Petroleo Brasileiro SA Petrobras

BOVESPA:PETR4

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to Petrobras' webcast conference call with analysts and investors concerning its first quarter 2019 results. [Operator Instructions] We'll start by listening to Petrobras' CEO, Mr. Roberto Castello Branco, with the main highlights of the results. Afterwards, the participants' questions will be answered. The presentation will remain available throughout the webcast and on the company's Investor Relations website.

Present with us today are Mr. Roberto Castello Branco, Petrobras' CEO; Mrs. Andrea Almeida, Chief Financial and Investor Relations Officer; Mrs. Anelise Quintão Lara, Chief Refining and Natural Gas Officer; Mr. Carlos Alberto Pereira de Oliveira, Chief Exploration and Production Officer; Mr. Eberaldo de Almeida, Chief Corporate Affairs Executive Officer; Mr. Rafael Mendes Gomes, Chief Governance and Compliance Officer; as well as other company's executives.

Please, Mr. Roberto, go ahead.

[Roberto da Cunha Castello Branco, executive]

Good morning for those on the west side of the Atlantic. Good afternoon for those in the east side of the Atlantic, and good night for those in Asia, Australia and the Asia-Pacific region.

We are very pleased to present the first quarter 2009 (sic) [ 2019 ] performance of Petrobras. It was not a brilliant quarter, of course, but there are very good improvements on the side of debt management, the deleveraging process continued. We lengthened the average maturity of the debt. We've reduced our cash and cash flow abilities in order to improve capital allocation. And I'm going to speak for a few minutes and afterwards, I will leave the stage to Capo, our Chief Exploration and Production Officer, because he has good news for you in terms of production. Well, on the strategic front, we made several advancements on the execution of our 5 strategic pillars. In terms of portfolio management, we announced transactions involving USD 11.3 billion. Among them, the sale of TAG, the gas pipeline and they saved the closing of the transaction of the Pasadena refinery in Texas. That's very symbolic, very important to us, given that it would present the link to the past -- to track the past of Petrobras.

And in terms of the future, we added several of the assets to our divesture program, and I think that they contribute to the improved capital allocation in order to increase return on capital employed. They'll allow us to deleverage further and to -- in the case of the refineries to correct what we consider an anomaly. The fact that Petrobras, only Petrobras owns 98% of the refining capacity of Brazil. And for sure, it will contribute to increase our return on capital employed to stimulate increase in efficiency in our company.

We are starting a relentless search for lower costs. We are starting by focusing on the low-hanging fruits. There are several of them. We are already [ attacked ] in these first 4 months of the year. In terms of meritocracy, our Board of Directors approved variable compensation program in order to align the goals of the executives and shareholders to contribute to maximize value creation at the company. We started to work on EVA program. Our goal is to make every employee of this company independent of his or her position in the company to feel like an entrepreneur in order to generate value for its own business. It's like that everyone in this company, each employee in this company, is the owner of a small oil well in to expand his business, creating value for his little or her little business. We managed to put in place an administrative reform in order to gain more flexibility and speed on the decision process and to enhance accountability among our executives. Well, I'll leave my comments emphasizing our focus on safety of operations. We are starting a program involving the training of 180,000 people, including our own employees and employees of suppliers in order to maximize the safety of our operations. We're also focusing on fighting crime, that means the -- they steal -- of our pipelines, of our oil and fuel pipelines, this has been increasing in our operations in Brazil. And we are using our intelligence teams in close cooperation with the police of several states and the federal police of Brazil, and use -- the use of equipment, such as sensors, and drones, and so on, in order to be successful at fighting crime. We -- definitely, we don't want to have an accident like happened in Mexico a few months ago.

Well, I conclude my comments saying that our best days are still ahead of us. We believe -- we strongly believe, we are on the right path to maximize value. Now having said this, I'll pass to Capo, that's to -- for his comments on production and cost of production.

