strategic plan, the anticipation could be something to be evaluated in the future. But it's important to check two things at this time besides the cash availability, which will be higher with a higher price, which are the impact on the debt reduction strategy. And we always have to keep this target and the capacity of the suppliers as well to provide additional fiscal resources because today they are facing some restrictions due to the worldwide effects caused by the COVID-19 pandemic. So, that's not only something that's solely a matter of Petrobras doing it right because the market today regarding the fiscal resources that we need and especially because we work in this particular scenario that we saw requires specific resources. So, we will look at the capacity of the market to provide us with those resources as well.

Operator, Operator

Thank you, Andrea. Thank you, Capo. The second question comes from Rodolfo Angele with JPMorgan. He also sent us a message to Roberto and the management team. I'll begin to read now. So, first of all, I think it's important to acknowledge that in two years, you've been facing an oil crisis where prices became negative. In the global pandemic, current management was able to transform Petrobras even in a short time period? Today, the company has a healthy balance sheet, generates a lot of cash and has high returns, not to mention the transparency and openness to the capital markets. Congratulations, Roberto, and team. So, now going to the question, so the first question is for Roberto. Roberto, can you comment on how will be the transition process to the new management?

Roberto Castello Branco, CEO

Rodolfo, thank you for your comments on behalf of myself, the executive team and all federal Petrobras employees, because the performance is not due to the actions of just the CEO and the executive directors; every one of the employees has a part in the construction of our company's performance. Well, I don't know for the time being how the transition will be implemented. The only thing that I strongly believe is to guarantee that we will be very open, very transparent as well, and we will try to help the transition to be very smooth and productive. This is our duty to contribute to that process.

Operator, Operator

Roberto, our next question comes from Luiz Carvalho - oh, sorry. So, we have a second question for Rodolfo Angele with JPMorgan. It's for Andrea. Andrea, the company is generating a lot of cash, keeps on deleveraging and has been showing declining financial expenses. Looking ahead, how many opportunities do you still have to continue deleverage and engaging in liability management?

Andrea Almeida, CFO

Rodolfo, thank you very much for the question. I think we do have lots of opportunity to do liability management. We still have a big bat, as we say. So, we reduced a lot; $76 million is a number that we never expected for last year, but it's still a high number. As you know, we wanted to get to $60 million in 2022. We still have a lot to be done to reduce the debt and to lower the interest we pay on our loans. So, we still have many opportunities to do prepayments in the bilaterals and prepayments in the capital markets. And we will be exploring the opportunities to do that and reducing our debt towards our goal of $60 billion in 2022.

Operator, Operator

Thank you, Andrea. The next question comes from Luiz Carvalho with UBS. Luiz also sent a message to Roberto and the team that I'm going to read now. So before we go to questions, I’d like to take a moment to reinforce our positive view on the work that has been done in the company, strategy and governance led by Roberto over the past two years, really well done. So Luiz’ first question goes to Andrea? So Andrea, there were lots of noise over the past couple of days as we all know. Could you please share the most relevant changes on company bylaws and a service law that gives us a high protection and independence in several forms?

Andrea Almeida, CFO

Thank you, Luiz for the question. Yes, there are some protections in the law 13-303. And some of them were even increased in our bylaws. So one of them is that - let's say, in the law, we have 25% of independent members on the Board. In our bylaws, we extended that to 40% of independent Board members. So as we have really a Board that has independent people acting, we also have technical criteria for the selection of the Board of Directors and Executive Board members. We have to cope with certain criteria. Even for me to join Petrobras, I had to prove that I had 10 years of experience in finance and years reporting to the CFO of other companies. So, this is a technical criterion that is needed from us and from the Board of Directors.

Operator, Operator

Thank you, Andrea. And the next question also from Luis with UBS is for you. The company is now a net crude exporter. Importers gain market share on a few products supplied in Brazil. Could you please give more color on how the upstream versus downstream balance will play out on our results looking forward?

