Earnings Call Transcript - PBR Q3 2021

Operator, Operator

Good morning, everyone. Welcome to the Petrobras Webcast with Analysts and Investors regarding the Third Quarter 2021 Results. We're glad to have you with us today. We want to let you know that all participants will listen to the transmission. Following the introduction, we will have a Q&A session. You can send your questions by email at petroinvest@petrobras.com.br. All executives are participating in the event remotely from their individual rooms, adhering to security protocols. Today, we have Claudio Mastella, Chief Trading and Logistics Officer; Nicolas Simone, Chief Digital Transformation and Innovation Officer; Roberto Ardenghy, Chief Institutional Relations and Sustainability Officer; Rodrigo Araujo, Chief Financial and Investor Relations Officer; Rodrigo Costa, Chief Refining and Natural Gas Officer; Salvador Dahan, Chief Governance and Compliance Officer; an Executive Manager for Subsea Systems; and Joao Jeunon, Executive Manager for E&P Integrated Asset Management. To begin, I will hand it over to our CFO, Rodrigo Araujo. Rodrigo, please take it from here.

Rodrigo Araujo Alves, CFO

Thank you, Carla. Hello, everyone. Good morning. It's a pleasure to be here with you today, and I hope you're all well and safe. We can start with the next slide, please. Thank you. As we see, our rate of total recordable injuries per million man-hours has been continually decreasing, and when we look at the first 9 months of 2021, we're at a 0.56 level that is below our level of alert of 0.7. Of course, the Company has been doing significant work in terms of continually improving its safety, and safety is a main value and priority for us. But of course, we're not only comfortable with such a rate; we're focused on having zero fatalities, and unfortunately, we had two fatalities in the third quarter of 2021. So, we're highly focused on improving safety in our operations and meeting our ambition of zero fatalities. Next slide, please. In terms of our emissions and our commitment to the energy transition, we've announced in September this year our ambition to achieve emissions neutrality in a timeframe compatible with the Paris Agreement. This ambition is focused on the neutrality of activities under our control, Scopes 1 and 2, and we're also committed to influence our partners in our upstream joint ventures to achieve the same ambition in non-operated assets. This ambition is aligned with the Oil & Gas Climate Initiative (OGCI), of which we've been a member since 2018, and reinforces our commitment to reducing emissions in our operations. Next please. In terms of the results with respect to emissions in the year 2021, our results are coming as expected and our outlook for 2021 is very healthy, and we expect to achieve the goals that we set for 2021 in terms of kilos of CO2 emitted per barrel in the upstream segment. Our carbon intensity is 15.7 compared to our target of 17; our acceptable maximum limit is 17. So, we're comfortably below the target that we set for 2021, and in terms of the emissions in our refining operations, we're also below. We have 39.9 kilos of CO2 equivalent per ton of complexity weighted in our refining operations, and our acceptable maximum limit is 40, so we're below the target set for 2021. In terms of absolute GHG emissions for 2021, we've emitted 46 million tons of CO2 this year, which is also compatible with the targets that we set for 2021. Next, please. In terms of CO2 emissions and CO2 reinjection, we've been focusing on reinjecting a relevant portion of our CO2 emissions, and when we look at what we've done since 2008, we've already reinjected 28.1 million tons of CO2, and only in 2021, we've already reinjected 6.7 million tons, which is very close to the level of reinjections of 2020. We're focused on achieving our commitment of reinjecting 40 million tons of CO2 by the year 2025. Next, please. Another important aspect of our ESG strategy is, of course, the recognition of improvements in our governance. In October of this year, we completed the obligations that we had under the agreement with the U.S. Department of Justice. This agreement was signed in 2018 and is now closed, and there are important recognitions that were made in the conclusion of this process, of course, related to both the improvement of our internal controls and the evolution of our integrity program. The Company's compliance system has evolved substantially since 2015, and of course, we're highly committed to continuing the improvements in our governance and compliance systems. This is an important achievement and recognition of the conclusion of our agreement with the U.S. DOJ. The agreement also acknowledges that Petrobras was a victim of the corruption schemes that occurred in the past, and as I mentioned before, we're focused on continually improving our governance and compliance systems. Next, please. In terms of our financial and operational highlights, we have to highlight the fact that we've achieved our target of $60 billion gross debt more than a year