[Carlos Alberto Pereira Oliveira, executive]

Well. Good morning, good afternoon, good evening. I will just say a few words about production. And -- but the first thing that I would like to say is that we are maintaining and changing our target oil production forecast for 2019. I mean, at 2.8 million barrels of oil equivalent per day.

In the first quarter of 2019, we had a lower production comparing to the first and to the fourth quarters of 2018, and it was mainly due to the divestment that we had on the -- in the Roncador Field. And also the sale of 80% of our share in United States operations, the company that you have there, the Petrobras America.

And also, we faced some delays on the commissioning of our gas systems on new -- in the new platform, new units that we have put then on stream. And also we have some concentration in this quarter, in this first quarter of 2019 for the maintenance stoppage. But if the startup of the 7 new production units, P-74, 75, 76, 77 from -- off the Búzios Fields and P-67, 69; and also the FPSO Campos those Goytacazes 7 units in the last 11 months. We are in ramp-up phase in these units, and this for sure can assure you that we still can maintain our target oil production forecast, unchanged for the 2019, the 2.8 million barrels of oil equivalent per day. In April, we returned to the same level of production as the last quarter of 2018 when we considered the same asset base, I mean, when we just don't consider the divestments that we made in 2018.

And so -- and it is also important to mention that in May -- on May 2, we -- after 12 months of the first trial, we completed the ramp up of the P74 platform and this platform is now producing in its maximum capacity of 150,000 barrels of oil per day, with 4 wells on production. And so based on this, based on the perspective that we already have in April, we can receive that in the last 10 days after the entering of this new well, in the last 10 days, we are producing about 2.7 million barrels of oil equivalent per day.

And in May, we are producing over 2.8 million barrels of oil equivalent per day. And we've an upward trend that the production is still -- production keeps growing. And we are in this space in order to keep our growth for the year, the -- our target of 2.8 million barrels of oil equivalent per day.

That's what I wanted to say now.

[Andrea Marques Almeida, executive]

I believe we can open for questions right now.

[Operator]

[Operator Instructions] Our first question comes from Andre Hachem, Itaú BBA.

[Andre Hachem, analyst]

My first question is in regards to production. Hello?

[Carlos Alberto Pereira Oliveira, executive]

We are listening.

[Operator]

You may proceed.

[Andre Hachem, analyst]

Good morning. Can you hear me? Hello?

[Carlos Alberto Pereira Oliveira, executive]

Yes. Yes, Andre, please proceed.

[Andre Hachem, analyst]

I have two questions. The first one is in regards to production. Capo mentioned that the charges relating to the ramp-up of the P-74 platform have now been overcome, and the unit is now running at full capacity in only 12 months. I would like to understand if this would be reasonable -- it if would be reasonable to assume that the same ramp-up rate for the new units? Or if this could be an even shorter ramp-up rates for the new units, given the learning curve of this first unit? I would also like to understand, in regards to this Campos Basin, what could be done to reduce the depletion rates that we've been seeing over the past few months? My second question is in regards to the compensation for the deferred -- for the deferral of production, the transfer of rights. In Petrobras' view, will this be a cash payment? And is this considered in the deleveraging target of 1.5x net debt to EBITDA?

[Carlos Alberto Pereira Oliveira, executive]

Hello Andre. About production. Yes, we -- our expectation now is that we have learned something about the P-74 and of course, the first units that went on stream. And on the commissioning of the gas systems, they are very complex, different than the units that we had before on the pre-salt -- even on the pre-salt. And with this learning, what we can say is that we are going to proceed now with the ramp-up of those units, and that will sustain the growth of the production for the year.

About the Campos Basin, yes, we had a lot of efforts on the Campos Basin. In the last presentation of our results at the fourth quarter of 2018, we mentioned that for the Campos Basin, not only we are working with Equinor in other companies in strategic partnerships in order to have more oil from those fields particularly in Roncador, but at the same time, we are working to have more oil from new wells that we are going to put in soon in the old platforms that we have there. At the same time, we are buying some territory areas, with a lot of sort of actions that we maintain a program Sustainability of the Campos Basin, our intention is to keep production in the next 2 years at the same level that we have today.

