Petróleo Brasileiro S.A. - Petrobras (PBR) Q4 2020 Earnings Report, Transcript and Summary

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, petroinvest@petrobras.com.br.

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 pandemics of COVID-19 pandemics in our store shock, negative shock on the oil industry reducing price to as low as $19 per barrel in April, even negative price for a short period of time, high inventories demand contraction across the board. But at that time, we promised G-shape and 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 better and 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 full 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 in corporate activities. Efficiency gains were realized through digital transformation was accelerated as well as the status execution. We enhanced the information technology infrastructure and created excellent centers. We used internal startups to find very fast solutions from some problems is working very well, agile teams. And our research center was revamped with - today, it's much more integrated into the company with a vision not only a technological vision but also with economics. There is an say 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 you.

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 periods 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?

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 price higher than expected, I believe that that's the easiest thing to do. But as we always mentioned, we had two things that we were lagging behind compared to the other big 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, I believe, 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 faster, we will do. So, but prices are volatile so it's very hard to say that that these prices are going to be kept. And that's why we kept our long-term pricing for the Brent as the $50 per barrel. But thank you for the question.

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?

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. So, we will keep that, doesn’t matter what is the scenario. 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 a 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 compliment.

Okay, Andrea, thank you. Well, as Andrea mentioned all projects in our portfolio are resilient to a Brent of $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 higher price, which are the impact on the debt reduction strategy. And we have always - we have always to have this target to keep this target and the capacity of the suppliers as well to provide additional fiscal resource because as today they are facing some restrictions due to the worldwide effects caused by the pandemic of the COVID-19. So, that's not only something that's only 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 that requires resources that are specific. So, we will look at the capacity of the market to provide us those resources as well.

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?

Rodolfo, thank you for your comments on behalf of myself, the executive team and all federal Petrobras employees, because the performance is not only due to the action of the CEO and the executive directors its - each one of the employees have a piece in the construction of our company's performance. Well I don't know - for the time being, I don't know about 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 on this way.

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?

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. And we still have a lot to be done to reduce the debt and to reduce the interest we pay on our loans. So, we still have a lot of opportunities to do prepayments in the bilaterals and prepayments in the capital markets. And we will be exploring the opportunities to be doing that and reducing that towards our goal that is the $60 billion in 2022.

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?

Thank you, Luiz for the question. Yes, there are some protection 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 the 25% of independent members in the Board. And in our bylaws we extended that to 40% of independent Board members. So as we have really a Board that has independent people really acting. We do have as well technical criteria for the selection of the Board of Directors and Executive Board members. So we have to cope with a certain criteria. Even for me to join Petrobras, I have 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 criteria that is needed from us and from board of directors.

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

Thank you, Carla. Thanks for your question, Luis. We will continue to compete in the domestic market, seeking the most appropriate market share, which optimize the use of our refineries and of course maximize 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 international market. By continuously monitoring and developing new oil markets globally, on the other hand, we ensure access to the best alternatives in order to maximize the value of our oils. In summary, we will continue to optimize the value creation for the company, combining refining and export alternatives in the best possible way. Thank you.

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 bureau 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 prices for the oil industry globally. While many were struggling to stay solvent, Petrobras generated cash and reduce its financial leverage. All of that was achieved despite the challenging posed by the pandemic and the necessity to look after people's health and business continuity. Congratulations for 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?

Hi, Régis. First of all, I’d like to thank you for your message. We are very flattered with your words. My thank you on behalf of myself, the executive director team and all the Petrobras employees, because as I was saying people are the most important asset. It’s not asset X or Y. It’s people. People is the most important asset. Regarding your question about the health plan, well, there health plan was badly managed because we don't have a specialist in managing health insurance plans, health insurance plans. It's not our business. So, it had a very big debts and actuarial liability was huge, about BRL 45 billion. And what we did to spinoff the health insurance plan through a non-profit institution with professionals, with large experienced 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 is that it supplied poor service to the employees. There was a lot of complaints. It was the number one complaint made by employees this last year was 2,894 complaints made by the employees. So, we have to change. We had two big problems, off balance sheet problems, the health plan, AMS, and Petros, the pension fund. These problems are being solved, Petros with the professional management with the two new plans, the newest one is defined contribution plan instead of benefits - defined benefit plan. And also we prepared obligations to the pension fund in order to recapitalize it. Petrobras had a 20-year that with the pension plan. It was set in 2008 with a payment only in 2028. So, part of this was prepared in the - on the benefit of the plan as it become - it gained liquidity and also solvency because the situation there was troubled. And by the same token, we are addressing the problem of the health insurance plan, which had a lot of problems that end up producing an annual net loss for Petrobras of almost BRL 3 billion. So, I believe that the impact in our balance sheet, in our cash flow will improve significantly over time. The plan according to all estimates, there is a significant economy to be made over the next 10 years. Thank you.