before the expected deadline. We expected to achieve that in 2022, and we closed the third quarter of 2021 with a gross debt of $59.6 billion, which is a very important achievement and brings us to a capital structure that is much more compatible with our peers and allows us to compete much more efficiently in the oil and gas market with majors and other peers. We had a recurring EBITDA of $12.2 billion and a recurring net income of $3.3 billion in the third quarter of 2021. A very solid operational performance with higher sales of oil products in the domestic market, especially diesel, gasoline, and jet fuel. Our oil and gas production also increased in the third quarter. We have the presalt representing more than 71% of our total production now, leading to a very solid operational quarter. This resulted, of course, in an important generation of cash from our operations of $10.5 billion and a free cash flow of $9 billion. During the third quarter, we also had important inflows from our portfolio management strategy. Of course, the remaining shares that we had in Petrobras Distribuidora resulted in a cash inflow of $2.2 billion, and we also received payments from the Coparticipation Agreement for the Buzios field of $2.9 billion. This was also a relevant cash inflow and represented our data entry software partners in the Buzios field. Our Board of Directors approved a new anticipation of dividends of $6 billion, which alongside the $6 billion announced in August totals $12 billion of anticipated shareholder remuneration for the year. This is, of course, an important contribution and represents the Company's commitment to generating value and distributing its earnings, and contributes both to its shareholders and to Brazilian society, not only in the form of dividends, but also in terms of taxes paid and social responsibility as well. The Company is getting stronger and healthier, enabling it to substantially contribute to Brazilian society with relevant investments and commitment to operational efficiency. Next slide, please. When we examine the external environment, Brent prices were 7% above Q2 2021, and there was a slight appreciation of the real compared to the U.S. dollar during the quarter. But the main relevant figure here is the change in the end-of-period exchange rate, which impacts our end-of-period debt when translated into Brazilian real, our functional currency, impacting our earnings. We saw a significant impact on our earnings in the third quarter of 2021, which is of course a non-cash impact but affects our overall performance. Next, please. Looking at gross debt, as I mentioned before, we reached our target of $60 billion in anticipation. Originally, we forecasted to meet this in 2022. The Company's track record since 2015, which had a gross debt of $166 billion when finance leases were included, shows an impressive corporate turnaround journey that has been made, allowing us to focus more on operational efficiency and on returning the cash we generate. In the third quarter of 2021, we prepaid $6.1 billion in gross debt, and there was also the startup of the FPSO Carioca, which added another $3 billion in finance leases. This marks an important achievement regarding FPSO Carioca, as we are very close to starting production from the second field within FPSO Carioca and continuing to ramp up production on the platform, which adds relevant production and value to our portfolio overall. When we look at our leverage, our net debt to EBITDA ratio close to Q3 2021 was at 1.17, which is very much in line with our major peers. Of course, regarding the $60 billion debt target we've set, it's at a level that allows us to remain committed to the Company's financial sustainability and navigate through much more challenging scenarios than the ones we're currently seeing. The $60 billion debt level enables us to manage through scenarios like we experienced last year when Brent prices were around $40 per barrel without significantly increasing our leverage. This provides us with a highly optimized capital structure and allows us to look very enthusiastically toward the future. Next, please. In terms of our EBITDA, we had a very solid quarter as well. We improved our recurring EBITDA by 7%. Our total EBITDA was $12.2 billion of recurring EBITDA in the third quarter of 2021. As previously mentioned, this is a result of a very solid operational performance in both the upstream and downstream segments. Next, please. When analyzing the performance by segment, there's been an important impact from Brent prices on the upstream segment. Our production increased by approximately 1% this quarter, and we saw this improve in its share of our total portfolio, which also adds value to our results. In terms of our RTC segment, we had also important results in the second quarter, and despite improvement in operational performance, we faced higher expenses with legal proceedings that offset the improvement in operational efficiency. Our gas and power segment experienced notable challenges, as we faced lower natural gas