About the TOR compensation, could you ask again because I didn't get your question?

[Andre Hachem, analyst]

In regards to Transfer of Rights production compensation, in your view, is this a cash -- will this be a cash payment? And are you considering this to reach the 1.5x net debt EBITDA leverage target?

[Carlos Alberto Pereira Oliveira, executive]

Okay. About the compensation, no we are not considering it in our target, about this compensation. It's something that is going to be defined by the partners that are going to enter in the area, so there will be a bid at the end of this year. And so the new owners of the concession of the area will establish their negotiation in order to define what will be the compensation. But the compensation is not something that's open, it's -- in fact, it's defined, very well defined by the resolution of the Sapinhoá. And also another compliment that was made by the news of energy in Brazil. So the parameters of this compensation is defined. The only thing that's not -- is to define and that has to be negotiated is what would be the -- what we'd be producing in the field in the next years -- in each field in the next years after the bid.

[Andre Hachem, analyst]

This compensation be in cash? Or could it be in, for example, in barrels we're not taking of the production?

[Carlos Alberto Pereira Oliveira, executive]

No. It's part of the negotiation between the partners.

[Operator]

Our next question comes from Frank McGann, Bank of America.

[Frank McGann, analyst]

Just in terms of your production goals, longer term. Clearly, as we look at -- you had a chart on Page 30 on the slide or Page 30 of the presentation. You've got a number of units that have been defined when you get past 2020. But the -- a lot of those have not been contracted yet, and it's less clear how you're thinking about long-term production growth. You obviously have resources that are very, very large that could be developed over time and raise production. But how are you thinking of the balance between your other goals of profitability and the balance sheet and longer-term growth in production? How do you see that will be play out and what will be the opportunities here that we could get for potentially substantial additional production growth? And then, secondly, in terms of the profitability of the upstream units. A lot of -- the Transfer of Rights areas have no special participation tack so should we think of potentially a faster ramp-up now in overall profitability as a result of that?

[Carlos Alberto Pereira Oliveira, executive]

Well, Frank, about the long-term expectations for the production, in fact we are keeping the same production levels that we announced when we made our business plan for the 2019 and 2023. So until we have another strategic plan, we are -- we have the same levels for the -- the same targets for the production for those years, for the years to come. And in terms of the profitability for the TOR, we, for sure, with this productivity and levels that we are having on those wells, we have good profitability. But at the same time, it's also planned in our business plan for the 2019, 2023, the same answer I could say that I gave you for the production for the next years. So it's all included, and we really have good profitability in this field -- in those fields that are related to the TOR contract, but we have already included this profitability in our future perspective that we have for the rest.

[Operator]

The next question comes from a Regis Cardoso, Credit Suisse.

[Regis Cardoso, analyst]

Also welcome, Andrea, wish you the best of luck in this new entrepreneurship -- in this new mission you have. Also if Carla is also on the line, also wanted to welcome her. I have a few questions, mostly follow-ups, I'll try to be brief. One is the -- one of them in regards to production ramp-up. That's probably really best for Capo to answer.

It seem to us that, that 2.7 million barrels equivalent a day you mentioned in the release for the last week of April would probably relate to something around 2.1 million barrels a day of oil production in Brazil. And that you would still have another 400,000 barrels a day to ramp up in the existing production that is already net of your divestment in Tartaruga. So I wanted to know if you can comment on those numbers, if you believe them are correct? So 2.1 oil, with a potential for the ramp up for another 0.4 in existing platforms. And also, what do you believe to be the main risks to that ramp up if it's gas commissioning? Or is it something else? Also, the second question would be to Anelise. It's in regards to the sale of refineries. If you already have a clear view of whether is it -- or whether it's possible to sell individual refineries and whether you would sell the logistics associated together because that logistics is often shared between more than one refinery, right?