Roberto Castello Branco, CEO

Thank you, Carla. Thanks for your question, Luis. We will continue to compete in the domestic market, seeking the most appropriate market share, which optimizes the use of our refineries and of course maximizes our modernizing refinement. Our goal always is to maximize value. Part of the market will continue to be served by other players, which also ensures transparency in our price alignment with the international market. By continuously monitoring and developing new oil markets globally, on the other hand, we ensure access to the best alternatives to maximize the value of our oils. In summary, we will continue to optimize value creation for the company, combining refining and export alternatives in the best possible way. Thank you.

Operator, Operator

The next question comes from Régis Cardoso with Credit Suisse. Régis also sent a message to Roberto and the management team. So Roberto, this management team was wise in recognizing the achievements of previous managements and to build upon their progress, with no disruption. In order to pursue a responsible business plan, Petrobras achieved a grand milestone after two years, including starting the process for opening the downstream and natural gas markets in Brazil. Petrobras was a clear industry outperformer in what presented itself as one of the deepest pricing declines for the oil industry globally. While many were struggling to stay solvent, Petrobras generated cash and reduced its financial leverage. All of that was achieved despite the challenges posed by the pandemic and the necessity to look after people's health and business continuity. Congratulations on the excellent results. So he has a question also for Roberto. So Roberto, what changes were made to the health plan? How does it impact the financial statement going forward?

Roberto Castello Branco, CEO

Hi, Régis. First of all, I’d like to thank you for your message. We are very flattered by your words. My thank you on behalf of myself, the executive director team and all Petrobras employees, because as I was saying people are the most important asset. It’s not asset X or Y. It’s people. People are the most important asset. Regarding your question about the health plan, well, the health plan was badly managed because we don't have a specialist in managing health insurance plans; health insurance plans are not our business. So, it had very big debts and actuarial liabilities were huge, about BRL 45 billion. What we did was to spin off the health insurance plan through a non-profit institution with professionals who have large experience in this type of business, and they are entitled to increase the efficiency, reduce costs and improve the quality of service. One of the problems of the old scheme was that it provided poor service to the employees. There were a lot of complaints; the number one complaint made by employees this last year was 2,894 complaints. So, we had to change. We had two big off-balance sheet problems, the health plan AMS and Petros, the pension fund. These problems are being solved, Petros with professional management with the two new plans, the newest one being a defined contribution plan instead of a defined benefit plan. Also, we prepared obligations to the pension fund in order to recapitalize it. Petrobras had a 20-year deal with the pension plan set in 2008 with a payment only in 2028. Part of this was prepared in the benefit of the plan as it became liquid and also solvent because the situation there was troubled. By the same token, we are addressing the problem of the health insurance plan, which had a lot of issues that led to an annual net loss for Petrobras of almost BRL 3 billion. I believe that the impact on our balance sheet and cash flow will improve significantly over time. The plan, according to all estimates, should show significant savings over the next 10 years.

Operator, Operator

Thank you, Roberto. The next question also from Régis Cardoso and it's regarding higher production that's recovered in January?

Andrea Almeida, CFO

So, it's about maintenance. Were the maintenance stoppages completed in January or is there more that could impact production in 2021?

Roberto Castello Branco, CEO

Well, as you know, there are some stops that were rescheduled for 2021, and for sure we have a lot of stoppages during the year. But the stops for 2021 that came from 2020 were rearranged. We also optimized the stops after 2021. What we see today is that we have already a prediction in January that is in line with what we expected and it’s above the production of the last quarter. So, we don't see that the maintenance that we had postponed until 2021 will impact on production or in the target of production that we shared with you last year, which is 2.72 million barrels of oil equivalent per day, considering a variation of less 4%. So, nothing changed. Even with this production in January that is above the last quarter, we had already estimated it would be like that.

Operator, Operator

The next question comes from Bruno Montanari of Morgan Stanley, and he’s also sent us a message to Roberto and the management team that I'm going to read. So, congratulations for the solid results in the year with impressive cash generation. I believe this speaks to the effort and success of the strategy outlined by the company under the leadership of Roberto. He also has a question for Capo. So, thinking about a scenario of oil prices heading to $70 per barrel this year, what sources of upsides could come? Other than increased cash generation in the E&P segment, would it be possible to advance projects and expedite the production growth? And related to that, can you comment on the maintenance schedule for the FPSOs now for the first months of the year?