margins, attributed to significantly increased LNG costs. I believe international LNG costs are substantially higher, and we have longer-term contracts. Thus, we incurred a notable impact from LNG costs in our long-term contracts during this quarter, but the annual result is also very solid and in line with our planning for this year. Next, please. Cash generation was impacted by income taxes and working capital in the third quarter. Higher prices have resulted in an increase in working capital. As mentioned earlier, we generated free cash flow of $9 billion in the third quarter of 2021, and when we include inflows from portfolio management strategy and the Buzios Coparticipation Agreement, we had free cash flow after divestments of $14.3 billion. This cash flow was primarily utilized to reduce gross debt, as we prepaid $6.1 billion in gross debt and also made scheduled payments totaling $6.8 billion this quarter, alongside the first dividend payment of $4 billion announced in August. Overall, we achieved a positive cash change of $1 billion in the third quarter of 2021. Next, please. Regarding our liability management strategy, we feel quite comfortable with the current capital structure. This is something the Company continually monitors. We believe that maintaining a $60 billion debt level will allow us to manage the Company efficiently in challenging scenarios. Our current costs are at 6%, and we improved the maturity in the third quarter of 2021 from around 12.5 to 13.5 years. Our amortization schedule is well aligned with the Company’s cash flow generation, creating a rather smooth amortization profile which allows the Company to make necessary investments and distribute dividends without compromising its financial sustainability. We also have revolving credit facility lines totaling $8.7 billion and cash of $11.5 billion. Our cash level is currently higher than the optimal cash level we believe is around $8 to $10 billion. While we anticipate potential challenges stemming from the pandemic, which continues to improve, we still foresee some obstacles in the near future. Therefore, we plan to bring our cash levels down to a more optimal range closer to $8 to $10 billion. In the third quarter, we also made an early redemption of $1.3 billion in our bonds, as well as $3.5 billion in bank loan prepayments, and we received positive news regarding our credit profile; Moody's upgraded our credit risk from Ba2 to Ba1 in the third quarter of 2021. Next, please. In terms of portfolio management, we finalized six signings and four closures in the third quarter of 2021. These relevant transactions support our deleveraging and help us achieve an optimal portfolio focused on world-class upstream and refining assets in Brazil, especially in ultra-deepwater, pre-salt, and high-class refining assets in southeastern Brazil, which is the focus of our portfolio. Next, please. In terms of highlights for the third quarter, we followed through on our remaining shares in Petrobras Distribuidora; moreover, we had significant signings in our agreements concerning refining assets and natural gas assets. We signed the SBA with respect to the natural gas agreements with Brazilian and Teristo authorities, and we completed the sale of the Habbo Branco field in October 2021. Our total cash inflows in 2021 amounted to $2.9 billion, with a total value of signed transactions reaching $5.6 billion, which supports our deleveraging strategy and distribution of earnings. Thus, we view this as a highly positive cash inflow. Next, please. Regarding earnings for the quarter, we reported $3.3 billion of recurring earnings in Q3 2021, achieving a 5% increase in gross profit, despite a negative impact stemming from the depreciation of the real, as mentioned, which is non-cash but had a substantial effect on our earnings. We achieved reversals of impairments from upstream assets, owing to a more favorable price scenario and capital gains from the Buzios Coparticipation Agreement. These gains were partially offset by actuarial losses tied to our corporate health plan, which experienced a notable legislative change in Brazil that affected our third-quarter results. Next, please. Lastly, as previously mentioned, our Board of Directors approved a $6 billion dividend anticipation for 2021; an additional $6 billion was approved in the third quarter. This anticipation of shareholder remuneration aligns with our financial sustainability and reinforces our focus on capital discipline, optimizing our capital allocation, and distributing all earnings that we generate. This is very positive, both for our shareholders and for Brazilian society, as a significant portion of the dividends we distribute benefits the Brazilian society. We believe that having a stronger and more solid Petrobras is highly favorable for Brazilian society; as previously stated, we remain committed to executing our strategy, and we believe the results from the third quarter reflect important achievements in delivering our strategic plan. Thank you. I'll pass the floor back to Carla. Thank you.