And just a few very quick follow-ups. One of them in regards to the payment of IOCs. Company has been very vocal about deleveraging. You were not -- I mean, why announce now these early distributions? And then also a follow-up question on the low execution of CapEx, if you have any examples of why CapEx in the quarter was so much below what you had originally budgeted?

[Carlos Alberto Pereira Oliveira, executive]

Regis, good morning. About the production ramp-up and also about the Tartaruga fuel divestment. We are going to have keeping the go -- the targets of 2.8 million barrels of oil-equivalent per day, even with the divestment of the Tartaruga fuel that we announced recently. And we -- in Brazil, we are producing over 2.1 million barrels of -- barrels of oil per day, and we are going to grow this production after the ramp up of the new units.

And the risks that we consider the risks, the necessary risk in our risk management of the production, and we also included any risk that are the natural risks of our activities. So the gas commissioning is something that we learned a lot when we started the production of the P-74 and that we have already used these learning on the commissioning of the gas systems on the order platforms that are going on stream.

So based on that, we keep the goal, the targets of the oil production for the year based on -- in this that I have mentioned now.

[Andrea Marques Almeida, executive]

Maybe I'll try to cover Anelise that had to leave. The idea -- we will have a teaser that will be in the market in the end of June, and we'll have the details on the sales of refineries. The idea is to -- to do the sales individually and only attach the oil pipelines together that are really connected to the refinery. That's the idea, but we'll have more details in June. And covering the dividends or interest on capital, the idea is why we are deleveraging, and I believe we still have a lot to do. We will be -- the idea is to pay the minimum dividends that we are somehow obliged by law. And after we reach the goal, then we believe we'll be able to pay more to the investors. That's the idea.

[Roberto da Cunha Castello Branco, executive]

Again, I'd like to point out that Brazil is one of the few countries in the world, which has a minimum mandatory dividend. Of course, it's distortion. We are not a utility. We are an oil company that's subject to price and cash flow volatility, but we comply with the law. We will pay dividends. We will pay the minimum dividends established by law. We believe -- we strongly hope that in the future the law on capital markets in Brazil will be modernized.

[Regis Cardoso, analyst]

If you allow me just a few follow-ups, in regards to the interest on capital. If I understand it correctly, you continued to provide intermediate distributions of both dividends and interest on capital. And then also, in regards to the CapEx question, if you have any examples of why execution was below budget? And finally, with you Capo, it seemed like you have an inventory of drilled wells that is well in advance of your first -- expected first oil date for the FPSOs, if you -- if this is indeed the case and why is that?

[Roberto da Cunha Castello Branco, executive]

[ Andre ], we have a long to-do this. One item is to establish a very clear dividend policy and disclose it to the market. We are still in the process of making. Capo?

[Carlos Alberto Pereira Oliveira, executive]

[ Andre ], about the CapEx question. As we had -- we faced this delay in the commission of the systems -- of the gas systems, and sometimes we postpone it as well the construction of some wells and also the -- and for sure, the interconnection of those wells to the platforms. So that's the reason why we have this reducing on the CapEx of the first quarter. Particularly for the P-70s, the P-74, P-75, P-76 and P-77 of the Búzios Field. But at the same time now we are reassuming the drilling and completion of those wells. And we will be then ready to increase the setup in the next months. And that's why we -- and that's the reason for sure that we are going to increase the production mainly in the -- we are going to see higher productions in the next semester in order to keep the goal, the target, for the 2.8 million barrels of oil equivalent per day in the 2019.

[Operator]

Our next question come from Christian Audi, Santander.

[Christian Audi, analyst]

I had 2 questions. The first one on return on capital employed, and the second one on cash flow generation. Roberto, on return on capital employed, the company has already stated a target, which I think is very positive in that not many oil companies do that in the world of 11% medium term. My question is, given your recent announcement of you trying to sell the 8 refineries, which I would think have a lower return on capital employed than the Upstream assets. Do you feel that you could actually surpass that target in a shorter period of time than initially set in the plan? Or you feel that 11% is really the target that is ambitious enough for you at this point?