Carlos Alberto Pereira de Oliveira, CFO

Okay. Well, I think that I have already mentioned before that our prudence in our portfolio makes them resilient to Brent at $35 per barrel, so we have to consider that all projects must pass this target. If prices in the future confirm to be higher than those we estimate in our strategic plan, anticipation could be evaluated about the acceleration of some projects. But we still have to check that besides cash availability, we have to check the impact on this debt reduction strategy, which is a goal, and the capacity of the suppliers to provide additional physical resources, as I mentioned, because the suppliers today are facing some restrictions due to the effects of COVID-19. Regarding the other question about the maintenance schedule for the FPSOs, in the first quarter of 2021, we are projecting a reduced number of scale stops compared to the fourth quarter of 2020. Together with the continued ramp-up of platforms P-70 and P-68, these factors will lead to a possible increase in production in relation to the fourth quarter. So we expect to have more production in this first quarter than in the last quarter of the year.

Roberto Castello Branco, CEO

Carla, I think the question was very well answered. I have nothing to add.

Operator, Operator

Thank you. So the next question comes from André Hachem with Itau BBA. He also sends us a message to go back to the management team. I'm going to read right now. So first of all, we would like to congratulate Roberto and the executives on the tenure over the best two years. The company has made great strides in advancing on its deleveraging efforts, asset sale program, and disclosure. As a whole, the company has improved tremendously. So, he has a question for Roberto. So Roberto, in your view, what are the greatest challenges your successor at Petróleo Brasileiro will face and what suggestions would you provide him with?

Roberto Castello Branco, CEO

Thank you so much for your general comments about us. And I thank you on behalf of myself, the management team, and all the Petrobras employees. Well, I have not had the opportunity to meet my successor, if approved by the board of directors or not, I don't know when he will take the helm or who will replace me as CEO. I would be very pleased to engage in an open discussion to make my very frank comments about the company, about suggestions, and about the challenges. For the time being, it would be too early to say anything about that.

Operator, Operator

Thank you, Roberto. The next question comes from Christian Audi with Santander. Christian also sent a message. So first of all Roberto, I’d like to congratulate you on the amazing work you've done at Petrobras since taking over as CEO. You significantly improved the strategic direction and focus of the company, as well as its operational performance while strengthening the company financially? You will be missed. So he has a question also for you, Roberto. So, how should we think about the asset sale program? Given the noise surrounding the pricing policy might impact the sale of refineries?

Roberto Castello Branco, CEO

Christian, thank you so much for your comments, on behalf of myself, the management team and all Petrobras employees. I don't know what's going to happen. It depends on the Board of Directors and the new management of the company. So at the moment, I will make no comments about that.

Operator, Operator

Thank you, Roberto. The next question comes from Bruno Amorim with Goldman Sachs. He also has a message for you. So, before my questions, I'd like to thank Roberto and the team for the good work and transparency with the market during your administration? So - he also has a question about asset sale? So, has the recent developments led to any change in the asset sale program so far? Will the company move ahead with this process until the change in management is completed?

Roberto Castello Branco, CEO

Well, thank you for your comments. But as far as I know, there were no changes. Of course, some of the bidders were concerned about the recent events, but it did not show any signal that they are going to leave the process. I hope they maintain the same position.

Operator, Operator

Thank you, Roberto. And we have the last question, from Gabriel Fonseca. He also has a message for you. So, before my questions, I’d like to leave on record my congratulations to Roberto and his team for the excellent results achieved under their tenure in Petrobras, as well for the legacy they will leave for the company. So, he has a question for Chiarini. So, Chiarini, could you comment on the balance of supply and demand for oil products in the Brazilian markets? In particular, what levels of the utilization rates of the refining park are currently at? Can we say that the impacts of COVID-19 over fuel demand in Brazil have already normalized? Is the company importing oil products such as gasoline and diesel? If so, could you comment on the magnitude of these imports compared to the recent results?