Operator, Operator

Thank you, Rodrigo. We can now move to our Q&A session, and the first question that we've received comes from Frank McGann with Bank of America Merrill Lynch, and it's for Andre. Andre, what cost pressures are you seeing both relative to operations and also to investments? Could this affect future CapEx decisions?

Andre Chiarini, Analyst

Thank you, Frank, for your question. We do not expect cost impacts this year since the contracts for goods and services have been set beforehand, and even inflation corrections do not apply at the same time for all our contracts. In terms of future investments, we continuously assess all applicable variables, including exchange rates, brand scenarios, both short and long term. Possible project optimizations and other aspects are also considered for future CapEx decisions. We are concluding our strategic plan for 2022 to 2026, which will detail our investment choices, and we expect to announce it by the end of November and early December. Thank you for your question.

Operator, Operator

Thank you, Andre. The second question from Frank is for Rodrigo Araujo. Rodrigo, given the significant improvement in the Company's balance sheet and expected tight global supply-demand scenario that is anticipated over the next few years, could the Company move to increase investments in upstream projects during this period?

Rodrigo Araujo Alves, CFO

Thank you for your question, Frank. Of course, the more positive oil price scenario supports an increase in CapEx in upstream assets. However, when assessing the portfolio with future perspectives, we remain concerned about long-term prices, and we are committed to investing in environmentally resilient and low-price assets. We maintain a solid threshold for project decisions at a Brent price of $35 in terms of resilience for long-term projects. We expect some increase in CapEx for the 2022 to 2026 business plan to be announced at the end of November, beginning of December. But again, all capex increases will pertain to resilient assets that are profitable and yield adequate returns, even in challenging scenarios. Thank you for your question.

Operator, Operator

Thank you, Rodrigo. The next question comes from Luiz Carvalho with UBS, and it's also for you. The Company has been very vocal about highlighting its potential contribution to society through dividends. How do you see this developing in the next 12 to 18 months? As the country faces a challenging macro situation, could Petrobras increase its dividends to benefit the country? What potential limits do you foresee for distribution? Could there be a case for a percentage higher than 60% of the difference between operating cash flow and CapEx?

Rodrigo Araujo Alves, CFO

Thank you for your question, Luiz. Of course, 2021 is a transition year in which we achieved our $60 billion gross debt target, and we have managed to balance reducing our leverage this year with distributing our earnings as well. This has been an important aspect of our 2021 strategy. Of course, depending on the results of the fourth quarter of 2021, we may see additional dividend distribution, contingent on the scenario, results, and Company's financial sustainability. For 2022, we expect to adhere to our dividend policy and distribute 60% of our free cash flow, starting next year. If favorable scenarios arise, we might also consider additional distribution. Nonetheless, this will depend on the circumstances and potential upsides from next year. We are currently reviewing the 2022 to 2026 business plan and considering dividend distribution timing, aiming for more consistent timing, potentially quarterly or semi-annual distributions. However, we don't have a straightforward answer at this time, but it is something under consideration, and we may have conclusions by the announcement of our business plan. Thank you for your question.

Operator, Operator

Thank you, Rodrigo. The second question comes from Louise, and I will divide it into three parts. The first part is for Rodrigo Costa: What changes does Petrobras expect following the divestments of the refiners? Does Petrobras anticipate further investments from other players in the market, possibly in your refineries? The second part is for Marcelo: How do you see the evolution of the Brazilian refining markets after the sale of the refineries? Additionally, how does the Company plan to ensure that domestic fuel supply remains secure with other players in the market? What role will Petrobras play in this situation? The third part is for Rodrigo Araujo: After suspending the sale process for [Indiscernible], what are the plans for the final optimal portfolio for the Company? Is Petrobras considering modifications to its configurations, or can we expect the Company to focus solely on refineries in Sao Paulo, even in the long term?

Rodrigo Costa Lima E Silva, Chief Refining and Natural Gas Officer

Louise, we are getting our Company ready for this new environment by implementing three action plans. The first focuses on enhancing our efficiency through a program aimed at positioning our refineries in the top quartile based on U.S. refinery performance. We are working to optimize our energy efficiency through this initiative to lower unit costs while improving our natural gas and power strategies. Currently, we have five projects planned that will total around $300 million in capital expenditures until 2025. The second action plan is about preparing our hardware to adapt to market conditions. We are increasing our hydrotreating capacity by about 10,000 cubic meters per day and aiming to boost our conversion capacity by around 9,700 cubic meters per day. Our business plan indicates a capital expenditure of approximately $3.7 billion for these projects. Finally, the third action focuses on exploring opportunities in the energy transition related to bio-refining, as we investigate options for producing bio-jet fuels and renewable products. I will now turn it over to Marcelo to answer your second question.

Marcelo Zenkner, Chief Institutional Relations and Sustainability Officer

Thank you for the question, Louise. Regarding our new refinery environment in Brazil, competition among refiners will naturally emerge and is expected to positively impact market supply and risk sharing. It will also create healthy pressure on efficiency. Brazil already has a competitive environment for diesel and gasoline in the domestic market, with various players involved, especially in product imports. Petrobras has shown that it is ready for the entry of new players. Thank you.

Rodrigo Araujo Alves, CFO

Thank you for your question about our strategy and portfolio changes. There are no expected changes. We remain committed to the agreement with Brazilian antitrust authorities to divest a significant portion of our refineries. We have already signed HILA and HEMMA in the first and second quarters of 2022 and are making quick progress toward completing the remaining six. We are also advancing with other initiatives. For those that were not successful, such as GAAP and HIPAA, we plan to continue discussions with Brazilian antitrust authorities to restart these processes to ensure better outcomes in the future. We are actively refining our timing and strategy to enhance competition in the M&A process to finalize these sales successfully. Thank you for your question.