The second question has to do with cash flow generation. Even in this quarter, it remains strong, given what you and Capo are saying about production growth, we would expect this cash flow to continue growing. So can you talk a little bit about CapEx, whether you feel current levels could actually increase or could decrease, and therefore obviously impact this cash flow generation?

[Roberto da Cunha Castello Branco, executive]

Well, I believe there are 3 questions. Thank you for asking, Christian. First of all, the return on capital employed of the target of 11% is for sure aggressive because, we -- at least, in the last few years, we are -- we have been far away from it. But it -- I believe it's feasible, it's not easy. And it was not -- when it was announced, it was not supported by initiatives that will allow us -- could allow us to meet this target. Now we are launching several initiatives in terms of divestures and cost cutting that will make it possible, but I still believe that it won't be easy.

So we don't want to overpromise and not delivering. That's 11%, that's a good target, and we'll go for it, very strongly. Your other question was related to cash flow generation. Oh yes, definitely it's what we are laser focused on increasing cash flow generation through the acceleration of oil and gas output, Capo has explained about that, and to cost cutting. And the third question was about CapEx. We are going to review internally CapEx, it's likely to be overestimated for the year and we are going to analyze the cause why we are running low on CapEx, if it's a problem of overestimation of CapEx or its a question that we are being slow in procurement, in the internal process of making the disbursements or if how much of it is obtained through cost reductions in the procurement of equipment and parts. So it's still a question to be analyzed. At the moment, I am not able to give you a good answer about that. We are going to review it, and after this review I believe that we'll be able to supply you with a good answer on that subject.

[Christian Audi, analyst]

Okay. And you plan to announce a strategic plan update I guess where you would address this CapEx. Or do you have already an idea of the timing of when you would do the next update for your strategic plan? Or not yet?

[Roberto da Cunha Castello Branco, executive]

We are making it gradually. As you have seen, we launched a resilience plan that added several assets to the -- our portfolio of divestures, we announced a cost-reduction goal of $8.1 billion over the next 5 years. It could be more, including depending on our speed of implementation of this -- the transformation program. When we review the CapEx budget for 2019, we are going to disclose it if it would be needed to reduce or to increase, but anyway the CapEx budget does not include our expenditures with the auctions that will happen in the second half of this year.

[Operator]

The next question comes from Vicente Falanga, Bradesco BBI.

[Vicente Falanga Neto, analyst]

First of all, congratulations for the company and the IR department for the addition of data disclosed in the press release. The data is really helpful for interpretation and for modeling. I just had 2 questions here. First of all, Roberto, it was announced that Petrobras pretends to substitute the participation of employees and earnings for a bonus compensation based on certain targets. We think obviously the idea is very positive to align the interest of shareholders with employees.

On the other hand, based on what we have read in the media, some union representatives are obviously against it, claiming that it will not be legally possible for the company to do that. My question is, what is Petrobras' legal conviction that it could be able to implement this change? And then, my second question, how long does Petrobras estimate that it could sell the additional 10% stakes in NTN and NTS? Could this happen anytime soon?

[Roberto da Cunha Castello Branco, executive]

Well, first of all, regarding the compensation program, it's implemented. Everybody knows the targets and everybody is aware of that. Our human resource department has been doing the job, and it's in place for 2020. It will be more refined to include EVA. The EVA program is being implemented. We are working hard on that. A few days ago, we have the official start-up of the EVA work with a speech of Joel Stern, one of the founders of EVA, jointly with Bennett Stewart. He came to Brazil specifically, for this event and our teams are working with Stern Value Management on the implementation of this important program. Your second question is about?

[Vicente Falanga Neto, analyst]

You mentioned, Roberto, in the press release that Petrobras could sell the additional 10% stakes in NTN and NTS?