André Chiarini, CFO

Thank you, Gabriel. I guess we already answered this question in the Portuguese version. Should we go ahead or go to the next question?

Operator, Operator

Yes, please. We have - we may have like a different audience.

André Chiarini, CFO

Okay. I'll start with the part regarding the demand because we have already covered the COVID levels. And then I’ll pass to Rodrigo Costa to complement the answer regarding the utilization factor of the refineries. So, we have already recovered the demand of the pre-COVID-19 regarding the fuel market in Brazil. In fact, we have already seen growth also in diesel A, about 20.8% in comparison to January 2020 with a very interesting result for low-sulfur diesel that grew 37.5%. In terms of gasoline A, our sales were 8.5% higher than in January 2020. Yes, also, we are importing some gasoline and diesel just because we are currently undergoing maintenance in our refineries. And now, I’ll pass to Rodrigo to complement the answer. Thank you.

Rodrigo Costa Lima e Silva, Executive

Hey Andrea - Gabriel, we increased our utilization rate this year. Now, we are at the level of an 86% rate at this moment.

Operator, Operator

Thank you, Chiarini. Thank you, Rodrigo. We have one last question from Bradesco with Vicente Falanga. Vicente also has a message to Roberto. So, congratulations, Roberto, for the courage to effect changes. These changes were never before made in Petrobras history. He has a question for Andrea. Andrea, what can we expect in terms of working capital for the year of 2021? 2020 was a solid recovery in that figure? Yet now, oil prices seem to be strong and moving up?

Andrea Almeida, CFO

Vicente, thank you for the question. We will keep doing - I think we optimize the inventories in oil - in all the oil products. So, I think this will continue. We optimized the inventories as well off of materials. So, this will continue. And in terms of - even the receivables, we are working with the financial institutions because we believe there are working capital transactions that can be done to reduce those payables' terms. So, we are engaging with our financial institutions to do transactions to discount receivables and we are also obtaining support from our suppliers. So, I believe this work in the working capital arena is going to continue in 2021 very strongly. This is a very important focus for us as well. So this will be very important in 2021.

Operator, Operator

Okay. So thank you, Andrea. Vicente has another question and it's for Chiarini. So Chiarini, the media reports that Brazil has the risk of being undersupplied, stating that Petrobras will not be able to comply with its diesel cargoes in March. Is any of that true? And what’s Petrobras doing to avoid the risk of fuel shortage?

André Chiarini, CFO

Thank you for your question, Vicente. First of all, it's important to say that the Brazilian market is served by several players. Petrobras, of course, is a very relevant supplier, but it has been a long time since trading companies and distributors became relevant actors regarding imports of gasoline and diesel in Brazil. Having said that, Petrobras alone cannot predict any risks of fuel shortages in the country as a significant part of the market is still served by third parties. For our portion, Petrobras has contractual agreements with our customers, and we will serve all of them without any exception. There were requests from some customers for an increase in the volume of products far beyond our contractual obligation, and Petrobras is not only fulfilling the contractual volumes of delivery but is also offering volumes far beyond agreed volumes. So we are meeting our commitments and we are going further. In relation to reducing the risks of fuel shortages, we are also keeping - following the pricing policy which, as all you know, is aligned with the international market. Thanks.

Operator, Operator

Thank you, Chiarini. So with that, we conclude our Q&A session. If you have any further questions, you can send them to our investor relations team. Roberto will now make his final remarks. So please, Roberto.

Roberto Castello Branco, CEO

Well, my thanks for attending our video conference for analysts and investors. I will say that we accomplished our mission. Our mission was to restructure Petrobras, and according to our judgment, and the judgment of the market, we made several advances. However, there is much more to be done. We won only some battles, but not the war. So several battles have to be fought in the future, and Petrobras should prevail and win. Petrobras has the human capital, high-quality human capital, knowledge, and technological knowledge. It has the capacity to innovate, and it will be very easy to win with the combination of these three elements. Petrobras now has a culture of value creation; it has improved significantly, and I would say that it’s firing on all cylinders. Thank you so much. I appreciated this contact, this frank and transparent conversation with you over the last couple of years. I see you later. Thank you. Bye.