Operator, Operator

Thank you all. The next question comes from Rodolfo de Angele with JPMorgan, and it is for you, Rodrigo. Can you give us an update on the process of selling the Refining Park? What can be done to enhance these assets' attractiveness to buyers, and what would be a reasonable timeframe?

Rodrigo Araujo Alves, CFO

Thank you for your question, Rodolfo. As previously mentioned, we're considering the timing and strategy for relaunching processes that did not meet expectations for various reasons. In the case of HIPAA, we received bids substantially below our minimum valuation; for HIPAA, we could not agree on transaction terms. Unfortunately, we did not receive binding offers, but we anticipate relaunching these transactions once we finalize discussions with the Brazilian antitrust authorities. We are focused on enhancing competition in these transactions and ensuring a successful relaunch. We remain in this developmental phase now, thank you for your question.

Operator, Operator

Thank you, Rodrigo. Rodolfo also posed a question for Joao: Joao, can you update us on the auction of Atapu and Sepia? Have you seen interest from companies in partnering with Petrobras?

Joao Jeunon, Executive Manager for E&P Integrated Asset Management

Thank you, Rodrigo, for your question. As the Company publicly announced in April, Petrobras has separated its rights to act as Operator in both areas, Atapu and Sepia, with a minimum working interest of 30%. Unfortunately, as you know, the bid process is ongoing, and we cannot provide insights into other companies' interest at this time. Finally, we want to affirm that Petrobras maintains the intention to work in partnership across all EMP areas to reduce risks and costs. Thank you for your question.

Operator, Operator

Thank you, Joao. The next question comes from Bruno Amorim with Goldman Sachs, and it is for Mastella. Mastella, do you attribute the recent rise in demand for Petrobras shares for November to much stronger demand in the domestic market overall, or is it harder to achieve more internal sourcing and less dependency on imports by the fuel distributors?

Claudio Mastella, Chief Trading and Logistics Officer

Bruno, thank you for your question. We haven't noted anything substantial supporting demand growth for November, which is typically a weaker month compared to October. In considering typical demand for our products for November, we must acknowledge that we have nearly 100 clients, each with different market perspectives. Therefore, I cannot represent all of their opinions, but the perspectives I have gathered do not indicate substantial growth. Thank you.

Operator, Operator

Thank you, Mastella. The second question from Bruno is for Rodrigo Araujo. Rodrigo, could you clarify the rationale for determining the size and timing of dividends going forward? The delivery storage story is now behind us. Is it reasonable to expect for the Company to pay out 60% of operating cash flow minus CapEx on a quarterly basis?

Rodrigo Araujo Alves, CFO

Thank you, Bruno. Regarding the anticipated dividends we've previously announced, we did factor in maintaining our gross debt target of $60 billion. We've successfully balanced distributing our holdings while achieving our goal. 2021 is indeed a transitional year, and we expect to start consistently paying 60% of our free cash flow adhering to our dividend policy from 2022. We're currently evaluating whether it is feasible to create a more consistent dividend distribution schedule, considering timing and whether it will be quarterly or semi-annual. We will have clearer insights by the time we finalize our business plan. Thank you for your question.

Operator, Operator

Thank you, Rodrigo. We have further questions from Bruno Montanari with Morgan Stanley, specifically for Mastella. Mastella, fuel prices in Brazil have been in the news since the beginning of the year. How can Petrobras contribute to making price adjustments less volatile for final consumers without increasing margin risks? How can the Company engage in discussions surrounding potential tax changes or the implementation of fuel price stabilization funds in Brazil to lessen the high price impact on end consumers?

Claudio Mastella, Chief Trading and Logistics Officer

Thank you, Bruno. In regard to our contribution to reducing volatility, we avoid passing on full volatility to customers prior to entering and exiting the market rates. This leads to lower frequency adjustments, but it does not prevent us from responding to structural changes in international price levels. Finally, regarding public policies, Petrobras would like to clarify that, when requested, we provide technical knowledge and expertise to various government agencies on a range of issues pertaining to Brazil's fuel market. Thank you.

Operator, Operator

Thank you, Mastella. The second question from Bruno is for Rodrigo. Rodrigo, compared to peers, Petrobras has taken a more pragmatic approach toward energy transition by emphasizing short-term goals and capital investments. Does management foresee any changes to this approach in the new business plan? Given the high level of free cash flow generation and elevated oil prices, would it make sense for the Company to increase investments in new energy research to better position itself amid the energy transition?