[Roberto da Cunha Castello Branco, executive]

Yes. We are going to sell. We are going to sell as fast as we can. The 10% -- the remaining 10% at NTS and TAG. First, we are going to close the deal with [indiscernible], and after that, we will start the efforts to sell both of our sakes in these 2 gas pipeline companies.

[Operator]

The next question comes from Gabriel Francisco, XP Investimentos.

[Gabriel Francisco, analyst]

My first one is regarding the refining results. Ever since the company has begun implementing hedges to -- for stated purpose of amortizing the effects of volatility. The borderline effect is that refining margins haven't actually recovered to the pre-hedging practices. They have, particularly underperformed previous results. I wanted to understand better how -- what is going on in this front? What are the -- what are the cost entailed to practice hedges? Because my understanding they intend to amortize the effect of the oil price volatility, yet the company continues to announce in its results that the refining was -- the refining margins were lower due to a higher stock effect on inventory -- sorry, on inventories. That's my first question.

My second question refers to the E&P segment. I wanted to understand the rationale of the deepwater investment in Sergipe, which is expected in the business plan? Given the company's rhetoric of focusing on the pre-salt, I wanted to understand what is the -- what are the particular areas of these investments that justify an investment?

[Andrea Marques Almeida, executive]

So I can start answering the question about the hedging and the impact on the refineries results. Actually, the hedging that we have been doing is really to cope with the import parity. So whenever we are setting a fixed price for the market, we are hedging to keep the import parity. So the volatility in the EBITDA that you see in the refining results, actually, there has more -- the reason is more related to the cost of oil that they are using whenever processing the -- whenever processing. So we see the fourth quarter drop in EBITDA generation, and that's because they are using petrol oil from the previous quarters, where the oil was much higher. And in the next quarter, like the first quarter of 2019, we see an improvement, and they are still using higher cost oil petrol, but not as much impacted as the fourth quarter, and they increased the volume sales so they had better results. But I wouldn't say that there is a connection between the hedging because the hedging is just to keep the import parity. I believe the way the refiners work and when they are -- the lag between the price of oil they use in their processing, that's the most -- the biggest impact. I transfer for Capo.

[Carlos Alberto Pereira Oliveira, executive]

Okay. Gabriel, thank you for the question, about the rationale for the investment in Sergipe deepwaters. It's -- our strategic in E&P is to work -- we are a deepwater company. So -- and at the same time, we -- this is a new province where we want to -- we have the idea to invest, but at the same time, we have to remember that we are on the -- that Sergipe is also in our -- on our partnership program. We want to invest there as a new frontier and we'd always do that. We have a partner that we are, at this days, in this process. So but there is -- for sure, there is a rational in this because we are a deepwater company and we work on the pre-salt. We work on the Campos Basin. We deal at the Campos Basin, where we have almost 40% of our production. It's not pre-salt, but it's also very important for our production, and it's also important for the grooming of our production. Regarding the basin -- the Campos Basin, for instance, we have been -- we have introduced this concept of -- to work in strategic partnerships at the Roncador Field, for example, with Equinor. And also we are buying some areas for the -- new areas to explore the new -- the Campos basin. So the rationale is very clear, we -- our perspective is to work in deepwaters, that's where we have the necessary capacity and the capabilities for salt. And also at the same time this is a new frontier area. We are going to do this. We have a partner there.

[Operator]

Thank you, all. At this time, the Q&A session of Petrobras webcast and conference call is over. Mr. Roberto Castello Branco will now make his final remarks.

[Roberto da Cunha Castello Branco, executive]

I'd like to thank you for participating in our conference call today. It was -- it's always a pleasure to talk to you. And as I said, our best days are still ahead of us. We have world-class assets. We have a strong team, highly committed to deliver value, and we have technology. These are the key points in our strategy and we'll do that. Thank you.

[Operator]

Thank you. Ladies and gentlemen, the order of this conference call for replay will be available on Petrobras' Investor Relations website at www.petrobras.com.br/ir. Thank you very much for your participation, and have a great day.