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

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

Well, as you know, there is some stops were rescheduled for the 2021, and for sure we have a lot of stoppage during the year. But the stops for 2021 that came from the 2020, they were rearranged. And then, we've also optimized the stops after 2021. So, 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 the production or in the target of production that we told you last year, which is the 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 but it was - we have already estimated it would be like that.

The next question comes from Bruno Montanari of Morgan Stanley, and he’s also sent us message to Roberto and the management team that I'm going to read. So, congratulations for the solid results in the year with an impressive cash generation. I believe this speaks to the effort and success of strategy outlined by the company under the leadership of Roberto. He also has a question for Capo. So, thinking about Capo and Rudimar - thinking about a scenario or oil prices heading to $70 per barrel this year, what sources of upsides could come? Other than increase 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?

Okay. Well, I think that I have already mentioned before that our prudence in our portfolio, they are resilient to a Brent of $35 per barrel, so we have to consider that all projects have to pass this target and this. And so if the price in the future they confirm to be higher than the price that we estimate in our strategic plan, anticipation could be - we could evaluate about the anticipation of some projects. But we still have to check that besides cash availability, we have to check the impact on this every reduction strategy which is a goal and the capacity of the supply is, as I mentioned, to provide and the capacity of the suppliers, as I mentioned, to provide additional physical resource the suppliers today they are facing some restrictions due to the effects of the COVID-19. Regarding the other question about the maintenance schedule for the FPSOs, in the first quarter of 2021, we are projecting a reduced reduction in the number of scale stops compared to the fourth quarter of 2020. And together with the continue of the ramp-up of the platform P-70 and P-68, those fact will lead us to the possible increase in production in relation to the fourth quarter. So we expect to have more production at this first quarter than at the last quarter of the year.

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

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?

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

Thank you, Roberto. The next question comes from Christian Audi with Santander. Christian also - send you a message. So first of all Roberto, I’d like to congratulate you on the amazing work you have at Petrobras since taking over as CEO. Significantly improving the strategy 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 that on the noise surrounding the pricing policy might impact the sale of refineries?

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, depends on the new management of the company. So at the moment, I will make no comments about that.

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 recently developed led to any change in the asset sale program so far? Will the company move ahead with those process until the change in management is completed?

Well, thank you for your comments. But as far as I know, there were no changes, 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.

Thank you, Roberto. And we have the last question, from Gabriel Fonseca with . 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 achieving 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 infused in Brazil markets? In particular, what levels of the utilization rates of the refining park are currently debt. Can we say that the impacts of COVID-19 over fuel demand in Brazil has 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: Thank you, Gabriel. I guess, we already answered this question in the Portuguese version. Should we go ahead or go to the next question?

Yes, please. We have - we may have like a different audience. André Chiarini: 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 COVID - pre-COVID-19 regarding the fuel market in Brazil. In fact, we have already grew also in diesel A) about 20.8% in comparison to January 2020 with a very interesting result for the low-sulfur diesel that grew 37.5%. In terms of gasoline A) we generate, our sales were 8.5% higher than in January 2020. Yes, also, we are importing some gasoline and diesel just because we have now going - we are going through the maintenance in our refineries. And now, I’ll pass to Rodrigo to complement the answer. Thank you.

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

Thank you, Chiarini. Thank you, Rodrigo. We have one last questions 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 to 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?

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 that term of those payables. So, we are engaging with our financial institutions to do transactions to discount receivables and we are doing as well transactions. We are getting support for our suppliers. So, I believe this work in the working capital arena is going to continue in 2021 very strong. This is a very important focus for us as well. So this will be very important in 2021.

Okay. So thank you, Andrea. Vicente has another question and is for Chiarini. So Chiarini, the media reports at Brazil has the risk of being undersupply, 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: Thank you for your question, Vicente. First of all, it's important to say that the Brazilian market is hurt by several players. Petrobras of course is a very relevant supplier, but it has been a long time since trading companies and distributors have become relevant actors regarding imports of gasoline and diesel in Brazil. So having said that, Petrobras alone cannot predict any risks of fuel shortages in the country as a relevant part of the market is still served by third parties as 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 or pay. But also is 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 international market. Thanks.

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

Well, my thank you for you - for attending our video conference analysts, investors. And I'll say that we accomplished our mission. Our mission was to restructure Petrobras and we will - according our judgment, according to the judgment of the market, we make several advance. 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, should win. Petrobras has the human capital, high-quality human capital, knowledge, technological knowledge. Has the capacity to innovate and it will be very easy to win with the combination of these three elements. Petrobras has now a cultural of value creation has improved it significantly. And I would say that’s firing on all cylinders. Thank you so much. I appreciated very much of this contact, this very frank and transparent conversations with you over the last couple of years. And I see you later. Thank you. Bye.