Rodrigo Araujo Alves, CFO

Thank you, Bruno, for your question. There are several ways to look at this. Firstly, the quality of our portfolio, in terms of environmental values and its ability to withstand low prices, is essential. As we observed in 2020, our portfolio demonstrated significant resilience during the $40 average Brent price scenario. This strong portfolio allows us to navigate these circumstances thoughtfully and effectively, as you pointed out. While we are dedicated to reducing emissions and have set targets in line with the Oil and Gas Climate Initiative, we are also making ongoing investments in projects aimed at decreasing emissions throughout our operations, both up and downstream. For instance, the project we announced this year focuses on enhancing energy efficiency in our refining operations. We are also considering establishing frameworks and governance processes for potential future energy projects while maintaining our current capital expenditures on improving emissions in our operations. Thank you for your question.

Operator, Operator

Thank you, Rodrigo. The next question comes from Regis Cardoso with Credit Suisse, and it is for you. It's regarding additional distributions for 2021. Cash flow generation was strong in the third quarter of 2021, and we believe Petrobras could distribute even more cash generated until the end of 2021. Should we expect Petrobras to announce more dividends, or will that depend on the complete annual results?

Rodrigo Araujo Alves, CFO

Thank you, Regis. As previously mentioned, depending on the fourth quarter of 2021 outlook, earnings, and cash flow generation, we might observe additional dividend distributions. However, this remains contingent on the Company's financial sustainability and the overarching Q4 performance. As noted, our cash levels are currently above what we deem optimal, and we still anticipate challenges in the overall scenario. We're striving to reduce cash levels towards our anticipated optimal range of $8 billion to $10 billion. This will be evaluated alongside our dividend policy for 2022, which is aimed at distributing 60% of free cash flow as we proceed. Thank you.

Operator, Operator

Thank you, Rodrigo. The next question from Regis is targeted towards Mastella. Mastella, this involves gasoline and diesel supply. Recently, some news indicated that Petrobras is not fulfilling additional fuel demand from distributors beyond contracted volumes, which has been confirmed by the Company. Could you provide your perspective? How do you view the capacity of third parties to satisfy local demand for oil products exceeding Petrobras's current capacity? Do you believe the current price levels provide sufficient incentives for importation? Does it make sense for Petrobras not to cover specific markets where imports could be more viable, particularly in the northern coastal and northeastern regions?

Claudio Mastella, Chief Trading and Logistics Officer

Thank you, Bruno, for the question. First and foremost, Petrobras fully complies with its contractual obligations, which is crucial to note. Specifically for November, as I mentioned earlier, we encountered atypical additional demand that was significantly higher than expected for that month. Consequently, even with our refineries operating at maximum capacity, we could not meet the excess demand of approximately 20% for diesel and 10% for gasoline. Brazil's market is not short on supplies; there are numerous entities beyond Petrobras, such as distributors, trading companies, and refiners, that produce and import gasoline and diesel and can sufficiently fulfill demand. In terms of commercial strategy, we do not avoid markets. Petrobras will maintain operations in every region where we can be profitable and competitive, including the coastal areas in the North and Northeast. Thank you.

Operator, Operator

Thank you, Mastella. The next question comes from Vicente Falanga with Bradesco, and it's directed to Rodrigo Araujo. Rodrigo, it appears Petrobras has the balance sheet capacity to pay more than 60% of operating cash flow minus CapEx. Has the Company discussed this potential for this year?

Rodrigo Araujo Alves, CFO

Thank you for your question, Vicente. As previously stated, 2021 is regarded as a transition year for us. Consequently, our focus centered on achieving the $60 billion gross debt target, which we have now met in the third quarter. Depending on fourth-quarter results, the Company’s sustainability, and the scenario, we may announce additional dividends, contingent on forthcoming developments. For 2022, our goal is to comply with our established dividend policy and provide 60% of our free cash flow while remaining open to additional distributions whenever feasible. Thank you for your inquiry.

Operator, Operator

Thank you, Rodrigo. The next question also comes from Vicente and is directed to Joao. Joao, has Petrobras been in discussions with potential partners for the TOR auctions coming in December? What is the interest level from foreign companies?

Joao Jeunon, Executive Manager for E&P Integrated Asset Management

Vicente, thank you for your question. As I noted, the transfer of rights bid process is ongoing, and as such, I am unable to disclose specific information regarding competitiveness at this time. Thank you for your question.

Operator, Operator

Thank you, Joao. The next question comes from Lilyanna Yang with HSBC, and it is for Rodrigo Araujo. Rodrigo, could you provide an update on the monetization status? Why has this process taken so long to materialize?

Rodrigo Araujo Alves, CFO

Thank you, Lilyanna, for your question. We are currently engaged in discussions with Novonor, another key shareholder, about the next steps and working towards a mutual understanding of the conditions for a potential sale transaction. That is our current situation. While we remain dedicated to divesting our interests, our objective is to maximize value, and our discussions with Novonor focus on this aspect. Thank you for your question.

Operator, Operator

Rodrigo, Lilyanna also has another question for you regarding CapEx plans. Given that Petrobras is generating more revenue than expected in the budget and is leveraging faster and has announced higher dividends, is this an appropriate time to increase CapEx beyond inflation? If so, where would it be more sensible to allocate funds? Does management prefer to recommend to the board of directors to distribute more dividends instead?

Rodrigo Araujo Alves, CFO

Thank you, Lilyanna. As I mentioned during the presentation, higher oil price scenarios support increasing CapEx in upstream projects, and we anticipate a level of CapEx growth within the 2022-2026 business plan, particularly for previously postponed projects due to last year's price challenges that could be advanced, notably for projects closer to the end of the plan. That said, we remain focused on resilient assets regarding both emissions and low-price scenarios. Additionally, even anticipating potential CapEx growth, the opportunity for additional dividends remains on the table but hinges on ongoing scenarios. Thank you for your question.

Operator, Operator

Thank you, Rodrigo. We have further questions from Christian Audi with Santander, and the first question is for you, focusing on cash usage. How will you prioritize your cash use moving forward?

Rodrigo Araujo Alves, CFO

Thank you, Christian, for your question. As previously stated, we believe that maintaining a $60 billion gross debt level is adequate concerning our capital structure. However, we do require some degree of flexibility around this level, primarily after achieving it, for effective management of the Company’s future financial sustainability. Relating to the advantageous oil price scenario, this structure supports increases in resilient upstream projects and additional dividend distributions, contingent on the scenario. Our future capital allocation strategy will focus on committed CapEx studies for our 2021-2025 business plan, maintaining CapEx increases for 2022-2026 while meeting the 60% free cash flow dividend policy, potentially exceeding that if durable scenarios arise like those observed presently. Thank you for your question.

Operator, Operator

Thank you, Rodrigo. Now we have questions from Gabriel with Citi. The first question is for you. Given the Company’s strong cash generation from divestments and current leverage, how can we interpret the dividend policy? Is there room for payments beyond what has been disclosed by the Company?

Rodrigo Araujo Alves, CFO

Thank you for your question, Gabriel. As mentioned earlier, 2021 is a transition year. We've successfully reached our $60 billion gross debt target ahead of expectation, and depending on our earnings and cash flow generation in the fourth quarter of 2021, we may announce extra dividends. However, this will depend largely on how things unfold. Thank you for your inquiry.

Operator, Operator

Thank you, Rodrigo. The next question from Gabriel is for Mastella. Mastella, one of the key topics regarding Petrobras is its pricing policy. Considering the current foreign exchange situation, we expect fuel pressure to persist at least in the short term. However, with the current import parity level, we still see the Company charging prices below the expected level. Can you explain how Petrobras is planning its pricing strategy for now and in the future? Is there a chance for changes in this approach?

Claudio Mastella, Chief Trading and Logistics Officer

Thank you for your question, Gabriel. We believe that aligning general prices with global markets is essential for developing Brazil's competitive market. With many stakeholders involved, investments in refining and logistics will help mitigate supply risks. We are committed to maintaining this market balance as we have been doing so far. Thank you.

Operator, Operator

Thank you, Mastella. Now we have questions from Anne Milne with Bank of America Merrill Lynch, and she has a question for Rodrigo. Rodrigo, as the $60 billion debt target has been reached, what will be the subsequent goals or targets in the management of leverage?

Rodrigo Araujo Alves, CFO

Thank you, Annie, for your question. We view the $60 billion level as adequate for navigating challenging scenarios, similar to those we faced last year without risking the Company’s financial sustainability, even in lower price scenarios like those observed in 2020. However, we do require some level of flexibility around the $60 billion figure and do not anticipate reducing this number significantly below 55 or above 65. Some flexibility around $60 billion should suffice for efficiently managing the Company’s capital structure and adding value to our shareholders. Thank you for your question.

Operator, Operator

Thank you, Rodrigo. We now have questions from Pedro Soares with BTG Pactual. The first question is for you. With the gross debt target achieved, what should we anticipate regarding capital allocations in the upcoming quarters? Could you provide insight into the minimum cash levels that the Company should target? Are we able to expect payouts beyond 60% of the operating cash flow minus CapEx?

Rodrigo Araujo Alves, CFO

Thank you, Pedro, for your question. Our optimal cash level is estimated to rest between $8 billion to $10 billion, which we aim to achieve moving forward. Nevertheless, there remain specific pandemic-related challenges that we expect to continue facing in the near future. Our goal is to initiate a downward trajectory to align our cash levels with the aforementioned optimal range. Regarding gross debt, as stated earlier, we do not expect to reduce our Company’s debt significantly and do not wish to under-leverage it. Therefore, we believe $60 billion serves as an appropriate benchmark for the present time, and we will continue monitoring this closely. For now, we consider $60 billion a sustainable and optimal level for cash allocation and adequately supports our dividend distribution within future CapEx strategies. As for the possibility of additional dividend payments, we remain committed to our existing dividend policy while having the flexibility to propose extra dividends in favorable contexts. Thank you for your question.

Operator, Operator

Thank you, Rodrigo. Following we have a question from Pedro Soares directed towards Rodrigo Costa. Refinery utilization rates are currently at elevated levels. Should we expect to see a reduction in utilization in the coming months since distributors are expected to ramp up fuel imports?

Rodrigo Costa Lima E Silva, Chief Refining and Natural Gas Officer

Pedro, our utilization rates depend on value generation output, which is influenced by market demand and the availability of our refinery hardware. We've achieved an 85% utilization rate at the beginning of the quarter, and our forecast for October aims for a 90% utilization rate.

Operator, Operator

Thank you, Rodrigo. Our final question comes from Barbara Halberstadt with JPMorgan, and she has two inquiries. The first question will be for Rodrigo Araujo: In terms of capital structure, assuming the divestiture program is successful, what debt level would the Company find acceptable?

Rodrigo Araujo Alves, CFO

Thank you, Barbara, for your question. We believe that maintaining $60 billion is an adequate level for capital structure. A degree of flexibility around this figure is necessary, but we do not anticipate substantially reducing it below 55 or exceeding 65. This flexibility surrounding the $60 billion mark would be sufficient to efficiently manage the Company’s capital structure, allowing us to adjust for any value-add for shareholders. This is where we plan to set our gross debt levels moving forward while closely monitoring it. Thank you.

Operator, Operator

Thank you, Rodrigo. The second question from Barbara is directed towards Rodrigo Costa. Rodrigo, could you offer more insights into the natural gas business and LNG? How is the business performing in the fourth quarter of 2021? Several companies have raised concerns regarding freight costs. Has Petrobras faced similar challenges regarding LNG imports? How are the pass-through mechanisms structured in this context?

Rodrigo Costa Lima E Silva, Chief Refining and Natural Gas Officer

Hi, Barbara. Petrobras plays a relevant role in the Brazilian natural gas market, maintaining a portfolio on both the supply and demand sides. We have multiple contracts aligning with various commercial conditions spanning short durations. Our pass-through processes reflect the market conditions effectively. In the fourth quarter, we expect elevated demand in our markets due to rising thermal and industrial market needs. For supply sources, we have our pipeline production alongside importation from Bolivia and LNG. We have procured approximately 112 LNG cargoes, and we are evaluating potential additional purchases depending on supply and demand trends, specifically concerning power generation needs. Considering our profile, we have not experienced significant issues regarding freight costs, as Brazil resides in the Atlantic basin market. We also possess our vessels, which helps us manage local market operations efficiently. Thank you for your question.

Operator, Operator

Thank you, Rodrigo. At this time, the Q&A session is over. If you have any further questions, you can send them to our Investor Relations team. Rodrigo Araujo will now make his final remarks. Please, Rodrigo, go ahead.

Rodrigo Araujo Alves, CFO

Well, thank you, Carla. Thanks, everyone, for your time this morning as we presented. We're very pleased with the solid quarter we had, concerning both operational and financial performance. We're thrilled to have achieved our gross debt target of $60 billion, and, of course, we're delighted with our results for 2021. We're also proud to announce significant dividend distributions and relevant investments, which have allowed us to contribute meaningfully to Brazilian society. Thank you for your time today. Feel free to contact our Investor Relations teams with any further inquiries. Thank you.